Wall Street's reluctance to the plan came to a head during an emergency meeting Friday night when officials from the Federal Reserve asked members of Wall Street's biggest firms, including Jamie Dimon of JP Morgan, John Mack of Morgan Stanley and John Thain of Merrill Lynch to play a role in the bailout of Lehman.

Negotiations continued Saturday with top government officials present, including Treasury Secretary Hank Paulson, Securities and Exchange Commission Chairman Christopher Cox and New York Federal Reserve President Tim Geithner, but sources said a deal seemed unlikely before Sunday.

Sources would not say whether there had been progress, only that all sides were still talking. But government officials had been insisting a deal get done by Sunday. Given the complexity of any deal, it seemed likely the parties would take whatever extra time was available.

The ongoing session harkened to a deal in 1998, when the big Wall Street firms chipped in billions of dollars in capital to save the troubled hedge fund Long Term Capital Management.



But times have changed.

In 1998, Wall Street was flushed with cash as the dotcom boom fueled underwriting revenues. Right now, Wall Street is in the middle of one of its most protracted profit droughts in years.



Compounding the street problems, the LTCM bailout was an isolated incident. In addition to Lehman other Wall Street firms, such as Merrill Lynch, have soured real estate loans on their books and may have suffered a similar loss of investor confidence as Lehman has in recent days, forcing the firm's CEO Dick Fuld to begin scouring the financial world for a white-knight buyer.

Troubled insurer American International Group has hired JP Morgan to raise additional capital and is raising funds from other sources in an effort to prevent a possible ratings dowgrade because if its troubled balance sheet.

AIG may have to raise $20 billion or more to solve its problems in a plan that could be put together this weekend as well, CNBC has learned



On Friday night, after the government finished out what one person with knowledge of the discussion described as the Fed's "LTCM Plan," an executive in the room pointedly asked, "What happens when there's another one?"



People with knowledge of the matter say the government provided no real answer other than to point out what they've been saying for the past three days as Lehman began to implode and look for buyers: There will be no government bailout of the firm, and if the street doesnt do something to help in the process, such as buying Lehman's bad assets, a deal to sell the good part of Lehman will be difficult to complete.



If Lehman is not sold, most analysts conclude it will likely be forced to file bankruptcy possibly as early as the end of this weekend. A bankruptcy filing could be catastrophic for the markets, given the size of Lehman's balance sheet. Billions of dollars in trades would effectively be frozen, something that would almost certainly cause massive selling of stocks.

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People with knowledge of Friday's meeting said the situation remains fluid and Wall Street may ultimately back the plan under continued press from government officials and fear that if the Lehman deal doesnt happen, the markets will tank.

On Saturday afternoon, officials at the major Wall Street firms were all working as the Federal Reserve and the Treasury continued to search for a way sell Lehman and prevent a market meltdown. Potential bidders for Lehman include Bank of America, Barclays PLC and HSBC. Private equity is interested in Lehman's Nueberger Berman asset management unit.



A major roadblock, however, is Lehman's $40 billion in troubled real estate and subprime assets on its books. Bidders don't want to purchase Lehman and its bad debt, particularly without government assistance.



That's why the Fed and the Treasury have pushed the LTCM plan: If Wall Street buys the illiquid debt, it could bail out Lehman and possibly make money once the real estate market comes back. The problem for the street however is that they fear the rolling financial crisis could claim other victims. One executive at major Wall Street firm said the Federal Reserve might have to guarantee a government bailout of the next firm to implode for the Wall Street firms to agree to the plan.

CNBC's Steve Liesman contributed to this report.