As Lehman talks falter, BofA suddenly eyes Merrill Lynch

Wildness on Wall Street on a Sunday afternoon: Amid reports Barclays had walked away from eleventh-hour talks to buy faltering Lehman Brothers, traders prepared for the possibility of a possible bankruptcy filing by Lehman Brothers, according to numerous reports Sunday. To complicate matters, and potentially calm roiled markets, there were also reports that Bank of America had entered into talks to buy Merrill Lynch.

Links, headlines, and highlights:

Barclays walks away from Lehman talks, making liquidation of Lehman likely, from the Wall Street Journal: "The fate of Lehman Brothers darkened early Sunday afternoon with Barclays PLC, the sole remaining bidder for the 158-year-old Wall Street firm, telling federal regulators that it is walking away from a transaction, people familiar with the matter say.

Why did Barclays walk away? Here's a big part of the reason: The Bush administration wouldn't budge on its no-bailout-this-time pledge. Barclays wanted some federal help; the Bush administration wouldn't give it. From Tom Petruno's Money & Co. blog:

Barclays abandoned its bid after the government refused to financially guarantee any of Lehman’s troubled assets, according to a person familiar with the matter

Wall Street braced for a possible Lehman bankruptcy filing, from Bloomberg: "Wall Street readied for a potential Lehman Brothers bankruptcy after Bank of America and Barclays PLC pulled out of talks to buy it and the government indicated it wouldn't provide funds to prevent a collapse."

Bank of America eyes Merrill Lynch, from The New York Times: "Bank of America is in advanced talks to buy Merrill Lynch for at least $38.25 billion in stock, people briefed on the negotiations said on Sunday, as a means to preserve that investment bank while Lehman Brothers looks likely to collapse.

What's the connection to housing? The bursting of the housing bubble exposed the bad loans that have rocked Lehman Brothers and weakened the numerous banks that otherwise would be in a position to save Lehman tonight. It's all connected, folks. And until housing prices find a bottom, it's going to be difficult to measure the losses these big firms are holding on their books.

-- Peter Viles

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'Brinksmanship' over Lehman; Will government give in?

The Lehman Brothers soap opera continues on Wall Street today, as the Bush administration tries to take a hard line and force Wall Street either to rescue one of its own or deal with the consequences.

In a situation the Wall Street Journal calls "highly fluid," the following questions were swirling: Could Lehman succeed in splitting itself into a "good bank" and a "bad bank," with all of its toxic assets shoved into the bad one? Will Wall Street firms -- some of them short on cash -- come up with $30 billion to keep the "bad bank" afloat? Or will the Bush administration blink and put federal guarantees behind the bad bank? If a buyer comes forward for the "good bank," will Lehman Brothers accept a low-ball bid? And if none of this happens, will global markets spin into panic or take the chaos at Lehman Brothers in stride?

Conventional wisdom says the drama must reach some sort of conclusion by later this afternoon, when Asian stock markets open. But conventional wisdom is on a long losing streak lately when it comes to the credit crunch and the spreading damage from the housing meltdown. The latest this morning:

CNBC.com:

As top Wall Street executives arrived Sunday morning for another round of talks to resolve the Lehman Brothers crisis, sources said the group continued to work on how to handle the possibility of a deal not getting done before Monday

The New York Times:

Some considered the weekend talks as high-stakes brinksmanship.

Both Barclays and Bank of America expressed interest in buying Lehman and were negotiating hard, initially insisting that the government provide financial support. But federal officials were adamant that no public money be used — a big point of contention because many of the top Wall Street executives believe that their banks, which have each written down tens of billions of dollars in assets, do not have the capacity to lead the rescue on their own.

The Wall Street Journal:

Barclays PLC, the U.K.'s third-largest bank, is emerging as a leading contender for Lehman Brothers  as discussions continued Sunday in London and New York in what is a highly fluid and pressure-charged environment.

A sale of Lehman to either Barclays or Bank of America Corp. remained dependent on government financial support, according to people familiar with the situation. According to these people, Barclays appeared to be moving more aggressively in trying to find a way to complete a deal.

...Demands by Bank of America and Barclays that the government somehow financially backstop the bad bank could be negotiating tactics during the talks.

--Peter Viles

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Photo Credit: L.A. Times