Barclays holds talks to buy core Lehman brokerage

London: Barclays emerged as a potential buyer of some of felled investment bank Lehman Brothers' assets, as the fin-ancial sector carnage spread on fears American International Group could be the next to fall.

Barclays, the UK bank that pulled out of emergency talks to save Lehman over the weekend, is in talks to buy the investment bank's core US broker-dealer business, people familiar with the matter told Reuters yesterday.

But concerns intensified that AIG, once the world's largest insurer by market value, could be the next victim after a ratings downgrade, causing a rout in stock markets already battered on Monday after Lehman sought bankruptcy protection.

Leading European stock indices were down between 1.4 and 2.2 per cent in morning trading. The Dow Jones Stoxx banking index was 3 per cent weaker early morning.

UBS fell 9.6 per cent, HBOS lost 11.5 per cent, and Barclays was 2.9 per cent lower.

AIG's illiquid shares on the Frankfurt stock exchange were 4.8 per cent off.

Asian share markets, many of them closed for a holiday on Monday, tumbled as investors absorbed the weekend's dramatic events on Wall Street, where Merrill Lynch agreed to be sold to Bank of America for $50 billion.

AIG has lost 92 per cent of its value this year.

Barclays, which quit frantic talks over the weekend to rescue Lehman after US authorities failed to guarantee trading obligations, is now looking to buy Lehman's US broker-dealer business, including equity, fixed income, M&A advisory and other parts, the sources said.

The talks mainly involve the core US business, with 8,000 to 10,000 staff, but could include some of its global businesses, the sources said, and a deal could save thousands of jobs and many of the core investment bank operations.

But markets focused on AIG's ratings downgrade, which could force it to post more collateral and nullify insurance contracts, possibly setting in motion a chain reaction that could threaten its survival.

"You don't just have a potential impact on the reinsurer side, you have it on the institutions that might be holding AIG paper," said Lorraine Tan, director of research for Asia at debt rating agency Standard and Poor's in Singapore.

"This would have a much bigger impact than a bank going down like Lehman or Bear (Stearns) or even a Wachovia or WaMu in the US. AIG has a much bigger presence globally," she said.