Economy going to hell? Lehman, Lynch, WAMU, AIG

In Frantic Day, Wall Street Banks Teeter

September 15, 2008
In Frantic Day, Wall Street Banks Teeter
By ANDREW ROSS SORKIN, BEN WHITE and JENNY ANDERSON

In one of the most extraordinary days in Wall Street’s history, Merrill Lynch is near an 11th-hour deal with Bank of America to avert a deepening financial crisis while another storied securities firm, Lehman Brothers, hurtled toward liquidation, according to people briefed on the deal.

The dramatic turn of events was prompted by the cataclysm of losses that has shaken the American financial industry over the last 14 months.

The moves came after a weekend of frantic negotiations between federal officials and Wall Street executives over how to avert a downward spiral in the markets. Questions still remain about how the market will react and whether other firms may still falter like A.I.G., the large insurer, and Washington Mutual, both of whose stocks fell precipitously last week.

Coming just a week after the government took control of mortgage lenders Fannie Mae and Freddie Mac, the magnitude of the industry’s reshaping is staggering: two of the most powerful firms on Wall Street, Merrill Lynch and Lehman, will disappear.

The weekend’s once unthinkable outcome came after a series of emergency meetings at the Federal Reserve building in downtown Manhattan in which the fate of Lehman hung in the balance. In the meeting Federal Reserve officials and the leaders of major financial institutions were trying to complete a plan to rescue the stricken investment bank.

But as the weekend unfolded, Barclays and Bank of America, which had both considered buying all or part of Lehman, decided that they could not reach a deal without financial support from the federal government or other banks.

As a result, people briefed on the matter said late Sunday that Lehman Brothers would file for bankruptcy protection, in the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago.

Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, as its subsidiaries remain solvent while the parent firm liquidates, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government.

Lehman has retained the law firm Weil, Gotshal & Manges. The firm’s restructuring head, Harvey Miller, also spearheaded Drexel’s bankruptcy filing in February 1990.

As efforts to acquire Lehman faltered, Bank of America turned to Merrill Lynch and offered $50 billion in stock for that investment bank, people briefed on the negotiations said. The deal, valued at $29 a share, could be announced as soon as Sunday night, these people said. Merrill shares closed at $17.05 on Friday.

Merrill’s chief executive, John A. Thain, and Kenneth D. Lewis, Bank of America’s chief executive, initiated talks on Saturday, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, people briefed on the negotiations said.

Merrill’s 15,000 brokers will be combined with Bank of America’s smaller group of wealth advisers. The entity will be run by Robert McCann, the head of Merrill’s global wealth management business.

Mr. Fleming, Merrill’s president, will be president of the combined bank’s corporate and investment bank while Thomas Montag, a former Goldman executive who started at Merrill in August, will head all the merged company’s all risk, trading and institutional sales.

The leading proposal to rescue Lehman had been to divide the bank into two entities, a “good bank” and a “bad bank.” Under that last scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank’s troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.

But that plan fell apart on Sunday, all but assuring that Lehman would be forced to liquidate.

The overarching goal of the weekend talks had been prevent a quick liquidation of Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world. Of deep concern is what impact a Lehman failure would have on other securities firms, insurance companies and banks, which have come under mounting pressure in the markets.

Even as Lehman and Merrill played out, the insurance company, the American International Group, was planning a major reorganization and a sale of its aircraft leasing business and other units to stabilize its finances, a person briefed on the company’s strategy said on Sunday.

A.I.G. became one of the focuses at an emergency gathering of Wall Street executives over the weekend, and was trying to arrange a capital infusion in the face of possible credit downgrades.

It was unclear whether A.I.G. would succeed in its capital search, but a person briefed on the discussions said it was seeking more than $40 billion even as it tried to sell assets to shore up its financial footing.

Among the businesses likely to be sold is A.I.G.’s aircraft leasing business, the International Lease Finance Corporation. Founded in 1973, the business has nearly 1,000 planes in its fleet.

Investors, afraid that A.I.G. would have to absorb further write-downs in its already damaged mortgage securities and collateralized debt obligations, have driven down the company’s shares in recent days. The stock closed Friday at $12.14 a share, a decline of 46 percent for the week.

Eric Dash, Louise Story and Michael de la Merced contributed reporting.

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