Lehman in freefall on faltering deal hopes

Published on Friday 12 September 2008 21:54

MOUNTING worries that Lehman Brothers may fail to find a buyer following its poorly-received restructuring plan this week sent shares in the embattled US investment banking giant to a 14-year low last night.

Fears that there will be no corporate or US government bailout for Lehman, America's fourth-biggest investment bank, also rattled Wall Street. The Dow Jones index was down 60 points in early afternoon trading.

The market jitters came as speculation also grew that Bank of America was the favourite to launch any rescue bid, with Barclays an outside candidate.

Jim Fehrenbach, head of Nasdaq trading at Piper Jaffray in Minneapolis, said: "Lehman is a proxy for the US markets to some extent. Where Lehman goes so will the market in the short term."

Lehman's stock hit a low of $3.55 in early trading, but recovered a little in the afternoon to be down 11 per cent at $3.75.

If America's fourth-biggest investment bank goes to the wall there are concerns that the failure would reignite all the uncertainty in the banking industry after a year of credit crunch and global economic downturn.

Analysts said Bank of America was mulling a joint bid with private equity investor JC Flowers and sovereign wealth fund China Investment Co.

Barclays is also said to be keeping an eye on events, but analysts said it was less likely to meet US regulatory favour than a homegrown solution to Lehman's capital problems. Neither BoA or Barclays would comment.

The situation has also been complicated by the fact that US Treasury secretary Henry "Hank" Paulson is "adamant" that no government money be used in any deal, according to sources.

That will make it even harder to resolves the crisis at Lehman, which also employs thousands in the City of London.

Bank of America Corp is seen by many as the most likely saviour for the 158-year-old firm.

Richard Bove, an analyst at Ladenburg Thalmann, said: "I believe that Bank of America will win the auction for Lehman Brothers. There is a natural fit between the two companies."

Another analyst agreed, saying: "Lehman needs Bank of America to lower its borrowing costs. It also needs the bank to portfolio its commercial real estate loans. These are negative reasons (for a merger]."

By contrast, analysts said part of Lehman's attraction to Barclays was the US bank's strong position in equity and debt markets.

It ranks third in equity capital markets in the US this year and ninth in debt capital activity, where BarCap ranks fifth,

Barclays could also be attracted by asset management business Neuberger Berman, seen as one of Lehman's crown jewels, in which it is auctioning a majority stake.

Sandy Chen, analyst at broker Panmure in London said: "I can understand the strategic attraction of Lehman for Barclays, but as with many banks the problem is it's constrained by capital."