ANALYSTS' VIEW: Reaction to Lehman, Merrill

(Reuters) - Lehman Brothers Holdings filed for bankruptcy protection on Monday while Bank of America said it would buy Merrill Lynch & Co, as the worsening credit crisis further rocked the U.S. financial sector.

Meanwhile, the U.S. Federal Reserve and major banks announced steps to mitigate market volatility.

ANALYSTS' COMMENTS

MEREDITH WHITNEY, ANALYST, OPPENHEIMER & CO

"We expect the financial markets to be under unprecedented strain over the next several days as players respond to outsized industry deleveraging....

"Due to the liquidation of an unprecedented scale, we expect a broad-based decline in marks on asset values within the financial markets....

"We also expect the liquidation by Lehman's counterparties and asset sales to be swift....

"While we view this clearly as a long-term positive for Bank of America, the stock will likely not respond accordingly as investors near-term will focus on greater systemic risk, and BAC's sizable consumer loan exposure will overshadow any long-term positives in the deal, in our opinion."

DAVID TRONE, ANALYST, FOX-PITT KELTON

"Upon cyclical normalization, we believe surviving competitors will benefit from the demise of both Lehman and Bear Stearns, whose revenue will be reaped by other market participants....

"We believe Goldman Sachs stands to be the biggest beneficiary, with an estimated cross-cycle revenue lift of 5.5 percent....

"The failure of Lehman creates a significant amount of near-term uncertainty -- another financial institution could well emerge as having major exposure to Lehman."

SAM STOVALL, CHIEF INVESTMENT STRATEGIST, S&P EQUITY

RESEARCH

"From a sector standpoint, unfortunately, it's unclear as to whether we are more than halfway to the bottom of this financials free-fall."

JEFF HARTE, MANAGING DIRECTOR, SANDLER O'NEILL

"The price would have seemed fair weeks ago, but in this environment, we are surprised that Bank of America was willing to pay a 70 percent premium to Merrill's $17.05 market price....

The acquisition should avert a potential Lehman-like 'bear run' on Merrill....

SIMON WILLIS, ANALYST, NCB

"Near-term, a fire sale of Lehman assets will roll across to other banks, putting further pressure on capital ratios....

"The banking and financial services industry still needs a lot more capital, including Washington Mutual....

"Longer-term, as long as there is no issue over systemic risk, the withdrawal of capacity should help margins for the remaining participants but there is a great deal of uncertainty to overcome first."

SANDY CHEN, ANALYST, PANMURE GORDON & CO

"With Lehman Brothers Holdings now preparing its bankruptcy filing, the market's focus will now shift from estimates of write-downs, capital needs and M&A scenarios, to concerns about counterparty exposures and default risks....

"The real stress, however, will come from the CDS markets....

"We accordingly expect that counterparty default charges will sweep through the global financial sector over the next few weeks."

RICHARD BOVE, ANALYST, LADENBURG THALMANN

"If by spreading out the liquidation of these assets (Lehman) can achieve reasonable prices, the bankruptcy will be short-lived and a large portion of the debt will be repaid....

"The deal (BofA-Merrill) does make sense on a business combination basis. If these were normal times this deal would be viewed as a huge success for both companies....

"The fact that Bank of America paid a high premium for Merrill and would not buy Lehman indicates that the due diligence done on both companies suggests that Merrill may be in stronger condition than thought."

LUTZ KARPOWITZ, FOREX STRATEGIST, COMMERZBANK

"What we're seeing is a rise in risk aversion because nobody really knows if there is a systemic problem in the U.S. financial system."

MARIE-PIERRE PEILLON, HEAD OF EQUITY AND CREDIT RESEARCH,

GROUPAMA ASSET MANAGEMENT, PARIS

"This shows the U.S. government is saying 'enough' after saving other institutions and that they see Lehman as a private affair. I think today and tomorrow there will be a panic on the markets."

