Lehman Deader Than The Dodo

[Admiral Valdemar]

The time is three minutes to midnight.

Wall Street Prepares for Potential Lehman Bankruptcy (Update1)

By Craig Torres

Sept. 14 (Bloomberg) -- Wall Street prepared for a potential Lehman Brothers Holdings Inc. bankruptcy after Barclays Plc said it pulled out of talks to buy the firm and the government indicated it wouldn't provide funds in a resolution.

Banks and brokers today held a session for netting derivatives transactions with Lehman, or canceling trades that offset each other, in case the New York-based firm files for bankruptcy before midnight New York time.

``The purpose of this session is to reduce risk associated with a potential Lehman Brothers Inc. bankruptcy filing,'' the International Swaps and Derivatives Association said in a statement today. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the U.S. and abroad.

The step indicates that Wall Street lacks confidence that three days of talks to find a buyer for Lehman, held at the Federal Reserve Bank of New York, will be successful. Treasury Secretary Henry Paulson, who has led the talks with New York Fed President Timothy Geithner, was adamant two days ago against using taxpayer funds in a resolution.

The fourth-largest securities firm until the past week, Lehman has thousands of such trades in credit, equity, commodity, interest rates and currency derivatives.

``ISDA confirms a netting trading session will take place between 2 p.m. and 4 p.m. New York time for over-the-counter derivatives,'' the ISDA said. ``Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time, Sunday, Sept. 14, 2008. If there is no filing, the trades cease to exist.''

The announcement came after Barclays, the U.K.'s third- biggest bank, said it abandoned talks to buy Lehman, contending it couldn't obtain guarantees to protect against potential losses at the U.S. securities firm.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net
Last Updated: September 14, 2008 15:19 EDT

Will the line be drawn here? Will this bank also be bailed out if no buyer is found?

[J]

Don't jinx it now, it's not bankrupt and dead until we see a corpse. I'm not prepared to call it over & done until I read multiple headlines announcing its demise, the Feds and their friends have become quite notorious for pulling out last minute saves at taxpayers' expense.

[Admiral Valdemar]

But J, they said they'd never bail Fannie and Freddie, and they kept their word... Oh, good point.

[apocolypse]

I just saw headlines that Bank of America is looking to buy.

[Einhander Sn0m4n]

I just saw headlines that Bank of America is looking to buy.

Whoopsy! Looks like B of A had a change of heart.

It also looks like the Chinese are tiring of the Fed's inflationary and downright Communist bailouts, so they want to dump their dollars. This is very Not Good™.

[apocolypse]

I just saw headlines that Bank of America is looking to buy.

Whoopsy! Looks like B of A had a change of heart.

It also looks like the Chinese are tiring of the Fed's inflationary and downright Communist bailouts, so they want to dump their dollars. This is very Not Good™.

Actually, I think I completely screwed the pooch on that one. I just noticed it was Merrill Lynch in the headlines, not Lehman. My bad. One was right above the other, and well....

[Broomstick]

So, um, is it time to stock up on canned food and ammo, yet?

Of course, with the recent Chicago-area flooding getting to the store to pick up those items might be problematic, as I don't own a boat at the moment....

[Admiral Valdemar]

So, um, is it time to stock up on canned food and ammo, yet?

Of course, with the recent Chicago-area flooding getting to the store to pick up those items might be problematic, as I don't own a boat at the moment....

The failure of Lehman means a potential unwinding of tens of trillions of CDS holdings around various other banks and financial institutions. The Feds can either pull an 11th hour saving of Lehman, leading to more taxpayer's cash going to socialise rich banker losses, or they can let Lehman reap what they sow, which could tank beyond anything we can imagine.

We shall know as trading starts later today (it's 0039 BST on Monday here) and if Lehman has been left to die.

[Broomstick]

Well, if the shit is going to hit the fan sooner or later, isn't it better to get it over with sooner?

My uneducated gut-level intuition is that we're going to have a massive crash of financial institutions in the near future... but I'd be happy to be entirely wrong on the issue.

[aerius]

Well, if the shit is going to hit the fan sooner or later, isn't it better to get it over with sooner?

Think of it as a kid who got in trouble at school, he can either tell his parents about it or he can do everything he can to keep his parents from finding out, knowing that they'll find out anyway one way or another. Some kids will do it anyway knowing full well that it's futile, and that's exactly what the banks are doing these days.

