Markets meltdown as Lehman collapses, Merrill taken over

NEW YORK: Global financial markets sank sharply on Monday as traders worried over more troubles at the Wall Street following a failed plan to rescue Lehman Brothers, and Bank of America's takeover of Merrill Lynch.

Lehman Brothers, burdened by 60 billion dollars in soured real-estate holdings, said it is filing for chapter 11 bankruptcy after attempts to rescue the 158-year-old firm failed.

The giant of financial markets was shaken up by losses of hundreds of billions of dollars in bad mortgages in the housing markets.

The stunning weekend developments came as Lehman Brothers began considering bankruptcy after Barclays and Bank of America, the top suitors, walked away apparently following Federal authorities declining to provide financial backup to them, declaring bankruptcy would allow Lehman's subsidiaries to continue to function as the company itself is wound down. Its businesses in Britain were already placed in administration, said the administrator, accounting firm PricewaterhouseCoopers, as employees carrying boxes and bags were walking out of Lehman's London offices, AP reports said.

Bank of America said it is buying Merrill Lynch & Co Inc in a 50 billion dollar all-stock transaction.

Merrill Lynch, another investment bank laid low by the crisis that was triggered by rising mortgage defaults and plunging home values in the United States, 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 dollars a share, a 70 per cent premium over the brokerage's Friday closing price of 17.05 dollars, but well below what Merrill was worth at its peak in early 2007, when its shares traded above 98 dollars.

North Carolina-based 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 US bank in terms of assets.

The demise of the independent Wall Street institutions came as shock waves from the 14-month-old credit crisis engulfed the US financial system six months after the collapse of Bear Stearns.

The world's largest insurance company, American International Group Inc, also was forced into a restructuring.

And a global consortium of banks, working with government officials in New York, announced a 70 billion dollar pool of funds to lend to troubled financial companies.

Merrill has some 60,000 employees and Lehman 25,000. It was not clear how the moves would affect them.

AIG executives were reported to be trying to raise funds by selling assets or infusion of capital from private equity firms.

As the crisis intensified, Mayor Michael Bloomberg, himself a billionaire, cancelled his visit to California to meet governor Arnold Schwarzenegger and instead was talking to officials and experts to determine the impact of the developments on the city.

Ten banks -- Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS -- each agreed to provide 7 billion dollars "to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets." The Federal Reserve also chipped in with more largesse in its emergency lending programme for investment banks. The central bank announced late on Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.

Federal Reserve Chairman 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."

Lehman, a 158-year-old firm that started as an Alabama cotton brokerage, and Merrill, with its trademark bull logo, have been pillars of the Wall Street for much of the past century, the Wall Street Journal noted.

With the demise of Bear Stearns, three of the Street's five major independent brokers could end up disappearing, leaving only Goldman Sachs Group Inc and Morgan Stanley.

The convulsions could lead to even tighter credit, higher borrowing costs and moribund capital markets, as securities firms and commercial banks try to further limit risk and preserve capital.

Those moves could cause the US economy to slow further, the Wall Street Journal added. Meanwhile, AFP reported that the European Central Bank, the Bank of England, and the Swiss central bank also made more short-term credit available to banks. European stocks fell sharply with the FTSE 100 Index off 3.42 per cent in London, the CAC-40 down 4.27 per cent in Paris, and Germany's blue-chip DAX 30 falling 3.38 per cent. Asian stock markets also tumbled. Japan and Hong Kong were closed for holidays.

Financial stocks were hard hit and the dollar fell against the pound and the euro.

The common denominator of the financial crisis, analysts said, is the bursting of the housing bubble. Home prices have dropped an average 25 per cent so far. They could drop another 15 per cent.

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.