Aug. 13 (Bloomberg) -- Lehman Brothers Holdings Inc., seeking to restore investor confidence after a $2.8 billion second-quarter loss, is negotiating to sell commercial real estate assets to a group including BlackRock Inc., said three people briefed on the discussions.

Lehman is seeking to sell about $14 billion of its $40 billion in commercial property and related securities by the end of the year, according to two potential buyers approached by the New York- based firm.

The sale would bolster capital as analysts including Ladenburg Thalmann & Co.'s Richard Bove raise questions about Lehman's ability to withstand further losses on mortgage securities. The firm's shares tumbled 75 percent this year in New York trading as the mortgage market collapse and ensuing credit crunch sparked more than $500 billion in writedowns and losses at financial firms.

``They are taking steps to eliminate parts of the balance sheet that have caused concern,'' Bove said in an interview yesterday. He rates the stock ``neutral'' and expects the bank to sell assets for 10 percent less than their valuation.

BlackRock, the largest publicly traded U.S. fund manager, bought $15 billion in mortgage bonds from UBS AG in May and more than doubled its stake in Lehman during the second quarter, becoming the 10th biggest shareholder.

`Logical Buyer'

Lehman spokesman Mark Lane declined to comment, as did BlackRock spokeswoman Bobbie Collins.

``BlackRock is a logical buyer,'' said Jeffery Harte, a Chicago-based analyst at Sandler O'Neill & Partners LP. ``They have experience in managing portfolios of assets like these. They also have experience leading groups of investors.''

Bove expects Lehman to sell its entire $29.4 billion commercial mortgage portfolio. The firm also owns $10.4 billion of property. It may record a loss of $4.9 billion on the sale of the commercial mortgages, Sanford C. Bernstein & Co. analyst Brad Hintz estimated in a report last week.

Last year, as the market collapsed, Lehman underwrote more mortgage-backed securities than any other firm, accumulating an $85 billion portfolio, 44 percent more than Morgan Stanley's and almost four times the $22.5 billion of shareholder equity Lehman had as a buffer against losses. Lehman sank 4 percent to $15.57 as of 16:16 p.m. in New York Stock Exchange composite trading.

Buffer

Chief Executive Officer Richard Fuld, 62, has already trimmed the mortgage holdings by 23 percent, raised $14 billion of capital, sold $147 billion of other assets, increased cash holdings and reduced the firm's reliance on short-term funding to create a buffer against a possible bank run.

BlackRock, led by Chief Executive Officer Laurence Fink, 55, avoided subprime-related losses and has several new funds under way to take advantage of the credit crunch. It's joining hedge fund Highfields Capital Management LP to start a company that will raise $2 billion to buy delinquent home mortgages.

That company, Private National Mortgage Acceptance Co. LLC, or PennyMac, will be run by Stanford Kurland, the former president of failed mortgage lender Countrywide Financial Corp. BlackRock also raised $5 billion for two other funds to buy mortgages, distressed debt and leveraged loans.

BlackRock has out muscled competitors such as Legg Mason Inc. in the current crisis. The company collected $63.2 billion in new business from investors in the second quarter, including advisory assignments, the most of any publicly traded asset manager.

BlackRock, which has $527 billion in fixed-income assets, ranks second among U.S. bond managers after Pacific Investment Management Co. of Newport Beach, California. BlackRock manages $1.43 trillion in total, including stocks, real estate and private equity. The firm is 49 percent-owned by New York-based Merrill Lynch & Co. and 34 percent by Pittsburgh-based PNC Financial Services Group Inc.

To contact the reporters on this story: Jonathan Keehner in New York jkeehner@bloomberg.net; Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.

Last Updated: August 13, 2008 16:30 EDT