Paulson "adamant" no goverment funds for Lehman: source

Secretary of the Treasury Henry Paulson seen at the Office of Management Supervision in Washington, DC, in this September 7, 2008 file photo. REUTERS/Joshua Roberts

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson is “adamant” that no government money be used in any deal that resolves the crisis at Wall Street investment bank Lehman Brothers, a source familiar with his thinking said on Friday.

The source said Lehman LEH.N already has substantial support from the Federal Reserve as it races to negotiate with potential buyers.

“There are two things that make this different from Bear Stearns. The market’s been aware of the situation for a long time and has had time to prepare. Second, the Primary Dealer Credit Facility was created by the Fed to allow time for an orderly process,” the source told Reuters.

“Given these things, (Paulson) is adamant that there will not be government money used in the resolution of the situation,” the source added.

The Federal Reserve in March provided $29 billion in loan guarantees to facilitate a Fed and Treasury-brokered deal for JP Morgan Chase & Co to buy Bear Stearns & Co for a bargain price and save the investment bank from collapse.

That same week, the Fed set up the dealer lending facility, which allows Wall Street investment banks to borrow directly from the U.S. central bank, in order to prevent the same type of massive liquidity crunch that felled Bear Stearns.

Lehman, the fourth-largest U.S. investment bank, is fighting for its survival after massive asset writedowns and a $3.9 billion loss from toxic real estate investments eroded market confidence in its ability to shore up its capital position.

Lehman shares traded nearly 12 percent lower at $3.73 on the New York Stock Exchange on Friday after falling around 40 percent on Thursday.

Lehman is discussions with U.S. officials about its options, which include a complete sale, according to other sources with knowledge of the talks. Bank of America BAC.N was seen as the most likely suitor, although European banks Barclays Plc BARC.L and HSBC Plc HSBA.L have also been linked with Lehman.

Reporting by David Lawder; Editing by James Dalgleish