My uneducated gut-level intuition is that we're going to have a massive crash of financial institutions in the near future... but I'd be happy to be entirely wrong on the issue.

And you'd be right, it's not if it crashes, it's when & how, and who pays. I can't answer the first 2, but I can guarantee that it's everyday ordinary Americans who will end up paying the price unless they break out the pitchforks and stick it to the government and the bankers.

[J]

Holy hot doo-doo patties!

I think Lehman's was just a distraction to get the eyes off the real action, Bank of America just bought Merrill Lynch!

WSJ

Bank of America Reaches Deal for Merrill
By MATTHEW KARNITSCHNIG, CARRICK MOLLENKAMP and DAN FITZPATRICK
September 15, 2008

In a rushed bid to ride out the storm sweeping American finance, 94-year-old Merrill Lynch & Co. agreed late Sunday to sell itself to Bank of America Corp. for roughly $44 billion.

The deal, which was being worked out in 48 hours of frenetic negotiating, could instantly reshape the U.S. banking landscape, making the nation's prime behemoth even bigger. The boards of the two companies approved the deal Sunday evening, according to people familiar with the matter.

Driven by Chief Executive Kenneth Lewis, Bank of America has already made dozens of acquisitions large and small, including the purchase of ailing mortgage lender Countrywide Financial Corp. earlier this year. In adding Merrill Lynch, it would control the nation's largest force of stock brokers as well as a well-regarded investment bank.

A combination would create a bank of vast reach, involved in nearly every nook and cranny of the financial system, from credit cards and auto loans to bond and stock underwriting, merger advice and wealth management.

It would also show how the credit crisis has created opportunities for financially sound buyers. At $44 billion, or roughly $29 a share, Merrill would be sold at about two-thirds of its value of one year ago, and half its all-time peak value of early 2007. Merrill shares changed hands at $17.05 each on Friday, after falling sharply in the wake of Lehman's looming demise.

"Why would Bank of America do this?" said analyst Nancy Bush at NAB Research LLC in Annandale, N.J. "Ken Lewis always likes to buy the biggest thing he can. So why not this? You are master of the universe, basically."

Bank of America and Merrill Lynch wouldn't comment on any discussions.

Merrill would give Bank of America strength around the world, including emerging markets such as India. And Merrill is also strong in underwriting, an area Bank of America identified last week at an investors' conference where it would like to be more aggressive.

Dramatic Deal

A deal would be all the more dramatic because Merrill, upon the arrival of Chief Executive John Thain, did more than many U.S. financial giants to insulate itself from the financial crisis that began last year. It raised large amounts of capital, purged itself of toxic assets and sold big equity stakes, such as its holding in financial-information giant Bloomberg. That Merrill has opted to sell itself thus underscores the severity of crisis.

The integration of Merrill, known for its proud, and sometimes testy, brokerage force, could turn out to be the biggest test of Mr. Lewis's career. Typically, the bank has made one big deal and then taken time to carefully merge the two institutions. But in recent years, acquisitions have come at a furious pace. In 2004, the bank bought FleetBoston Financial Corp. A year later, the bank agreed to buy MBNA Corp., the credit-card firm. In 2007, Bank of America bought Chicago's LaSalle Bank as part of the break-up of Dutch bank ABN-Amro Holding NV. Then came this year's purchase of Countrywide.

As of Sunday evening, a deal had not yet been signed, said people briefed on the discussions. And other last-second bidders could emerge from the woodwork. Yet with news of the Bank of America talks breaking Sunday, it became all the more difficult for Merrill and Mr. Thain to rebuff a deal. Should the talks collapse, most on the Street were expecting Merrill's shares to fall even further amid widespread worries about independent broker-dealers.

If struck, a deal would come together at breakneck speed. On Friday, Bank of America's top executives were pushing for a deal with Lehman Brothers, scrambling to perform due diligence on Lehman's books. Just 48 hours later, they were locked in discussion with Merrill and its top executives.

'The Ultimate Realist'

"I think John Thain at Merrill is the ultimate realist," Ms. Bush said, the analyst, who expected federal regulators to bless the deal by relaxing deposit limits for bank-holding companies. "He knows if Lehman goes under he is not far behind. He wants to cut the best deal he can."

