Wall Street Braces for Lehman Brothers Bankruptcy

The federal government showed no signs of stepping in to prevent a potential Lehman Brothers Holdings Inc. bankruptcy after Bank of America Corp. and Barclays Plc pulled out of talks to buy it, Craig Torres and Shannon Harrington of Bloomberg reported today.

Their report says:

Banks and brokers today held a session for netting derivatives transactions with Lehman, or canceling trades that offset each other, in case the New York-based firm files for bankruptcy before midnight.

"The purpose of this session is to reduce risk associated with a potential Lehman" bankruptcy, the International Swaps and Derivatives Association said in a statement today. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the U.S. and abroad.

The step indicates Wall Street lacks confidence that three days of talks to find a buyer for Lehman, held at the Federal Reserve Bank of New York, will be successful. Treasury Secretary Henry Paulson, who has led the talks with New York Fed President Timothy Geithner, was adamant two days ago against using taxpayer funds to help a purchaser take Lehman over.

U.S. regulators are betting that the financial system will be able to withstand the failure of a large institution without severe disruptions to an already weak economy.