Saturday, September 13, 2008

Markets Finish Almost Flat, Lehman Brothers Looking for a Buyer, Consumer Data Is Mixed

U.S. stocks closed essentially flat on Friday after another day of large moves as uncertainty over the fate of troubled investment bank Lehman Brothers (LEH) kept investors anxious. The Dow was down 11.72 points (0.10%). The S&P 500 was up 2.67 points (0.21%). The NASDAQ was up 3.05 points (0.14%).

On the economic front, the latest data on consumers was mixed. A government report showed retail sales unexpectedly fell in August, adding to concerns about the impact of the housing slump and a faltering labor market on household spending.

But U.S. consumer confidence soared unexpectedly to an eight-month high in September as lower fuel prices soothed inflation fears and made Americans more hopeful about the economy, the Reuters/University of Michigan Surveys of Consumers showed.

Lehman shares tumbled to a 14-year low amid uncertainty about what form a possible deal to rescue the firm would take, especially after a source said the Treasury was reluctant to provide financial backing in any deal. Lehman shares fell 13.5% to $3.65 after falling as low as $3.17 earlier.

Sources with direct knowledge of the talks said U.S. authorities were in intensive discussions with Lehman on options including an outright sale. But a source familiar with U.S. Treasury Secretary Henry Paulson's thinking said he is "adamant" no government money be used in any deal to resolve that crisis.

The Financial Times reported that Bank of America, the No. 2 U.S. bank by assets, was considering a joint bid for Lehman along with private equity investor JC Flowers and sovereign wealth fund China Investment Co. Lehman declined to comment.

Lehman's survival may hinge on the sale of a 55% stake in Neuberger Berman, its asset management business. Bids for the asset, due on Friday, were put in by private equity firms including Bain Capital and Clayton, Dubilier & Rice, sources said. Buyout firms Kohlberg Kravis Roberts and Hellman & Friedman have also been pursuing the unit and were expected to bid, sources previously told Reuters.

Lehman Chief Executive Richard Fuld, who had vowed never to sell the firm in his lifetime, has been trying to unload just a part of the company rather than the whole thing, sources familiar with the situation said.

But investors gave a thumbs-down to revival plans unveiled by Lehman on Wednesday, saying they lacked real progress. It prompted fears that clients and trading partners might take their business to more stable firms. Major Wall Street firms have said they continue to do business with Lehman.

According to most reports, a deal could be worked out with BAC over the weekend though this is just speculation. If a deal were to go through, this would be the second major deal this year by BAC in purchasing a distressed financial company. The previous purchase was for Countrywide.

"I believe that Bank of America will win the auction for Lehman Brothers. There is a natural fit between the two companies," banking analyst Richard Bove said in a note. By buying Lehman, BofA would get access to one of the best fixed-income trading desks, Bove said. "It immediately becomes a first-rank player in the equity investment banking sector."

Bank of America has bought troubled lenders before. In 1988, its predecessor, NCNB Corp, bought First Republic Bank Corp, a big Texas lender, in a government-assisted bailout that left it with huge tax credits and helped it expand nationally. NCNB later became NationsBank, where Ken Lewis (current Bank of America CEO) helped to design a deal to buy the former BankAmerica in 1998 for $43.1 billion to create Bank of America.

A deal may not happen, but does this sound familiar to anyone else?

Source: Reuters

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