Q&A: Lehman Brothers' Search For A Buyer
Lehman Brothers, one of the nation's largest investment banks, is searching for a buyer. The firm lost billions of dollars as a result of investments it made in mortgage-backed securities that have lost value as home values declined. And the company's stock has fallen to record lows — down more than 90 percent in a year.
If there's light at the end of the tunnel, then it may involve selling certain assets or putting the entire company up for sale. The Treasury Department and the Federal Reserve are working with Lehman in this quest. But there are no guarantees of the sort of deal that saved Bear Stearns.
Here, a look at some of the issues surrounding the bank's future.
How is Lehman Brothers' situation different from the Bear Stearns bailout?
The Treasury Department and the Federal Reserve engineered the sale of Bear Stearns to JP Morgan Chase in March by guaranteeing some of Bear Stearns' debt as an incentive for the purchase to go through quickly.
In this case, the government is facilitating discussions but plans to limit its financial exposure. Why? For one thing, following the Bear Stearns deal, the government established a way for investment banks, such as Lehman, to borrow money from the Federal Reserve as long as they can put up some collateral.
A source familiar with Secretary of Treasury Henry Paulson's thinking said that Lehman Brothers' situation differs from the Bear Stearns bailout in two ways:
First, the financial markets have had time to prepare for this scenario. Second, investment banks have been able to borrow at the Fed for six months now.
The secretary believes, the source said, that "there was time for the financial sector to see things coming and to plan for it and deal with it."
As a result, the source said, Paulson is "adamant that there be no government funds used in the resolution" of this situation.
The Bear Stearns purchase was resolved in a matter of days, not months. This time around, whatever fix Lehman Brothers engineers is likely to be less messy since it's not coming as a surprise for the financial markets.
Have investment banks always been able to borrow from the Federal Reserve?
The Federal Reserve's Primary Dealer Credit Facility is a financial lifeline for investment banks, giving them the opportunity to borrow funds to prevent failure. The Fed opened the window for at least six months in the aftermath of the Bear Stearns sale. The measure was designed to help stabilize the firms and bolster confidence in the financial markets. This program differs from the so-called "discount window lending" that the Federal Reserve extends to banks that are primarily depository institutions.
Will Lehman Brothers' troubles lead to a government takeover, similar to what happened with Fannie Mae and Freddie Mac?
No. The U.S. government's ambitious plan to help rescue mortgage finance giants Fannie and Freddie by placing the two companies into a conservatorship will use federal dollars to help prop up the companies and reinvigorate the U.S. housing market. That's in addition to replacing the company's CEOs and boards of directors.
What's more, Fannie and Freddie were — until the takeover — government-chartered companies with implicit government backing. But they were publicly traded corporations that were listed on the New York Stock Exchange. Part of their mission is to provide financing for affordable home loans. They now finance more than two-thirds of all mortgages in the U.S. But the companies also have to satisfy company shareholders, a responsibility Lehman Brothers also shoulders.
Why has it been difficult for Lehman Brothers to find a buyer?
Lehman's financial picture still remains uncertain, and so a number of investors — including the Korea Development Bank, a state-run institution; and others that were said to have been considering purchasing the firm — have distanced themselves from the deal.
Published reports indicate that Bank of America and Barclays Bank are potential buyers. Lehman Brothers is also said to be exploring other options.
Will other Wall Street firms need assistance?
Probably, in the coming months. This stems from the widespread practice of investing in housing-related bonds and the failure of many firms to accurately predict the risks these investments posed to their financial health.
With reporting by Jim Zarroli, John Ydstie and Joshua Brockman
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