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o:connecttype="rect"/> <o:lock v:ext="edit" aspectratio="t"/> </v:shapetype><v:shape id="_x0000_i1025" type="#_x0000_t75" alt="" style='width:149.25pt; height:35.25pt'> <v:imagedata src="In_Frantic_Day_Wall_Street_Banks_Teeter_files/image001.gif" o:href="cid:D67960AF-1CC3-4670-A703-F3EE98B026A0@local"/> </v:shape><![endif]--><![if !vml]><img width=199 height=47 src="In_Frantic_Day_Wall_Street_Banks_Teeter_files/image001.gif" v:shapes="_x0000_i1025"><![endif]><o:p></o:p></span></p> <div style='min-height: 31px'> <p class=MsoNormal><span style='font-size:18.0pt;font-family:"Georgia","serif"; mso-fareast-font-family:"Times New Roman";color:#000D62'><o:p>&nbsp;</o:p></span></p> </div> <div> <p class=MsoNormal><b><span style='font-size:18.0pt;font-family:"Georgia","serif"; mso-fareast-font-family:"Times New Roman"'>September 15, 2008</span></b><span style='font-size:11.5pt;mso-fareast-font-family:"Times New Roman"'><o:p></o:p></span></p> </div> <div style='min-height: 31px'> <p class=MsoNormal><span style='font-size:13.5pt;font-family:"Georgia","serif"; mso-fareast-font-family:"Times New Roman";color:#666666'><o:p>&nbsp;</o:p></span></p> </div> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in'><b><span style='font-size:31.0pt;font-family:"Georgia","serif"'>In Frantic Day, Wall Street Banks Teeter</span></b><span style='font-size:7.0pt'><o:p></o:p></span></p> <div> <p class=MsoNormal><b><span style='font-size:18.0pt;font-family:"Georgia","serif"; mso-fareast-font-family:"Times New Roman"'>By </span></b><span style='font-size:18.0pt;font-family:"Georgia","serif";mso-fareast-font-family: "Times New Roman"'><a href="http://topics.nytimes.com/top/reference/timestopics/people/s/andrew_ross_sorkin/index.html?inline=nyt-per"><b><span style='color:#000D62'>ANDREW ROSS SORKIN</span></b></a></span><span style='font-size:11.5pt;mso-fareast-font-family:"Times New Roman"'><o:p></o:p></span></p> </div> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>This article was reported by Jenny Anderson, Edmund L. Andrews, Eric Dash, Michael J. de la Merced, Andrew Ross Sorkin, Louise Story and Ben White. It was written by Mr. Sorkin.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>In one of the most dramatic days in Wall Streets history, <a href="http://topics.nytimes.com/top/news/business/companies/merrill_lynch_and_company/index.html?inline=nyt-org"><span style='color:#000D62'>Merrill Lynch</span></a> agreed to sell itself to <a href="http://topics.nytimes.com/top/news/business/companies/bank_of_america_corporation/index.html?inline=nyt-org"><span style='color:#000D62'>Bank of America</span></a> for roughly $50 billion to avert a deepening financial crisis while another prominent securities firm, <a href="http://topics.nytimes.com/top/news/business/companies/lehman_brothers_holdings_inc/index.html?inline=nyt-org"><span style='color:#000D62'>Lehman Brothers</span></a>, hurtled toward liquidation after it failed to find a buyer, people briefed on the deals said.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of tens of billions of dollars in losses because of bad mortgage finance and real estate investments.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>They culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to avoid a downward spiral in the markets stemming from a crisis of confidence.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>My goodness. Ive been in the business 35 years, and these are the most extraordinary events Ive ever seen, said <a href="http://topics.nytimes.com/top/reference/timestopics/people/p/peter_g_peterson/index.html?inline=nyt-per"><span style='color:#000D62'>Peter G. Peterson</span></a>, co-founder of the private equity firm the <a href="http://topics.nytimes.com/top/news/business/companies/blackstone_group/index.html?inline=nyt-org"><span style='color:#000D62'>Blackstone Group</span></a>, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street. Questions remain about how the market will react Monday, particularly to Lehmans plan to wind down its trading operations, and whether other companies may still falter, like the <a href="http://topics.nytimes.com/top/news/business/companies/american_international_group/index.html?inline=nyt-org"><span style='color:#000D62'>American International Group</span></a>, the large insurer, and <a href="http://topics.nytimes.com/top/news/business/companies/washington_mutual_inc/index.html?inline=nyt-org"><span style='color:#000D62'>Washington Mutual</span></a>, the nations largest savings and loan. Both companies stocks fell precipitously last week.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Though the government only a week ago took control of the troubled mortgage finance companies <a href="http://topics.nytimes.com/top/news/business/companies/fannie_mae/index.html?inline=nyt-org"><span style='color:#000D62'>Fannie Mae</span></a> and <a href="http://topics.nytimes.com/top/news/business/companies/freddie_mac/index.html?inline=nyt-org"><span style='color:#000D62'>Freddie Mac</span></a>, investors have become increasingly nervous about the difficulties of major financial institutions to recover from their losses.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nations growth rate has slowed.