Investors fear for Monday as Lehman talks continue

Regulators and bankers failed on Saturday to reach a deal to end the crisis at investment bank Lehman Brothers, and emergency talks were extended to a third day as authorities seek to calm jittery financial markets.

 

So far this year, the government has sponsored rescues of Lehman rival Bear Stearns and mortgage lenders Freddie Mac and Fannie Mae.

 

But this time, U.S. Treasury Secretary Henry Paulson is adamant that taxpayer funds not be used, a source familiar with his thinking said on Friday, Reuters reported.

 

The talks on Saturday ended without an announcement, but the final outcome could include hiving off Lehman's bad assets into a "bad bank", in which rival banks would acquire stakes, or even allowing it to file for bankruptcy, media reports said.

 

Investors are fixated on the problems at Lehman, whose shares plummeted 75 percent last week as it struggled to find a buyer to help it survive.

 

"Lehman is a proxy for the U.S. markets to some extent," Jim Fehrenbach, head of Nasdaq trading at Piper Jaffray in Minneapolis said. "Where Lehman goes, so will the market in the short term."

 

Even if the fate of Lehman Brothers is resolved this weekend, Wall Street is likely to remain on edge next week because of fears over the health of other big financial companies.

 

As with the collapse of investment bank Bear Stearns back in March, investors are bracing for weekend developments on Lehman that could again reshape the U.S. financial landscape as fallout from the credit crisis escalates.Â

 

The crisis presents a delicate balancing act for Paulson and the Federal Reserve, who have urged Wall Street chiefs to come up with their own solution.

 

The authorities don't want to be accused of encouraging excessive risk-taking by bailing out another yet another investment bank.

 

But they also cannot afford to let a blow-up of Lehman paralyze the financial system and deepen the credit crisis.

 

Both, Barclays and Bank of America expressed interest in buying Lehman and were negotiating hard, initially insisting that the government provide financial support. Lehman has declined to comment.

 

Photo: Reuters