In the past 15 months, Merrill and Lehman have both had tens of billions of dollars worth of risky, illiquid assets carried on balance sheets that were leveraged at a debt-to-equity ratio of more than 20 to one. When the credit crunch hit in mid-2007, the assets kept deteriorating in value and couldn't easily be sold, eating into both firms' capital cushion. Recently, Lehman's balance sheet topped $600 billion and Merrill's $900 billion.

Merrill's one-time chief Stan O'Neal was ousted in October 2007, and his successor, Mr. Thain, tried to repair the firm's balance sheet by arranging an infusion of more than $6 billion in capital starting last December by investors led by Temasek Holdings, a Singapore government investment fund.

But as the losses kept coming this year, Mr. Thain was forced in July to sell a huge slug of more than $30 billion in collateralized debt obligations at a price of just 22 cents on the dollar. That step required the firm to raise still more capital, under painful terms that re-priced some of the December stock sales at about half the original price.

One top Merrill executive lamented the pending sale of the venerable company, saying "it's sad but inevitable." This executive said that he was pleased it was Merrill, rather than rival broker Morgan Stanley, that was hatching a deal with Bank of America.

The fate of both Morgan Stanley and Goldman Sachs will be front and center Monday morning, as the Street wakes up to a world where the independent broker-dealer are increasingly thin in number.

This tumultuous year has made it clear that investment banks like Lehman and Bear Stearns face vulnerabilities that commercial banks such as J.P. Morgan and Bank of America are less prone to. The investment banks must constantly depend on short- and medium-term money markets to fund their operations. Commercial banks, meanwhile, can count on more stable consumer deposit bases.

In a highly volatile market, some advantages accrue to banks that can rely on those more stable deposit bases.

At Merrill, "we became convinced that for investment banking to be possible, we need to be part of a much bigger capitalized commercial bank," the Merrill executive said.

Merrill acted to avoid the same fate as Bear Stearns and Lehman, some analysts said. "Bear didn't think it could happen to them and Lehman didn't think it could happen to them either," said analyst David Trone of Fox-Pitt, Kelton. "I think management looked at Bear and Lehman and said we're not going to go down that slope, we're going to try and get our shareholders something before we end up in the same camp."

[SirNitram]

Holy hot doo-doo patties!

I think Lehman's was just a distraction to get the eyes off the real action, Bank of America just bought Merrill Lynch!

The bail-in was successful. I suspected someone would jump, for the simple fact that if no one rolls the dice on this one, Lehman falling flatulently would trigger a 'run' on the shadow banking system, and everyone realizes that that'd be bad for their business models.

[Ypoknons]

Scary as hell, I was almost employed by Lehman there.

[J]

If I have things figured out right, Bank of America just bought Merrill Lynch using money borrowed from the Federal Reserve Bank, and as collateral for the loan they gave the Fed shares of Merrill Lynch. No wonder they paid $29 a share for a company that's trading at $17 a share. Unbelievable. I have no words.

Lehman's is still sitting in limbo, there are no buyers yet and apparently the talks have broken down.

[Elessar]

Can the Fed allow Lehman to collapse? I was under the impression that allowing them to go under would be a nightmare similar to Fannie/Freddie going under...

[SirNitram]

Can the Fed allow Lehman to collapse? I was under the impression that allowing them to go under would be a nightmare similar to Fannie/Freddie going under...

Not really. Fannie and Freddie catching fire and exploding kills banks, which saps the FDIC. Lehman going down..

Earlier, I said Lehman falling will cause a 'Run' on the shadow banking system, but everything I've seen suggests that Lynch would be the first hit, when they start to shatter under the weight, the rest are sucked in to the black hole of crashes and bankruptcy as the runs increase. Counterparties all lose so much they can't keep up with the needs of those runs.

Lynch being given refuge in an actual bank is an unanticipated snarl in my guesses. If the scenario plays out as before, BofA and Lynch survive, battered but intact, after Lehman collapses. Because they survive, the run might not escalate; it's possible that the purchase just created a firebreak to contain the inferno no one can stop.

If this is as clear as I think it is, the Fed overpaying with the assistance on the buyout is the deal of the century, expensive and unearned but ultimately stopgapping a collapse so that it might have a softer landing. Of course, even if it's as clear as I think, and it doesn't work, it'll be cries for heads.

