The chief executive of Barclays and the president of Lehman Brothers just announced an acquisition of a part of Lehman by Barclays, according to someone present. It was unclear exactly what Barclays was acquiring but earlier news reporters suggested it would be the broker-deal arm of Lehman.

Barclays Bob Diamond and Lehman’s Bart McDade took to the second floor of Lehman to speak to employees.

“It’s time to dominate,” McDade announced.

They are apparently now going floor to floor making the announcement.

“They just announced they are keeping the trading platform in New York,” a person familiar with the matter said.

Update: Lehman employees have set up LaidOffByLehman.com, which is also reporting the tour by McDade and Diamond.

Well, now that someone actually put their money where their leaks were and ponied up for something that Lehman owns, other troubled firms look to be buoyed by the lift in Lehman confidence.

Lehman shares soared 9.00% on the news to $0.2276 per share and the rising tide of confidence that the assets in the opaque portfolios of financial firms are more of a Polonium-210-slow-and-painful kind of toxicity instead of the quick-and-violent lethality of sodium cyanide rallied firms like Washington Mutual (WM) up a whopping 19.50% to $2.39, its highest point in the preceding 10 minutes.

The news also boosted the second derivative of AIG’s stock price. The rate of the rate of deterioration in AIG’s share price reversed quickly, jumping +5.50%, up from a brutal -24.33% yesterday. AIG indicated it does not comment on the second derivative of their stock price during market hours, pursuant to that firm’s investor relations policy.

Depending on how hungry investors were for debt today, they may or may not have been annoyed at the news that Lehman’s rumored BWIC for $800+ million of debt from issuers like Tribune, Visteon, Sabre Holdings and the like has been canceled. Perhaps Barclays is closing in for the kill after all? Yep, that was it.

These guys bleed green.

(via BestWeekEver via VideoGum.)

One of the most interesting developments in the Lehman debacle must be the abrupt departure and the return (which followed hard upon) of Barclays as a Lehman suitor.

Hazarding a guess, one might think that Barclays was trying to stare down Paulson, pressing for federal backing of the potential toxic waste Barclays would have to take on in a Lehman purchase. After all, Jamie got the government to blink, why shouldn’t our friends from across the pond? That didn’t work so well. Bailing out a major counter-party and prime broker (and coping with the moral hazard problems that brings) was one thing, supporting a foreign buyer was a no-go and I suspect not a small number of risk arb managers who figured that out on Friday did fairly well today.

Still, The Wall Street Journal points out that Paulson was in no mood to nursemaid another transaction no matter who the buyer. Our own John Carney makes the case for a tempestuous and unpredictable Paulson. And for Barclays’ part, well, they look a bit silly now that their bluff bombed. But then, it tends to illuminate the desperation Lehman must feel that they seem to be ignoring all the bluster and continue to act as if nothing at all has happened now that the Brits are back bidding.

John Mack escapes with my favorite quote from the morass that is Lehman’s disposition: “If we’re going to do this deal, where does it end?”

It is rather shocking (but not) to see how quickly the financial press turns on its former heroes. Truly, very fair weather friends, the press. To wit: Dick Fuld’s fall from grace with the Financial Times as seen in their headlines and prose.

Smart survivors of the carnage

“Dick Fuld, Lehman Brothers chief executive, has emerged triumphantly from the squeeze….”

- FT November 5, 2007

Lehman rides out credit crisis

“Analysts had expected Lehman to earn $1.42 a share. But the diversification strategy of Richard Fuld, chief executive, helped avert the predicted earnings drop….”

- FT December 14, 2007

A fighter on the ropes

- FT June 14, 2008

Dick Fuld, the executioner

- FT June 17, 2008

On Wall Street: Be they ever so humble, but the times they are a-changing

“You know the Street has serious self-esteem issues, when even Dick Fuld, one of the toughest bankers around, has to come out with a mea culpa for Lehman Brothers’ losses.”

- FT June 20, 2008

Lehman chief to forgo annual bonus

- FT June 27, 2008

Fuld faces a tough fight to save his legacy

“Dick Fuld’s reputation as a titan of Wall Street….”

- FT September 10, 2008

Hadron Collider meets Dick Fuld

“…Lehman Brothers chief Dick Fuld was subjected to the laser-beam treatment….”

- FT September 11, 2008

Hubris - is thy name Richard Fuld?

- FT September 14, 2008

Denial disguises Lehman reality

- FT September 15, 2008

A tragedy of hubris and nemesis

- FT September 15, 2008

Ah yes. From smart fighter, triumphant, to humble tower of strength, to executioner, to tough banker to egotistical maniac. We love our financial heros strong, indelible and tough. Until we don’t anymore.

