-- Financial markets could be in for a wild ride Monday as they digest the meltdown of Lehman Bros., leh a merger of Merrill Lynch mer and Bank of America, bac and efforts to bolster American International Group.
"We are in a hysteria," says Richard Bove, banking analyst at Ladenburg Thalmann.
Late Sunday night, 10 leading banks announced they had created a special $70 billion lending pool for troubled financial institutions. And the Federal Reserve announced it would make it easier for the firms to borrow from it.
Talks to find a buyer for Lehman apparently stalled Sunday as Bank of America and Barclays Bank walked away. Its most likely fate: liquidation.
Also Sunday, Bank of America agreed to acquire Merrill Lynch for around $50 billion, according to a person with direct knowledge of the matter who declined to be named because he is not authorized to speak publicly. Bank of America and Merrill Lynch declined to comment about the deal. Merrill Lynch stock had fallen 12.3% to $17.05 Friday, as traders worried that Merrill could be the next firm caught in the vise of the credit crunch.
Rising mortgage defaults amid the collapse of the housing bubble left many financial firms holding billions in investments backed by bad loans. Merrill Lynch, AIG aig and Lehman are just the latest victims of the credit crunch, which has also clobbered mortgage giants Fannie Mae fnm and Freddie Mac fre, subprime lenders IndyMac Bank and Countrywide Financial, and investment bank Bear Stearns.
Lehman is an investment bank, so its bankruptcy could disrupt billions of dollars in financial transactions, spreading financial pain worldwide. Lehman account holders would be protected up to $500,000 by the Securities Investors Protection Corp.
"You don't know if the Dow will be up 300 points or down 300 points," says Richard Suttmeier, chief market strategist at ValueEngine.com. Futures on the Dow Jones industrial average fell 306 points Sunday. As Asian markets opened Monday, stocks and the dollar fell, and gold and U.S. Treasury bonds rose as investors sought safety.
Talks to buy Lehman apparently collapsed because the government refused to guarantee buyers against losses from Lehman's extensive holdings of mortgage-backed securities.
In recent months, the Fed and Treasury have taken measures aimed at buying time for the economy to recover and at reducing pressure on financial firms, including supporting an economic stimulus bill and legislation to calm the mortgage market.
A Lehman bankruptcy would be the largest financial collapse since 1990, when investment bank Drexel Burnham Lambert failed.
Government officials said the situation was not 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 $29 billion loan to facilitate the sale of that investment bank to JPMorgan Chase. jpm
The Wall Street Journal reported that AIG is trying to raise money to cushion its losses. The insurer is expected to announce a reorganization today and to sell some assets.