[J]

Things are still rather unclear & up in the air and I don't think anyone will have things figured out for a while. As I understand it, they can let Lehman's fail provided that counterparty risks for most of those investment instruments can be isolated and "cut out". They opened up a special session today to do just this, the banks got together and worked out new arrangements which would attempt to fence off their counterparty obligations with Lehman's, the details are still shady and the results unknown. In theory this would isolate Lehman's and allow them to fail without causing a cascade failure of the entire financial system.

Then the Merrill Lynch buyout happens with the Fed's help (again) throwing another wrench into the works, and the Fed is now taking used toilet paper for collateral.

So some good, and lots of bad. Personal thoughts: SELL MORTIMER!! SELL!!!

[SirNitram]

Basically, quarantining the worst infected and dropping a fuel-air bomb on them, and proceeding to surgically excise the largest and most time-sensitive tumors from the rest. The entire situation is still toxic, but like I said, it could act as a firebreak.

As for sell sell sell? If you own a stake in the securitization system, start selling off, preferrably slowly. Initiating a run would mean all this was a waste and the whole thing explodes before even a chance can be taken on a slow unwind.

But one way or another, the shadow banking system of buying and selling risk and assuring each other the risk is fine is dead.

[The Duchess of Zeon]

Lehman's Gone and Merrill Lynch has been sold to the kamikaze squad running BOA straight into a hospital ship (Because Countrywide Was Not Enough!!). The "good news" now from the optimists on Wall Street? Morgan Stanley and Goldman Sachs SHOULD SURVIVE! The incredible thing is that there are people crazy enough that they can be reduced to that, and still consider themselves optimists. AIG is probably the next firm to fail out of this, and I wonder if The Kernel will still be confident about BOA's survival now that they've swallowed Merrill Lynch too.

I wonder what sort of plunge the market is going to take tomorrow, and now we're entering the season in which oil prices should start to get back up soon anyway.

[The Kernel]

Lehman's Gone and Merrill Lynch has been sold to the kamikaze squad running BOA straight into a hospital ship (Because Countrywide Was Not Enough!!). The "good news" now from the optimists on Wall Street? Morgan Stanley and Goldman Sachs SHOULD SURVIVE! The incredible thing is that there are people crazy enough that they can be reduced to that, and still consider themselves optimists. AIG is probably the next firm to fail out of this, and I wonder if The Kernel will still be confident about BOA's survival now that they've swallowed Merrill Lynch too.

I wonder what sort of plunge the market is going to take tomorrow, and now we're entering the season in which oil prices should start to get back up soon anyway.

On the contrary, this deal could be a huge win for Bank of America. Merrill Lynch in the largest brokerage company in the world and Bank of America has always struggled to offer a brokerage service to their banking customers. If this deal goes as planned, Bank of America will become a financial powerhouse and will have incredibly strong retail banking and investment banking arms. Their customers are no doubt going to get screwed (can you imagine how many grannies who are trying to open savings accounts are going to get sold into annuities?) but Bank of America is getting a great deal here.

Even at an inflated $29 a share BofA is picking up Merrill cheap and this is going to significantly strengthen their bottom line in the long run.

[The Kernel]

There's an excellent article on Bloomberg about this deal:

Sept. 15 (Bloomberg) -- Bank of America Corp., the biggest U.S. consumer bank, agreed to acquire Merrill Lynch & Co. for about $50 billion as the credit crisis claimed another of America's oldest financial companies.

Bank of America will pay $29 a share for New York-based Merrill in stock, 70 percent more than the Sept. 12 closing price, the company said in a statement today. Merrill, battered by $52.2 billion in losses and writedowns from subprime-mortgage- contaminated securities, has plunged more than 80 percent from its peak of $97.53 at the start of last year.

The takeover ends 94 years of independence for Merrill and gives Charlotte, North Carolina-based Bank of America a sales force with 16,690 brokers who manage $1.6 trillion for customers. Merrill, led by Chief Executive Officer John Thain, was in danger of becoming the next subprime casualty after Lehman Brothers Holdings Inc. filed for bankruptcy court protection earlier today.

