Lehman looks headed toward bankruptcy

updated 9:49 p.m. ET Sept. 14, 2008

NEW YORK - As the outlook for Lehman Brothers appeared to dim Sunday, U.S. and foreign banks joined forces to create a plan aimed at inoculating the global financial system against the investment bank's possible failure, a top investment banking official said.

Banks were in tense talks to create a pool of money worth up to $50 billion to lend troubled financial companies, the official said on condition of anonymity because the discussions were ongoing.

The Federal Reserve announced several initiatives to expand emergency loan programs to cope with the worst credit crisis in decades. The central bank said late Sunday that it was broadening the types of collateral that financial institutions can use to obtain emergency loans from the Fed.

The plan comes as top government officials and Wall Street executives held marathon, but so far fruitless, meetings to save Lehman Brothers, whose shares have tumbled 95 percent in the past year over worries that it does not have enough money to cover losses from its real estate holdings.

The official also said the Treasury Department and the Fed were pushing Bank of America Corp. to buy Merrill Lynch & Co. On Friday, Merrill Lynch's shares fell as investors fretted it might be the next investment bank to come under pressure from its portfolio of risky mortgage-backed securities. Late Sunday, the Wall Street Journal reported on its Web site that the boards of the companies had agreed to a roughly $44 billion acquisition.

Expectations that the 158-year-old Lehman would survive dimmed Sunday afternoon after Barclays PLC withdrew its bid to buy the investment bank. Barclays' and Bank of America were considered front-runners to buy Lehman, which is foundering under the weight of $60 billion in soured real estate holdings.

The Lehman talks originally were aimed at selling the investment bank in whole or in part. The deal was tripping on the potential buyers' insistence that they receive the same kind of help that Bear Stearns Cos.' got last March when JP Morgan Chase & Co. bought the securities firm with a $29 billion Fed-backed loan.

Treasury Secretary Henry Paulson has said the government will not help close a Lehman deal, and it was clear late Sunday he was not budging.

Lehman declined to comment on the talks.

If no deal were reached, it raised the specter of a bankruptcy and liquidation of the investment bank, which in turn could have a tumultuous effect on world markets. Late Sunday, Dow Jones industrial average futures were down 208 points, or 1.8 percent, at 11,250.

Bankers and investment banking officials briefed on the Lehman talks described them as both complicated and fluid. They spoke on condition of anonymity because talks were ongoing.

There were signs that Lehman Brothers might be edging closer to a bankruptcy filing, with several reports that it has hired Weil, Gotshal & Manges, the law firm that handled the collapse of investment firm Drexel Burnham Lambert in 1990.

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