LEHMAN BROTHERS is preparing to split into two separately listed companies, as rescue talks between the beleaguered $11 billion (£6.2 billion) investment bank and the Korea Development Bank appear to be running out of time.

The group’s chief executive, Richard Fuld, has drawn up plans to create a “good bank” and a “bad bank” which could be unveiled with the group’s third-quarter results, due to be published within the next two weeks.

Fuld’s plans would see the bank’s $32 billion portfolio of toxic commercial mortgages siphoned off into a new company, supported with $24 billion of debt and $8 billion of new equity.

According to Wall Street bankers the remaining Lehman business would then be free to continue trading without constantly being haunted by market rumours of further problems looming in the group’s problematic portfolio of assets.

The split would echo measures taken by a number of US financial institutions in the wake of the savings and loans crisis. The move could also save Fuld’s job. Bart McDade, Lehman’s chief operating officer, has been a key architect in the proposed split.

Talks are still continuing with the Korean Development Bank (KDB) with a view to securing $6 billion of equity in exchange for a sizeable stake in the firm. But they appear to be struggling to agree acceptable terms. “It is a game of brinkmanship”, said one banker.

Under the plans, the KDB would acquire equity in the “good bank”. The cash raised, however, would be used to prop up the “bad bank”.

The KDB has been attempting to persuade Lehman to agree to a deal priced at a discount to Lehman’s battered share price.

The figures are expected to

show at least $5 billion of further write-downs on the bank’s huge exposures to American real estate and residential property. Losses are expected to run to $2.50 a share.

If the Korean deal falls through, Lehman will press ahead with a sale of its Neuberger Berman investment-management business, estimated to be worth up to $10 billion – roughly equivalent to the entire company’s current market capitalisation.

Private-equity giants KKR, Apollo and Bain Capital are all in the running for the business. A sale, however, would be a last-ditch move by Fuld, who is keen to hold on to the business.

If Fuld is forced to resort to a sale of Neuberger Berman, Lehman’s operations would be placed under review. Some Wall Street sources believe it would then push through a dramatic cost-cutting programme. It would not want to damage its global positions in bonds, equities and investment banking, but there would be a big reduction in its workforce.

Some analysts speculate that as many as 10,000 jobs, out of a global total of 25,000, could hang in the balance.

Lehman has seen its share price seesaw for months as fears have grown about the group’s future. If Fuld can show that the “good” bank has a viable future, he might keep his job as well.

In addition to the KDB, Nomura, the Japanese bank, has also expressed an interest in injecting fresh equity. These talks could be resurrected even after Lehman splits itself into a good and a bad bank. This would allow negotiations to be held without the backdrop of a looming deadline.

In June, Lehman tapped a group of American institutional investors for $6 billion when it announced second-quarter results. Some of these investors have said they are prepared to invest again, even though their initial stakes are under water.

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