``If Bank of America can put a fence around the bad assets, that retail distribution is a powerhouse,'' said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati, which oversees $16.5 billion in assets. ``The Merrill Lynch combination makes more sense than a Lehman deal.''

Merrill is the second bargain picked up this year by Bank of America Chief Executive Officer Kenneth Lewis tied to the collapse of the mortgage markets. The bank bought Countrywide Financial Corp. for $2.5 billion in stock last July to become the nation's biggest home lender. As recently as Sept. 12, Bank of America was considering making a bid for New York-based Lehman.

Stock Swap

Each Merrill share will be exchanged for 0.8595 shares of Bank of America stock, according to Bank of America's statement. That works out to $29 a share, based on Bank of America's closing price of $33.74 on Sept. 12. Because the payment is in stock, Merrill shareholders would get less if Bank of America's share price falls. The deal is scheduled to close in the first quarter of next year.

Bank of America slumped 14 percent to $29.06 in early German trading and Merrill gained 38 percent to $23.60.

``Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders,'' Lewis, 61, said in the statement.

The deal would mark the end of Merrill's almost century-long history as an independent company. According to Merrill's Web site, founder Charles Merrill solidified his reputation by advising clients to sell stocks prior to the crash of 1929. The firm went public in 1971 and in 1974 introduced its corporate logo -- a bull that Merrill executives say embodies one of the most recognizable brands in the world.

`Mr. Fixit'

Merrill's stock returned more than 13 percent a year from 2000 through 2006. Then last year, the housing market began to falter, and investments linked to the subprime mortgage market made under then-CEO Stan O'Neal tumbled in value. The firm posted a loss of more than $2 billion in last year's second quarter, and O'Neal was dismissed in October 2007.

The board replaced him with Thain, 53, a former Goldman Sachs Group Inc. executive who earned the moniker ``Mr. Fixit'' for his stewardship of the New York Stock Exchange for four years beginning in January 2004. Thain took over Dec. 1.

Lewis has made more than $100 billion of acquisitions since becoming CEO seven years ago, including the purchases of FleetBoston Financial Corp. and credit-card issuer MBNA Corp.

In Merrill's case, he's buying assets worth more than $40 a share, according to a Sept. 12 Citigroup Inc. analysis. The wealth management unit alone is worth $16 a share, said the report by Prashant Bhatia.

BlackRock Stake

Merrill also owns about half of BlackRock Inc., the New York-based money-management company that had a market value of $24 billion as of Sept. 12.

Bank of America employed about 207,000 people at midyear, compared with Merrill Lynch's 61,900.

``The fact that the biggest brokerage would be bought by the biggest retail bank is certainly historic,'' said John Medlin Jr., 74, retired chief executive officer at Wachovia Corp. ``Bank of America decided they weren't going to take on the Lehman risk, but they concluded the risk wasn't as severe at Merrill Lynch.''

Bank of America paid $3.3 billion in July 2007 for U.S. Trust Corp. to expand its wealth management business. The company had $589 billion in assets under management as of June 30 and its full-service brokerage, Banc of America Investments, employs about 5,600 financial advisers. The wealth management business contributed 14 percent of Bank of America's profit last year.

The bank said today it expects to cut $7 billion of costs by 2012.

`Big Cuts'

``B of A is known for making big cuts,'' said John Challenger at Challenger, Gray & Christmas Inc., the Chicago- based placement firm. ``They go in and thin it out,'' moving some functions to the bank's headquarters, he said.

Fusing the two companies' investment banks transforms Bank of America into a bigger player in several of Wall Street's most lucrative businesses, CreditSights Inc. analyst David Hendler said yesterday in a report.

Merrill is the world's sixth-biggest adviser on corporate mergers this year and Bank of America ranks 18th, data compiled by Bloomberg show. Together, they climb to ninth, according to the statement. Bank of America is the biggest arranger in the U.S. of loans to companies with junk credit ratings, or those below investment grade. Merrill is the third-biggest stock underwriter.

The Merrill purchase comes less than a year after Lewis, frustrated by proprietary trading losses at his company, said on a conference call, ``I've had all the fun I can stand in investment banking'' and vowed to scale back the unit.

