Lehman, Listing $613 Billion in Debt, Files Biggest Chapter 11 Bankruptcy Ever; Global Markets Plummet

Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, succumbed to the subprime mortgage crisis it helped create in the biggest bankruptcy filing in history, writes Yalman Onaran and Christopher Scinta of Bloomberg this morning.

The 158-year-old firm, which survived railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management a decade ago, filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The collapse of Lehman, which listed more than $613 billion of debt, dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990.

Lehman was forced into bankruptcy after Barclays Plc and Bank of America Corp. abandoned takeover talks yesterday and the company lost 94 percent of its market value this year. Chief Executive Officer Richard Fuld, who turned the New York-based firm into the biggest underwriter of mortgage-backed securities at the top of the U.S. real estate market, joins his counterparts at Bear Stearns Cos., Merrill Lynch & Co. and more than 10 banks that couldn't survive this year's credit crunch.

"There is likely to be a domino effect as other firms and individuals who relied on Lehman for financing feel the effects of its meltdown," said Charles "Chuck" Tatelbaum, a bankruptcy lawyer with Lauderdale, Florida-based Adorno & Yoss and former editor of the American Bankruptcy Institute Journal. "The whole thing is frankly frightening for the U.S. economy."

Lehman shares dropped 81 percent in Frankfurt trading to 75 cents from their $3.65 close in New York on Friday. UBS AG, HBOS Plc, and Axa SA led a decline of more than 3 percent for European stock markets on speculation a forced sale of Lehman's assets could lead to further writedowns at other banks.

Shares in U.S. banks trading in Frankfurt tumbled, with Lehman plunging 80 percent and Morgan Stanley, Citigroup and others all in retreat. Frankfurt-listed shares in AIG fell almost 30 percent, Reuters reported.

Merrill's shares offered a rare bright spot and its Frankfurt-based shares jumped 36 percent. Bank of America said it had agreed to buy Merrill in an all-share deal for the equivalent of $50 billion, or $29 a share, almost $12 a share above Friday's closing price.

Merrill Lynch Sell Itself to Bank of America for $50 Billion to Avert Financial Crisis; Lehman Can't Find Buyer; AIG Next?

Wall Street giant Merrill Lynch is selling itself to Bank of America for about $50 billion to avoid a financial crisis, as Lehman Brothers faces liquidation after it failed to find a buyer, The New York Times' Jenny Anderson, Eric Dash and Andrew Ross Sorkin reported in a story that carried Sorkin's byline late Sunday night. The developments capped a frantic Sunday for the investment firms.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.

But even as the fates of Lehman and Merrill hung in the balance Sunday night, another crisis loomed as the insurance giant American International Group appeared to teeter. A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive.

The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.

“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

The Washington Post reported the Merrill sale at $44 billion. Rick Rothacker and Christina Rexrode of the Charlotte Observer report that it was the best move for Bank of America, which is based in that North Carolina city:

James Early, an analyst at The Motley Fool, called Merrill a “less surprising” merger partner than Lehman, because of Merrill's recent management shakeup and its relative strength.

“Bear Stearns was a deathbed company, Lehman was an almost deathbed company, Merrill is just a sick company,” said Early. “And that is probably an easier sell to Bank of America shareholders.”

Wall Street Braces for Lehman Brothers Bankruptcy

The federal government showed no signs of stepping in to prevent a potential Lehman Brothers Holdings Inc. bankruptcy after Bank of America Corp. and Barclays Plc pulled out of talks to buy it, Craig Torres and Shannon Harrington of Bloomberg reported today.

Their report says:

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.

"The purpose of this session is to reduce risk associated with a potential Lehman" bankruptcy, 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 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 to help a purchaser take Lehman over.

U.S. regulators are betting that the financial system will be able to withstand the failure of a large institution without severe disruptions to an already weak economy.