The American financial market is in deep shit following Lehman Brothers’ filing for Chapter 11 bankruptcy early Monday morning. Signs were already imminent a week ago that Lehman Brothers would need a rescue plan but the carpet was finally pulled from beneath the investment bank’s feet late on Sunday night.
Bank of America was supposed to be one of Lehman Brothers’ suitors but instead, they decided that Merrill Lynch was a better buy. Barclays Bank was also supposed to be interested but they walked away.
Within a few tumultuous hours, the U.S. financial sector shrank significantly. Wall Street tumbled below 11,000 with a loss of 504.48 points, its largest point loss since reopening after the Sep 2001 terrorist attacks. US shares went into a freefall overnight as part of a global rout.
Merrill Lynch has been caught, like Lehman Brothers, with huge exposures to mortgages and mortgage securities though it had aggressively moved to unload those from its books in recent weeks. By agreeing to be bought by Bank of America, it is likely to escape the fate of Lehman.
The bankruptcy of Lehman Brothers and the sale of Merrill Lynch for a bargain basement price came hot on the heels of a U.S. government bail-out of mortgage firms Freddie Mac and Fannie Mae, and have heightened fears for the stability of the US financial system.
Meanwhile, the American International Group (AIG) is also struggling for survival after being hit by losses over the past three quarters from guarantees it wrote on mortgage derivatives.
Some salient highlights from the financial crisis:
- Reports circulate that AIG plans to sell its aircraft leasing business and other assets, as it seeks $15bn of capital. The group was destabilised by $18bn losses on mortgage investments.
- Official confirmation comes that Bank of America is buying Merrill Lynch in a $50bn all-stock transaction. The merger will create one of the US largest retail brokerages and one of the top investment banks by 2009.
- Lehman’s bankruptcy filing reveals $639bn of assets and $613bn of debt. Citigroup is the largest unsecured creditor. The Bank of New York Mellon, Aozora Bank and Mizuho Financial are also exposed.
- PriceWaterhouseCoopers says it has been appointed joint administrator to Lehman. Its priority will be an orderly winding down.
- Exactly 24 hours after Barclays walked away from the crisis talks, the financial world has changed forever. Two of Wall Street’s biggest banks are no more and billions have been wiped off the value of companies’ share prices in markets around the world.