New York - In a stunning reshaping of America's financial landscape, two venerable Wall Street firms fell from the shock waves of a credit crisis that has plunged the financial system into turmoil, as stocks tumbled across the globe Monday in response.
Lehman Brothers, a 158-year-old bank burdened by $60 billion in soured real-estate holdings, filed for federal bankruptcy protection in US Bankruptcy Court after attempts to rescue firm failed. Bank of America Corp. said it is snapping up Merrill Lynch & Co. in a $50bn all-stock transaction.
Stock markets fell precipitously and Treasury bond prices soared as investors reacted to some of the most dramatic economic news in modern US history. The Dow Jones industrial average fell 300 points, though the market's initial losses were not as steep as some investors had feared.
The developments took place as US voters, who rank the economy as their top concern, prepare to elect a new president in seven weeks. Presidential candidates John McCain, a Republican, and Democrat Barack Obama, immediately called for stricter financial regulation.
Obama called the news "the most serious financial crisis since the Great Depression" of the 1930s.
Major restructuring
The demise of the independent Wall Street institutions comes six months after the collapse of Bear Stearns and 14 months after the beginning of the credit crisis, sparked by bad mortgage finance and real estate investments.
Ominously, American International Group Inc., the world's largest insurance company, was asking the Federal Reserve for emergency funding and planned to announce a major restructuring Monday
A global consortium of banks, working with government officials in New York, announced a $70 billion pool of funds to lend to troubled financial companies. The aim of the bank consortium, according to participants who spoke to The Associated Press, was to prevent a worldwide panic on stock and other financial exchanges.
The Federal Reserve also chipped in with more largesse 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 chairperson 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."
Europe's major central banks also moved quickly to calm markets, pumping billions of euros and pounds into the financial system to shore up confidence.
Still, the FTSE-100 share index was down 4.07% in London, the Paris CAC-40 was off 4.5% and Germany's DAX 30 index of blue chips sagged 3.23%.
Asia's biggest stock exchanges in Japan, Hong Kong and South Korea were closed for holidays, but India's Sensex tumbled 3.4%, Taiwan's benchmark index plummeted 4.1% and Singapore dropped 3.2%.
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.
Bankruptcy
"Just the psychological impact of this kind of failure is going to be significant," he said. "It will colour people's feelings about their well-being and the integrity of the financial system."
Lehman Brothers' announcement that it is filing for bankruptcy came after all potential buyers walked away. They were spooked by the U.S. Treasury's refusal to provide any takeover aid, as it had done six months ago when Bear Stearns faltered and earlier this month when it seized mortgage giants Fannie Mae and Freddie Mac.
In an effort to calm the markets, Lehman pre-announced third-quarter results on Wednesday. In an affidavit filed with the bankruptcy court, Lehman Chief Financial Officer Ian Lowitt said that action "did little to quell the rumours in the markets and the concerns about the viability of the company." He said the uncertainty made it impossible for Lehman to continue.
Employees emerging from Lehman's headquarters near the heart of Times Square Sunday night carried boxes, tote bags and duffel bags, rolling suitcases, framed artwork and spare umbrellas.
Its businesses in Britain were placed in administration Monday, said the administrator, accounting firm PricewaterhouseCoopers, and employees carrying boxes and bags were walking out of Lehman's London offices.
Merrill Lynch, another investment bank laid low by the crisis that was triggered by rising mortgage defaults and plunging home values in the US, agreed to be acquired by Bank of America for 0.8595 shares of Bank of America common stock for each Merrill Lynch common share.
That values Merrill at $29 a share, a 70 percent premium over the brokerage's Friday closing price of $17.05, but well below what Merrill was worth at its peak in early 2007, when its shares traded above $98.
Bank of America has the most deposits of any US 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.
Struggling
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. 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, 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.
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 the embattled mortgage lender Countrywide Financial, which it acquired in January.
Insurer AIG, hit hard by deterioration in the credit markets, said 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.
The common denominator of the financial crisis, analysts said, is the bursting of the housing bubble. Home prices have dropped on average 25% so far. Roubini predicted they could drop another 15%.
The crisis has begun to slow the broader economy as banks make fewer loans and consumers have begun cutting spending. Many economists are now 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.
The wreckage could prompt the Federal Reserve to do an about face and once again cut a key interest rate this week or possibly later this year. Just a few days ago, a rate cut appeared largely off the table, but now it has emerged as a possibility as the Fed prepares to meet Tuesday.
The International Monetary Fund predicted earlier this year that total losses from the credit crisis could reach almost $1 trillion. So far, banks have only taken about $350 billion in losses.
- AP