The government-backed Korea Development Bank (KDB) today ended weeks of speculation and declared that it was assembling a bidding consortium to negotiate a possible investment in Lehman Brothers.

The announcement, first revealed by Times Online, could enable the struggling Wall Street investment bank to taken over by an “all-Korea” consortium that would give managerial control to KDB.

KDB admitted that the talks were stalled over the price, which sources close to the deal say have caused the bid negotiations to reach deadlock several times in the past few weeks.

Min Euoo Sung, the president of KDB, said that the talks and investigations into Lehman’s liabilities were continuing but that it was hard to predict how negotiations would turn out, given the potential risk factors surrounding the sub-prime stricken US bank.

"I think it is desirable to make a joint bid for Lehman Brothers. So, KDB is in talks with other commercial banks on forming a consortium," he told reporters. "It is difficult to predict the outcome of negotiations with Lehman Brothers due to differences over price.”

Reflecting growing concern in the South Korean Government that it would be bankrolling a potentially hazardous investment, Mr Min added that “due diligence is still under way but there are differences over the scale of Lehman Brothers' potential liabilities.”

Sources close to KDB told The Times that the group led by the state-backed lender is struggling to assemble a workable consortium, as Korea’s troubled economy and huge levels of household debt make its banks look vulnerable. Several leading banks are understood to have turned down KDB’s offer of joining its investment consortium.

The last minute rush to put together a credible group is thought to have been prompted by South Korea’s Financial Services Commission, which privately believes that the country should be pushing to create a global investment banking champion and sees the current woes of Lehman as a perfect opportunity to take control of a Wall Street brand at a knock-down price.

The commission’s chairman, when asked last week about the discussions between Lehman and KDB, said "generally speaking, the private sector should be the leader in such a deal."

His comments reflect growing worries in Korea over the state of its currency, which plunged three per cent on Monday, despite official assurances that the country had the ability and the willpower needed to defend the falling won.

Currency dealers in Seoul said that the lack of any visible intervention by the Korean authorities was prompting some investors to place more bets against the won, sending it yet further down against the US dollar.

The weakening economy has combined with dwindling foreign exchange reserves to make the Korean Government reluctant to bankroll KDB for the full amount that would be required to gain control of Lehman.

Many suspect that KDB and Lehman are able to maintain a dialogue on the subject of cash injections or stake-building because of close ties. Min Euoo-Sung, KDB’s governor was, until earlier this year, the chief executive of Lehman’s operations in Seoul.

A potential bid to buy Lehman is one of several possible outcomes for the Wall Street brokerage, which is working to boost its balance sheet after suffering billions of dollars of losses on mortgage-related investments.

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