Lehman Brothers and Merrill Lynch suffer the sword they lived by

Wall Street's fourth largest investment bank, Lehman Brothers, is filing for bankruptcy protection, while Merrill Lynch has agreed to a Bank of America takeover.

Last Updated: 31 Aug 2010

Despite a weekend of crisis talks involving most of the key figures in the western world’s banking industry (and what a couple of days they must have been), no rescuer could be found for the 158-year-old Lehman’s. So, at the mercy of the market forces which have provided its livelihood since 1850, the bank has been left with no alternative but to apply for Chapter 11 protection from its creditors.

Hardly less dramatic is the news that Merrill Lynch has agreed to a takeover by Bank of America, valuing Merrills at $50bn. It’s an indicator of how bad things have got that this fiercely proud institution should willingly surrender to a rival rather than continue the unequal struggle to go it alone. Having been temporarily suspended for the past few years, it seems that the law of the jungle –only the fittest survive – is back again with a vengeance on the financial markets.

Until yesterday, BoA had – along with Barclays and several others – been on the list of potential Lehman rescuers. But interest evaporated rapidly once it emerged that the Federal Reserve was not going to underwrite Lehman’s liabilities, as it did for the last I-bank to go under, Bear Stearns back in March.

This lack of a federal safety net appears to have convinced the great and the good of Wall Street that their best bet for making a killing on the death of Lehman’s – for that is surely their main concern - is now to let it go to the wall. They can be confident of grabbing a few bargains when what remains of Lehman’s assets are sold off – provided they can weather the storm which its collapse will surely create.

As if all this chaos wasn’t enough, there may yet be more to come. AIG, the world’s largest insurer, is also in trouble due to its losses on the US property market. The firm – also incidentally Manchester United’s main sponsor - has gone cap-in-hand to the Fed seeking a $40bn loan, and is expected to announce a $20bn sale of assets to calm investors’ fears. And the vultures are circling around another, much smaller bank, too - Washington Mutual, whose shares dived 35% last week following warnings of a third quarter credit losses of $4.5bn.

Lehman’s notoriously hot-tempered boss Dick Fuld – a man with a dubious fondness for referring to himself in the third person during presentations – has come under withering attack for everything from hubris and incompetence to egomania. It’s certainly true that he may be reflecting on the wisdom of having rejected several previous takeover offers on the grounds of their being too low.

Exactly how severe the impact of all this transatlantic mayhem will be over here is unclear at present, but the outlook is not good. For a start, job losses at the London offices of Lehman’s and Merrill Lynch are expected to run into the thousands, with all that means for the already depressed high street and property markets. Better brace yourselves – the credit crunch just got a lot worse.

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