Fri Sep 12, 2008 7:40pm EDT
By David Lawder - Analysis
WASHINGTON (Reuters) - Takeover talks for Lehman Brothers are
a key test of the government's willingness to bail out large financial institutions -- less than a week after the seizure of home finance giants Fannie Mae and Freddie Mac.
Treasury Secretary Henry Paulson and Federal Reserve officials, working to broker a deal to sell Lehman Brothers to a stronger financial institution, have made it clear that any buyer of Lehman will not get the same kind financial support granted to JPMorgan Chase & Co. in March
in the rescue of Bear Stearns.
"It's time to draw a line. If the government assists Lehman, there's going to be another one coming for a
bailout," said William Poole, former president of the Federal Reserve Bank of St. Louis. "The more often you do it, the harder it becomes to say it's just a special exception."
"If the market is so fragile, so close to the edge, then bailing out Lehman is not going to solve the problem," Poole said. "Letting Lehman go down, if it comes to that, that would clear the air," he said,
if such an event "doesn't trigger an enormous crisis. And that would be my expectation."
Paulson in early July called for a stronger regulatory process that can
allow big investment banks to fail in an "orderly way" without threatening the stability of the financial system. He said he wanted to avoid the perception that an institution is "too interconnected to fail or too big to fail."
But the Treasury's involvement in quickly finding a buyer for Lehman shows that Paulson is a long way from achieving that goal, and such failures will require a guiding hand from the top of the Fed and Treasury, at least from a deal brokering standpoint.
Alice Rivlin, a Brookings Institution fellow and former Federal Reserve vice chairman, likened the Lehman talks to former Treasury Secretary Robert Rubin's recruitment of banks in 1998 to provide loans in a privately funded bailout of hedge fund Long Term Capital Management.
"What they'll try to do is get the people together and say 'don't let this organization fail, which could be very disruptive,'" she said, adding that a sale or multiple asset sales at very low prices is the most likely result.
Continued...