Aug. 26 (Bloomberg) -- Lehman Brothers Holdings Inc. may set up a company funded by outside investors to buy some of its mortgage assets, aiming to dispel concern the firm faces crippling losses, people familiar with the discussions said.

Investors in the new venture would also manage the holdings, which are linked to commercial real estate, the people said, declining to be identified because the proposal hasn't been made public and no decision has been made about how to proceed. The New York-based firm had about $40 billion in commercial-mortgage assets as of May.

Lehman, the largest underwriter of mortgage bonds last year, has been trying to reduce assets linked to that market as demand dried up and prices plummeted, generating more than $8 billion in writedowns and credit losses. BlackRock Inc., the largest publicly traded U.S. money manager, is considering a purchase of some of Lehman's commercial mortgages, people familiar with those discussions said last week.

``They need to reassure investors by offloading some of these assets,'' said Mayiz Habbal, an analyst at Boston-based research firm Celent. ``Lehman isn't negotiating from a position of strength.''

The company has lost almost 80 percent of its value on the New York Stock Exchange this year as Chief Executive Officer Richard Fuld, 62, tried to reassure investors Lehman won't suffer the same fate as smaller rival Bear Stearns Cos. New York-based Bear Stearns collapsed in March when creditors and investors balked at doing business with the firm.

`Tough Times'

``There's no question that selling their troubled assets will help,'' said Michael Holland, chairman of Holland & Co., which manages $4 billion of assets. ``But how much will it help? We're in tough times, and it doesn't look like things are going to get any better any time soon.''

Lehman, the worst performer on the 11-company Amex Securities Broker/Dealer Index this year, gained 58 cents, or 4.3 percent, to $14.03 in composite trading at 4:10 p.m.

Mark Lane, a spokesman for Lehman, declined to comment on possible asset sales.

Lehman may contribute some of the equity for the new venture so it could benefit should asset prices recover, the people familiar with the talks said.

UBS AG, Switzerland's biggest bank, and Merrill Lynch & Co., the third-largest U.S. securities firm, also discarded mortgage assets in transactions in which they loaned buyers most of the money for the purchases. BlackRock and other investors put in $3.75 billion of equity to buy $15 billion of mortgages from UBS, with the rest borrowed from the Zurich-based bank.

Residential Mortgages

In addition to its commercial real-estate holdings, Lehman had about $24.9 billion in residential assets as of the end of May. The firm may decide to dispose of both types of mortgage holdings in an outright sale, though no final decisions have been made regarding what form a transaction will take, the people familiar with the discussions said.

Lehman has also been in talks with potential investors who'd buy a stake in the firm or its asset-management unit as a way to offset losses incurred while it's disposing of assets.

Private-equity firms including Blackstone Group LP and Carlyle Group expressed interest in the business, people familiar with the matter said last week. Kohlberg Kravis Roberts & Co. has emerged as the frontrunner while Blackstone has dropped out, CNBC television reported yesterday.

Korea Development Bank said last week it was considering an investment in Lehman. China's Citic Securities Co. and the Korean bank ended talks to buy as much as 50 percent of Lehman because the price the firm demanded was too high, the Financial Times reported last week.

Gregory, McDade

Lehman posted a $2.8 billion loss in the second fiscal quarter, which ended May 31, amid speculation that it may have further writedowns on mortgage-related assets. Fuld in June removed his associate of 30 years, President Joseph Gregory, 56, and replaced him with Herbert ``Bart'' McDade, 49, who had run fixed income and equities.

Fuld, McDade and other members of the management team are racing to conclude a deal with potential investors before the firm reports earnings next month, the people familiar with the discussions said.

The CEO is running out of time to show he can turn things around, said Richard Bove, an analyst at Ladenburg Thalmann & Co. in Lutz, Florida.

``People inside the company are in open revolt while people outside are losing confidence in him,'' Bove said in an interview. ``The quarter is almost over and he has failed to sell bad assets. That's not acceptable.''

Lehman's third quarter ends this week, and the firm typically announces earnings in mid-September.

Bear Stearns

The mortgage-bond crisis that spread to Lehman escalated in June 2007, when Bear Stearns Cos. began liquidating holdings from one of its hedge funds after losing bets on securities tied to subprime mortgages. Bear Stearns, then the fifth-largest U.S. securities firm, sold itself to JPMorgan Chase & Co. for $10 a share in March.

Bear Stearns's downfall came in part because the firm was constantly in the news, spooking clients and lenders, said Bruce Foerster, president of South Beach Capital Markets in Miami.

``Lehman needs to get out of the spotlight if it's to survive,'' Foerster, a former Lehman managing director, said in an interview. ``Selling most of the bad assets and a big capital infusion might help them achieve that. They need to do whatever it takes to stop being speculated about.''

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: August 26, 2008 16:11 EDT