Latest developments on Wall Street’s momentous day

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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