Lehman teeters toward bankruptcy
Power shifting on Wall Street as BoA pursues Merrill Lynch
The ruptured U.S. financial system was facing an unprecedented shakeup on Sunday that was expected to lead to the failure of Lehman Brothers, the takeover of Merrill Lynch & Co. and big asset sales by major insurer American International Group.
The developments indicate that chief executives on Wall Street and regulators in Washington are accepting that massive triage is necessary in the face of the 13-month old credit crisis and destructive U.S. housing bust.
“The U.S. financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before,” said Peter Kenny, managing director at Knight Equity Markets in Jersey City, N.J. “It’s a new financial world on the verge of a complete reorganization.”
Growing expectations that Lehman will become Wall Street’s most high profile bankruptcy since junk bond specialist Drexel Burnham Lambert collapsed in 1990 sparked a sell-off in U.S. asset prices.
“It appears that Lehman will file for bankruptcy and the risk of an immediate tsunami is related to the unwind of derivative and swap-related positions worldwide in the dealer, hedge fund, and buying universe,” said Bill Gross, chief investment officer at Pacific Investment Management Co (Pimco).
Sunday’s events signalled a transformation in the power structure on Wall Street with major banking groups like Bank of America Corp. , which is bidding for Merrill, and JPMorgan Chase & Co. becoming more dominant.
If Lehman and Merrill disappear or get taken over, then three of the top five U.S. investment banks would have dissolved or been bought inside six months. Bear Stearns was acquired in a fire sale by JPMorgan in March.
The focus early Sunday was on whether talks between regulators and Wall Street’s top bankers would lead to the sale of Lehman, until recently the No. 4 U.S. investment bank.
Those talks faltered when Britain’s Barclays Plc., which had appeared to be front-runner to take over Lehman — excluding its toxic mortgage-related assets — said it had pulled out of the bidding.
That triggered expectations the investment bank was heading into bankruptcy and prompted a rare emergency trading session to allow Wall Street dealers in the $455 trillion derivatives market to reduce their exposure to the firm.
Within hours of Barclays withdrawal, people briefed on the matter said Bank of America was in advanced talks to acquire Merrill.
The Wall Street Journal said Merrill Lynch had agreed to a deal for $44 billion, or $29 a share.
There were signs of attempts by banks and regulators to try to prop up market confidence.
To help provide liquidity, the Federal Reserve said it would accept a wider array of securities as collateral at its key borrowing windows.
“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,” Fed chairman Ben Bernanke said in a statement.