BERNARD McALINDEN, MARKET STRATEGIST, NCB STOCKBROKERS

"In the wake of Lehman it looks like the Fed cannot go any further and will not bail out the banking industry. However, the S&P 500 futures have not gone through the July low which I would have thought it would have.

"The Bank of America purchase of Merrill Lynch looks like good news and is balancing the market for the moment.

SEBASTIEN BARTHELEMI, ANALYST, LOUIS CAPITAL MARKETS, PARIS

"Lehman's bankruptcy is very bad news. We had hoped for a rescue of the firm. But we don't think that it could spur a domino effect.

"We might see a break-up of the firm, which is not good news for bondholders, but Chapter 11 doesn't mean it's the end of Lehman's activities, so that should limit the impact on other institutions."

VALERIE PLAGNOL, CHIEF STRATEGIST, CM-CIC SECURITIES, PARIS

"It can be the final clean-up, but you have a risk within the financial system to see a lot of downgrading and losses. Beyond this point, my concern is the real economy. We are faced with quite a dramatic credit crunch. We are looking at still not very good numbers in the housing markets. The end of the year doesn't look good at all in terms of activity.

"The fact that the central bank is widening its collateral to include stocks may prove to bring some support to the market, but I don't know. The Fed is really doing its best to avoid any major crash."

MARCO ANNUZIATA, GLOBAL CHIEF ECONOMIST, UNICREDIT, LONDON

"There is now speculation that the Fed might decide an emergency rate cut to help the market absorb the stress. This cannot be excluded if signs of meltdown materialize, but we think the Fed will try to avoid this step, which would be a reversal of the previous shift to more targeted measures.

"The U.S. Treasury has decided it was time for shock therapy, and taken an extremely gutsy gamble by letting Lehman fail, against widespread expectations that a solution would be brokered over the weekend. The financial system now faces the unprecedented challenge of absorbing the unwinding of a major broker. If it works, it should boost considerably the hopes that the global financial system can work itself out of the year-long crisis. But the risk is enormous....

"We are witnessing a turning point in the modern history of the financial system, as three major brokers have now disappeared from the scene. The coming days and weeks will be truly crucial to the global economic outlook."

JUSTIN URQUHART STEWART, INVESTMENT DIRECTOR, 7 INVESTMENT

MANAGEMENT

"This is a perfect storm in a perfect storm. There are two ways of looking at it: one, as financial Armageddon, the other as a dose of realization of the level of complexity of the problem people are dealing with.

"It's a return to pure capitalism, the survival of the fittest -- the government can't and won't bail everybody out. Investors will now retreat to the trustworthy banks, though that's not a phrase that trips off the tongue easily nowadays.

"There are three issues: the counterparties in derivative trades with Lehman, the people who hold Lehman stock and debt, and third and most important, market confidence."

ALAN RUSKIN, RBS GREENWICH CAPITAL

"At the time of writing it seems the US Treasury has decided to teach us ALL a lesson, that they will not backstop every deal in the wave of financial sector consolidation that is upon us.

"Their motivation is part fiscal and part moral hazard. I suspect more the latter. Presumably the most important reason to teach Wall Street this lesson, is that they will change their behavior, and not take the decisions that are reliant on a public bail-out. For many, but not all, this is an impossible lesson to learn in the middle of the worst financial storm since the Great Depression."

BROWN BROTHERS HARRIMAN FX STRATEGISTS

"We have argued that each major cathartic event (new lending facilities by the Fed, Bear Stearns, the Treasury announcement it would seek authority to take over Fannie and Freddie, and then when it actually did), the dollar rallied each time. This time is different.

"That may be infamous last words, but the reason it is different is that this is not a cathartic event. Lehman's demise will not make things more transparent or increase the appetite for risk. Quite on the contrary, its failure raises perceptions of risk. The fall of the house of Lehman means that others in the same situation, i.e., not posing significant systemic risk are increasingly vulnerable."

(Reporting by Vidya Ranganathan, Brenda Goh and Saeed Azhar in Singapore, Mette Fraende in Sydney, Sweta Singh in Bangalore; editing by Neil Fullick and Mike Miller)