Securities Unit Shakeup

While he later said he regretted the comment because it made clients question his commitment to the business, Lewis replaced the head of investment banking and eliminated staff, citing slower demand for many capital markets businesses. He promoted former wealth management division leader Brian Moynihan as president of the corporate and investment bank.

Moynihan has recruited more than two dozen people since March, including senior investment bankers and analysts from Bear Stearns Cos., Morgan Stanley and other Wall Street firms. The hires include David Glaser, former co-head of investment banking at Bear Stearns, and David Flannery, former head of leveraged capital markets at Deutsche Bank Securities.

``It's a puzzle that Ken Lewis said he didn't want to be in the investment banking business and here he is jumping in with both feet,'' said Jack Ablin, who helps manage $65 billion as chief investment officer at Harris Private Bank, including shares of Merrill and Bank of America. ``Maybe by harnessing the brain power of Merrill they can become a player.''

Trading Losses

Lewis's willingness to buy Merrill comes two and a half months after Bank of America completed its $2.5 billion purchase of Calabasas, California-based Countrywide, which was forced to sell due to mounting losses on subprime home loans -- the same assets that led to four straight quarterly losses at Merrill. Subprime loans go to home buyers with the weakest credit, and defaults are running at record rates.

Because of its trading losses and slumping demand in capital markets, Bank of America's corporate and investment bank made up 4 percent of the company's profit last year, down from 25 percent in 2006. The company is the dominant U.S. retail bank, accounting for almost 10 percent of the nation's bank deposits and about one of every five newly issued home mortgages.

Merrill posted a $9.8 billion loss in the fourth quarter, and Thain had to sell about $12 billion of equity in Merrill to bolster its capital base. At the time, Thain said he thought Merrill's troubles were mostly behind it.

``We're very comfortable with our position,'' Thain said on Jan. 30.

Stock Drops

Merrill posted another $6.6 billion of losses in the first and second quarters, and in July Thain announced the sale of $31 billion of collateralized debt obligations for 22 cents on the dollar, resulting in another $4.4 billion of writedowns. With the prospect of more losses -- Oppenheimer & Co. analyst Meredith Whitney predicted last week Merrill would post a $6.87 billion deficit for the third quarter -- the stock plunged 36 percent to $17.05, adding pressure on Thain to act and avoid the fate of Bear Stearns, which collapsed in March, and Lehman.

``The potential of a Bank of America-Merrill deal is very positive for the market,'' said Peter Kenny, a managing director at Knight Capital Group Inc., the Jersey City, New Jersey-based brokerage that handles about $1 trillion of stock transactions a quarter. ``It's a stronger balance sheet, and brings more certainty and confidence in the counterparty of trades.''

Emphasis mine. Just because Merrill has been in trouble doesn't mean that they aren't worth a hell of a lot more than their share price. Bank of America is making a very smart move by picking them up so long as they can properly manage the exposure.

[President Sharky]

Looks like Lehman is finished. My brother's an employee at the advisory service in Toronto and I helped him clean out his office last night. There's still a chance some of the subsidiaries of Lehman Brothers Holdings might be sold off, but most people at the office are looking for new jobs now.

[cosmicalstorm]

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.

The accounting firm of PricewaterhouseCoopers 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.
A chaotic week for Lehman and Wall Street

The talks followed what has been one of the most tumultuous weeks ever on Wall Street.

Things first started to unravel at Lehman Tuesday following reports that talks between the state-run Korea Development Bank, who was rumored to be interested in buying a stake in Lehman, had ended.

That, combined with the threat of a downgrade by some of the credit ratings agencies, led to a bloody sell-off in the firm's stock.

Hoping to finally put all the rumors to rest, the company released its third-quarter results more than a week in advance on Wednesday, booking a nearly $4 billion loss and announcing a drastic restructuring plan. Investors were unconvinced though and the sell-off in Lehman shares continued, with the stock plunging 42% on Wednesday.

By Thursday evening, it was widely reported that Lehman was actively seeking a buyer for the entire firm. The company reportedly reached out to a number of suitors, including Bank of America and Barclays.

Speculation also surfaced Friday that J.C. Flowers & Co. and other private equity firms may bid for all or parts of Lehman. Current regulatory restrictions prevent buyout firms from owning a bank outright, although the Federal Reserve has eyed loosening those restrictions as bank failures pile up.

