* Lehman files for Chapter 11 bankruptcy protection
* Bank of America to buy Merrill
* Asia, European stocks tumble, Dollar falls
* Fed to accept stocks in exchange for emergency loans
(Adds analyst, Lehman banker comments, European market moves)
By Dan Wilchins and Jennifer Ablan
NEW YORK, Sept 15 Global financial markets were
shaken to their core on Monday after Lehman Brothers filed for
bankruptcy protection and Merrill Lynch agreed to be taken over
as a deepening crisis took new, bigger victims.
The U.S. Federal Reserve also said for the first time it
will accept stocks in exchange for cash loans and 10 of the
world's top banks agreed to establish a $70 billion emergency
fund, with any one of them able to tap up to a third of that.
On a black Sunday for Wall Street, frantic attempts to find
a rescuer for Lehman LEH.N failed, and troubled insurer
American International Group (AIG.N) asked the Fed for a
lifeline, according to news reports.
But Bank of America (BAC.N) agreed to buy Merrill Lynch
MER.N in an all-stock deal worth $50 billion, seeking a
bargain as the world's largest retail brokerage sought refuge
from fears it could be the next victim. [nLF644127]
"It's a return to pure capitalism, the survival of the
fittest -- the government can't and won't bail everybody out,"
said Justin Urquhart Stewart, investment director at 7
Investment Management in London.
"Investors will now retreat to the trustworthy banks, though
that's not a phrase that trips off the tongue easily nowadays."
Asian and European stock markets tumbled as the worries
about Lehman counterparty risk and further financial market
turmoil sent investors scurrying for safe havens such as gold.
The FTSEurofirst 300 .FTEU3 index of leading European
shares fell over 3 percent, led by falling bank stocks such as
UBS UBSN.VX, down over 7 percent.
Shares in U.S. banks trading in Frankfurt tumbled, with
Lehman LHMH.F down 85 percent and Morgan Stanley (MS.N),
Citigroup (C.N) and others all in retreat.
Merrill's shares offered a rare bright spot and its
Frankfurt-based shares jumped 38 percent. Bank of America said
it had agreed to buy Merrill in an all-share deal for the
equivalent of $50 billion, or $29 a share, almost $12 a share
above Friday's closing price.
Lehman said it filed for Chapter 11 protection and was
attempting to sell assets, becoming Wall Street's
highest-profile bankruptcy since junk bond specialist Drexel
Burnham Lambert succumbed in 1990.
It followed three days of talks between bank CEOs and
regulators at the Fed's fortress-like Manhattan building,
showing Wall Street and Washington accepted decisions on
priority and need were needed in the face of the credit crisis
and U.S. housing bust.
"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," said Marie-Pierre Pillon, head of equity and credit
research at Groupama Asset Management in Paris.
S&P500 share futures SPc2 were down 3 percent, signalling
U.S. stocks will open sharply lower, and the dollar tumbled.
The euro jumped to as high as $1.4479, up 1.7 percent from
Friday, while U.S. Treasury yields dropped to five-month lows on
concern about the stability of the U.S. financial system and as
investors increased bets the Fed will cut interest rates.
The events signalled a transformation in Wall Street's power
structure with major banking groups like Bank of America and
JPMorgan Chase (JPM.N) becoming more dominant.
With Lehman and Merrill out of the picture, three of the top
five U.S. investment banks have effectively departed the scene
inside six months. Bear Stearns was acquired in a fire sale by
JPMorgan in March.
Britain's Barclays (BARC.L) emerged as a front-runner to buy
Lehman late on Sunday after Bank of America pulled back, but it
was deterred by the U.S. government's unwillingness to provide a
financial backstop to potential losses.
Lehman collapsed under the weight of toxic assets, mainly
related to real estate, that are now worth only a fraction of
their original prices.
In its bankruptcy filing Lehman said Citigroup, Bank of New
York Mellon (BK.N), Japan's Aozora Bank (8304.T) and Mizuho
Financial Group (8411.T) were among its top unsecured creditors.
LINE IN SAND
Lehman employees streaming into its European headquarters in
London's Canary Wharf financial district were met by television
cameras, a scrum of reporters and a beefed-up security team.
"I guess times are tough and we've got to face the music ...
Everyone is worried about their job, it's inevitable," said one
banker entering the building, adding a company-wide meeting had
been set for Monday morning.
Other employees said staff were clearing desks, packing
personal belongings and saying farewells to colleagues.
The New York Times also reported that AIG, once the world's
largest insurer, had made an approach to the Federal Reserve
seeking $40 billion in short-term financing.
Late on Sunday, authorities sought to prop up market
confidence with announcements from regulators including the Fed
and the U.S. Securities and Exchange Commission.
The Fed said it would begin accepting equities as collateral
for emergency loans, and laid out a series of steps to calm
markets and brace for the collapse of Lehman.
In addition to broadening the collateral it will accept from
investment banks for direct Fed loans, it said it would increase
the amount of Treasury securities it auctions on a regular basis
under one of its lending programs.
One of the catalysts for this weekend's events was the
stance of U.S. Treasury Secretary Henry Paulson, who opposed
using government money to resolve the Lehman crisis.
So far this year, the government has sponsored rescues of
Bear Stearns and mortgage lenders Freddie Mac FRE.N and Fannie
Mae FNM.N, and the authorities did not want to be accused of
encouraging excessive risk-taking by bailing out another yet
another investment bank.
But they also could not afford to let a blow-up of Lehman
paralyze the financial system and deepen the credit crisis.
The SEC will take action against abusive short-selling,
according to a source briefed on the matter. In late July and
early August, major financial shares were protected by an
emergency rule that expired on Aug. 12.
For more stories on Lehman, click [ID:nN13574113]
(Additional reporting by Steve Slater, Sitaraman Shankar and
Olesya Dmitracova in London; Editing by Jean Yoon and Quentin