Expectations that a deal will emerge to save Lehman Brothers mounted on Friday after its plunging share price prompted intensive talks with U.S. officials about rescue options.
Lehman's shares added 4% to $4.40 in pre-market trading in New York as talk swirled that the bank would put out a statement before Wall Street opens. Lehman declined to comment.
The bank wrote down $5.6 bln for the third quarter, dragging it to a record quarterly loss of $3.9 bln and has failed to attract investors to shore up its capital position.
Bank of America Corp (BofA) is seen as the most likely suitor for the 158-year-old firm, according to various reports and analysts. BofA declined to comment.
"I believe that Bank of America will win the auction for Lehman Brothers. There is a natural fit between the two companies," Ladenburg Thalmann analyst Richard Bove said in a note.
Lehman and U.S. officials were in discussions about a number of options, including a complete sale, sources with direct knowledge of the talks said late on Thursday. One of the sources said the firm was resisting government intervention.
The Treasury and Federal Reserve were engaged in the talks, which could be completed this weekend, a second source said. The U.S. government is hoping to avoid spending money on a bailout, another person familiar with the situation told Reuters.
European banks Barclays and HSBC have also been linked with Lehman, but executives at both have distanced themselves from such a move in past weeks and they are seen as unlikely to make a move.
Also reflecting concerns that integrating Lehman would be a disruptive deal for any bank, Goldman Sachs, another potential rescuer, is not pursuing a takeover, sources said on Thursday.
By buying Lehman, BofA would get access to one of the best fixed income trading desks, Bove said. "It immediately becomes a first rank player in the equity investment banking sector…it gains access to customers around the world in the capital markets arena," he said.
Lehman's shares fell 42% to $4.22 on Thursday, cutting its market value to under $3 bln. The stock rose 20% in Frankfurt but pared gains after a statement failed to emerge.
Optimism a deal could be struck also lifted the broader European bank index and Asian bank shares, dealers said. The DJ Stoxx European bank index was up 1.7%.
Lehman Chief Executive Dick Fuld, long resistant to ceding independence, has been trying to sell just a part rather than all the company, sources familiar with the situation said.
But investors have given a thumbs-down to revival plans unveiled on Wednesday, saying they lacked real progress. It prompted fears clients and trading partners might take their business to more stable firms.
Its troubles have shown how confidence remains key for investment banks.
"The ups and downs that followed the Bear Stearns bailout should be still fresh in the mind of investors and the economic backdrop has deteriorated since," Deutsche Bank analysts said in a report on Friday.
They said a takeover of Lehman could spark a relief rally, but warned of a worsening global economic picture.
Bear Stearns was taken over by JPMorgan in a government-backed bailout in March.
