Lehman bankruptcy sparks US stock sell-off (Third lead)

September 15th, 2008 - 10:09 pm ICT by IANS  

Washington, Sep 15 (DPA) US stocks were poised for a massive sell-off Monday after embattled investment bank Lehman Brothers Holdings filed for bankruptcy - one of many financial firms in turmoil amid a significant broadening of the US credit crisis.News of the venerable Lehman Brothers’ failure came hours after financial services firm Merrill Lynch & Co agreed to be sold to Bank of America Corp late Sunday night.

Within 10 minutes of the opening bell, the blue-chip Dow Jones Industrial Average had fallen as much as 300 points - more than 2.5 percent - and the broader Standard & Poor’s 500 Index was down more than 3 percent.

Negotiations throughout the weekend failed to produce a buyer for Lehman Brothers after the US Treasury refused to put up taxpayer funds to facilitate a deal, leading to the fourth-largest investment bank’s bankruptcy filing in the morning.

News of the developments also sent stocks in Asia and Europe into a nosedive as fears of more bank failures spread throughout the investor community.

Other financial firms under threat included American International Group Inc, the largest US insurer, and bank Washington Mutual. The New York Times reported AIG has asked the Federal Reserve for a $40-billion loan to stay afloat.

In a deal announced late Sunday, Merrill Lynch, a stock brokerage and investment bank, agreed to be bought out by Bank of America for $50 billion in stock.

The Lehman collapse is the largest to date after more than a year of turmoil arising from the collapse of the US housing bubble and a record rate of home foreclosures, which undermined Wall Street’s market for mortgage-backed securities.

Banks and mortgage lenders have already reported more than $500 billion in writedowns and losses from the crisis. The International Monetary Fund (IMF) has forecast $1 trillion in losses by the end of the turmoil.

The US Federal Reserve Board also announced late Sunday that it would make more loans available to US banks, and would accept a wider array of securities as collateral for such lending.

“We have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses,” Fed Chairman Ben Bernanke said in a statement.

The action was seen as a step to help calm financial markets heading into the uncertain start of trading Monday morning in New York.

Earlier this year, the Federal Reserve helped engineer the sale of another troubled investment banking firm, Bear Stearns. More recently, the federal government acted to take over the government-chartered Fannie Mae and Freddie Mac, which undergird the US mortgage lending markets.

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