BofA, Barclays gain the edge in bid for Lehman

The field of possible buyers for Lehman Bros. Holdings Inc. narrowed Saturday, but the parties involved in the discussions over the wounded investment bank’s future were at loggerheads over how to finance the rescue.

An investment banking official said Bank of America Corp. and Britain’s Barclays had emerged as front-runners for Lehman after a possible cash injection from its rival Wall Street banks and brokerages.

Top officials from the Federal Reserve and the Treasury Department and executives from several Wall Street banks met at the Federal Reserve Bank of New York’s downtown Manhattan headquarters Saturday for the second day in a row to try to hash out a deal to rescue Lehman.

The financial world was watching. Failure could prompt skittish investors to unload shares of financial companies, a contagion that might affect stock markets at home and abroad when they reopen Monday.

Discussions are expected to continue today, a New York Fed spokesman said.

The investment banking official, who asked not to be named because the talks were ongoing, said the investment houses were balking at paying to polish up Lehman’s balance sheet so Bank of America or Barclays could buy a financially clean firm.

He said the investment banks were angling for the government to provide some money, as it did when it helped JPMorgan Chase & Co. buy Bear Stearns Cos. in March, because they would get little to nothing in return for their help.

The government has drawn a line in the sand over using taxpayer money to help rescue Lehman, however.

The official said the talks were tense and neither side appeared willing to back down.

Besides selling the company whole or piecemeal, Lehman could be liquidated, perhaps with financial firms agreeing to still do business with the company as it wound down.

Or a financial company or companies could buy Lehman’s “good” assets. Its shunned or devalued real estate assets could be placed in a “bad bank” financed by other banks.

Saturday’s participants included Treasury Secretary Henry M. Paulson, New York Fed President Timothy Geithner and Securities and Exchange Commission Chairman Christopher Cox.

Citigroup Inc.’s Vikram Pandit, JPMorgan’s Jamie Dimon, Morgan Stanley’s John Mack, Goldman Sachs Group Inc.’s Lloyd Blankfein and Merrill Lynch & Co.’s John Thain were among the chief executives at the meeting.

Representatives for Lehman were not present during the discussions.

The meeting was held on the heels of an emergency session convened Friday night by Geithner, the Fed’s point man on financial crises.

Federal Reserve Chairman Ben S. Bernanke is actively engaged in the deliberations but wasn’t in attendance.

Geithner convened the meeting Friday night, telling bankers to come up with a solution or risk being the next to go under, according to investment banking officials with direct knowledge of the talks.

They spoke on condition of anonymity because the talks were ongoing. A spokesman for Lehman declined to comment about the meeting.

Other potential buyers may include Japan’s Nomura Securities, France’s BNP Paribas Securities and Deutsche Bank Group. All have declined to comment.