Lehman Brothers Bailout Concerns Mount

Editor's note: Our "On the Brink" series will provide daily insight into the financial firms facing capital shortfalls and the growing pressure from short sellers in the market.

As Lehman Brothers (LEH) scrambled to find a buyer, concerns are mounting that a deal may involve government money and place too much of a burden on already strained taxpayers.

Treasury Secretary Henry Paulson reportedly was "adamant" that no government money would be involved in any deal for Lehman Brothers, but potential buyers were reported to be looking for a backstop similar to the $29 billion cushion against potential losses the Federal Reserve gave to JPMorgan Chase (JPM) when it bought Bear Stearns earlier this year.

Lehman last week entered what looked very much like Bear's death spiral, as the firm's shares shed 77% over the course of the week to $3.65 at Friday's close.

The severity of the investment bank's situation was underscored Friday night when the Federal Reserve Bank of New York held an emergency meeting with government officials and Wall Street chieftains to discuss Lehman's fate, according to a report in The Wall Street Journal. The group, which included Paulson and Securities and Exchange Commission Chairman Christopher Cox, is expected to meet throughout the weekend and attempt to come up with a rescue plan for Lehman, according to the report.

Just a week after the U.S. government took over Fannie Mae (FNM) and Freddie Mac (FRE), taking on trillions more in debt in the process, regulators find themselves faced with another potential bailout candidate.

But many analysts view it as unlikely the government will provide a financial backstop to a Lehman buyer.

Brian Gardner, chief political analyst at investment bank Keefe, Bruyette & Woods, argues Paulson, who is scheduled to testify before the Senate Banking Committee Tuesday to discuss the government takeover of Fannie Mae and Freddie Mac, got a pass in the Bear Stearns situation because it happened so quickly and there was no liquidity facility in place.

"I don't think Congress is going to stand behind him if taxpayers are on the hook again," Gardner says. "The Street is trying to pinch him and call his bluff on whether there will or will not be government intervention."