Barclays ends talks to buy Lehman Brothers

WASHINGTON -- Barclays, one of Britain's largest banks, dropped out of talks Saturday to buy investment bank Lehman Brothers because it could not get a guarantee from the U.S. government to cover losses for Lehman's problem assets, according to a source close to the matter.

Barclays was approached by the U.S. Treasury Department last week about Lehman Brothers, according to the source, who declined to be named because he was not authorized to speak on the record. Barclays explored an acquisition of Lehman, the person said, because a deal would enhance the bank's investment banking franchise as well as add diversity to its operations and geographic presence.

The deal discussed this weekend would have required the acquirer to guarantee the trading obligations of Lehman Brothers, this source said, which Barclays ultimately was not willing to assume.

Talks continued Sunday at the Federal Reserve's New York headquarters among federal banking regulators and representatives of many leading banks aimed at reaching a deal to sell Lehman. The objective is to avoid a fire sale of assets that could worsen a year-old credit crisis crippling the U.S. economy.

A major impetus toward reaching a deal Sunday were concerns that no action might drag down foreign financial markets and U.S. credit markets Monday.

Lehman's financial outlook soured in large part over defaults in the mortgage market. Its shares fell more than 90% in the past week amid worries that the investment bank was having difficulty raising fresh capital and Lehman's disclosure of a larger-than-expected third quarter loss of $3.9 billion.

Other major banks are also strained by the credit crunch and are therefore reluctant to make large financial outlays to help Lehman.

The government has been trying to encourage other banks to resolve Lehman's fate without federal financial assistance, a different approach from its other recent interventions in troubled financial service companies. Last week, the government took over mortgage-finance giants Fannie Mae and Freddie Mac and the Federal Reserve provided a $29 billion loan to assist JPMorgan Chase's takeover of investment bank Bear Stearns earlier this year.