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>What will happen to Merrills 60,000 employees or Lehmans 25,000 employees remains unclear. Worried about the unfolding crisis and its potential impact on New York Citys economy, Mayor <a href="http://topics.nytimes.com/top/reference/timestopics/people/b/michael_r_bloomberg/index.html?inline=nyt-per"><span style='color:#000D62'>Michael R. Bloomberg</span></a> canceled a trip to California to meet with Gov. <a href="http://topics.nytimes.com/top/reference/timestopics/people/s/arnold_schwarzenegger/index.html?inline=nyt-per"><span style='color:#000D62'>Arnold Schwarzenegger</span></a>. Instead, aides said, Mr. Bloomberg spent much of the weekend working the phones, talking to federal officials and bank executives in an effort to gauge the severity of the crisis.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>A weekend that was humbling for Lehman and Merrill Lynch and triumphant for Bank of America, based in Charlotte, N.C., began at 6 p.m. Friday in the first of a series of emergency meetings at the <a href="http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_system/index.html?inline=nyt-org"><span style='color:#000D62'>Federal Reserve</span></a> building in Downtown Manhattan.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>The meeting was called by Fed officials, with Treasury Secretary <a href="http://topics.nytimes.com/top/reference/timestopics/people/p/henry_m_jr_paulson/index.html?inline=nyt-per"><span style='color:#000D62'>Henry M. Paulson Jr.</span></a> in attendance, and it included top bankers. The Treasury and Federal Reserve had already stepped in on several occasions to rescue the financial system, forcing a shotgun marriage between <a href="http://topics.nytimes.com/top/news/business/companies/bear_stearns_companies/index.html?inline=nyt-org"><span style='color:#000D62'>Bear Stearns</span></a> and <a href="http://topics.nytimes.com/top/news/business/companies/morgan_j_p_chase_and_company/index.html?inline=nyt-org"><span style='color:#000D62'>JPMorgan Chase</span></a> this year and backstopping $29 billion worth of troubled assets and then agreeing to bail out Fannie Mae and Freddie Mac.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehmans stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Without government backing, Lehman began trying to find a buyer, focusing on <a href="http://topics.nytimes.com/top/news/business/companies/barclays_plc/index.html?inline=nyt-org"><span style='color:#000D62'>Barclays</span></a>, the big British bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their own precarious situation. The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nations largest brokerage force and its name is known in towns across America, while Lehmans main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Knowing that investors were worried about Merrill, <a href="http://topics.nytimes.com/top/reference/timestopics/people/t/john_a_thain/index.html?inline=nyt-per"><span style='color:#000D62'>John A. Thain</span></a>, its chief executive and an alumnus of <a href="http://topics.nytimes.com/top/news/business/companies/goldman_sachs_group_inc/index.html?inline=nyt-org"><span style='color:#000D62'>Goldman Sachs</span></a> and the <a href="http://topics.nytimes.com/top/reference/timestopics/organizations/n/new_york_stock_exchange/index.html?inline=nyt-org"><span style='color:#000D62'>New York Stock Exchange</span></a>, and <a href="http://topics.nytimes.com/top/reference/timestopics/people/l/kenneth_d_lewis/index.html?inline=nyt-per"><span style='color:#000D62'>Kenneth D. Lewis</span></a>, Bank of Americas chief executive, began negotiations. One person briefed on the negotiations said Bank of America had approached Merrill earlier in the summer but Mr. Thain had rebuffed the offer. Now, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, the two parties proceeded with discussions.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>On Sunday morning, Mr. Thain and Mr. Lewis cemented the deal. It could not be determined if Mr. Thain will play a role in the new company, but two people briefed on the negotiations said they did not expect him to stay. Merrills thundering herd of 17,000 brokers will be combined with Bank of Americas smaller group of wealth advisers and called Merrill Lynch Wealth Management.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>For Bank of America, which this year bought Countrywide Financial, the troubled mortgage lender, the purchase of Merrill puts it at the pinnacle of American finance, making it the biggest brokerage house and consumer banking franchise.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Bank of America, meanwhile, eventually walked away from its talks with Lehman after the government refused to take responsibility for losses on some of Lehmans most troubled real-estate assets, something it agreed to do when JP Morgan Chase bought Bear Stearns to save it from a bankruptcy filing in March.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>A leading proposal to rescue Lehman would have divided the bank into two entities, a good bank and a bad bank. Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would have agreed to absorb losses from the banks troubled assets, to two people briefed on the proposal said. Taxpayer money would not have been included in such a deal, they said.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Other Wall Street banks also balked at the deal, unhappy at facing potential losses while Bank of America or Barclays walked away with the potentially profitable part of Lehman at a cheap price.