U.S. may broker rescue of Lehman Bros.

Fearing that a failure of Lehman Bros. could topple other financial firms, senior officials of the Federal Reserve and Treasury Department were talking with the struggling company and potential buyers Thursday to try to smooth the way for a sale of the venerable investment bank, people familiar with the situation said.

The 158-year-old Wall Street institution has seen its shares fall 70% in the last three days. A sale of Lehman Bros. Holdings Inc. -- at what would be a bargain price -- would make it the second major Wall Street firm to succumb to the nearly 2-year-old mortgage crisis.

Word that Lehman had apparently given up its quest to remain independent came after investors reacted unkindly to the investment bank's plan, unveiled Wednesday, to cope with billions of dollars in mortgage-related losses that have depleted its capital.

Lehman's shares plunged $3.03, or 42%, to $4.22 on Thursday, pushing the company's total stock market value below $3 billion and making an acquisition feasible for a range of potential suitors, particularly if the federal government provides financial backing to grease a sale, as it did with JPMorgan Chase & Co.'s absorption of Bear Stearns Cos. in March.

"It's a great play for somebody at this price," said Dan Alpert, managing director at Westwood Capital, a New York-based investment bank.

But the Fed and the Treasury are thought to be highly reluctant to get involved in another government rescue similar to those of Bear Stearns or mortgage giants Fannie Mae and Freddie Mac last weekend.

The argument for federal aid is that a collapse of Lehman could cause a painful chain reaction in the financial system, given the extent of its financial obligations to banks, brokerages, hedge funds and other players.

But a government-assisted sale of Lehman could spark a political firestorm just days after Treasury seized Fannie and Freddie while committing to invest as much as $100 billion of taxpayers' money in each firm to keep them solvent.

The leading contenders to buy Lehman were believed to be Bank of America Corp. and British banks HSBC Holdings and Barclays. But other European, Japanese and Middle Eastern banks aren't out of the question, analysts said.

At a price of about $3 billion, Lehman could also be in the cross-hairs of a private equity firm such as Blackstone Group or money-management giant BlackRock Inc., said Richard X. Bove, an analyst at Ladenburg Thalmann.