China's Citic Securities and state-owned Korea Development Bank (KDB) today denied that they held formal talks this month with Lehman Brothers over buying up to half of the beleaguered Wall Street bank.

Tan Ning, board secretary of Citic, China's biggest brokerage, said: "We have had no such talks as far as I know ... We know there are always lots of rumours like this in the markets but we are not in formal talks with Lehman or other firms on stake investments."

Ming Euoo-Sung, chairman and chief executive of KDB, went on an overseas trip last month to meet investors but a KDB spokesman dismissed speculation that Mr Min had discussed an investment with Lehman.

Sung Joon Rhee, KDB's senior executive director, said on Wednesday that the Korean bank needed to remain cautious for the next few years because it did not expect problems in the US mortgage market to abate soon.

It was reported overnight that Lehman, which is expected to reveal a further $3 billion (£1.6 billion) of writedowns when the investment bank publishes its third-quarter figures next month, talked to KDB about selling a 25 per cent stake directly in the bank and another 25 per cent by market tender. Citic was also reported to have had less specific discussions about an investment in Lehman.

Lehman wanted the investors to pay 50 per cent more than the bank's book value, which the investors thought was too high, so the talks fell apart, according to reports.

But today Mr Ning said that Citic planned to concentrate on its domestic business. "It seems there are no signs when the US credit problems may eventually end," he said. China's financial regulators have warned local financial groups to be careful of the risks of getting involved in the US credit crunch. Any foreign investment worth a large sum must be approved by the Chinese Cabinet, according to Reuters sources.

The Chinese and Korean companies are not thought to have denied the possibility of informal discussions with Lehman.

Meanwhile, The Wall Street Journal reported that the Federal Reserve last month rushed to act on rumours that Credit Suisse planned to pull a credit line from Lehman Brothers. Fed officials were thought to be desperate to avert another Bear Stearns-style rescue, after creditors called in their debts from the bank.

Credit Suisse told the Federal Reserve that it had no intention of pulling the line of credit, the WSJ said.

Lehman is also thought to be planning to sell a stake in its successful fund management business, worth as much as $10 billion, and is seeking to dispose of its $40 billion real estate asset portfolio, in an effort to raise much-needed extra capital.

Sanford Bernstein, the Wall Street broker, said that it expected Lehman to publish losses per share of $1.40 for the third quarter of 2008, compared with its former forecast of earnings per share of 74 cents. It expected the bank to report a loss of $867 million for the period, rising to a total estimated loss for the year of $2.57 billion.

While the broker has also lowered its estimates for Goldman Sachs and Morgan Stanley, it highlighted Lehman’s predicament because of its exposure to mortgage-backed securities.

Sanford Bernstein said: “The firms we cover [Lehman in particular] continue to have significant exposures to the troubled asset classes. With the exception of leveraged loans, these exposures have proven difficult to remove or to hedge effectively as the market for these positions remains relatively illiquid. As long as these firms have these troubled assets, their earnings results will be affected by the fluctuations in the fixed income market.”

Lehman Brothers has not yet told shareholders when its third-quarter results will be announced, but the middle of next month is a likely date. In volatile trading, the shares closed up 66 cents or 5.05 per cent at $13.73.

Last week, Deutsche Bank in New York also told clients that it was expecting a worse performance from Lehman Brothers and that it had pencilled in a writedown of $3 billion for the third quarter. The German bank told its clients that at the end of the second quarter Lehman’s balance sheet was exposed to $30 billion of commercial mortgage and real estate assets, leveraged loans of $18 billion and $3 billion of US sub-prime securities.

Another banking analyst, who declined to be named, said: “Everyone has exposure to problematic fixed-income securities but Lehman is the most exposed.”

Lehman declined to comment.

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