Best observation:

It might be a good idea to expand the maximum check-box answers on the form for:

Estimated Number of Creditors (Over 100,000).
Estimated Assets (More than 1 Billion).
Estimated Liabilities (More than 1 Billion).

Potential Inaccuracies:

“Does the debtor own or have possession of any property that poses or is alleged to pose a threat of imminent and identifiable harm to public health or safety?” Yes [ ] No [X].

(Though, I suppose it is possible Dick Fuld has been fired, and this is why his ego is not triggering this provision).

Most Potentially Screwed Creditors (though note that some of these may be listed in their capacity as trustees for the debt issues, not as creditors):

CitiBank, Bank of New York (jointly): “Approximately $138 billion” in “Bond Debt.”
Bank of New York (solely): $17 billion.
Aozora Bank, Ltd., Tokyo: $463 million.

Country Other Than The United States With Most Potentially Screwed Creditors:

Japan- about $1.6 billion. (First the real estate in the 80s, now this, HAH!)

Best “That About Sums It Up” Figures:

Total Assets: $639 billion. (AHEM!)
Total Liabilities: $613 billion.

Most Obvious Equity Pain:

Name / % of Common Stock Held
AXA and related parties / 7.25%
ClearBridge Advisors, LLC and related parties / 6.33%
FMR LLC and related parties / 5.87%

Method For The Very Broker-Dealish Lehman To Avoid Chapter 7?

File at the holding company level?

Lehman Brothers continues to trade natural gas swaps in the US ICE market, but ICE Europe has shut them out its market for crude oil futures, a person familiar with the matter said. The CME group continues to allow them to trade agricultural futures, currencies and interest rate swaps, and on the NYMEX (which is owned by the CME group) Lehman is still permitted to trade on the NYMEX, the person said.

No one is trading on the physical markets. While several trading floors were instructed by managers to cease trading on the spot market with Lehman late last week and over the weekend, part of the lack of physical trading could be due to the effects of hurricane Ike, which is believed to be diminishing physical trading in oil today. Many Houston trading desks are operating remotely today, with traders difficult to reach by emails and phones and some offices in Houston still closed.

Employees at the Lehman Brothers in midtown Manhattan are described as “crying, angry, distraught” by a witness. They’ve been filing out of the building this evening.

The bank was said by a person familiar with the matter to be close to confirming that it will file under Chapter 7 of the bankruptcy code, which means the firm will be liquidated.

However Robert Peston at the BBC says it will be Chapter 11 rather than Chapter 7. “Preparations have been made for Lehman Brothers, the substantial US investment bank, to obtain protection from its creditors under US Chapter 11 insolvency procedures,” he writes.

Meanwhile, talks continue at the New York Federal Reserve. With the two major buyers for Lehman Brothers, Barclays and Bank of America, having walked away from deals this afternoon, the talks now are focussed on limiting the damage from Lehman’s collapse. These talks include consideration of a merger between Merrill Lynch and Bank of America, hoping to stop the “who is next” question from toppling another Wall Street firm.

Barclays has walked away from the negotiations on the fate of beleaguered Lehman Brothers, balking at the government’s refusal to provide guarantees that would shield Barclays from Lehman losses. Bank of America continues in talks, sources say.

We hear that Lehman CEO Dick Fuld is complicating negotiations, saying at first thatthe deals being worked out at the New York Federal Reserve would not benefit Lehman shareholders. He had threatened to pull Lehman out of talks and keep his investment bank independent. Many believe that survival as an independent entity is simply not feasible for Lehman, however. They predict that if a buyer or buyers for all or a large part of Lehman cannot be found the firm will have to be liquidated.

Today Fuld seems to have largely given up on autonomy for Lehman. He is said to favor a deal with Barclays in the lead and a government guarantee supporting the transaction. This position may risk alienating Bank of America.

Please keep in mind that the situation is very fluid, with deals apparently being reached and then collapsing.

Lehman Heads Toward Brink as Barclays Ends Talks [New York Times]
Barclays Ends Talks to Buy Lehman; BofA Still Involved [CNBC]
Barclays Walks from Lehman Deal [Wall Street Journal]

We understand that a deal has been reached to divide Lehman Brothers into two entities, with a “bad bank” taking the toxic, real-estate assets amounting to around $85 billion. The deal will be financed without any government backing. Lehman chief executive Dick Fuld will resign.

Bank of America will take the lion’s share of the good assets of Lehman, with Barclay’s and Nomura playing a role as well. An international consortium of financial firms will inject capital for the deal, preventing Lehman’s assets from flooding the market in a fire sale. Many US based firms have not played a large role, in part because they are facing their own financial challenges.

Dick Fuld’s resignation was demanded by Bank of America, which played a brinkmanship role in negotiations, threating to let Asian markets open tomorrow without a deal in place, a person familiar with the matter says. Many believe that a Monday market opening without a resolution would effectively have been the end of Lehman Brothers and could have spread financial turbulence to other securities firms. (On a side note: apparently, Japanese markets will be closed Monday morning for a holiday.)

