- The Washington Times - Sunday, September 14, 2008

From combined dispatches

Regulators and bankers failed Saturday to reach a deal to end the crisis at investment bank Lehman Brothers, and emergency talks were extended to a third day as authorities seek to calm jittery financial markets.

So far this year, the government has sponsored rescues of Lehman rival Bear Stearns and mortgage lenders Freddie Mac and Fannie Mae.

But this time, Treasury Secretary Henry M. Paulson Jr. is adamant that taxpayer funds not be used, a source familiar with his thinking told the Reuters news service Friday.

The talks Saturday ended without an announcement, but the final outcome could include shunting off Lehman’s bad assets into a “bad bank,” in which rival banks would acquire stakes, or even allowing it to file for bankruptcy, people briefed on the matter told Reuters.

The crisis presents a delicate balancing act for Mr. Paulson and the Federal Reserve, who have urged Wall Street chiefs to come up with their own solution.

The authorities don’t want to be accused of encouraging excessive risk-taking by bailing out another yet another investment bank, but they also cannot afford to let a blow-up of Lehman paralyze the financial system and deepen the credit crisis.

Investors said that if nothing is done by Monday, global financial markets could plunge, because of fear that the U.S. government will have to prop up more financial institutions.

Saturday’s talks included Mr. Paulson, Securities and Exchange Commission Chairman Christopher Cox and Timothy Geithner, president of the New York Federal Reserve Bank.

They were meeting on the heels of an emergency session convened Friday night by Mr. Geithner - the Fed’s point man on financial crises.

Participants in Saturday’s discussions also included executives from Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup and Merrill Lynch.

Federal Reserve Chairman Benjamin S. Bernanke is actively engaged in the deliberations, but wasn’t in attendance.

Fed and Treasury officials are aiming to engineer a private-sector rescue for the troubled firm that doesn’t involve government money. Options include selling Lehman outright or breaking it up into pieces to be sold to private firms.

Potential buyers could include Bank of America Corp., the largest consumer bank in the U.S.; Barclay’s PLC, Britain’s third-largest bank; Japan’s Nomura Securities; France’s BNP Paribas; and Deutsche Bank AG.

All declined to comment.

Global fears intensified Saturday that the collapse of the country’s fourth-largest investment bank would stagger markets and undercut confidence in the U.S. financial system.

German Finance Minister Peer Steinbrueck, urging that a resolution be found before Monday, warned ominously that “the news that is coming out of the U.S. is bad.”

“We expect that a solution will be put forward before Asian markets open on Monday,” Mr. Steinbrueck said on the sidelines of a European Union finance ministers meeting in Nice, France.

Lehman Brothers Holdings Inc. put itself on the block early last week. Bad bets on real-estate holdings - which have factored into bank failures and taken out other financial companies - have thrust the 158-year-old firm into peril.

Lehman’s stock has been hammered and the company has been dogged by growing doubts about whether other financial institutions would continue to do business with it.

On Friday, Lehman’s stock closed at $3.65 - an all-time low and down nearly 95 percent from its 52-week high of $67.73 as investors grew more convinced that Lehman may be auctioned at fire-sale prices.

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