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>For Lehman, the end essentially came Sunday morning when its last potential suitor, Barclays, walked away from a deal, saying it could not obtain a shareholder vote to approve a transaction before Monday morning, something required under <a href="http://topics.nytimes.com/top/reference/timestopics/organizations/l/london_stock_exchange/index.html?inline=nyt-org"><span style='color:#000D62'>London Stock Exchange</span></a> listing rules, one person close to the matter said. Other people involved in the talks said the Financial Services Authority, the British securities regulator, had discouraged Barclays from pursuing a deal. Peter Truell, a spokesman for Barclays, declined to comment.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Lehman was expected to seek bankruptcy protection for its holding company by late Sunday evening, representing the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago, people close to the matter said. Lehmans subsidiaries were expected to remain solvent while the firm liquidates its holdings, these people said. Under this scenario, a group of banks have tentatively agreed to provide a financial backstop to assist in an orderly winding down of the 158-year-old investment bank. Such an agreement could expose those banks to losses on Lehmans assets.</span><span style='font-size: 11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Bart McDade, Lehmans president, was at the Federal Reserve Bank in New York late Sunday discussing terms of Lehmans dissolution with government officials. The Fed was expect to play a supporting role in the process by temporarily accepting lower-quality assets from banks in return for loans from the government.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Lehmans filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firm, Lehman cannot hope to reorganize and survive. It was not clear whether the government would appoint a trustee to supervise Lehmans liquidation or how big the financial backstop would be.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Lehman has retained the law firm Weil, Gotshal &amp; Manges as its bankruptcy counsel.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>The collapse of Lehman is a devastating end for Richard Fuld Jr., the chief executive who has led the bank since it emerged from <a href="http://topics.nytimes.com/top/news/business/companies/american_express_company/index.html?inline=nyt-org"><span style='color:#000D62'>American Express</span></a> as a public company in 1994. Mr. Fuld, who steered Lehman through near- death experiences in the past, spent the last several days in his 31st floor office in Lehmans midtown headquarters on the phone from 6 a.m. until well past midnight trying to find save the firm, a person close to the matter said.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>The weekends events indicate that top officials at the Federal Reserve and the Treasury will take a harder line on providing government support of troubled financial institutions.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed chairman, <a href="http://topics.nytimes.com/top/reference/timestopics/people/b/ben_s_bernanke/index.html?inline=nyt-per"><span style='color:#000D62'>Ben S. Bernanke</span></a>, and Mr. Paulson had warned that they would not put taxpayer money at risk simply to prevent a Lehman collapse.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>The tough-love message was a major change in strategy, but it remained unclear until at least Friday whether the approach was real or just posturing. If the Fed was faced with the genuine risk of another market meltdown, analysts said, it would be almost duty-bound to ride to a rescue of one kind or another.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>What few people anticipated was that the Treasury and Fed officials might reach for an even broader strategy.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>They were faced after Bear Stearns with the problem of where to draw the line, said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisors, a forecasting firm. It became clear that this piecemeal, patchwork, case-by-case approach might not get the job done.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>At first glance, the new strategy by Mr. Paulson and Mr. Bernanke represents a much purer and tougher insistence that Wall Street work out its own problems without government help.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>But that is only the first glance. If Bank of America acquires Merrill Lynch, its capital reserves would immediately fall below the minimum requirements for bank holding companies. Federal regulators, including the Federal Reserve, would have to show lenience for as long as it takes the capital markets to regain their confidence which could be quite a while.</span><span style='font-size: 11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>And Merrill Lynch is hardly the only troubled financial institution on the horizon. Administration officials acknowledged this week that more bank failures are inevitable, and the main protection for depositors the <a href="http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_deposit_insurance_corp/index.html?inline=nyt-org"><span style='color:#000D62'>Federal Deposit Insurance Corporation</span></a> is likely to exhaust the reserves it has built over the years from bank insurance premiums.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>What we need now is a systemic solution and to admit that this is an extraordinary situation, Mr. Meyer said. Mr. Meyer said the government should go to the heart of the crisis the mortgage market and start buying up mortgage-backed securities in a broad rescue.