Peston's Picks

Lehman on critical list

• Robert Peston
• 12 Sep 08, 10:27 AM

The game is up for Lehman Brothers, the fourth largest US investment bank.

Talking to bankers overnight, it's clear that Wall Street has lost confidence in its capacity to survive as an independent - which is only to state the obvious given what's been happening to the price of its bonds and its shares.

What's done for it is its $54bn of unwritten-down illiquid commercial and residential property assets - the equivalent of being weighted down by a concrete block in the middle of the Hudson River.

So it needs to find a bigger, sounder bank to rescue it and fast. As I mentioned earlier this week, Bank of America is being touted as the most likely saviour, if any can be strong-armed by regulators into swallowing this big, bloated and poisoned beast (our own Barclays will try to pick up Lehman's better people, in what might be described as muscular pragmatism - but Barclays shareholders would go bananas if it took over the whole ailing thing).

But will anyone take on the risk without some support from taxpayers?

The US Treasury may - so soon after propping up Fannie and Freddie - have to provide some backstop underwriting for Lehman, so that an orderly resolution of Lehman's woes can be achieved.

When confidence in a bank erodes, it ebbs at first and then is gone in a great whoosh. Lehman will be lucky to end the day as an independent bank.

UPDATE: 17:51

Lehman is racing to meet a deadline of Sunday night to find a new owner for the troubled bank.

Bankers close to Lehman warn that failure to conclude a deal by then would be devastating for confidence in the fourth largest Wall Street firm.

"If a solution isn't found by the time Asia opens for business on Mondau, well the consequences would be disastrous" said a senior banker.

He added that the US Treasury was working assiduously behind the scenes to facilitate a takeover of the bank.

The leading candidate to buy Lehman for a knockdown price is Bank of America, although Lehman is talking to a number of other potential bidders.

Lehman's fund management business, which is in relatively good shape, may be sold separately.

UPDATE: 18:56

Barclays position on Lehman has changed during the day. It is now looking at playing a role in the rescue of the troubled investment bank, by buying all or part of it.

But a US solution, led by Bank of America, is still the most likely outcome.

I suspect it won't be many hours before we see the detail of the rescue plan.

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