Fuld is said to have taken tonight’s developments very badly. He does not believe that the situation is as desperate as others on Wall Street believe it is, and may be trying to negotiate an alternative deal, we’re told.

Of course, the situation remains fluid and there is still a possibility that the deal reached tonight could fall apart. Many of the details remain to be worked out, although there is widespread agreement on the outline of this deal.

Update: The New York Post is reporting that Lehman was taking offers for its investment management business today.

The notion of a planned sale of its asset-management operation, which is anchored by Neuberger Berman, is alive because Lehman plans on using the offers, which were submitted yesterday, to help assign a value to the entire bank, sources said.

The Wall Street Journal reports that “people familiar with the situation” say a solution to the Lehman Brothers problem could be reached as soon as tonight.

On Saturday, the main task ahead in discussions being led by the Federal Reserve is identifying whether a so-called “bad bank” structure could be designed to hold Lehman’s souring assets. That issue is now seen by people familiar with the situation as the key stumbling block to completing a deal, especially if Treasury and Fed officials keep digging in their heels on opposition to a government-backed rescue.

Potential buyers such as Bank of America Corp. and Barclays PLC are loathe to take on Lehman’s bad assets, which are seen as an immovable object to getting a deal done, according to people familiar with the situation.

The phones at Lehman Brothers must be ringing off the hook. Callers to their offices this afternoon were greeted with a recorded message which said,”You have reached the offices of Lehman Brothers. Due to heavy call volume you may receive delays longer than usual. Please hold for the next available operator.”

Heavy call volume? Oh, Lehman. We love you guys. Keep your chins up.

Whatever else is going wrong at Lehman Brothers, the firm hasn’t had to tap the Fed’s primary dealer credit facility. A few moments ago the Fed released the latest numbers showing that the discount window for investment banks hasn’t had any drawings at all. This news was somewhat telegraphed by the successful commercial paper offering from Lehman earlier today.

Commercial banks, on the other hand, are borrowing heavily from the discount window.

Update: There has been some speculation that Lehman cannot tap the discount window, either because it lacks adequate collateral or because the Fed has deemed that it is no longer eligible because it is not an ongoing concern. Our sources tell us that this is flatly wrong. The Fed takes a wide variety of collateral, which it values at prices far higher than the going rates in the markets. Lehman has plenty of junk in its trunk to trade for Fed ducets. And the “going concern” thing just hasn’t come up and its highly unlikely that the Fed will turn off this money spigot on that basis.

We’ve known for most of the day that Lehman Brother has been actively shopping itself in a desperate attempt to avoid catastrophe. Now names of potential buyers are starting to come in. The Wall Street Journal is reporting that Bank of America is in talks with Lehman.

Perhaps most interesting is the Journal’s reporting on who isn’t participating. Up until just a few minutes ago we were hearing rumors that HSBC could put in a bid over night, despite earlier denials from the bank. Now the Journal says no bid is expected from HSBC. Others who aren’t “expected to participate” include Goldman Sachs, France’s BNP Paribas, Germany’s Deutsche Bank, and Spain’s Banco Santander. Barclays is a maybe.

While Lehman is looking for buyers, the potential buyers are looking for Hank Paulson and Ben Bernanke. Pressure is mounting on the government to become involved, as the Journal story makes clear.

But potential buyers remain wary about plugging holes in Lehman’s balance sheet, and are increasingly looking to the U.S. government to help backstop future losses, according to people familiar with the talks.

A number of these buyers would “come out of the woodwork,” if the U.S. were to step in, said one person monitoring the process. It remains unclear whether the U.S. Treasury or Federal Reserve would take such steps, as was done when the government assisted J.P. Morgan Chase & Co. in its Bear Stearns takeover in March.

Any government involvement would likely require an under-market price for shareholders. When the Fed and Treasury helped JP Morgan Chase buy Bear Stearns, the price of the stock was reduced from around $30 a share to $2 a share. A similar haircut for Lehman from recent market prices could result in a take-under priced at less than a dollar.

Lehman Brothers in Sales Talks; B of A Seen As a Potential Suitor [Wall Street Journal]

We earlier reported that officials at the Federal Reserve and Treasury are scrambling to find a buyer for Lehman Brothers, perhaps going as far as bending or waiving rules that limit the ability of private equity firms to buy sizable stakes in investment banks. Part of the rationale for this may be because the Fed and Treasury want to avoid putting its own balance sheet or taxpayer funds into what would widely be perceived as another bailout.

