'Bloodbath' in global markets as Wall St. has worst day since 9/11
by Rob Lever
WASHINGTON (AFP) - Troubled Wall Street giant Lehman Brothers sought bankruptcy protection Monday after a frantic weekend of talks failed to find a buyer for the firm ravaged by credit and real estate woes in a shaken financial system.
In a surprise for some analysts, Lehman said it was seeking reorganization under Chapter 11 of the bankruptcy code, a sign that it was still holding out hope for survival in some form.
The massive bankruptcy filing in US federal court in New York listed 639 billion dollars in assets at 613 billion in debts.
The news of Lehman's collapse prompted a bloodbath in global financial markets as traders flocked to safer Treasury bonds on fears of more dominoes falling in the banking system.
Some analysts said the Federal Reserve, which took a series of steps Sunday and Monday to boost liquidity available to the financial system may need to cut interest rates at its Tuesday policy meeting.
"The sudden bankruptcy of Lehman Brothers over the weekend has led to another dangerous escalation of the crisis in the US financial markets," said Brian Bethune, economist at Global Insight.
"The economy is very weak, the recession wolves are pounding down the door and the financial system faces new deflationary threats from the bankruptcy of Lehman Brothers. This is an emergency situation and an aggressive response from the Fed is needed."
Lehman shares plunged 94 percent to 21 cents after the news. Meanwhile American International Group, one of the world's biggest insurance companies, slid 60 percent to 4.76 dollars on fears it may too face a cash crunch and credit downgrade.
Merrill Lynch, another white-shoe Wall Street firm, managed to get a lifeline over the weekend with a deal to sell itself for 50 billion dollars to Bank of America. Merrill shares rose 0.06 percent to 17.06 dollars.
The news came after a weekend of crisis talks involving US Treasury and Federal Reserve officials failed to head off a collapse of Lehman Brothers which some say could send shockwaves through the global financial system.
"The remaining Wall Street firms are scrambling to match as many of Lehman's offsetting positions as possible to avoid a complete liquidation wipeout," said Ed Yardeni at Yardeni Research.
"Another potential calamity would be a fire sale of Lehman's distressed assets -- such as commercial real estate. This would push prices even lower and potentially force other firms to mark down once again the value of their own holdings."
Lehman Brothers said its filing was to exclude the broker-dealer operations, the company, said, adding that operations of the brokerage arm and its Neuberger Berman asset management division would continue to trade.
The statement said Lehman was "exploring the sale of its broker-dealer operations and, as previously announced, is in advanced discussions with a number of potential purchasers to sell its investment management division."
Lehman Brothers was the fourth-biggest US investment bank, dating back to 1850 with a staff of some 27,000 people but that counted for naught, after writedowns of 13.8 billion dollars on the US subprime or higher risk home loan crisis.
Under steadily mounting pressure, especially after rival Bear Stearns was bailed out earlier in the year, Lehman Brothers tried to find a savior too but a quarterly loss of 3.9 billion dollars and planned radical asset sales made buyers reluctant to step in without US government backing.
Yet some said that despite the turmoil, Lehman's failure may serve to purge the financial system of its troubles and set the stage for recovery.
"The darker view is that this will be the catalyst for a chain of failures or bankruptcies throughout the financial system, exacerbating the credit crunch and the recession," said Mark Zandi, chief economist at Economy.com.
"A more upbeat perspective sees these events as a catharsis that will make the financial system more resilient. Bank of America's acquisition of Merrill Lynch testifies to this more optimistic view."