Lehman bankruptcy shakes world financial system
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NEW YORK (AFP) - Lehman Brothers declared bankruptcy Monday and Wall Street rival Merrill Lynch was taken over in a new financial earthquake driving a global stocks plunge and central bank intervention.
The US Federal Reserve, European Central Bank and Bank of England injected tens of billions of dollars into money markets after the fall of the finance titans under the weight of massive bad loans.
Lehman Brothers file for bankruptcy on Monday after a frantic weekend of negotiations failed to arrange a rescue.
In the fallout, Bank of America took over Merrill Lynch in a 50-billion-dollar deal, insurance giant AIG was reported to have sought a massive emergency loan to head off its own crisis and a group of banks set up a 70 billion dollars global emergency fund.
"You've probably seen more in one day of financial history than we've seen since the great crash of 1929," Macquarie Private Wealth associate director Marcus Droga said.
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"I'm not suggesting the US market will crash tonight, but in terms of landmark events, it's an historic day," Droga told Dow Jones Newswires.
Despite reassurance from central banks, major European and Asian stock markets plunged by five percent, the dollar fell and oil went below 93 dollars a barrel over fears for the international economy.
The Federal Reserve eased conditions for collateral in return for the provision of funds to banks and said it was working "to identify potential market vulnerabilities."
The European Central Bank said it injected 30 billion euros (43 billion dollars) into money markets to keep them going after the Lehman collapse.
The Bank of England injected 5.0 billion pounds (6.3 billion euros/9.0 billion dollars) into short-term money markets. Switzerland's central bank also reportedly offered a money injection.
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The European Commission expressed confidence in central banks and other agencies to contain contagion from the crisis.
"It seems clear that a category five storm is making landfall in the US financial system and a lot of very messy stuff is hitting the fan," Michael Panzer, author of the book "Financial Armageddon," said on his blog.
Lehman filed for bankruptcy protection in New York. The bank said in a statement it was acting "in order to protect its assets and maximize value."
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"Customers of Lehman Brothers, including customers of its wholly-owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts," the statement said.
The bank lost an estimated 3.9 billion dollars (2.7 billion euros) in its fiscal third quarter amid fresh writedowns on mortgage assets.
Last-ditch efforts to find a buyer collapsed Sunday. A London source at British bank Barclays said it walked away from negotiations because of concerns it would have to guarantee the 158-year-old US firm's trading commitments.
Bank of America said it was buying Merrill Lynch for 50 billion dollars in a transaction that creates the world's largest financial services company.
The acquisition gives Bank of America the largest brokerage in the world with more than 20,000 advisers and 2.5 trillion dollars in client assets.
Analysts expected Lehman's bankruptcy to hit a range of companies dealing with the Wall Street giant and could worsen the global credit crunch.
Unicredit economist Marco Annunziata in Frankfurt said: "The coming days and weeks will be truly crucial to the global economic outlook.
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"The US Treasury has decided it was time for shock therapy, and taken an extremely gutsy gamble by letting Lehman fail."
US Treasury Secretary Henry Paulson vowed steps to maintain market stability however.
"I am committed to working with regulators and policymakers - including Congress - to take necessary and appropriate steps to maintain the stability and orderliness of our financial markets," Paulson said in a statement.
"And I will engage with regulators and policymakers around the world to that end," he said. "I am confident in the resilience of our capital markets, and in the commitment of US regulators and market participants to work together through this difficult period."
The German finance ministry said links between German banks and Lehman Brothers were "manageable".
Japan's financial watchdog ordered Lehman Brothers' Japan unit to retain certain assets within Japan, it said in a statement.
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A consortium of 10 global commercial and investment banks announced plans to provide 70 billion dollars to help offset a credit squeeze.
Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, and UBS, said in a joint statement they "initiated a series of actions to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets."
They also said they would work together "to help facilitate an orderly resolution" of the derivatives exposures between Lehman Brothers and its counterparties.
"These actions reflect the extraordinary market environment," the statement said.
Meanwhile, The New York Times reported that AIG was seeking a 40 billion-dollar bridge loan from the Federal Reserve in the face of a possible downgrade from credit ratings agencies that could spell its doom.
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