High Stakes Poker Game

Talks continued Saturday between federal officials and top Wall Street executives aimed at resolving the crisis swirling around Lehman Brothers Holdings Inc. and soothing jittery U.S. financial markets.

While the situation remains fluid, some sort of solution might be reached as soon as Saturday night, according to people familiar with the situation. But it isn’t clear how much progress has been made toward clearing the biggest hurdle in the discussions, which is whether any government funding will be provided to help engineer a rescue for the battered investment bank.

Treasury Department and Federal Reserve officials have made it clear to participants that no government bailout should be expected. Potential bidders, worried about the risk of buying an ailing financial institution like Lehman, want the government to step in with a package similar to what was offered to J.P. Morgan when it bought Bear Stearns Cos. Then, the federal government agreed to absorb as much as $29 billion in losses.

At an emergency meeting Friday night called by the Federal Reserve Bank of New York, New York Fed President Timothy Geithner, described two potential scenarios: either a liquidation of Lehman or an industry-driven solution in which Wall Street firms would possibly providing financing to remove some of Lehman’s real estate assets, one person briefed on the matter said.

Most of the Wall Street executives present at the meeting listened and asked questions, "but didn’t show their hands" as to what they thought, this person said.

In addition to Mr. Geithner, government officials in attendance included Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox. The Wall Street executives included Morgan Stanley Chief Executive John Mack, Merrill Lynch Chief Executive John Thain, J.P. Morgan Chase CEO Jamie Dimon, Goldman Sachs Group CEO Lloyd Blankfein, Citigroup Inc. head Vikram Pandit and representatives from the Royal Bank of Scotland Group PLC and Bank of New York Mellon Corp.

Other industry leaders that attended were Credit Suisse CEO Brady Dougan, Morgan Stanley Chief Financial Officer Colm Kelleher, Citigroup Chief Financial Officer Gary Crittenden, UBS AG Chief Risk Officer Thomas Daula, J.P. Morgan investment bank co-head Steve Black and Goldman Sachs Co-president Gary Cohn, according to a person familiar with the matter.

In trying to hold firm to their no-bailout stance even while pressing for a deal, federal officials could try to pit Bank of America and Barclays against each other. But that leverage can work only if both banks stay in the discussions.

Now there’s a joke: "trying to pit Bank of America and Barclays against each other". The fact is no one wants the Lehman turkey unless it comes with a government (taxpayer) guarantee.

Treasury Wants Wall Street Sponsorship

Bloomberg is reporting Treasury Said to Call on Wall Street to Back Lehman.

U.S. Treasury Secretary Henry Paulson and New York Federal Reserve Bank President Timothy Geithner urged the heads of Wall Street’s biggest firms to find a solution to the plight of Lehman Brothers Holdings Inc., signaling their reluctance to use government funds to bail out the investment bank, people familiar with the talks said.

Geithner and Paulson presented two scenarios at last night’s meeting, people briefed on the talks told Bloomberg News. The first was a forced liquidation of New York-based Lehman, which they said could spread turmoil in the markets and lead investors to flee other investment banks.

The scenario preferred by Geithner and Paulson was for other companies to contribute money to a so-called bad bank to assume Lehman’s devalued real-estate assets. That approach is similar to one Lehman presented to investors this week, which the company said would cost $5 billion to $7 billion. By assuming the "bad" assets, firms would help ease a sale of the rest of Lehman to Barclays Plc or Bank of America Corp., the people said.

Lehman had $50 billion of mortgage-related assets at the end of August, marked down to between 29 cents and 85 cents on the dollar. Reducing valuations further to between 5 cents on the dollar for collateralized debt obligations and 35 cents for European mortgages would result in $21 billion of further writedowns. Shareholders’ equity was $28 billion at the end of firm’s fiscal quarter in August.

Banks and brokers called into the meeting may be asked to contribute money to back Lehman long enough to unwind its trades, the people said. The Wall Street firms were reluctant to do so unless Barclays, Bank of America or any other buyer also agrees to contribute significantly, which they may not be willing or able to do, one of the people said.

If the government’s resistance to fund the purchase lowers the price offered for Lehman, Fuld could balk as well, said Brad Hintz, an analyst at Sanford C. Bernstein & Co.

"We might have a Mexican standoff, with two guys holding guns to each others’ heads but nobody firing," Hintz said.

No Government Sponsorship?

Inquiring minds are reviewing Paulson’s claim of no government funds for Lehman. Please see Paulson’s Claim Of "No Government Sponsorship" Reviewed for a rebuttal.

The Taxpayer Loses