HIGH profile US investment firm Lehman Brothers has declared bankruptcy and Merrill Lynch has announced a rescue sale in a series of dramas in the US financial system which hit European stocks as soon as trading began.
Today`s stunning fall of Lehman Brothers came after a frantic weekend marking a dangerous new chapter in the financial crisis sparked by failings in the subprime home-loan market.
In Frankfurt, the European Central Bank said it was ready to intervene again on the money market. A group of banks set up a $US70 billion ($A85.45 billion) global emergency fund and reports said insurance giant AIG had asked for a $US40 billion ($A48.8 billion) loan to ward off its own disaster.
The US Federal Reserve also acted with an easing of collateral for the provision of loans to avert systemic breakdowns; and the events immediately shook European stock markets.
The London market opened with a fall of 2.28 per cent on the FTSE 100 index of leading shares, in Frankfurt the DAX index fell by 1.55 per cent and in Paris the CAC 40 index fell by 2.48 per cent.
In the United States, Lehman said the bankruptcy was authorised by its board of directors and will take place at the US Bankruptcy Court for the Southern District of New York today.
The bank said in a statement it was acting "in order to protect its assets and maximise value."
"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 beleaguered bank lost an estimated $US3.9 billion ($A4.76 billion) in its fiscal third quarter amid fresh writedowns on mortgage assets.
Last-ditch efforts to find a buyer collapsed yesterday. 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 $US50 billion ($A61 billion) 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 $US2.5 trillion ($A3.05 trillion) in client assets.
The shake-up came as the US Federal Reserve, eager to cushion the impact of the Lehman blow, said it was easing collateral requirements for the firms as it acted "to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution."
The collateral for the special emergency loans will be expanded to all investment-grade debt securities, the central bank said. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.
Treasury Secretary Henry Paulson, who took part in weekend discussions in New York to avert a new financial shock, said the actions "will be critical to facilitating liquid, smooth functioning markets, and addressing potential concerns in the credit markets."
Analysts expected Lehman`s bankruptcy filing could affect a range of companies dealing with the Wall Street giant and could worsen the global credit crunch.
The Securities and Exchange Commission said it was "taking actions" to protect the deposits of Lehman`s customers, who are protected by SEC rules and an insurance fund.
In a related action, a consortium of 10 global commercial and investment banks announced plans to provide $US70 billion ($A85.45 billion) 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 agreed to create a "collateralised borrowing facility", with each bank contributing $US7 billion ($A8.54 billion), to help ease access to credit.
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.
The 10 banks would be able to tap this facility, with any bank eligible for up to one-third of the fund. The amount may be expanded if more banks join the program.
"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.
Meanwhile, The New York Times reported that AIG was seeking a $US40 billion ($A48.8 billion) bridge loan from the Federal Reserve in the face of a possible downgrade from credit ratings agencies that could spell its doom.
Citing a person briefed on the matter, the daily said rating agencies threatened to downgrade the insurance giant`s credit rating by this morning, which would lead to a sharp outflow of cash.
"One thing I do not understand - is it really there are people out there who still buy shares? Posted by: Michael of Sydney 7:28pm today Comment 65 of 76"It's obvious you don't understand Michael. The smart people will be buying shares to cover their shorts once this latest tank has run it's course.
Posted by: Neutral of Sydney 8:26pm today
Yeah Chris, I have heard of day trading. Why don't you just go to the casino and put your money on a roulette table - black or red? It is the same thing !!!!!
Posted by: kp 8:23pm today
Bad Wolf...
Posted by: Nuggett of Sydney 8:17pm today
Steve of Doncaster - you do realise you make no sense? The collapse of the Australian share market this year is entirely due to the economic mismanagement in the United States, which has pulled the global economy down. Exactly nothing to do with Rudd and everything to do with Howard's best friend.
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