There seems to be an increasing consensus among commentators that Lehman won’t be bailed out by the Federal Reserve or the Treasury. Over at RealTimeEconomics, Sudeep Reddy adds color to this idea by pointing out that to Fed officials it may well appear that they have already bailed out Lehman. The primary deal credit facility gives Lehman Brothers access to the discount window, allowing it to borrow cheaply against collateral arguably priced at inflated values. Indeed, Bill Gross of Pimco has publicly cited the facility as preventing him from withdrawing from trades with Lehman on the other side.

What’s more, the Treasury and the Fed may want to reduce the moral hazard issue in the market by allowing an institution to fail, Reddy says. But its not clear that they will have the luxury of adding discipline to the market. Lehman is deeply intertwined in the credit markets, particularly, and its failure could have unwanted ripple effects, rocking the stability of the broader financial markets. A better solution, some at the Fed believe, would be to find a willing buyer and arrange private financing without a Fed backstop. This most likely explains the Fed scramble to find a buyer.

Would the Fed Let Lehman Fail? [Wall Street Journal]

We don’t know enough about the commercial paper market to know what to make of a report from Reuters that Lehman offered $340 million in commercial paper and placed 75% of it as of late this morning. Is this good news? After all, it shows they can borrow. Or is Lehman scrambling for liquidity and having to restrict its borrowings to overnight money?

We report, you deride.

Well, that didn’t take long. As soon as we floated the rumor about an emergency rate cut, we heard from a “source familiar with the matter” who tells us that the New York Federal Reserve and Treasury are scrambling to find a buyer for Lehman Brothers. Our source says that one possible solution may be to have regulators wave restrictions that have prevented private equity buyers from buying the troubled investment bank. Officials at the Fed and Treasury are looking into whether they may have the authority to grant waivers.

One plan under consideration is to bring in a foreign bank to make the purchase, with additional capital coming from private equity buyers. The situation was described as “fluid to the point of chaos, category 4 hurricane” by the source. Both the Fed and Treasury officials agree that there should not be another Fed backstop to Lehman obligations, one of tools employed to get JP Morgan Chase to buy Bear Stearns.

Update: Andrew Ross Sorkin just also said on CNBC that the Fed is actively helping find a solution to the crisis at Lehman.

Update II: Bloomberg reporting that Lehman is in negotiations with buyers. “Bankers from other firms are reviewing Lehman’s books today, people with knowledge of the situation said, declining to identify the potential acquirers,” Bloomberg says.

Ever since the Federal Reserve arranged for the acquisition of Bear Stearns and opened the discount window to investment banks, the phrase moral hazard has been on everyone’s lips. The idea is that by relieving Bear Stearns investors and creditors of the full cost of Bear’s failure, the Fed encouraged more risky behavior.

Today Michael Lewis proposes a new kind of moral hazard created by this series of moves by the Fed and the Treasury. He says that the bailouts have led market participants to believe that they don’t need to worry about the collapse of another investment bank because the government will step in. Where once Wall Street would have scrambled to prop up Lehman, as it did Long Term Capital Management, now it feels secure enough to watch Lehman go down.

People are enjoying its failure. The pleasure and interest the markets now take in seeing it fail now exceeds their pleasure and interest in seeing it survive.

This is one of the many unintended little side effects of the government bailout of Bear Stearns Cos.: to greatly reduce the interest of the people who do business with Lehman Brothers in the survival of Lehman Brothers.

All those people whose affairs are intertwined with Lehman might have pressured them to handle their problems more briskly and intelligently — and might also be trying to keep it afloat. The U.S. government has made it possible for them to instead stand back and watch with some detachment and even pleasure as Lehman collapses.

After all, the Federal Reserve will give them their money back, re-insure their credit defaults, take another pile of these distressed assets out of the market. And when the dust settles they can go in and poach Lehman’s business and its smarter employees.

Lehman’s stock is down another 40% this morning.

Joyous Loathing at Lehman Brothers’ Collapse: Michael Lewis [Bloomberg]

When we woke up this morning to await the news from Lehman Brothers we fully expected to spend the rest of the day exploring the question: who is next? Candidates such as Merrill Lynch, Wachovia and Washington Mutual would get batted around the same way attention turned to Lehman after Bear Stearns fell.

But we didn’t do that. It turns out that Lehman is still next. Talking to traders and money managers today made it all too clear to us that the news today has not extinguished questions about the viability of Lehman. The lack of details about financing and other aspects of the commercial real estate spin off, worries about where profits will come from, the non-plan and non-strategy to raise capital, the long delay in the announcement and suspicions that Lehman may employ some fancy accounting to reduce the size of its losses were all cited by folks we spoke with. Lehman is still the most vulnerable firm on Wall Street.

Everyone is saying that, at best, Lehman may have bought itself some time. But money managers we spoke with today agree that Lehman doesn’t have the balance sheet to afford to buy much of anything, not even time.