Christine Selb, Suzy Jagger – Times Online September 15, 2008
Lehman Brothers, the 158-year-old Wall Street bank, has announced it would declare itself bankrupt after a weekend of rescue talks masterminded by Henry Paulson, the US Treasury Secretary, failed.
The end of Lehman Brothers, which owns an investment bank, a fund management business, and a $30 billion portfolio of real estate assets came as its larger rival Merrill Lynch agreed a sale of itself to Bank of America for $44 billion.
While the Merrill deal is expected to be widely perceived as a positive move, the collapse of Lehman, which controls $600 billion worth of assets, is forecast to send shock waves across the London and New York stock and debt markets.
The US banking giant said today that its customers would be able to continue to use their accounts normally and it will take a series of actions today that will should allow it to continue managing its operations, including paying staff wages.
Lehman Brothers said: "The board of directors ... authorised the filing of the Chapter 11 petition in order to protect its assets and maximise value".
Traders from all the major banks were ordered back to their desks on Sunday afternoon to calculate their exposure to a possible collapse of Lehman Brothers.
While the bank has widely been perceived as most vulnerable because of its substantial holdings of mortgage backed secuities, it was the US Treasury's refusal to bankroll a rescue that is seen as preventing other parties bailing out the bank.
US authorities had tried to secure a rescue deal for Lehman Brothers over the weekend.
Mr Paulson and Tim Geithner, president of the New York Federal Reserve Bank, had convened an emergency meeting in New York on Friday evening to try to convince other banks to bail out Lehman.
At the same time, the Merrill Lynch board, led by John Thain, agreed to be bought by Bank of America, the mortgage provider for around $29 a share, well above the $17.05 that Merrill Lynch stock closed at on Friday evening but well above the $97 they fetched in January 2007. It is understood that both boards have approved the all shares deal.
The deal will see Merrill Lynch, which has been dogged by questions over its mortgage-backed securities, protected by Bank of America's substantial current account, credit card and lending businesses.
American authorities had hoped to ringfence $85 billion worth of Lehman's real estate assets into one company which they wanted banks such as Citigroup and JP Morgan Chase to prop up with $35 billion of new capital.
Mr Paulson had hoped to persuade the banks to inject new money to prevent a fire sale of Lehman's assets, a move which could have triggered a fall in the value of their own securities.
At the same time, Mr Paulson had tried to sell off Lehman's investment bank to either Bank of America or Barclays. However, both walked away at the weekend after Mr Paulson refused to bankroll a possible bailout of Lehman with taxpayer funds.
On Sunday evening, Lehman Brothers, whose shares have fallen about 94 per cent over the year, was left in a vulnerable position.
Over the weekend, Lehman hired bankruptcy specialists in the event that all other funding routes failed.
The Federal Reserve is now expected to try to help banks exposed to Lehman to use a wider range of collateral to borrow funds from the central bank.
In addition, 10 major banks said they would pool $70 billion of their own money to create a borrowing facility. The 10 institutions, which include Citigroup, Credit Suisse Group, Deutsche Bank, could tap the pool to help them ride out the crisis.
In Midtown Manhattan, at Lehman's New York Heaquarters, employees were seen removing their belongings from the building ahead of the expected collapse of the bank.
Last updated 17/09/2008