By JOE BEL BRUNO and MARTY CRUTSINGER
NEW YORK (AP) - As the outlook for Lehman Brothers' future appeared to dim Sunday, U.S. and foreign banks joined forces to create a plan aimed at inoculating the global financial system against the investment bank's possible failure, a top investment banking official said.
Banks are in tense talks to create a pool of money worth up to $50 billion to lend troubled financial companies, the official said on condition of anonymity because the discussions were ongoing. And officials at the U.S. Treasury and the Federal Reserve are expected to say they are prepared to be more generous in the Fed's emergency lending program for commercial and investment banks .
The plan comes as top government officials and Wall Street executives hold marathon meetings to save Lehman Brothers, whose shares have tumbled 95 percent in the past year over worries that it does not have enough money to cover losses from its real estate holdings.
The meetings have failed to find a buyer for the troubled 158-year-old investment bank, raising concerns that its likely collapse would disrupt global financial markets.
The official also said the Treasury Department and the Fed are pushing Bank of America Corp. (BAC) (BAC) to buy Merrill Lynch & Co. (MER) (MERPO), though talks are still preliminary.
On Friday, Merrill Lynch's shares fell as investors fretted it might be the next investment bank to come under pressure from its portfolio of risky mortgage-backed securities.
Global banks and brokerages have written down more than $300 billion since the subprime mortgage crisis undermined the credit markets beginning last August.
Expectations that Lehman would survive as a company dimmed Sunday afternoon after Barclays PLC (BCS) withdrew its bid to buy the investment bank. Barclays' and Bank of America Corp. were considered front-runners to buy Lehman.
The Lehman talks originally were aimed at selling the investment bank in whole or in part. The deal was tripping on the potential buyers' insistence that they receive the same kind of help that Bear Stearns Cos.' got last March when JP Morgan Chase & Co. bought the securities firm with a $29 billion Fed-backed loan.
Treasury Secretary Henry Paulson has said the government will not help close a Lehman deal.
Lehman declined to comment on the talks.
If no deal were reached, it raised the specter of a bankruptcy and liquidation of the investment bank. Bankers and investment banking officials briefed on the talks described them as being both complicated and fluid. Hope was dwindling that an agreement could be brokered or that new bidders might emerge. They spoke on condition of anonymity because talks were ongoing.
There were signs that Lehman Brothers might be edging closer to a bankruptcy filing, with several reports that it has hired Weil, Gotshal & Manges, the law firm that handled the collapse of investment firm Drexel Burnham Lambert in 1990.
Moreover, there was also an emergency trading session being held at the International Swaps and Derivatives Association to "reduce risk associated with a potential Lehman Brothers Holdings Inc. (LEH) (LEH) bankruptcy." The ISDA, which arranges trades for derivatives, said it was allowing customers to make trades and unwind positions linked to Lehman - but that those trades would be voided if no filing occurs before midnight.
Government officials and executives from several Wall Street banks were huddled at the New York Fed's downtown Manhattan headquarters for a third day seeking a solution to Lehman's financial crisis. Failure could prompt skittish investors to unload shares of financial companies, a contagion that might affect stock markets around the world when they reopen Monday.
Dow Jones industrial futures fell 2.5 percent Sunday, indicating a sharply lower open for the blue chip index Monday morning. Asian markets will begin trading Sunday night Eastern time.
Paulson, Timothy Geithner, president of the New York Fed, and Securities and Exchange Commission Chairman Christopher Cox were among those taking part in the meetings. Federal Reserve Chairman Ben Bernanke is actively engaged in the deliberations but wasn't in attendance.
Paulson's tough bargaining stance received support from outside observers Sunday, who argued that the government had no choice but to draw a line in the sand.
"If Treasury put money into the Lehman deal, then going forward no deal would get done without Treasury help," said Mark Zandi, chief economist at Moody's Economy.com. "Every potential buyer would wait until Treasury stepped in and that would mean Treasury would be on the hook for a lot more bailouts."
The current situation is different from Bear Stearns' situation six months ago.
In Lehman's case, financial markets have been aware of Lehman's problems for a much longer period and have had time to prepare. Investment banks also now have the ability to obtain emergency loans directly from the Fed, a crucial support that they did not have back in March when Bear Stearns was rescued.
In the Lehman talks, bankers and government officials were also trying to tackle a broader agenda that includes problems at American International Group Inc. (AIG) and Washington Mutual Inc. (WM), said the investment bank officials, who were briefed on the talks.
AIG, the world's largest insurer, and WaMu, the nation's biggest savings bank, have taken steep losses during the past year from risky investments. The Wall Street Journal reported Sunday that American International Group Inc. plans to disclose a restructuring by early Monday that's likely to include the disposal of major assets including its aircraft-leasing business and other holdings.
Lehman put itself on the block earlier last week. Bad bets on real-estate holdings - which have factored into bank failures and caused other financial companies to founder - have thrust the firm in peril. It has been dogged by growing doubts about whether other financial institutions would continue to do business with it.
Richard S. Fuld, Lehman's longtime CEO, pitched a plan to shareholders Wednesday that would spin off Lehman's soured real estate holdings into a separately traded company. He would then raise cash by selling a majority stake in the company's unit that manages money for people and institutions. That division includes asset manager Neuberger Berman.
AP Business Writer Raphael Satter contributed to this story from London.