US financial sector in turmoil as Lehman fails

September 16th, 2008 - 5:34 am ICT by IANS  

Lehman BrothersNew York/Washington, Sep 16 (DPA) The bankruptcy of Lehman Brothers Holdings and fears of more bank failures in the imminent future sent investors running for the hills Monday, amid signs of 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 a takeover by Bank of America Corp - the product of a frantic weekend of talks.

Negotiations throughout the weekend failed to produce a buyer for the 158-year-old 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.

The blue-chip Dow Jones Industrial Average fell more than 300 points - more than 2.5 percent - and the broader Standard & Poor’s 500 Index was down more than three percent upon opening Monday morning, but investors had pared some of those early losses by the afternoon.

The developments earlier sent stocks in Asia and Europe into a nosedive as fears of further bank failures spread throughout the investor community.

Other financial firms under threat included American International Group Inc, the largest US insurer, and the bank Washington Mutual. New York Governor David Patterson said a $20-billion bridge loan would be made to AIG, about half of what the company reportedly needs to stay afloat. Shares in AIG were down about 50 percent.

In a surprising 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.

Bank of America chief executive Kenneth Lewis Monday said the acquisition left the banking giant best positioned to weather the financial storm that has engulfed Wall Street and is unlikely to end before 2010.

Lewis said the takeover, which first came under discussion Saturday morning, had been the “strategic opportunity of a lifetime” despite one of the most difficult financial environments in US history.

Diversity in financial assets will be the key to survival, Lewis said, as a major housing slowdown has pummelled the value of mortgage-backed securities in the United States.

“The combined company is a much stronger entity and will survive almost anything as a result of the combination,” Lewis said.

Bank of America had reportedly been in talks to acquire Lehman, which became the largest casualty to date after more than a year of turmoil arising from the burst of the US housing bubble. The extent of potential job losses at Lehman and at Merrill was as yet unclear.

A record rate of home foreclosures has severely undermined Wall Street’s market for mortgage-backed securities, and the crisis has exposed deep cracks in the financial sector. Many banks had been taking on greater debt in the past decade without maintaining enough capital to meet a sharp downturn.

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

President George W Bush warned that a “painful” series of short- term adjustments were needed in the financial sector but insisted the fundamentals remained strong.

Bush said he appreciated the work of the US Treasury and Wall Street firms in helping foster stability in financial markets, which have been hit hard by the ongoing credit crisis.

“In the short run, adjustments can be painful. In the long run, I am confident that our capital markets are flexible and resilient,” Bush said in a brief statement at the White House.

The US Federal Reserve Board also announced late Sunday that it will make more loans available to US banks, and will accept a wider array of securities as collateral for such lending. On the same day, a group of 10 major banks set up an independent $70-billion fund to help keep the market afloat.

Tuesday the Fed board will decide whether or not to further lower interest rates to avoid a sharper downturn in credit availability for US consumers.

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.

The Bear Stearns and Fannie-Freddie situations could cost the taxpayer as much as 200 billion dollars.

Lewis and Merrill CEO John Thain, in announcing their merger, said they expected “dramatic” changes in the way financial firms do business in the future.

“It’s going to be tougher. There are going to be fewer companies and we are going to have to be better at what we do,” Lewis said.

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