Barclays pulls out of Lehman sales talks

Barclays has pulled out of talks to buy parts of Lehman Brothers Holdings Inc, according to a person at the British bank with knowledge of the negotiations. The person, who spoke on condition of anonymity, citing company policy, said the decision was "very unlikely" to change. The person said that while Lehman was attractive, the investment bank did not meet what he described as stringent requirements. The move by Britain's third-largest bank complicates efforts to find a buyer for Lehman and save it from collapse. Lehman appeared headed towards being broken up and sold in pieces today, as global financial markets braced for the turmoil likely to follow the collapse of Wall Street's fourth-largest investment bank. Officials from the US Federal Reserve, the US Treasury Department and the heads of the biggest banks on Wall Street and the UK held a third day of meetings in New York in an effort to keep the investment bank from sinking under the weight of money-losing mortgage securities and possibly sucking other banks down with it. While no details have been announced, the US government has already reportedly rejected bailing out the bank with taxpayer funds and given up on selling Lehman as a whole. Instead, the Fed was apparently considering a plan to carve up the investment bank, with rival Wall Street firms buoying it with cash before selling its healthy businesses to Bank of America and possibly Goldman Sachs. Barclays was to be a third potential buyer. Lehman's ailing businesses would later be sold separately. Optimism was low, however, that the Fed would be able to conjure up a deal capable of preventing Lehman's demise from reverberating through the global financial system. With markets elsewhere closed for the weekend, Gulf exchanges provided what could be a bleak preview. Dubai's benchmark stock index - also weighed down by a continuing corruption investigation into some of the emirate's biggest companies - tumbled by as much as 3.4 per cent yesterday. The Abu Dhabi Securities Exchange's main index fell 2.7 per cent and Saudi Arabia's benchmark Tadawul index fell by as much as 1.3 per cent. The crisis surrounding Lehman is the culmination of what economists have warned for months was the next wave of problems emanating from the US subprime mortgage crisis, which have snowballed to become a global credit crunch that some worry could cause a global recession. Despite the concerted efforts of the Fed and other global central banks to contain the damage, the slumping US housing market and deepening losses among investors and financial institutions are creating a vicious circle of ebbing credit. The deeper the losses go, the less money investors and banks can afford to risk, depriving markets of funds that are pushing up costs, eroding profits and creating even more losses. Concerns now centre on just how any bidder for Lehman would finance the purchase of its good assets, and whether selling its bad ones would force down the value of similar worthless securities held by other banks. Analysts and economists said Lehman's troubles were likely to compound a global credit crunch that has triggered a recent rush by global investors out of emerging markets, including those in the Gulf. "Developments like Lehman are exacerbating global risk aversion," said Monica Malik, an economist at EFG-Hermes in Dubai. "Banks are less willing to lend to each other and financing has become more difficult." Lehman's demise represents an ignominious end for one of Wall Street's oldest and most powerful investment banks. Started in 1850 by three brothers in Montgomery, Alabama, who began trading cotton at their general store, Lehman Brothers by the end of last year had 28,000 employees in 23 countries pulling in $19.3 billion (Dh71bn) in annual revenues. But Lehman's share price has dropped 94 per cent in the past year as the subprime mortgage crisis torpedoed the value of its holdings, fuelling speculation that it would have to raise massive amounts of capital or go under. In early April, Lehman raised $4bn selling convertible preferred shares to long-term clients and institutional investors, luring them with a 7.25 per cent annual coupon for shares they could convert for a profit had Lehman's stock price recovered. It did not. In March, the US government stepped in with about $30bn to cement the sale of Bear Stearns to JP Morgan Chase and then last week rescued Fannie Mae and Freddie Mac with a plan that analysts say could cost taxpayers as much as $25bn. But it has reportedly rejected any similar bailout for Lehman. Also apparently standing on the sidelines of the Lehman debacle are the world's sovereign wealth funds, which devoted billions from their massive and still-growing pools of capital to shoring up the likes of Citigroup, Merrill Lynch and Morgan Stanley, only to see the value of their investments plummet as the financial crisis widened. "The sovereign wealth funds have decided they're not going to come to the rescue of every embattled financial institution," said John Habib, a lawyer for Washington firm Kalbian Hagerty in Abu Dhabi. Yesterday's plan was being hammered out inside the Federal Reserve Bank of New York just two blocks from Wall Street. There, bankers from Citigroup, Merrill Lynch and other financial giants met the president of the New York Fed, Timothy Geithner, and US treasury secretary Henry Paulson, who only a week ago announced the bailout of Fannie Mae and Freddie Mac. One proposal would involve selling Lehman's profitable businesses to Barclays, according to the New York Times, with a group of roughly a dozen Wall Street banks providing up to $30bn to offset the losses at Lehman's unprofitable businesses. Britain's Sunday Express reported yesterday that the Bank of America would buy the lion's share of Lehman, including its troubled mortgage assets, while Barclays would buy a smaller portion that would include Lehman's asset management and bond businesses. Goldman Sachs, it said without citing sources, would buy the remainder. If Mr Paulson and the Fed fail to line up buyers for Lehman, the company may have no other option but to declare bankruptcy, at which point its assets would be wound up. The Fed is also reportedly considering contingency plans for making this process as smooth as possible. *With AP and Reuters