Meltdown as bank collapses

Wall Street banks were preparing for one of the most dramatic shake-ups in the finance industry's history last night as it emerged that Lehman Brothers, an investment bank with a 158-year history, was working on a plan to declare bankruptcy.

As a marathon session of weekend talks went into its final hours, an even bigger rival, Merrill Lynch, also assembled its board to vote on a takeover offer. With the opening of Asian markets as a deadline, the signs were that two of the most powerful corporations in global finance could disappear. Insiders said other financial institutions were examining the creation of a massive fund, perhaps as large as $50bn (£28bn), which would be used to prop up other firms that get into difficulty.

Whatever the exact shape of the deal, it was clear that it would have profound – and unpredictable – consequences for the world economy. The events represent a crescendo for the year-long credit crisis, which has wiped out half-a-trillion dollars in investments held by Wall Street's biggest firms, forced governments to nationalise once-proud financial institutions and has made it ever harder for ordinary people and businesses to get loans. Failure to end the crisis soon could tip the world into a severe recession, say economists.

For that reason, the Federal Reserve, the US central bank, had called in the chief executives of Wall Street's biggest banks for crisis talks over the future of Lehman Brothers on Friday night, but few expected such dramatic action would be necessary.

One by one, the major players revealed that the credit crisis had so weakened their finances that they would not be able to fund a rescue deal for Lehman. When the UK bank Barclays walked out of negotiations to buy the company yesterday, there seemed no option left but a liquidation of Lehman.

Fears grew over the weekend that Lehman's failure could trigger a crash when Asian markets resumed trading. The Fed and the US Treasury refused to hand over government money to prop up firms brought low by their own bad mortgage investments.

There were signs, however, that the Fed was considering taking some action to aid markets by loosening conditions for lending money to Wall Street firms.

The question is whether a once-in-a-generation shake-up on Wall Street will bring stability and help restore confidence, or presage a new leg-down in the credit markets that are the lifeblood of the global economy.

It is certain to throw thousands more bankers out of work. Lehman employs 25,000 people around the world, including 4,500 in London, where it has its European headquarters.

Coming on the heels of the fire sale of the government-backed Bear Stearns in March, the disappearance of Lehman Brothers and Merrill Lynch would mean the Big Five investment banks will become just two.

Bank of America was cajoled by the Fed into talks to buy Merrill Lynch after walking away from negotiations with Lehman Brothers yesterday. It will pay $40bn, but not in cash, issuing Merrill Lynch investors instead with new BofA shares. If the takeover is consummated, it will spare Merrill Lynch, one of the most famous brands on Wall Street, from the ignominious fate of Lehman Brothers, which declined to accept cut-price offers to refinance the firm earlier in the year, only to find that its value continued to plummet and its business began to wither.

Dealers across Wall Street were called in for an unprecedented shadow trading session, supervised by the derivatives industry regulator, aimed at reducing exposure to Lehman. The trades would only go into effect if Lehman filed for bankruptcy before midnight, NY time.

Such a liquidation has not been tried since the explosion of derivatives trading, which meant the collapse of one institution could mean unpredictable losses elsewhere. Bill Gross, of Pimco, one of the most outspoken fund managers, predicted an "immediate tsunami" if Lehman fails.

PROMOTED VIDEO
Arts and Entertainment
From Mean Girls to Mamet: Lindsay Lohan
theatre
Sport
Nathaniel Clyne (No 2) drives home his side's second goal past Arsenal’s David Ospina at the Emirates
footballArsenal 1 Southampton 2: Arsène Wenger pays the price for picking reserve side in Capital One Cup
News
Mike Tyson has led an appalling and sad life, but are we not a country that gives second chances?
peopleFormer boxer 'watched over' crash victim until ambulance arrived
Arts and Entertainment
Geena Davis, founder and chair of the Geena Davis Institute on Gender in Media
tv
News
i100
Travel
travelGallery And yes, it is indoors
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
tech
Arts and Entertainment
The Tiger Who Came To Tea
booksJudith Kerr on what inspired her latest animal intruder - 'The Crocodile Under the Bed'
News
i100
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
film
News
Alan Bennett criticised the lack of fairness in British society encapsulated by the private school system
peopleBut he does like Stewart Lee
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

IT Project manager - Web E-commerce

£65000 Per Annum Benefits + bonus: Clearwater People Solutions Ltd: If you are...

Trainee / Experienced Recruitment Consultants

£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Syria air strikes: ‘Peace President’ Obama had to take stronger action against Isis after beheadings

Robert Fisk on Syria air strikes

‘Peace President’ Obama had to take stronger action against Isis after beheadings
Will Lindsay Lohan's West End debut be a turnaround moment for her career?

Lindsay Lohan's West End debut

Will this be a turnaround moment for her career?
'The Crocodile Under the Bed': Judith Kerr's follow-up to 'The Tiger Who Came to Tea'

The follow-up to 'The Tiger Who Came to Tea'

Judith Kerr on what inspired her latest animal intruder - 'The Crocodile Under the Bed' - which has taken 46 years to get into print
BBC Television Centre: A nostalgic wander through the sets, studios and ghosts of programmes past

BBC Television Centre

A nostalgic wander through the sets, studios and ghosts of programmes past
Lonesome George: Custody battle in Galapagos over tortoise remains

My George!

Custody battle in Galapagos over tortoise remains
10 best rucksacks for backpackers

Pack up your troubles: 10 best rucksacks for backpackers

Off on an intrepid trip? Experts from student trip specialists Real Gap and Quest Overseas recommend luggage for travellers on the move
Secret politics of the weekly shop

The politics of the weekly shop

New app reveals political leanings of food companies
Beam me up, Scottie!

Beam me up, Scottie!

Celebrity Trekkies from Alex Salmond to Barack Obama
Beware Wet Paint: The ICA's latest ambitious exhibition

Beware Wet Paint

The ICA's latest ambitious exhibition
Pink Floyd have produced some of rock's greatest ever album covers

Pink Floyd have produced some of rock's greatest ever album covers

Can 'The Endless River' carry on the tradition?
Sanctuary for the suicidal

Sanctuary for the suicidal

One mother's story of how London charity Maytree helped her son with his depression
A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world