Hank Paulson begs banks to rescue Lehman Brothers

"We have been asked [by Paulson] to look at this, and it would be remiss of us not to, but looking is not the same as doing," a person close to Barclays said last night.

Barclays is facing competition to buy Lehman from Bank of America, and it remains possible that another bidder will emerge today, with Nomura, the Japanese brokerage, Goldman or others named as potential buyers.

Lehman would be valuable to both Barclays and its US rival, either strengthening the British bank's standing on Wall Street or giving Bank of America an enhanced presence in Europe and Asia, regions where its investment banking business is weak.

At an emergency meeting at the New York Federal Reserve on Friday night, Lehman was told by some of those present that it needed to find a solution to its capital crisis before Asian stock markets open tomorrow morning, about midnight tonight in Britain.

The summit was attended by Wall Street bosses including John Mack, chief executive of Morgan Stanley, John Thain, his counterpart at Merrill Lynch, Jamie Dimon, head of JP Morgan Chase, and Lloyd Blankfein, chief executive of Goldman Sachs. Representatives from Royal Bank of Scotland, which has a large US banking business, and US government officials, including Paulson, and Tim Geithner, head of the New York Federal Reserve, were also there. It is not clear whether anyone from Barclays attended.

A further meeting was held yesterday and another is expected to be staged today in an effort to secure a deal that will salvage Lehman's future. The Fed meetings have revived memories of the crisis which engulfed Long Term Capital Management, the hedge fund, in 1998, when Wall Street firms were asked to make contributions to save it from collapse.

Lehman's situation is different, in that the US authorities do not generally view its collapse as an event which would pose a broader systemic risk. Efforts to secure capital infusions are now more complicated because of the deep scars on the balance sheets of many investment banks.

Last week, as its share price continued to slide despite the government rescue of Fannie Mae and Freddie Mac, the US mortgage giants, Lehman unveiled plans to separate its core investment bank from the 'toxic' real estate assets which have triggered concerns for its financial health.

The slump in Lehman's share price last week - the bank has lost more than 90 per cent of its market value this year - was mirrored by sharp declines at Merrill and AIG.

AIG had been planning to update the market about its strategy towards the end of the month, but is now likely to do so as early as tomorrow, potentially raising billions of dollars through a stock issue and asset sales.

Lehman had been hoping to secure a capital injection of about $6bn (£3.6bn) from Korea Development Bank, a state-backed lender in South Korea. Talks with KDB ended unsuccessfully last week with Dick Fuld, Lehman's chief executive, holding out for a price higher than the Koreans were prepared to offer. Other discussions with potential investors, including sovereign funds in the Middle East, and Citic Securities of China, have also stalled.

Fuld was this weekend seeking offers for Neuberger Berman, Lehman's asset management arm, which is valued at up to $8bn but may fetch considerably less because the bank is seen as a forced seller. Lehman and Barclays both declined to comment.