Sept. 12 (Bloomberg) -- Treasury Secretary Henry Paulson is adamantly opposed to using government funds to aid Lehman Brothers Holdings Inc., and Federal Reserve officials are inclined to agree.

A person familiar with Paulson's thinking said Wall Street has been aware of Lehman's troubles for a long time and had time to prepare for any crisis at the company. The access Lehman has to loans from the central bank will allow an orderly process, the person said. Fed officials are aligned with the Treasury and have a strong predisposition against use of government money.

The Fed and Treasury judgments are an indication policy makers want to draw a line after the widest expansion of federal safety nets to the financial system since the Great Depression. They also signal any buyers of Lehman won't have the same deal as JPMorgan Chase & Co., which bought Bear Stearns Cos. in March after the Fed agreed to take on $29 billion of Bear assets.

``It is about time'' the government stop providing assistance, said Allan Meltzer, an economist at Carnegie Mellon University in Pittsburgh and author of a history of the Fed. ``The system can't work if the bankers make the money and the taxpayers take the losses. That is just not viable.''

Bank of America Corp. leads the list of potential buyers for Lehman, a person familiar with the bidding said. Fed and Treasury officials are involved in talks helping to find a buyer, a person with knowledge of the matter said yesterday. Lehman fell 77 percent this week on concern it lacks sufficient capital to offset losses sparked by the mortgage-market rout.

Greenspan's View

Avoiding taxpayer funds in the Lehman resolution would be ``the ideal solution,'' former Fed Chairman Alan Greenspan said in an interview with Bloomberg Television in Washington today. ``Once you put the line under Bear Stearns, that whole structure of financial and non-financial institutions above that automatically became too big to fail,'' he warned.

The Fed's predisposition against putting public money at risk suggests it wouldn't take on Lehman assets and put them in Maiden Lane LLC, the fund it set it up to hold the $29 billion of Bear Stearns assets. It may not preclude help with financing, such as loans.

``They have demonstrated a strong willingness to provide financing, but a reluctance to own things outright,'' said Brian Sack, who used to serve as head of monetary and financial market analysis at the Fed and is now a vice president at Macroeconomic Advisers in Washington.

Lehman's Demise

Lehman traded at $3.63 at 1:12 p.m. in New York Stock Exchange composite trading. As recently as Feb. 1, the shares sold for $66.58.

The company's crisis comes less than a week after Paulson seized Fannie Mae and Freddie Mac, declaring that the two largest sources of U.S. mortgage finance had insufficient capital. The government takeovers were the biggest step yet in policy makers' efforts to stem the yearlong credit crisis.

``The government right now -- Treasury and the Fed among others -- they're trying to work a deal with no government money, as they should,'' Senator Richard Shelby, the top Senate Banking Committee Republican, said in an interview with CNBC television today. ``A little money would be better than a lot, but no money at all by the taxpayers would be the best.''

White House spokesman Tony Fratto said the White House and the Treasury are ``monitoring'' markets.

Lehman on Sept. 10 announced a $3.9 billion loss, the biggest in its 158-year history, after $5.6 billion of writedowns on real-estate loans and mortgage assets.

``The market now expects the Fed and Treasury to come in and bail everyone out,'' said Gilbert Schwartz, a former Fed attorney and now a partner at Schwartz & Ballen LLP in Washington. ``Somebody has to be the test case, and it looks like it's going to be Lehman's creditors.''

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Rebecca Christie in Washington at Rchristie4@bloomberg.net.

Last Updated: September 12, 2008 13:16 EDT