Financial bonds plunge after Lehman bankruptcy

NEW YORK (Reuters) - Financial bonds tumbled on Monday after the year-long global credit crunch claimed three high-profile victims on a Black Sunday for Wall Street.

Lehman Brothers filed for bankruptcy after weekend talks to find a rescuer for the firm failed, Merrill Lynch agreed to a takeover by Bank of America and insurer American International Group made an unprecedented request for $40 billion in short-term financing from the Federal Reserve.

Lehman's senior-ranked bonds fell to 35 cents on the dollar from about 65 cents late on Friday, while its subordinated debt fell to 5 cents from around 40 cents, a trader said.

Lehman Brothers' credit default swaps ceased to trade as the bankruptcy filing triggered payments on the contracts.

The cost to insure the debt of other brokers rose by about 50 to 100 basis points, while banks' debt protection costs rose by about 25 basis points, Barclays analysts said in a report.

"We expect liquidity to be extremely thin," they added. "The weekend's developments have substantially increased the market's systemic risk premia."

The cost to insure the debt of AIG also surged following reports it had approached the Fed for financing. AIG's credit default swaps jumped to 28.5 percent the sum insured on an upfront basis from 13 percent on Friday, in addition to annual payments of 5 percent, according to Markit Intraday.

General Electric Co's finance arm was also swept up in the credit turmoil. The cost of protecting GE Capital's debt with credit default swaps rose by 139 basis points to 348 basis points, or $348,000 a year to protect $10 million of debt, according to data from Markit Intraday.

Wells Fargo & Co's credit default swaps rose by 44 basis points to 190 basis points.

(Reporting by Natalie Harrison, Dena Aubin and Karen Brettell; Editing by James Dalgleish)