NEW YORK — A failed plan to rescue Lehman Brothers was followed Sunday by more seismic shocks from Wall Street, including an apparent government-brokered takeover of Merrill Lynch by Bank of America.
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 13-month- old credit crisis intensified.
Futures pegged to the Dow Jones industrial average fell almost 300 points in electronic trading Sunday evening, pointing to a sharply lower open for the blue-chip index today. Asian stock markets were also falling.
Lehman Brothers may be forced to seek an orderly unwinding of its businesses. All potential buyers walked away after the U.S. Treasury refused to 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.
Insurer AIG, hit hard by deterioration in the credit markets, said Sunday it is reviewing its operations and discussing possible options with outside parties to improve its business after a week when its stock dropped 45 percent amid concerns about the company’s financial underpinnings. It 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.
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 The Wall Street Journal. 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.
The deal would not come without risks, however. 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.
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.
The weekend’s developments will likely 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.
U.S. Treasury Secretary Henry Paulson was huddled through the weekend at the New York Federal Reserve’s 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: Paulson; Timothy Geith ner, president of the New York Fed; Securities and Exchange Commission Chairman Christopher Cox; and a host of chief executives, including Vikram Pandit of Citigroup, Jamie Dimon of JPMorgan Chase & Co., John Mack of Morgan Stanley, Lloyd Blankfein of Goldman Sachs Group Inc., and Merrill Lynch’s John Thain.
For all their efforts, Lehman appeared ready to file for 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 cost of insuring financial firms’ debt from default has been soaring. A rise in the cost of the insurance, known as credit default swaps, indicates debt holders believe there is a greater chance of default by the financial companies.
Swaps on most financial firms are likely to get even worse during the upcoming week, analysts said.
On Sunday, there was also an emergency trading session being held at the International Swaps and Derivatives Association to “reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy.”
The common denominator of the financial crisis, analysts said, is the bursting of the housing bubble. Home prices have dropped on average 25 percent. Roubini predicted they could drop another 15 percent.
The Fed is widely expected to keep its main interest rate steady at 2 percent when it meets Tuesday. It was possible, however, that the central bank might decide in coming weeks to cut rates if such a move is seen as needed to calm turbulent financial markets.
Christopher Whalen, managing director of Institutional Risk Analytics, a research firm, predicts that about 110 banks with $850 billion in assets could close by next July. That’s out of 8,400 federally insured institutions, he said, which together hold $13 trillion in assets.
Individual customers are starting to get nervous about the financial health of their banks for the first time in generations, he said. Whalen’s firm analyzes the safety and soundness of banks for business clients but began receiving inquiries from individuals in the past two months for the first time, he said.
“If we don’t get ahead of this, we are going to face a run on the retail banks by Election Day,” he said.
