NY Fed tells banks to keep quiet to protect Lehman

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With Bear Stearns collapsing into the hands of JPMorgan, with its shares valued at just $240 million (£120 million), it is reported the Federal Reserve Bank of New York, the local of arm of IS central bank, contacted executives at the top banks to ensure Lehman does not suffer a Bear-style problem.

The New York Fed is said to have approached Goldman Sachs, Morgan Stanley, Merrill Lynch and Bank of America over the weekend in a bid to prevent any words or actions in the market at the start of the week that might jeopardise the future of Lehman.

Wall Street commentators have alighted upon Lehmans as the bank with a business model most like Bear's and, therefore, the one most likely to hurt in a liquidity crisis which the Federal Reserve is attempting to avert by pumping money into the banking systems and cutting inter-bank lending rates.

Investors, however, have voted with their feet on Lehman, which reports its 2007 results today and will give an update on its financial health. Its shares closed down 22% last night, having almost halved in trading at one stage.

Yields on Lehman's shortest dated bonds which finance the bank's balance sheet widened to 573 basis points (5.73%) over the equivalent 2012 US Treasuries from 501 points, indicating investors want a better return for their continuing support.

The cost of Lehman's credit default swaps also widened by 40 basis points - effectively putting $40,000 a year on Lehman's debt bill for every $10 million borrowed. The New York Fed and Lehman declined to comment.