Dick Fuld, the chairman and chief executive of Lehman Brothers, is seeking to complete a crucial deal for the Wall Street bank within three weeks as Kohlberg Kravis Roberts (KKR), the private equity group, emerged as favourite to bid for the bank's asset management business.

Other private equity groups thought to be considering a move on Neuberger Berman, the lucrative fund management business acquired by Lehman four years ago, include Blackstone, although it is not known how serious its intentions are. TPG, another private equity group that has targeted weakened financial services assets, including banks, in recent months, may also be a contender.

Mr Fuld is considering a range of options for the future of Lehman that include the sale of Neuberger or the disposal of a stake in the entire bank. He has held conversations with a number of parties about both scenarios. Although Mr Fuld has strongly denied liquidity problems, he has decided recently to consider a drastic range of options for the bank.

Neither Lehman nor Wall Street believes that a sale of the entire bank is feasible because of the lack of confidence about how the bank's assets should be valued and because of the lack of a buyer prepared to take on such a substantial business.

It is believed that one of the most favourable outcomes for the Wall Street bank would be an agreement with an investor such as KKR to take a stake in Neuberger, or to try to float the asset management business and retain a holding in it. The bank is also believed to be considering the sale of its commercial real estate portfolio, estimated to be worth about $30 billion (£16.3billion), to raise capital.

The long-serving chief executive, who owns almost 3.9 million shares in the bank, is under intense pressure from Wall Street to bolster confidence in the group, whose staff and clients are nervous about its huge exposure to troubled fixed-income assets.

UBS, the Swiss bank, told its clients in New York last month that “time is not on their side” and that the “longer the concerns about [Lehman's] viability linger”, the more likely its own clients were to leave. That scenario led to a forced rescue of Bear Stearns this year, within a few days.

Lehman wants to secure a deal within three weeks, when the bank is scheduled to report its third-quarter earnings. Although it has not yet announced the precise date, it is understood that Lehman has ruled out the possibility of delaying the publication of its numbers to buy time. Wall Street has become increasingly anxious about the state of Lehman's balance sheet and the size of the loss the bank is likely to unveil for the present quarter. Over the past month a handful of institutions, including Sanford Bernstein, Goldman Sachs and UBS, have updated their forecasts for Lehman. Some have told their clients that they expect it to write down $3 billion of distressed mortgage-backed securities and plunge into the red by about $2 billion for the three-month period.

Along with other broker dealers on Wall Street, Lehman is believed to be suffering from a slump in mergers and acquisitions activity, poor equity markets and near-frozen debt markets. Lehman remains the most heavily exposed of all the Wall Street banks to mortgage-backed securities. According to Sanford Bernstein,

Lehman's total estimated exposure to troubled asset classes was about $120 billion during the second quarter of the year.

Analysts appear to agree that one of the biggest hurdles facing Mr Fuld in the next three weeks is managing to agree on a valuation for both the bank as a whole and for Neuberger.

Lehman Brothers shares have plummeted by as much as 90 per cent in the past 12 months, leaving the bank valued yesterday at only $10 billion.

It is believed that informal talks between Citic, the Chinese bank, and the Korean Development Bank over acquiring a substantial stake in the entire bank failed after a disagreement over price. Such a disagreement prompted another analyst to tell his clients that Lehman was ripe for a hostile takeover because its management appeared to be unwilling to sell at present levels.

Chris Whalen, co-founder of Institutional Risk Analytics in New York, said: “The real problem is getting a number. Ignoring the issue of state-run foreign banks, most other banks who would be looking at taking a stake in Lehman have shareholders, and they have to justify how they reached that valuation. Lehman is a very valuable business. It has a valuable franchise and culture. Another major bank taking a stake in Lehman as a whole would probably solve the problem.

“Broker dealers are an endangered species. Wall Street needs them to help the likes of the swaps market to function, to clear their trades and provide credit. Lehman is core to the whole liquidity issue on Wall Street. What makes them vulnerable is that, unlike banks such as Morgan Stanley, they have no retail business, no retail accounts. If institutions get scared, they can pull their money out in a phone call. It's not the same if you have a massive retail base.”

Although the US Federal Reserve, on whose New York branch Mr Fuld sits, has been in constant talks with all Wall Street banks throughout the credit crisis, it is understood that Lehman has not been singled out for special attention of late.

Lehman Brothers, KKR and TPG all declined to comment.

Sweet Home Alabama

1844 Henry Lehman, a German immigrant, opens a shop in Montgomery, Alabama. Six years later he is joined by his siblings Emanuel and Mayer to form Lehman Brothers. They become cotton brokers and open a New York office in 1858

1880 Lehman enters merchant banking, becoming a member of the New York Stock Exchange in 1887

1984 American Express acquires Lehman Brothers and merges it with Shearson, a subsidiary

1990 Lehman splits into a retail unit run by T. Christopher Pettit and an investment banking division led by Dick Fuld

1994 American Express spins off Lehman Brothers and Mr Fuld takes over as chairman

2002 Lehman sets up its wealth and asset management divisions

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