Troubled investment bank Lehman Brothers is continuing to negotiate a sale of itself to large commercial banks. These banks include Barclays, Bank of America and HSBC. Company officials are trying to get a deal wrapped up and announced by Sunday night, people close to the deal tell CNBC.
Officials from the Federal Reserve and the Treasury are involved in the negotiations, these people say, but as of right now, there are no plans for the government to provide financial assistance to facilitate a purchase of Lehman in the way that the Federal Reserve provided a so-called "back stop" to JPMorgan Chase when it agreed to purchase Bear Stearns in March after that bank imploded because of bad debt on its balance sheet. The backstop in the Bear deal essentially protect JPMorgan from losses beyond $1 billion if the securities on Bear's book continue to fall, as they did.
Speculation that an announcement could be made shortly pushed up global stock markets but Lehman Brothers in London refused to comment on the rumors.
Bank of America is seen as the most likely saviour for the 158-year-old firm, according to various reports and analysts. BofA declined to comment.
"I believe that Bank of America will win the auction for Lehman Brothers. There is a natural fit between the two companies," Richard Bove, analyst at Ladenburg Thalmann, said in a note.
Still even with the government's assistance, there is no guarantee that a deal can be reached. Without such a deal, Lehman's stock could deteriorate even further from its already low levels, people on Wall Street fear.
(Watch the video to the left for more on Lehman Brothers.)
Lehman already has access to the Federal Reserve discount window for emergency borrowing, but if other firms stop taking its trades, Lehman may be forced to agree to a low ball issue.
The latest speculation from bankers at San Pietro is over a three way deal -- private equity buys Neuberger; Bank of America buys the investment unit; and someone else buys the bad debt, possibly Goldman Sachs.
Lehman's mess can be traced to the same target as the one that doomed Bear Stearns: The existence of tens of billions of dollars in bad debt on its books. In Bear's case, the bad debt stemmed from bets on subprime on other depressed residential real estate assets. In the case of Lehman, it was a combination of subprime debt and commercial real estate, some of which the firm purchase and finalized last year even as the markets were shaky.
A Lehman spokesman had no comment, and because the situation is in flux, it is possible that even private equity firms may be allowed to bid on Lehman despite regulations that make it difficult for private equity firms to own a major investment bank.
Lehman CEO Richard Fuld had tried to keep the firm independent for years through ups and downs, but as first reported by CNBC, Fuld began to actively shop Lehman after it was clear the market had rejected his latest plan to recapitalize the firm, including sell a major piece of its investment management business, which holds the firm's crown jewel Neuberger Berman asset management unit.
One thing seems certain: Lehman Brothers will likely cease to be an independent investment bank by the end of the weekend. Government officials may not provide financial assistance -- at least not yet -- but they are worried about the market fallout if counterparties stop trading with Lehman, which has a balance sheet of around $600 billion.
So far, big firms say they are continuing to trade with Lehman but that may change if shares of continue to fall below their current price of around $3. Lehman still has one of the best investment banking outfits on wall street, as well as savvy traders.
For this reason, many analysts say if the firm can get its financial house in order, it would make an appealing buyout target.
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In addition, some have speculated that Goldman Sachs might be interested in buying Lehman if it could get a deal similar to the one JPMorgan received for buying Bear Stearns.
Reuters reported that Goldman Sachs is not pursuing an acquisition of Lehman, reflecting concerns that integrating two investment banks would be too disruptive, citing sources familiar with the situation.
Goldman declined to comment, citing its policy on market speculation.
On Wednesday, Lehman—founded in 1850 by three German immigrants who traded cotton— reported a record quarterly loss of $3.9 billion on Wednesday, and said it would spin off distressed assets and sell a stake in its asset management business.
The bad news stoked fears that some of Lehman's clients and trading partners might take their business away and send it to more stable firms.
Watch Charlie Gasparino's report on Lehman on video at left.
"Although many investors thought it would be avoided, customers of Lehman Brothers are becoming more and more skittish in their dealings with them," said William Lefkowitz, options strategist at vFinance Investments, a brokerage firm in New York. "If this fear continues to grow, that could lead to the demise of Lehman Brothers."
A string of analysts—including JPMorgan, Wachovia , Goldman Sachs and Citigroup —widened loss estimates and cut Lehman's price targets on Thursday.
"We thought getting news out of Lehman was going to clear the dark cloud, but it really doesn't. It just leaves us with a company that's limping along, that may or may not make it," said Arthur Hogan, chief market analyst at Jefferies & Co.
The company has written down billions of dollars in assets in the last year—largely holdings of complex mortgage-backed securities.
And over the last several months, the bank has been battling rumors of defecting clients and talk of a takeover at a fire-sale price.
"It's unfortunate that we're in the kind of position now where events can take over. The stock is telling us that Dick Fuld is running out of options," said Michael Holland, founder, Holland & Co, which oversees more than $4 billion of investments. "Unfortunately for Fuld, who has been very adamant about keeping Lehman independent, he has to find a partner now, someone to acquire them."
—Reuters contributed to this report
CNBC anchors, reporters and experts will provide the latest on Lehman Brothers, the markets and Hurricane Ike in a special report starting at 8 p.m. ET, Sunday, Sept. 14.