Wall Street titan Lehman Brothers headed into bankruptcy Sunday after potential buyers Barclays Banks of Britain and Bank of America backed away, citing the Treasury’s refusal to guarantee Lehman’s toxic mortgage portfolio.
In weekend-long negotiations at the Federal Reserve Bank of New York, leaders of the Treasury, the Fed and the Securities and Exchange Commission sought to persuade the two banks, as well as other top Wall Street firms, to step forward and acquire all or part of Lehman to avoid a major downturn that could be triggered by a Lehman collapse when stock and credit markets reopen Monday.
Separately late Sunday, a person briefed on the deal said Bank of America Corp. is buying Merrill Lynch & Co. for about $50 billion, the Associated Press reported. The deal will create a financial-services giant and lift the uncertainty that has shrouded the nation’s biggest brokerage since the credit crisis began.
With no takers, the once-powerful Lehman planned to file for bankruptcy and liquidate its brokerage operations after 158 years in business Sunday night. In anticipation of that happening, Wall Street firms conducted an unusual Sunday trading session in the $62 trillion credit-derivatives market to try to unwind sensitive credit-insurance deals backed by Lehman and forestall a potentially monumental crunch in the credit market on Monday.
Securities and Exchange Commission Chairman Christopher Cox said customers of the brokerage are protected from losses on their investment accounts under a federal insurance program. He urged any investors requiring help retrieving their money to contact the SEC.
“For several days, we have worked closely with regulators around the world, including [Britain, Germany and Japan] to coordinate our actions in the interest of orderly markets,” he said. “We are committed to [reducing] the potential for dislocations from recent events and to maintain the smooth functioning of the financial markets.”
The Fed also made an adjustment in its loan program for Wall Street firms to accommodate Lehman and other investment banks that are struggling to cope with mounting credit losses. It said it would accept lower-quality mortgage securities and credit instruments as collateral on the loans. Previously, the Fed would accept only the highest-rated securities in exchange for the loans.
The federal involvement appeared minimal, aimed mostly at facilitating the liquidation of Lehman. Federal officials and Wall Street leaders were at loggerheads all weekend over the critical issue of government involvement in the transactions. Treasury Secretary Henry M. Paulson Jr. was adamantly against providing any guarantees on Lehman’s money-losing assets like the guarantee the Fed provided on $29 billion of Bear Stearns mortgages in March to facilitate Bear’s takeover by J.P. Morgan.
But Wall Street executives had little reason to put their own scarce capital into saving a competitor or backing its bad loans. In addition, political and financial leaders have been calling on the Treasury to draw the line and let the Lehman investment house fail to prevent any further unnecessary losses for taxpayers after the Treasury’s massive bailout of Fannie Mae and Freddie Mac only a week ago.
Former Federal Reserve Chairman Alan Greenspan told ABC’s “This Week” Sunday that not all major financial institutions can be saved and that some are certain to fail in what he said may be the biggest credit crisis in a century.
“This is a once in a half-century, probably once in a century type of event,” he said. “We shouldn’t try to protect every single institution. The ordinary cost of financial change has winners and losers.
“What they are trying to do with Lehman is find a way in which there is no government money involved in this particular set of negotiations,” he said. “If they can’t, they have to make a very key decision as to whether they allow it to liquidate or support it.”
Mr. Greenspan said the government should do what it can to ensure Lehman’s failure is orderly and does not cause great turmoil to financial markets.