Top officials from the Federal Reserve and the Treasury Department and executives from several Wall Street banks met at the New York Fed's downtown Manhattan headquarters Saturday for the second day in a row try to hash out a deal to rescue Lehman Brothers.
The financial world was watching. Failure could prompt skittish investors to unload shares of financial companies, a contagion that might affect stock markets at home and abroad when they reopen Monday.
Discussions are expected to continue Sunday, a spokesman for the New York Fed said.
The investment banking official, who asked not to be named because the talks were ongoing, said the investment houses were balking at paying to polish up Lehman's balance sheet so Bank of America or Barclays could buy a financially clean firm.
He said the investment banks were angling for the government to provide some money, as it did when it helped JPMorgan Chase & Co.
buy Bear Stearns in March, because they would get little to nothing in return for their help.
The government has drawn a line in the sand over using taxpayer money to help rescue Lehman Brothers, however.
The official said the talks were tense and neither side appeared willing to back down.
Besides selling the company whole or piecemeal, Lehman could be liquidated, perhaps with financial firms agreeing to still do business with the company as it wound down.
Or, a financial company or companies could buy Lehman's "good" assets. Its shunned or devalued real-estate assets could be placed in a "bad bank" financed by other banks.
Saturday's participants included Treasury Secretary Henry Paulson, Timothy Geithner, president of the New York Fed, and Securities and Exchange Commission Chairman Christopher Cox.
Citigroup Inc.'s Vikram Pandit, JPMorgan Chase & Co.'s Jamie Dimon, Morgan Stanley's John Mack, Goldman Sachs Group Inc.'s Lloyd Blankfein, and Merrill Lynch & Co.'s John Thain were among the chief executives at the meeting.
Representatives for Lehman Brothers were not present during the discussions.
They gathered on the heels of an emergency session convened Friday night by Geithner - the Fed's point person on financial crises.
Federal Reserve Chairman Ben Bernanke is actively engaged in the deliberations but wasn't in attendance.
Geithner convened the meeting Friday evening and told bankers gathered at the New York Fed to come up with a solution or risk being the next to go under, investment banking officials with direct knowledge of the talks said. They spoke on condition of anonymity because the talks were ongoing.
A spokesman for Lehman declined to comment about the meeting.
Other potential buyers could include Japan's Nomura Securities, France's BNP Paribas and Deutsche Bank AG. All have declined to comment.
Participants in Saturday's meeting were also trying to tackle a broader agenda that includes problems at American International Group Inc. and Washington Mutual Inc., said the investment bank officials, who were briefed on the talks.
AIG, the world's largest insurer, and WaMu, the nation's biggest savings bank, have taken steep losses during the past year from risky investments. Investors, worried they do not have enough cash on their balance sheets to withstand further hits, unloaded their shares on Friday.
AIG's shares dropped about 31 percent on Friday. WaMu's shares shed about 3.5 percent. Shares of investment bank Merrill Lynch & Co. Inc. also lost 12.3 percent. Lehman's stock closed at $3.65 Friday - an all-time low and down nearly 95 percent from its 52-week high of $67.73.
Lehman Brothers and AIG are the top priorities, said the investment banking officials. WaMu insisted Friday it has adequate capital to fund its operations even as it announced another multibillion dollar write-down on bad mortgage loans.
WaMu has 76 percent of its deposits insured by the Federal Deposit Insurance Corp., an independent agency created by Congress to insure deposits in banks and thrifts up to at least $100,000.
AIG has lost more than $18 billion over the last three quarters due to investments tied to subprime mortgages.
Global fears intensified Saturday that Lehman's collapse would stagger markets and undercut confidence in the U.S. financial system.
Germany's Finance Minister Peer Steinbrueck urged that a resolution be found before Asian markets open, warning ominously, "the news that is coming out of the U.S. is bad."
Lehman Brothers Holdings Inc. put itself on the block earlier this week. Bad bets on real-estate holdings - which have factored into bank failures and taken out other financial companies - have thrust the 158-year-old firm in peril. It has been dogged by growing doubts about whether other financial institutions would continue to do business with it.
Richard S. Fuld, Lehman's longtime CEO, pitched a plan to shareholders Wednesday that would spin off Lehman's soured real estate holdings into a separately traded company. He would then raise cash by selling a majority stake in the company's unit that manages money for people and institutions. That division includes asset manager Neuberger Berman.
Government officials want to avoid a Bear Stearns-like bailout; the Fed in March agreed to provide a loan of nearly $29 billion as part of JPMorgan Chase & Co.'s takeover of the firm. Unlike Bear, Lehman can go directly to the Fed to draw emergency loans if it needs a quick source of ready cash. In recent weeks, though, there's been no indication that Lehman has done so.
Bear's sudden meltdown led the Fed to engage in its broadest use of lending powers since the 1930s. Fearful that other firms could be in jeopardy, the Fed temporarily opened its emergency lending program to investment firms, a privilege that for years was granted only to commercial banks, which are subject to tighter regulation.
Those actions - along with the Bush administration's take over of mortgage giants Fannie Mae and Freddie Mac just last week - have spurred concerns that taxpayers could be on the hook for billions of dollars and companies will be encouraged to take on extra risks because they believe the government will come to their aid.
Paulson and Bernanke, however, have said they needed to help Bear Stearns and Fannie Mae and Freddie Mac to avert a financial calamity that would devastate the national economy.
Lehman's Fuld is currently a member of the New York Fed's board of directors.