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>That is similar to an approach urged by <a href="http://topics.nytimes.com/top/reference/timestopics/people/g/alan_greenspan/index.html?inline=nyt-per"><span style='color:#000D62'>Alan Greenspan</span></a>, Mr. Bernankes predecessor as chairman of the Federal Reserve. Mr. Greenspan, who long been a staunch opponent of government interference in the economy, said on Sunday that the Federal government might have to shore up some financial institutions.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>This is a once-in- a-half-century, probably once-in-a-century type of event, Mr. Greenspan said in an interview on ABC. I think the argument has got to be that there are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investment in an economy that on very rare occasions -- and this is one of them -- its desirable to prevent them from liquidating in a sharply disruptive manner.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Most economists contend that bailouts are often bad economic policy, because each rescue tends to encourage moral hazard the tendency of institutions and investors to take even bigger risks because they assume the government will rescue them too.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger bailout one week ago of Fannie Mae and Freddie Mac, the giant mortgage finance companies.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Officials noted that Lehmans downfall posed a lower systemic threat because it had been a very visible and growing risk for months, which meant that its customers and trading partners had had months to prepare themselves.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>Outside the public eye, Fed officials had acquired much more information than they had in March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>But James Leach, a former Republican congressman from Iowa and chairman of the House Banking committee, said the Fed and Treasury may not be able to avoid a broader rescue.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>The Feds historic position is to object philosophically to a rescue role but in the end to do everything in its power to avoid anything that poses systemic risk, said Mr. Leach, now a lecturer at Harvard.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><span style='font-size:22.5pt;font-family:"Georgia","serif"'>My sense is that the systemic question will be the only question on the table if Lehman falters, he continued. If systemic risk is considered grave, the Fed, perhaps with Treasury playing at least an advisory role, will intervene.</span><span style='font-size:11.5pt'><o:p></o:p></span></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:17.25pt;margin-left: 0in;mso-line-height-alt:17.7pt'><i><span style='font-size:22.5pt;font-family: "Georgia","serif"'>Michael Barbaro contributed reporting.</span></i><span style='font-size:11.5pt'><o:p></o:p></span></p> <div style='min-height: 31px'> <p class=MsoNormal><span style='font-size:18.0pt;font-family:"Georgia","serif"; mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> </div> <p class=MsoNormal align=center style='text-align:center;background:#E5E5E5'><span style='font-size:14.5pt;font-family:"Arial","sans-serif";mso-fareast-font-family: "Times New Roman";color:#000D62'><a href="http://www.nytimes.com/ref/membercenter/help/copyright.html">Copyright 2008</a></span><span style='font-size:14.5pt;font-family:"Arial","sans-serif"; mso-fareast-font-family:"Times New Roman"'> <a href="http://www.nytco.com/"><span style='color:#000D62'>The New York Times Company</span></a></span><span style='font-size:11.5pt;mso-fareast-font-family:"Times New Roman"'><o:p></o:p></span></p> <ul style='margin-top:0in' type=disc> <li class=MsoNormal style='text-align:center;mso-list:l0 level1 lfo1; tab-stops:list .5in;background:#E5E5E5' align=center><span style='font-size:14.5pt;font-family:"Arial","sans-serif";mso-fareast-font-family: "Times New Roman";color:#000D62'><a href="http://www.nytimes.com/privacy">Privacy Policy</a></span><span style='font-size:14.5pt;font-family:"Arial","sans-serif"; mso-fareast-font-family:"Times New Roman"'> <a href="http://query.nytimes.com/gst/sitesearch_selector.html?query=&amp;date_select=full&amp;type=nyt"><span style='color:#000D62'>Search</span></a> <a href="http://www.nytimes.com/corrections.html"><span style='color:#000D62'>Corrections</span></a> <a href="http://www.nytimes.com/rss"><b><span style='font-family:"Verdana","sans-serif"; color:white;background:#E26C21'>RSS</span></b></a> <a href="http://firstlook.nytimes.com/"><span style='color:#000D62'>First Look</span></a> <a href="http://www.nytimes.com/membercenter/sitehelp.html"><span style='color:#000D62'>Help</span></a> <a href="http://nytimes.com/ref/membercenter/help/infoservdirectory.html"><span style='color:#000D62'>Contact Us</span></a> <a href="https://careers.nytco.com/TAM/nyt_docs/TAM/candidate.html"><span style='color:#000D62'>Work for Us</span></a> <a href="http://spiderbites.nytimes.com/"><span style='color:#000D62'>Site Map</span></a></span><span style='font-size:11.5pt;mso-fareast-font-family: "Times New Roman"'><o:p></o:p></span></li> </ul> <p class=MsoNormal><span style='font-size:11.5pt;mso-fareast-font-family:"Times New Roman"'><br style='mso-special-character:line-break'> <![if !supportLineBreakNewLine]><br style='mso-special-character:line-break'> <![endif]><o:p></o:p></span></p> <p class=MsoNormal><span style='mso-fareast-font-family:"Times New Roman"'><o:p>&nbsp;</o:p></span></p> </div> </body> </html>