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| Lehman edges closer to insolvency | |
| (about 1 hour later) | |
| Preparations are being made in case the US investment bank Lehman Brothers has to file for bankruptcy protection. | |
| The firm was pushed to the brink on Sunday after UK bank Barclays pulled out of talks to buy most of Lehman. | |
| If no new financing is found before Wall Street opens on Monday, Lehman will have to seek so-called Chapter 11 bankruptcy protection. | |
| In the UK, accountancy firm PWC has been lined up to run the British operations of Lehman. | |
| BBC business editor Robert Peston says Barclays' decision to walk away from a Lehman deal was a huge setback for the effort to rescue the fourth-largest investment bank in the United States. | |
| A source close to the talks told the BBC that Barclays was unlikely to change its mind. | |
| Barclays terminated the negotiations because it was unable to obtain guarantees in relation to financial commitments faced by Lehman when markets open on Monday. | |
| Bad bank, good bank | |
| The rescue effort for Lehman is being coordinated by the US Treasury and the New York Federal Reserve. | |
| In the light of the credit crunch and the parlous state of financial markets, Barclays feels it would be running a crazy risk if it took [Lehman's obligations] on without any protection right now BBC business editor Robert Peston Robert Peston's BBC blog | |
| The US government had hoped to arrange a bailout under which other US investments banks - such as Citigroup, JPMorgan Chase, Morgan Stanley and Goldman Sachs - would finance a "bad bank" that would hold the most "toxic" investments of Lehman in the property and mortgage market. | |
| The "good bank" or rest of the firm, including its investment and wealth management arms, would then be sold to another financial institution, for example Bank of America or the UK's Barclays. | The "good bank" or rest of the firm, including its investment and wealth management arms, would then be sold to another financial institution, for example Bank of America or the UK's Barclays. |
| Although such a deal would have cost the other investment banks millions, it might have restored confidence in the sector and avoided a sharp drop in the share price of all banks. | Although such a deal would have cost the other investment banks millions, it might have restored confidence in the sector and avoided a sharp drop in the share price of all banks. |
| However, it appears that this plan is falling apart. | However, it appears that this plan is falling apart. |
| "The only thing that can prevent Lehman collapsing would be a huge injection of taxpayers' money," a banker close to the talks told the BBC. | |
| "In the light of the credit crunch and the parlous state of financial markets, Barclays feels it would be running a crazy risk if it took on [Lehman's obligations] without any protection right now," says our business editor. | |
| Bank of America, meanwhile, is said to be unconvinced that buying Lehman would be in the interest of its shareholders. | |
| 'Too difficult to value' | 'Too difficult to value' |
| "No other large firm should buy Lehman whole - its toxic real estate and securities are too difficult to value," said Professor Peter Morici of the business school of the University of Maryland. | "No other large firm should buy Lehman whole - its toxic real estate and securities are too difficult to value," said Professor Peter Morici of the business school of the University of Maryland. |
| "Only a fool would think he could fairly assess their value, unless those are assigned them a value of zero," he added. | "Only a fool would think he could fairly assess their value, unless those are assigned them a value of zero," he added. |
| Lehman is up for sale after it reported a $3.9bn (£2.2bn) quarterly loss last week amid concerns over its long term financial viability. | Lehman is up for sale after it reported a $3.9bn (£2.2bn) quarterly loss last week amid concerns over its long term financial viability. |
| The firm's share price has plummeted as fears over its future have mounted. | The firm's share price has plummeted as fears over its future have mounted. |
| Uncertainty | Uncertainty |
| Unless a bailout deal can be arranged and another large bank steps up to buy the good bits of Lehman, the US firm will have to file for bankruptcy protection. | |
| This would deal a severe blow to the global banking industry, which is based on the expectation that the other party will always honour its commitments. | This would deal a severe blow to the global banking industry, which is based on the expectation that the other party will always honour its commitments. |
| Banks and regulators would have to unwind Lehman's complex deals with and obligations to other banks, which could take weeks or months and cause uncertainty in the whole financial system. | Banks and regulators would have to unwind Lehman's complex deals with and obligations to other banks, which could take weeks or months and cause uncertainty in the whole financial system. |
| 'Difficult decision' | 'Difficult decision' |
| Former Federal Reserve boss Alan Greenspan said the US government faces "very difficult decisions" over Lehman if it cannot secure a rescue deal that does not involve public funds. | Former Federal Reserve boss Alan Greenspan said the US government faces "very difficult decisions" over Lehman if it cannot secure a rescue deal that does not involve public funds. |
| "They [will then] have to make a very difficult decision as to whether or not they allow it to liquidate or they support it," he said. | "They [will then] have to make a very difficult decision as to whether or not they allow it to liquidate or they support it," he said. |
| Yet Mr Greenspan said it would be "unsustainable" for the government to bail-out every US bank that got itself into difficulty. | Yet Mr Greenspan said it would be "unsustainable" for the government to bail-out every US bank that got itself into difficulty. |
| Predicting that Lehman would not be the last to require rescuing, Mr Greenspan added that this would not necessarily pose a problem. | Predicting that Lehman would not be the last to require rescuing, Mr Greenspan added that this would not necessarily pose a problem. |
| "The ordinary course of financial change has winners and losers," he said. | "The ordinary course of financial change has winners and losers," he said. |