Shelby says government could rescue Lehman Bros.

Another government rescue of a major financial services firm loomed Friday as the ranking Republican on the Senate Banking Committee suggested a bailout of Lehman Brothers could be coming.

Sen. Richard Shelby (Ala.), ranking Republican on the Banking, Housing and Urban Affairs panel, told CNBC the possibility of government help for the troubled firm is very real.

{mosads}“Between now and Monday, a lot of people believe, something's going to happen,” Shelby said.

The 158-year-old, New York-based Lehman Brothers has been hit hard by distress in the mortgage market. On Wednesday the firm announced a $4 billion loss, and on Thursday, the firm’s stock slid another 40 percent.

The company’s troubles come as federal officials are being forced to take increasing steps to react to the credit and mortgage market stresses. Federal regulators already helped arrange an emergency loan to Bear Stearns in March, and last weekend the Federal Housing Finance Agency took over Fannie Mae and Freddie Mac into a conservatorship.

Shelby said any aid to Lehman Brothers should be less drastic than the government’s help to Bear Stearns, and held out hope that another private firm will step in without the government having to play a role.

He also emphasized that federal officials should invest as little money as possible, to ease the burden on taxpayers.

“The government right now, Treasury and the Fed among others, they're trying to work a deal with no government money, as they should. I hope that works,” Shelby said. “But a little money would be better than a lot, but no money at all by the taxpayers would be the best situation … I don't like regulation, but I don't like an open-ended blank check either. So we've got to reach a balance there.”

Senate Banking Committee Chairman Chris Dodd (D-Conn.) reacted angrily earlier this week to the government’s takeover of Fannie Mae and Freddie Mac, noting that Treasury Secretary Henry Paulson had testified before his committee earlier in the summer that such a step wouldn’t be necessary.

Dodd said he was also irritated that Congress was kept in the dark until last Friday afternoon, leading him to suspect that the takeover had long been planned.

Dodd’s office said Friday that it was monitoring the Lehman Brothers situation.