Latest developments on Wall Street's momentous day

Wall Street and its regulators continued to scramble late Sunday evening to avert panic selling in European and U.S. markets on Monday because of the expected demise of investment bank Lehman Bros. Holdings Inc.

It’s already Monday in Asia, but major markets there -- including Tokyo, Hong Kong and Seoul -- were closed for a holiday. Where investors were getting the chance, however, they were selling stocks: A couple of hours into the trading session, the Australian market was down 2.4%, the Taiwan market was off 3.6% and the Singapore market was down 2.4%.

The dollar was broadly lower against major rivals; the euro rose to $1.447 from $1.422 on Friday.

Here are the latest developments, as of about 8:15 p.m. PDT, on this incredible day for the U.S. financial system:

--- BofA/Merrill merger: Sources confirmed to the Times that Bank of America Corp. and Merrill Lynch & Co. reached an agreement in principle for BofA to buy Merrill for $29 a share in BofA stock -- a 70% premium to Friday’s closing price of $17.05, but less than one-third Merrill’s all-time high of $97.53 reached in January 2007.

BofA, the No. 1 U.S. bank in deposits, credit cards and mortgages, will get Merrill’s vast global expertise in investment banking and its $1.6 trillion in client assets under management.

More important, for the moment, is that BofA averts the risk that investors on Monday would mark Merrill as the next candidate for failure because of ongoing real estate-related losses. Merrill was considered the weakest investment bank after Lehman.

--- Lehman dissolution: Lehman Bros. was said to be preparing a bankruptcy filing after BofA and Barclays PLC early Sunday aborted talks to buy the firm. The potential bidders wanted government aid, similar to what JPMorgan Chase & Co. got from the Federal Reserve to swallow crippled Bear Stearns Cos. in March.

But the Fed and the Treasury were adamant that they wouldn’t provide help to save Lehman. They stood their ground -- but with potentially dangerous short-term consequences for the global financial system.

The liquidation or reorganization of Lehman is expected to begin on Monday. Lehman’s bankruptcy filing would allow most of the firm’s units to continue operating as the business is wound down, the Wall Street Journal reported.

--- New borrowing options for banks: A group of 10 major banking firms, including JPMorgan Chase, Citigroup, Credit Suisse and Goldman Sachs Group, set up a $70-billion fund to provide cash to one another -- an attempt to keep markets from seizing up on Monday because of a shortage of liquidity, if investors flee en masse.

What’s more, the Federal Reserve announced an expansion of its current lending programs to investment firms, giving them more options if they need short-term credit to keep functioning. The banks will be able to pledge a greater range of securities as collateral for the loans -- including stocks.

Previously, the Fed would only accept investment-grade bonds as collateral. See the Fed’s announcement here.

This isn’t direct government aid to investment firms, because the Fed expects the loans to be paid back. But it’s more use of the Fed’s increasingly stretched resources to keep Wall Street afloat.

Fed Chairman Ben S. Bernanke will chair a regularly scheduled meeting of central bank policymakers on Tuesday. The Fed was expected to keep its benchmark rate steady at 2% -- but if financial markets crumble on Monday, a rate cut is possible.

--- AIG seeks help: Insurance titan American International Group Inc. is seeking a $40-billion bridge loan from the Fed to forestall a possible credit-rating downgrade that could spell the end of the company, the New York Times reported.

Scrambling to raise capital, New York-based AIG might try to sell its Woodland Hills-based auto insurance unit, 21st Century Insurance, sources told the Los Angeles Times. But the company did not want to let go of its aircraft leasing business, Century City-based International Lease Finance Corp., the sources said.

--- Help for Lehman's investor clients: The Securities and Exchange Commission said it was taking steps to ensure that Lehman's brokerage clients "will not be adversely affected by recent market events."

The agency noted that the brokerage’s customers "benefit from their extensive protections under SEC rules, including segregation of customer securities and cash, as well as insurance by the Securities Investor Protection Corp. These safeguards are designed to ensure that the broker-dealer’s customers will be protected."

See the SEC’s announcement here.

Photo credits: Merrill Lynch & Co. headquarters by Mario Tama / Getty Images; Fed Chairman Ben S. Bernanke by Susan Walsh / Associated Press

Comments

[Edward M.]

The financial markets are crashing! The global world is headed toward financial catastrophe! There is no end in sight, soon our Pensions are going to be affective by a O balance sheet. Crime lawlessness, wars, earthquakes are on the rise! What hope is there for mankind? Mathew 24:14 "The good news of Gods Kingdom will be preach in all the earth for a witness to all the nations then the end will come. Please search for the truth while there is time.

[Justin]

Well today's the day, the day of days.

Store up on food, buy some land.

September 15, 2008
Black Monday

[SB]

As a Lehman shareholder I think the following might help.
Lehman should go back to the bond holders and to the Koreans and
negotiate a deal that recapitalizes the company. If $20 B of bonds convert
and the Korean offer is back on the table this could be enough to keep
going for a sufficient period of time to dig out of the mess. How can BofA
which was forced to buy Merrill also buy Lehman? Paulson set them
up for failure by pressing BofA with Merrill and then insisting that Wall St.
will also handle Lehman. He should have indicated upfront that he thought
this completely foolhardy and that he did expect Lehman to fail. THe right
buyer for the bad assets is Freddie and Fannie. Even
a Freddie/Fannie Buyout of portions of Lehman's MBS portfolio for a
joint stake with Barclays might have worked. With this arrangement Barclays
buys a 60% stake in Lehman's good assets for $20 B and 20%
goes to Freddie and Fannie who assume the bad assets with shareholders
getting 10%. The $20 B goes to capitalize the assets. Eventually this well
capitalized company could become part of a "private" Freddie and Fannie
combo. Paulson did not do enough - rather worked to shut down Lehman.

[martscan]

Has anyone heard any talk of suing Lehman regarding their reckless use of credit swaps?