NEW YORK — A failed plan to rescue Lehman Brothers was followed Sunday by more seismic shocks from Wall Street, as the embattled firm said it would file for Chapter 11 bankruptcy and a government-brokered takeover of Merrill Lynch by the Bank of America for $50 billion came to light.
A forced restructuring of the world’s largest insurance company, American International Group Inc., also weighed heavily on global markets as the effects of the 14-month-old credit crisis intensified.
A global consortium of banks, working with government officials in New York, announced late Sunday a $70 billion pool of funds to lend to troubled financial companies. The aim, according to participants who spoke to The Associated Press, was to prevent a worldwide panic on stock and other financial exchanges.
Ten banks — Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS — each agreed to provide $7 billion “to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets.”
The Federal Reserve also chipped in with more largess in its emergency lending program for investment banks. The central bank announced late Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.
Federal Reserve Chairman Ben Bernanke said the discussions had been aimed at identifying “potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official-sector and private-sector responses.”
Futures pegged to the Dow Jones industrial average fell more than 300 points in electronic trading Sunday evening, pointing to a sharply lower open for the blue- chip index this morning. Asian stock markets were also falling.
The stunning weekend developments took place as voters, who rank the economy as their top concern, prepare to elect a new president in seven weeks. It likely will spur a much greater focus by presidential candidates — Republican John McCain and Democrat Barack Obama — and members of Congress on the need for stricter financial regulation.
Samuel Hayes, finance professor emeritus at Harvard Business School, said the Bush administration may get a lot of blame for the situation, which could benefit Obama.
“Just the psychological impact of this kind of failure is going to be significant,” he said. “It will color people’s feelings about their well-being and the integrity of the financial system.”
No takers on Lehman Bros.
Lehman Brothers will be forced to seek an orderly unwinding of its businesses. All potential buyers walked away after the U.S. Treasury wouldn’t budge on its refusal to provide any takeover aid as it had done six months ago when Bear Stearns faltered and earlier this month when it seized Fannie Mae and Freddie Mac.
Expectations that the 158-year-old Lehman would survive dimmed after Barclays PLC withdrew its bid to buy the investment bank.
Barclays and Bank of America were considered front-runners to buy Lehman, which is foundering under the weight of $60 billion in soured real-estate holdings.
Employees emerging Sunday night from Lehman’s headquarters near the heart of Times Square carried boxes, tote bags and duffel bags, rolling suitcases, framed artwork and spare umbrellas. Many were emblazoned with the Lehman Brothers name.
Some workers had moist eyes, while a few others wept and shared hugs. Most who left the building quietly declined interviews.
Merrill Lynch, another investment bank laid low by the crisis that was triggered by rising mortgage defaults and plunging home values in the U.S., agreed to be acquired by Bank of America for $29 a share, according to a person briefed on the deal who spoke on condition of anonymity because the agreement had not yet been finalized. That’s a premium to its closing price Friday of $17.05 but only a fraction of its price of almost $100 a share early in 2007.
Charlotte, N.C.-based Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world’s largest brokerage. A combination of the two would create a global financial giant to rival Citigroup Inc., the biggest U.S. bank in terms of assets.
Strategically, most industry analysts say it’s a good fit. If the deal goes according to plan, Bank of America will be able to offer Merrill’s retail-brokerage services to its huge customer base. There is not a great deal of overlap between the two companies — Bank of America does have an investment bank already, but it has never been terribly strong.
Where there is duplication, however, the combination of the two companies could result in more layoffs. Both Merrill and Bank of America have already cut thousands of investment-banking jobs over the past year.
The deal would not come without risks. Merrill Lynch, like many of its Wall Street peers, has been struggling with tight credit markets and billions of dollars in assets tied to mortgages that have plunged in value. Merrill has reported four straight quarterly losses.
And Bank of America’s own finances are far from robust. As consumer credit deteriorates, the bank has seen its profits decline, and the company is still in the midst of absorbing embattled mortgage lender Countrywide Financial, which it acquired in January.
Global repercussions
Struggling to raise billions of dollars, AIG reportedly rejected a private-equity firm’s offer to invest $8 billion in the insurer and was seeking to borrow $40 billion from the Federal Reserve, The New York Times reported.
AIG was working with New York Insurance Superintendent Eric Dinallo and a representative of the governor’s office through the weekend to craft a solution that protects policyholders, according to Dinallo spokesman David Neustadt.
Treasury Secretary Henry Paulson was huddled through the weekend at the New York Federal Reserve’s fortresslike building in downtown Manhattan with executives from major banks and investment houses to hash out the fate of Lehman Brothers and to stanch the bleeding on Wall Street that threatened to shatter investor confidence around the globe.
“It’s clear we’re one step away from a financial meltdown,” said Nouriel Roubini, chairman of the consulting firm RGE Monitor.
The meetings that began Friday night were a who’s who of financial heavyweights.
“The way of the dodo”
Late Sunday, Lehman said it intended to file for Chapter 11 bankruptcy.
The end of Lehman may not stop the financial crisis that has gripped Wall Street for months, analysts said. More investment banks could disappear soon.
The independent broker-dealers “are going the way of the dodo bird,” said Bert Ely, an Alexandria, Va.- based banking consultant.
That’s partly because some of the firms, particularly Merrill, made bad bets on real estate. But several analysts said investment companies will need the deep pockets of commercial banks to survive the next few years.
Roubini said with no deal for Lehman, Merrill and the other investment firms would have been hit with a “run on the bank,” as hedge funds and other clients withdraw funds and banks become reluctant to lend to them. Many of the investment banks rely on short-term loans to finance their day-to-day operations.
The common denominator of the financial crisis, analysts said, is the bursting of the housing bubble. Home prices have dropped on average 25 percent so far. Roubini predicted they could drop another 15 percent.
The crisis has begun to slow the broader economy as banks make fewer loans and consumers have begun cutting spending. Many economists are forecasting that the economy could slip into recession by the end of this year and early next year.
That, in turn, could cause additional losses for commercial banks on credit cards, auto loans and student loans.
At a glance
• Lehman Brothers Holdings said it will file for bankruptcy after it failed to find a buyer following the Treasury’s refusal to provide aid similar to the bailouts of Bear Stearns, Fannie Mae and Freddie Mac.
• Bank of America, which had been a suitor for Lehman, announced it would take over Merrill Lynch for $50 billion.
• Insurance titan AIG was reviewing its operations and reportedly asked the federal government for a $40 billion bailout.
• The deepening crisis led a global group of 10 banks to pool $70 billion to lend to troubled financial firms, hoping to avert a worldwide panic.
