Lehman Brothers Holdings Inc will not turn its asset management unit into a long-term business after creditors of the bankrupt investment bank objected.

LAMCO, or the Legacy Asset Management Co, instead will continue on its path to liquidate Lehman assets over the next few years to pay back creditors, and no longer will look for a partner to manage the business, Chief Executive Bryan Marsal said.

Under the current governance, as long as it is in bankruptcy, a LAMCO partnership will not be pursued, said Marsal, who is overseeing the world's biggest bankruptcy.

Marsal presented the possibility of a partnership between LAMCO and another firm at a creditor's meeting earlier this year, saying the arrangement would strengthen the asset-management business by letting it retain employees.

Outside investment would help defray the costs of starting up LAMCO and let it take advantage of its employees' expertise in managing asset liquidation by taking on non-Lehman business, supporters of the proposal said at the time.

Lehman started looking for a partner for LAMCO after its creation was approved by a Manhattan bankruptcy court in April 2010. But since then, there has been little publicly disclosed information about its future plans for the unit.

Indeed, the U.S. Trustee's Office, part of the Justice Department and a watchdog for bankruptcies, said in a recent objection filed in bankruptcy court that Lehman was too vague about how LAMCO would operate after bankruptcy ends. The trustee objected to Lehman's disclosure statement on its plan for how it will pay back creditors after it exits bankruptcy.

A hearing is set for August 30 when Judge James Peck will rule on whether the bankruptcy plan can go to creditors for a vote, during which the trustee can raise the objections regarding LAMCO's role within that plan.

Lehman collapsed in September of 2008 with $639 billion in assets and quickly sold off its most liquid assets as part of its efforts to pay back the clients, investors and trading partners who lost billions of dollars with its failure. It is now working on unwinding its more illiquid assets.

LAMCO has more than 400 employees, who either worked for Lehman Brothers before the bankruptcy or for Alvarez & Marsal, the restructuring firm led by Bryan Marsal. They are led by Douglas Lambert, an executive with Alvarez & Marsal.

CREDITORS SAY NO

The creditors' concerns were the main reason for shelving the plan, Marsal told Reuters.

From their standpoint, there was a real concern that we would become unfocused and instead of focusing on their $35 billion in assets, we would focus on new assets, Marsal said. For them, there wasn't enough juice in the deal to warrant that distraction.

A lawyer for the official creditors committee, which includes companies as diverse as hedge fund Elliott Management Corp, insurer MetLife and the Vanguard Group, declined to comment.

Other creditors that have been vocal in Lehman's bankruptcy process include hedge funds such as Paulson & Co and SilverPoint Capital and banks like Goldman Sachs & Co.

LAMCO has five groups of employees managing about $65 billion worth of assets in real estate, derivatives, private equity assets, commercial and other loans and its independent bank units. One of its top assets is its stake in Archstone, the apartment real estate company worth an estimated $18 to $20 billion.

On Wednesday, the Manhattan bankruptcy court approved Lehman's proposed deal to transfer the management of about $5 billion in commercial loans to WCAS/Fraser Sullivan Investment Management. WCAS/Fraser Sullivan may also sell those loans for the company.

(Additional reporting by Nick Brown; Editing by Robert MacMillan and Phil Berlowitz)