Lehman shares slide on Paulson bailout reluctance

By Patrick M. Fitzgibbons and David Lawder

NEW YORK/WASHINGTON (Reuters) - Concerns grew that Lehman Brothers Holdings Inc may fail to find a willing buyer due to U.S. government reluctance to provide financial backing for the deal, sending its shares to a 14-year low.

Lehman LEH.N executives, potential buyers and government officials struggled on Friday to craft a buyout plan, ahead of what is expected to be a series of increasingly frantic calls this weekend between Lehman and potential bidders.

"I think they're going to have to draw a line at some point," Rose Grant, managing director of Eastern Investment Advisors in Boston, said of Washington regulators' role in bailing out financial institutions. "This could be the point."

Bank of America Corp (BAC.N) is widely seen as a leading contender, with British bank Barclays Plc (BARC.L) also considered a possibility.

Time is of the essence for Lehman. Since Monday, the firm's market capitalization has lost 78 percent, to about $2.5 billion (1.39 billion pounds) from $11.2 billion. Its shares fell 13.5 percent on Friday to close at $3.65 on the New York Stock Exchange. Its bonds also dropped.

The uncertainty surrounding Lehman underscores how the U.S. banking system as a whole does not have the capital needed to get through the current credit crunch, an influential investor said on Friday.

"Recent developments highlight the extent to which the banking system as a whole lacks sufficient capital to comfortably navigate this period of sharp deleveraging," Mohamed El-Erian, co-CEO of Pacific Investment Management Co (Pimco), said in an interview. Pimco oversees more than $812 billion in assets.

Other financial companies' shares also plunged on Friday, including leading brokerage Merrill Lynch & Co Inc MER.N and American International Group Inc (AIG.N), once the world's largest insurer by market capitalization. AIG lost as much as a third of its value, while Merrill slid 11 percent.