But as Friday wore on without any news of a deal, Lehman's stock wound up falling another 13.5%. Shares plunged 77% over the course of the week, setting the stage for regulators to call upon banking executives to get together Friday night and begin talking about ways to hash out an end to the Lehman crisis.
End of an era for Wall Street icon

Lehman's bankruptcy marks a bitter coda for one of Wall Street's oldest and most well-known firms. Getting its start as a modest cotton-trading firm in Montgomery, Ala., in 1850 by German immigrant brothers Henry, Emanuel and Mayer Lehman, the firm saw its fortunes rose and fell along with the rest of Wall Street.

After World War II, Lehman's profile grew as it advised such household American companies as Ford, Campbell Soup and Philip Morris on deals, before expanding overseas into Europe and Asia in the 1960s and 1970s.

The firm also became a breeding ground for high-profile dealmakers. Both Steve Schwarzman and Pete Peterson, co-founders of the private equity giant Blackstone Group, worked for Lehman in the early 1980s.

But Lehman's rise was cut short in April 1984, when the company agreed to be purchased by Shearson/American Express for $360 million. The company emerged independent just seven years later, albeit in much weaker shape than it was before.

It was around that time, however, that CEO Richard Fuld Jr., assumed the helm at Lehman and the firm went public after splitting off from American Express.

Known for his direct approach and staunch loyalty to the firm, Fuld transformed Lehman in the decade that followed from a lowly bond trading house into a worthy adversary of larger investment banks Goldman Sachs and Morgan Stanley.

Still there were bumps along the way for the long-time Lehman chief, including the Russian credit crisis and the painful collapse of the hedge fund Long-Term Capital Management in the late 1990s.

Fuld was quick to remind investors of those painful days and subsequent comeback during a conference call Wednesday, just after the company revealed its nearly $4 billion third-quarter loss.

"This firm has a history based on adversity and delivering," said Fuld. "We have a long track record of pulling together when times are tough."

But the obstacles Lehman faced this time around proved too tough for Fuld to overcome.

CNN Wires and Fortune's Roddy Boyd and Telis Demos contributed to this report. To top of page
First Published: September 14, 2008: 9:38 AM EDT

[CJvR]

So it is no longer "about to" now it is gone.

[Bounty]

European stock markets are taking a big hit; the news reported a 12% drop in bank share prices. The situation is described as the "first step in the collapse of the US economy".

And Lehman Brothers has now officially gone under:

The fourth-largest investment bank in the US, Lehman Brothers, has filed for bankruptcy protection, amid a growing global financial crisis.

Lehman had incurred losses of billions of dollars in the US mortgage market.

The move threatens to deal a further blow to the global financial system, as banks unwind their deals with Lehman.

Merrill Lynch, also stung by the credit crunch, has agreed to be taken over by Bank of America in a dramatic weekend of events for Wall Street.

Its impact is being felt around the world:

* Stock markets and the US dollar have tumbled in reaction to Lehman's collapse, with banking shares hardest hit.
* Central banks have moved to reassure markets. The US Federal Reserve has broadened its emergency lending scheme and the UK and European central banks have injected a total of $39bn (£22bn; 28bn euros) into the financial system
* There are fears AIG, once the world's largest insurer, could also face collapse. It is taking steps to raise money amid reports it is seeking an emergency loan from the Fed.
* Bank of America's move to buy Merrill in a $50bn deal means that three of the top five US investment bank have fallen prey to the sub-prime crisis within six months.

Anxious markets

Stock markets in Europe and Asia dropped sharply and the dollar tumbled against the yen, the euro and the Swiss franc as Lehman's failure raised fears about the strength of the global financial system.

The FTSE 100 index of leading UK shares was down 271 points, or 5%, at 5145.3 by midday. Banking shares have been particularly badly affected with HBOS down almost 30%.

Wall Street is also expected to open lower in what is likely to be a tense day of trading.

The Bank of England and the European Central Bank said they were monitoring developments and had pumped £5bn and $30bn respectively into money markets to help stabilise them.

Talks collapse

The chance that Lehman Brothers could collapse increased sharply after the strongest potential buyers pulled out at the weekend.

Barclays and Bank of America had been in talks to rescue the bank but negotiations faltered when it became clear that the US Treasury was strongly opposed to using government money to help clinch a deal.