Lehman shares drag on bailout reluctance

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Bank of America Corp was widely seen as a leading contender for the role of white knight, with Barclays also named as a possibility.

The Financial Times reported that BofA, the No. 2 U.S. bank by assets, was considering a joint bid for Lehman along with private equity investor JC Flowers and sovereign wealth fund China Investment Co.

Lehman shares fell as much as 16 percent in early trading, though they trimmed those losses by about half following the FT report. Lehman declined to comment.

"Until there's definitive news, you're going to see volatile trading in Lehman, and it would continue to go on a roller-coaster ride based on rumours," said Robert Lutts, president and chief investment officer of Cabot Money Management.

The credit maelstrom is threatening other financial companies, including Washington Mutual, the largest U.S. savings and loan, leading brokerage Merrill Lynch and American International Group Inc, once the world's largest insurer by market capitalization. Wamu shares were down 4.6 percent, AIG plunged 20 percent, while Merrill slid 8.5 percent.

Adding new doubts about the possibility of a quick rescue for Lehman, a source familiar with U.S. Treasury Secretary Henry Paulson's thinking said he was "adamant" that no government money be used in any deal.

The investment bank is struggling to find a solution to the worst crisis of its 158-year history. Lehman wrote down its assets by $5.6 billion in the third quarter, triggering a second straight quarterly loss of $3.9 billion.

Lehman has so far failed to attract investors to shore up its capital position, weakened this year by its out-sized exposure to commercial real estate and residential mortgage assets hard hit by the continuing credit crunch.

The bank, until recently the nation's fourth-largest, is the latest casualty of the mortgage crisis that has roiled Wall Street over the last year, leading to billions of dollars in write-downs for major banks, a credit crunch, and the loss of thousands of jobs in the banking industry.

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