WALL STREET was braced last night for one of the biggest bank failures in US history after Barclays walked away from a deal to save investment bank Lehman Brothers from bankruptcy.
Federal Reserve officials and leaders of big financial institutions continued to meet in New York late last night to try to avert a fire sale of Lehman assets today that could have a devastating effect on the share prices of other banks, insurers and securities firms.
Barclays withdrew from the talks after two days of emergency negotiations, saying it could not take over Lehman without the support of the US government and other financial institutions.
"The proposed transaction required a guarantee for the trading obligations of Lehman Brothers which was potentially open-ended. Barclays wasn't willing to assume such an open-ended obligation," it said in a statement.
Throughout the weekend negotiators had worked on a plan to divide Lehman into a "good bank" that included the parts of the 158-year-old company that have been performing well, and a "bad bank" containing about $85 billion (€59.5 billion) in so-called toxic mortgage and real estate assets.
Under the plan Barclays or Bank of America, which had also shown interest in taking over Lehman, would buy the assets ring-fenced in the "good bank".
Other financial institutions would pump capital into the "bad bank" to keep it afloat for a few months and prevent a flood of bad assets into the market, which could depress the value of similar assets held by other banks and insurance companies.
Barclays said it was unable to win guarantees in relation to financial commitments faced by Lehman, and the British bank's withdrawal from the talks brought closer the prospect of bankruptcy.
US treasury officials, the Federal Reserve and officials from big Wall Street firms such as Goldman Sachs, Citigroup and JP Morgan Chase were working last night to mitigate the impact of Lehman's collapse on the markets.
One option would have major banks and brokerage firms continue to do business with Lehman as it unwinds its assets and liquidates over a period of months.
The US government has ruled out using public money to save Lehman, but treasury officials fear that a quick liquidation of a bank so big and interconnected with other financial institutions could cause panic in the financial world.
Credit-trading heads of major investment banks met in New York on Saturday to discuss their exposure to Lehman in the credit-default-swap market. This market in insurance-like contracts to hedge against debt defaults has no central clearing house, so financial institutions are directly exposed to one another in contracts linked to trillions of dollars' worth of debt.
Wall Street firms were compiling lists of such outstanding contracts with Lehman as dealers considered sharing the information and looked at ways to offset their positions with each other.
Former Federal Reserve chairman Alan Greenspan said yesterday the housing and credit crisis "is in the process of outstripping anything I've seen" and could continue for another year.
