Major Financial Players Map Out Lehman Options

NEW YORK, Sept. 13 -- Senior federal officials seeking to resolve the fate of Lehman Brothers met Saturday with top Wall Street executives to craft the details of at least three scenarios to save, sell or liquidate the ailing investment bank, according to sources familiar with the talks.

The all-day session at the Federal Reserve Bank of New York followed a three-hour meeting Friday night attended by Treasury Secretary Henry M. Paulson Jr., Securities and Exchange Commission Chairman Christopher Cox and New York Fed President Timothy F. Geithner. The meetings represented an extraordinary gathering of financial chieftains -- the longest series of face-to-face talks among senior regulators and top executives of banks and brokerages since the credit crisis erupted last year.

With federal officials seeking to shepherd some of the world's biggest financial firms toward a resolution, the government is marching deeper into uncharted territory. Federal officials, who were trying to help seal a deal before Asian markets open for Monday trading, hope to calm a global financial system already buffeted by the U.S. government takeover last weekend of mortgage finance giants Fannie Mae and Freddie Mac and the struggles of several major banks.

The talks in New York have centered on several options, including the orderly liquidation of Lehman's assets starting as early as Monday. In that scenario, participants in the session might fashion a deal under which other banks would keep lending money to Lehman as its holdings are wound down, sources said.

The financial leaders also discussed a good-bank, bad-bank model in which Lehman would spin off its troubled mortgage assets and other major firms would provide financial guarantees to this bad bank. This scenario has emerged because of the federal government's refusal so far to provide a backstop with public money, such as the $29 billion the Fed committed in March to help J.P. Morgan Chase absorb Bear Stearns.

A third scenario involves an outright sale of Lehman to one or more suitors. The leading contenders Saturday were Bank of America, HSBC and Barclays, sources familiar with the negotiations said. In this option, companies could acquire pieces of Lehman, and the New York Fed would serve as matchmaker.

Other options were also raised. But while some private-equity funds have expressed interest in bidding on Lehman, federal officials have discouraged this alternative.

In the past week, Lehman's business partners -- including clients, traders and funds that lend it crucial money overnight -- have become increasingly skittish and reluctant to keep engaging in those transactions. Sources familiar with the talks over Lehman's future said government officials have come to believe that the firm will have difficulty making it through next week without filing for bankruptcy unless some kind of buyout or similar deal is arranged.

Sources said discussions remained highly fluid, with different parties aggressively pushing their agendas. Among the Wall Street captains in attendance were the chief executives of Goldman Sachs, Merrill Lynch, Morgan Stanley, Citigroup and J.P. Morgan Chase, and representatives of other large firms.

Throughout the day, Cox led conference calls with foreign regulators in major markets to update them on the options and to review the regulatory cooperation each would require, according to a source with knowledge of the conversations.

Participants split into groups to tackle different topics and reported back periodically to the full session, said the sources, who spoke on condition of anonymity because of the sensitivity of the talks.

The conversations extended to other trouble spots in the financial markets, including the ailing insurance giant AIG and Wall Street bank Merrill Lynch, sources said, adding that those firms were not facing as severe crises as Lehman.