-- Financial markets could be in for a wild ride Monday as they digest the meltdown of Lehman Bros., a merger of Merrill Lynch and Bank of America, and efforts to bolster American International Group.
Talks to find a buyer for Lehman apparently stalled Sunday as Bank of America and Barclays Bank walked away from negotiations. Its most likely fate: liquidation.
Futures on the Dow Jones industrial average fell 306 points Sunday. As Asian markets opened today, stocks and the dollar fell, and gold and U.S. Treasury bonds rose as investors sought safety.
Bankruptcy at Lehman could disrupt or freeze some of the billions of dollars in financial transactions it was involved in, spreading financial pain around the world.
The International Swaps and Derivatives Association arranged an emergency trading session among members Sunday to sort out contracts that had Lehman as a counterparty.
Lehman account holders would be protected up to $500,000.
Talks to buy Lehman apparently collapsed because the government refused to guarantee buyers against losses from Lehman's extensive holdings of mortgage-backed securities.
Government officials said the situation did not present the same sort of crisis as the mid-March meltdown of Bear Stearns, when the Fed late on a Sunday evening agreed to make a $30 billion loan to facilitate the sale of that investment bank to JPMorgan Chase.
A Lehman bankruptcy would be the largest financial collapse since 1990, when investment bank Drexel Burnham Lambert failed.
The Fed and Treasury have backed several measures aimed to buy time for the economy to recover and lessen pressure on financial firms, including an economic stimulus bill and legislation to calm the mortgage market.
To ease market concerns, the Fed may expand its emergency lending facilities to provide some stability to the markets. U.S and foreign banks were working on a plan to create a $100 billion fund to lend to troubled financial firms, according to the AP.
The Fed late Sunday announced several moves aimed at reassuring markets To address what he called "potential market vulnerabilities in the wake of an unwinding of a major financial institution," Federal Reserve Board Chairman Ben Bernanke announced a series of initiatives. First, the Fed is expanding the collateral that investment banks can use for loans from the Fed to include stocks. Next, the Fed is temporarily allowing banks to do a collateralized loan with its own brokerage.
The Fed will also increase the frequency of auctions under one of its lending facilities to weekly, from every two weeks. The total amount of money made available will increase to $200 billion from $175 billion.
Bank of America agreed to buy Merrill Lynch, the nation's largest brokerage, for $44 billion, or $29 a share, the The Wall Street Journal reported on its website.
The Journal also reported that AIG is trying to raise money to cushion its losses. The insurer is expected to announce a reorganization today.