As the consolidation bandwagon continues its merry way down Wall Street, traders are eyeing the last great investment banking name,

Lehman Brothers



Pullback this week

Speculation is that Lehman will get bought sooner rather than later, as midsize houses face increasing difficulty snaring the most complex, lucrative, global assignments.

The key question for investors today is this: How willing are senior management and the board to sell the firm? Read on.

Squeeze Play

Lehman finds itself in much the same position as

J.P. Morgan

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before its pending acquisition by

Chase Manhattan


: A storied past as a pre-eminent Wall Street house; a diminished present as a good but second-tier firm; and an uncertain future in a world where Lehman's $233 billion in assets are simply not sufficient to compete with giants like


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, Chase/J.P. Morgan,

Goldman Sachs

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Morgan Stanley Dean Witter



We know how J.P. Morgan CEO Sandy Warner and his board resolved their dilemma. They sold out.

Whither Lehman? According to Lehman board member John D. Macomber, who is also head of the board's executive committee, "There is no formal agenda to sell this company, no actions that I know of to get us organized for a sale."

Lehman more than doubles over a year

Source: BigCharts

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Macomber emphasized in an interview that the board is fully behind CEO Dick Fuld's strategy "to keep building the quality of the business." But he rejected speculation that the board has shifted its stance with regard to the firm's independence: "The implication that we are suiting the company up for sale or have discussed that in some formal way is not true," Macomber said. "There has been no change in strategy."

Macomber declined to respond to questions about how the board would react to a bid. "We don't answer 'what if' questions," he said. "A board of directors always has to look after the interests of shareholders. But it is ludicrous to say that there is a movement to sell the company to someone else."

Hearing Aid

It may not be ludicrous, however, to suppose that the board would listen seriously to a bid, according to a senior Lehman executive. This insider said that the board would likely be "responsive" to an offer.

The executive said that as much as the directors think the firm's franchise value has improved in recent years -- and there is no doubt it has -- the fact remains that size matters increasingly in investment banking. "The board knows that," said the executive, who emphasized that as directors of a public company the Lehman board must, and would, respond to serious bids.

And the exec expects one. Imminently? The Lehman source gave no indication of that.

What kind of board is Lehman's?

On paper, it looks to be pretty independent of management. Fuld is the only insider. The board totals nine directors, a manageable number to make decisions. It includes some well-regarded business and investment figures. There is former Sandy Weill partner Roger Berlind, economist and bond manager Henry Kaufman, former


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head John Akers, the ex-head of


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, Thomas Cruikshank. And, of course, Macomber, an ex-McKinsey partner and former CEO of



But an investment banking source familiar with the board says, "Dick Fuld is very much in control. It's a weak board. In the event of an offer, they would look to him."

That makes sense. A number of the board are holdovers from the James D. Robinson III's old

American Express

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board. (American Express owned Lehman for a decade before spinning it out in 1994.) The old Amex board wasn't known for excessive independence from Robinson, who was bounced as CEO only after years of missteps and fierce pressure from outside investors.

In the Fuld

What does Fuld want? "He is not looking to go out and sell the place," the investment banking source says. "There are other shareholders who would like to sell the firm, but the board is fully behind Dick. They like and respect everything he has done." Nonetheless, this person adds, "Lehman has a limited future as an independent. They are in a tough bind, and Dick knows that."

What kind of deal would Fuld cotton to? The investment banking source says that Fuld would rather do a deal where he remains in control. That would be more likely with a European bank than a New York-based outfit. The source said that the most likely bidder for Lehman would be a European bank looking for greater presence in the U.S.

So far, there have been relatively few approaches by potential buyers, according to the investment banking source. The primary problem is Lehman's narrow business mix. The firm is highly reliant on trading for its profits, and that is a notoriously

volatile business.

The takeaway from this inside look at the stance of the Lehman board? Directors are torn. This is not a board or senior management mistaken about the basic challenges facing the franchise. They are also aware of the money to be had if they sell out. Lehman can boast to a buyer that it has an excellent, experienced bond-trading unit, a valuable European operation and a profitable domestic mergers-and-acquisition advisory business.

The Lehman executive described their dilemma well. "They would rather not" sell, said the source. "But they recognize reality."

On Wall Street, reality generally wins out in the end.