Lehman Brothers is thought to have approached Bank of America as it actively seeks a buyer for the whole group, it emerged yesterday.

The news came as continuing concerns about the brokerage’s financial stability dragged its shares down by a further 42 per cent Lehman is thought to have approached several potential buyers, who were poring over its books yesterday, as the beleaguered bank’s ability to survive as an independent entity was called further into question after Moody’s said it must find a strong financial partner if it is to escape a credit-rating cut. However, analysts cautioned that it may be difficult for Lehman to strike a deal without government support, because of its precarious financial position.

The Government is understood to be exploring ways of helping to safeguard any potential buyer against some of the risks associated with an acquisition of Lehman. This may result in the Government guaranteeing some of Lehman’s riskier assets, in the same way as it did when it drove through the takeover of Bear Stearns by JPMorgan in March.

Bank of America and Lehman declined to comment on any takeover talks.

Shares in Lehman, which fell by $3.03 to $4.22 in New York trading, were also dragged down by a series of analysts’ notes that cut their full-year earnings forecasts for the group and reduced their expectations for its share price. The decline followed a 45 per cent drop in the share price on Tuesday as the collapse of key financing negotiations with Korean Development Bank leaked into the market, and a 6.9 per cent fall on Wednesday.

The downgrades came a day after Lehman announced a $3.9 billion third-quarter loss and measures designed to shore up its battered balance sheet and boost confidence among its staff, clients and investors.

However, analysts and investors continued to fret that the measures were insufficient to solve the group’s capital crisis after it took about $16 billion of writedowns on mortgage-related investments in the past five quarters.

Hugh Johnson, head of Johnson Illington, the US fund manager, said: “Lehman needs to stop the bleeding and build its capital – and do it fast – if it is to secure the confidence of staff, clients and counterparties”.

Rose Grant, managing director of Eastern Investment Advisors, said: “As much as they try to calm investors down, investors don’t yet have the answers they need. There’s a complete lack of faith, lack of confidence and lack of trust.”

Analysts said that the danger of Lehman losing key traders and investment bankers had increased this week as plummeting share valuations destroyed the value of their stock options, reducing their confidence in the firm and demoralising them.

Pete Najarian, a New York-based options trader, said: “Staff defections from Lehman has been a topic of conversation in the marketplace, especially in the past couple of days. I have heard from Lehman’s rivals that Lehman staff are being approached and that they are approaching other brokerages. Some have already left and others are looking to leave, some are traders and some are investment bankers.”

Citigroup, Goldman Sachs, Oppenheimer & Co, JPMorgan, Wachovia and Ladenburg Thalmann & Co were among the research houses that reduced their expectations of Lehman yesterday. William Tanona, of Goldman, said that the restructuring plan announced on Wednesday “fell short of what was necessary to lessen the bear case on the stock” and cut his rating from buy to neutral. The restructuring includes plans to spin off up to $30 billion of commercial property assets into a separate entity, sell 55 per cent of its asset management unit and cut its dividend by 93 per cent.

Dick Bove, an analyst for Ladenburg Thalmann, said: “For the past two days I have been trying to write a commentary on Lehman’s earnings but have failed. . . . I finally concluded that I was trying to argue that yesterday’s announcement of a new strategic direction meant that something had happened at the firm when in fact the only events that have occurred is that the company announced a big loss and cut its dividend. It is increasingly evident that outside intervention in the form of a hostile takeover is a necessity.”

Goldman Sachs had been rumoured as a possible suitor for Lehman but is not thought to be interested.

Republican Senator Richard Shelby said that the US Government should not rush in to rescue Lehman. “I hope they will not use all their powers or all their rabbits in doing this,” he said.

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