Lehman says it will file for bankruptcy. Fed and 10 strong banks expand
lending to weaker players. Plus: Bank of America and Merrill strike a
deal.
NEW YORK (CNNMoney.com) -- After enduring one of the most dramatic days
in its history, Wall Street received a climactic jolt on Monday when
Lehman Brothers, a 158-year-old investment bank undermined by bad bets
on real estate, said it will file for bankruptcy.
The fall of Lehman followed a wild, three-day scramble by top Wall
Street executives and federal regulators who worked around the clock to
come up with a solution to a still-unfolding financial crisis.
By the end of the weekend, the Federal Reserve had stepped in to try to
calm the markets by announcing plans to loosen its lending restrictions
to the banking industry. A consortium of 10 leading domestic and foreign
banks had agreed to create a $70 billion fund to lend to troubled
financial firms. And two major financial companies - Bank of America
(BAC, Fortune 500) and Merrill Lynch (MER, Fortune 500) - were
finalizing a merger while another - American International Group - was
reportedly struggling to secure billions of dollars in capital.
But it was the fate of Lehman (LEH, Fortune 500) that gripped Wall
Street. After weeks of speculation about its health, Lehman's fate took
a turn for the worse Sunday when Bank of America and British bank
Barclays, both viewed as potential "white knights," pulled out of deal
talks, according to sources.
"This looks like the end," a Lehman executive, who declined to be
identified, told Fortune on Sunday afternoon.
So Bank of America turned to merger talks with Merrill. By early Monday,
the two had announced that BofA had bought Merrill for $50 billion in
stock. Hours before Bank of America pulled out, Barclays had abandoned
talks to buy Lehman, a source close to the situation told CNNMoney.com.
All the while, top Wall Street officials and federal regulators, who
began meeting Friday, spent much of their Sunday at the Federal Reserve
Bank of New York in the hopes of devising a plan to save Lehman and
allay fears that threatened to roil U.S. financial markets Monday.
said Monday that three of its partners have been appointed
administrators to Lehman's British operations. Meanwhile, broader
efforts to tackle problems plaguing the industry are underway.
The Federal Reserve announced a series of steps to support the financial
markets. The Fed said it would expand its short-term lending to banks by
starting to take all investment-grade debt as collateral - instead of
just Treasurys and other high-grade securities.
"The steps we are announcing today, along with significant commitments
from the private sector, are intended to mitigate the potential risks
and disruptions to markets," said Fed Chairman Ben Bernanke.
Similarly, a group of 10 commercial and investment banks including,
among others, Goldman Sachs (GS, Fortune 500), Citigroup, Barclays and
Morgan Stanley, agreed to pony up $7 billion each to create a $70
billion lending pool to help troubled institutions.
The measure would also help resolve exposure between Lehman Brothers and
its counterparties, the companies said. Treasury Secretary Henry
Paulson, who has led efforts to help get the U.S. housing market and the
broader economy back on track, applauded the plan and steps taken by
regulators.
"These initiatives will be critical to facilitating liquid, smooth
functioning markets, and addressing potential concerns in the credit
markets," Paulson said in a statement.
Yet the last-minute efforts provided little comfort to financial markets
around the globe. As of Sunday evening, U.S. markets were headed for a
steep selloff at the start of Monday's session.
Futures in the Dow Jones industrial average, as well as the broader
Nasdaq composite and the Standard & Poor's 500 were as much as 3% lower,
before paring some of their losses.
Investors already started piling into safe-haven Treasuries as the yield
on the benchmark 10-year note dipped to 3.565% from 3.72% late Friday.
That nervousness also spread to the currency markets as the dollar eased
against both the euro and the yen.
Adding to those concerns was news that insurance giant AIG (AIG, Fortune
500) planned to unveil a restructuring plan that will include the sale
of part of its business to raise cash and boost investors' confidence,
according to a published report.
Investors are also likely to await more data about troubled savings and
loan Washington Mutual (WM, Fortune 500), which sought to provide
assurance about capital levels on Thursday. What could help temper a
market selloff is the Bank of America-Merrill deal, said one expert.
"This sort of offsets the Lehman thing," said Dan Alpert, managing
director of the boutique New York City-based investment bank Westwood
Capital. "But the reality is that it is just a short-term impact."
Lehman dark and light
Still, much of the market's focus ahead of Monday was on the endgame for
Lehman. The hope was that some solution could be found by early Monday
morning in the U.S. - before financial markets open in Europe. Most
Asian markets are closed for a holiday Monday.
But the abandonment of Barclays and Bank of America left Lehman Brothers
teetering. During the afternoon, and adding to the dark cloud hanging
over Lehman, the International Swaps and Derivatives Association staged
a special trading session so that big brokers could limit their Lehman
Brothers risks.
The session was called "to reduce risk associated with a potential
Lehman Brothers Holding Inc. bankruptcy," according to a statement on
the ISDA's Web site.
Lehman - one of the nation's largest and oldest investment banks - has
suffered a dramatic and rapid descent. Its shares, which sold for as
much as $67 in the past 12 months, have plummeted 94% this year and now
trade at $3.65.
In the past six months, the company reported $6.7 billion in losses due
largely to bad bets on real estate. In its bankruptcy announcement
Monday, Lehman said that its board had OK'd the filing "to protect ...
assets and maximize value." None of Lehman's broker-dealer subsidiaries
will be included in the Chapter 11 petition, the firm's announcement
said. Lehman said it is trying to sell its broker-dealer business and is
in "advanced discussions" to unload its investment management division.
Race against the clock
A source with knowledge of this weekend's meetings told CNN that
representatives of several major financial institutions met with
Paulson, Securities and Exchange Commission Chairman Christopher Cox and
New York Federal Reserve Bank President Timothy Geithner to discuss
Lehman and the volatile state of the financial markets.
On Saturday, several heads of big Wall Street banks, including Merrill
Lynch CEO John Thain, were seen entering and leaving the offices of The
Federal Reserve Bank of New York.
According to several reports, other financial firms were said to be
reluctant to contribute their own funds to help keep Lehman's more toxic
assets afloat without the assurance that the government would backstop
Lehman's bad loans.
However, a source close to the situation told CNN Friday that the
Treasury Department was adamantly against using any government money to
help finance a takeover, restructuring or bailout of Lehman.
Top banking regulators, including the Federal Reserve, faced heavy
criticism from lawmakers following the bailout of Bear Stearns in
mid-March.
The Fed helped engineer a fire sale of the firm to JPMorgan Chase (JPM,
Fortune 500), agreeing to put taxpayer funds at risk by guaranteeing $29
billion's worth of potential losses on Bear Stearns' portfolio.
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Mon Sep 15, 2008 10:01 pm