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Bank of America today emerged as the front-runner to take over beleaguered Lehman Brothers as management and US government officials scrambled to produce a rescue package by this weekend.
Lehman shares lurched violently ahead of today's Wall Street opening, rising 13% before diving 5% to $4.
The bank has effectively put itself up for sale after losing a record $3.9billion (£2.2billion) in its third quarter and failing to get a massive cash injection from Korea Development Bank.
Richard Fuld, chief executive of what has become America's biggest underwriter of mortgage-backed securities, came up with a plan to sell off parts of the business earlier this week, but it failed to reassure investors.
Headhunters are already targeting key Lehman staff. But sources inside the London offices described the atmosphere as "subdued but calm", adding: "People are clearing positions for their clients and ensuring that deals can continue under any new owner."
Ladenburg Thalmann analyst Dick Bove said there was a natural fit between BoA and Lehman: "If it does the deal, BoA becomes a first-rank player in the equity investment banking sector, and has one of the best fixed income desks in the country."
Shares in Barclays which was also rumoured to be a front-runners to buy Lehmans, rose 9 ½p to 348p. Its president and head of Barclays Capital, Bob Diamond, is keen to grow the investment banking business in the US.
He reportedly cancelled a dinner in London last night to fly to join negotiations in New York. But analysts were sceptical it would make a full-blown takeover bid.
Said one: "Barclays may have raised £4.5billion in fresh capital and ultimately everything, even Lehmans, has its price. But would Barclays' new shareholders really be keen to see it take on something where they don't know the bottom of the liabilities?"
Another questioned whether Barclays would receive the same kind of support from the US Government that might be offered to a domestic bank.
A senior banker said: "The body language out of Washington looks different. It may be that they are prepared to let an investment bank go under."
