Economist Irwin Stelzer on the Wall St Crisis

Barclays, the UK lender, confirmed today that it was in talks with Lehman Brothers to buy assets from the bankrupt US investment bank.

The British bank is reported to be on the verge of a deal to buy Lehman Brothers’ core US broker-dealer business for roughly $2 billion. The deal for Lehman’s broker-dealer business includes equity, fixed income, M&A advisory and other parts, according to reports.

A formal announcement of the pact is expected later on today or Wednesday.

Barclays had been in talks with Lehman Brothers at the weekend, in discussions orchestrated by Hank Paulson, the US Treasury Secretary, about rescuing the US bank. However, Barclays walked away when it became clear the US Government was not prepared to guarantee Lehman Brothers' toxic debt.

Barclays is not understood to be interested in Lehman's international businesses, such as Europe and Asia. The future of Lehman's mortgage security and real estate assets is still unclear.

Barclays said that the deal would only be completed on terms that were attractive to its shareholders. It said: "There can be no assurance that the discussions will result in an agreement. A further announcement will be made in due course".

Several of Barclays' leading shareholders made it clear yesterday that they would be unwilling to support any deal that would involve the bank raising fresh equity.

They said they were not opposed in principle to the bank striking a deal with Lehman but the terms would have to be in the clear interests of shareholders.

One top shareholder, who said he had not been consulted by the bank ahead of its bid talks, said: "What would matter is the terms, strategy and funding. If anything the pressure is on the bank to improve its Tier-1 ratio [the amount of debt compared with equity]."

Another said: "I thought capital strength was the mantra here. We are not entirely happy that Barclays has become a clear candidate for parts of Lehman. It needs to be sure it is getting the right assets at the right price."

Lehman executives are hoping to save as many of the bank's 26,000 staff and operations as possible, after it filed for Chapter 11 bankruptcy protection yesterday.

Mr Paulson, the US Treasury Secretary, was reluctant to bail out another American bank, just six weeks ahead of the presidential election.

"What's going on in New York is a private sector effort, again, focused on dealing with an important issue. We're working through a difficult period in our financial markets right now as we work off some off the past excesses but the American people can remain confident in the soundness and resilience of our financial system", Mr Paulson said yesterday.

"There's got to be balance between regulation and market discipline. You can't rely on one to solve the problem", he added.

About $29 billion (£16 billion) of federal money was spent propping up Bear Stearns in February so that it could be bought by JPMorgan Chase.

Alistair Darling, the Chancellor, this morning called on the world's central banks to act together to stabilise the financial system as it struggled with the fallout from Lehman.

Yesterday, the Bank of England pumped £5 billion of three-day cash into the money market to maintain liquidity while the European Central Bank (ECB) made €30 billion (£23.8 billion) in capital available.

Mr Darling said: "We need to take action internationally, and we are ... It means that central banks need to help, and yesterday you saw right across the world the American Fed [Federal Reserve], the ECB, our own Bank of England and Japan, all intervening.”

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