15 Sep 2008, Victoria Pennington, Operational Risk & Regulation
NEW YORK – One of the world’s largest investment banks, Lehman Brothers, has announced that it is filing for bankruptcy protection. A weekend of crisis talks, led by the US Treasury secretary Henry Paulson, at the investment bank failed to find a buyer for the troubled bank. Previous efforts by Lehman’s chief executive Richard Fuld to rescue the bank by selling off many of its operations failed to stem a fall in market confidence, after the bank predicted record losses in the third quarter of this year.
Merrill Lynch was rescued from a similar fate by Bank of America, which abandoned talks to buy Lehman Brothers to agree to a $50 billion takeover of Merrill Lynch. Although Merrill’s large retail brokerage business is extremely attractive to Bank of America, the bank will need to clean up Merrill’s trading books, which have already cost $52 billion in writedowns. The takeover, however, will create the world’s largest financial services company.
Other global banks have reacted quickly to make available a $70 billion liquidity pool to help support other vulnerable institutions. More firms are expected to fail in the coming months, with signs already beginning to show in some quarters. Global insurance firm American International Group has announced its plans to radically restructure its business, including the sale of its aircraft-leasing arm.
In preparation of more failures, the Federal Reserve has eased terms on emergency borrowings facilities and it has also suspended rules that prohibit banks from using deposits to fund their investment banking subsidiaries. That said, the US Treasury was not forthcoming in committing taxpayer’s funds to bail out Lehman, marking a turnaround in its approach to combating the fallout from the credit crisis.