| NEW YORK
NEW YORK Lehman Brothers Holdings Inc filed for bankruptcy protection after trying to finance too many risky assets with too little capital, becoming the largest U.S. bankruptcy and the highest-profile casualty of the global credit crisis.
Lehman is expected to sell most of its businesses, including its broker-dealer operations and its Neuberger Berman asset management unit.
Those units did not file for bankruptcy protection and are operating, but customers are often jittery about trading with a company whose parent is bankrupt, so selling the units before too many customers leave is crucial.
"Much of (Lehman's) asset value at the end of the day is tied up in its credibility, and that takes a significant hit early in a bankruptcy case," said Jack Williams, resident scholar at the American Bankruptcy Institute and a professor at Georgia State College of Law.
A sale of the investment management division, which includes Neuberger Berman, is close to being announced, a person familiar with the matter said. Bain Capital, Hellman & Friedman, and Clayton, Dubilier and Rice have placed bids, the person said. Lehman last week had planned to sell a stake in the business, but now it is selling the entire unit.
But there are also assets, such as Lehman commercial mortgage bonds, which will be more difficult to sell and will probably be sold at a cut-rate price, analysts said. That in turn might force other banks to mark down the value of their assets, perhaps pressuring them to raise capital, wrote Meredith Whitney, analyst at Oppenheimer.
"We expect the financial markets to be under unprecedented strain over the next several days," Whitney wrote late Sunday.
That strain was evident on Monday. Major U.S. stock market indices turned in their worst day since September 2001, and the Standard & Poor's 500 fell to its lowest level since October 2005. Lehman is set to exit the S&P 500 index after Tuesday's market close.
Lehman is the biggest investment bank to collapse since 1990, when Drexel Burnham Lambert filed for bankruptcy as the junk bond market cratered. Lehman listed $639 billion of assets as of the end of May in its bankruptcy filing, putting it well ahead of long-distance phone company WorldCom Inc, which listed $107 billion of assets when it filed for bankruptcy in 2002.
The bankruptcy filing represents the end of a 158-year-old company that survived world wars, the 1997 Asian financial crisis and the 1998 collapse of hedge fund Long-Term Capital Management, but not the global credit meltdown.
That meltdown is creating financial turmoil. In addition to Lehman's failure, American International Group Inc struggled to stay afloat on Monday, and Merrill Lynch & Co hastily agreed to sell itself to Bank of America Corp
Financial institutions globally have recorded more than $500 billion of write-downs and credit losses as the U.S. subprime mortgage crisis has spread to other markets.
Bankruptcy represents an abrupt end to Chief Executive Dick Fuld's four-decade career at Lehman.
Fuld, who piloted the investment bank through prior crises with aplomb, was widely seen as too slow to recognize Lehman's need to raise capital and shed bad assets.
At the end of August, Lehman had $600 billion of assets financed with just $30 billion of equity. Having so little capital meant that a 5 percent decline in assets would wipe out the company's value, which investors saw as a real risk due to the company's billions of dollars of mortgage securities.
"Lehman decided to play chicken with the market and they lost," James Ellman, portfolio manager at hedge fund Seacliff Capital, said late on Sunday.
In its Chapter 11 filing, Lehman named Citibank N.A. and Bank of New York Mellon as trustees for about $138 billion of senior Lehman bonds. Citi's Hong Kong affiliate had made a $275 million bank loan to Lehman.
Among Lehman's other unsecured creditors are Japanese banks Aozora Bank, Mizuho Financial Group Inc, Shinsei Bank and UFJ Bank. France's BNP Paribas is also on Lehman's list of its 30 largest unsecured creditors.
The firm said that as of May 31, it owed about $110.5 billion of senior unsecured notes, $12.6 billion of subordinated unsecured notes, and $5 billion of junior subordinated notes.
Lehman also disclosed that it owned stakes of 10 percent or more in a number of companies, including Imperial Sugar Co, GLG Partners, Ronco Corp, Pacific Energy Partners, Blount International, and Transmontaigne Inc.
The investment bank, once the fourth-largest in the United States, had hoped to raise capital by selling off a stake in its investment unit, and use that capital as well as other funds to spin off some of its toxic assets to shareholders.
But that plan last week did not satisfy investors, who punished Lehman's share price, or rating agencies, who pressed the company to find a stronger partner.
Lehman said the uncertainty, particularly among banks through which it clears securities trades, ultimately made it impossible for it to continue to operate its business.
The bankruptcy filing comes after a weekend of heated negotiations among regulators and Wall Street firms about Lehman's fate. The U.S. government refused to backstop Lehman's worst assets in the way it backstopped Bear Stearns Cos' sale to JPMorgan Chase & Co. Government officials told banks to support Lehman or else be prepared for more investment banks to lose investor confidence and fail.
But prospective bidders refused to buy Lehman without government support, people briefed on the matter said. In the end, Lehman was allowed to fail, and Bank of America agreed to buy Merrill, which was seen as the next weakest U.S. investment bank.
For many of Lehman's 26,000 employees the outlook is likely to be gloomy, with job losses expected to be substantial even if significant parts of the business can be sold.
Lehman employees showed up at dawn Monday at the New York headquarters, toting duffel bags and suitcases to pack up their desks. No official layoff announcements have been made, a source said.
Lehman's bankruptcy is massive and likely to be complex, due in part to the large number of illiquid assets the company has. The U.S. Trustee said on Monday that a meeting of unsecured creditors will take place on Tuesday to form at least one committee of unsecured creditors.
"This isn't a manufacturer or retailer ... so we don't have a very rich track record about how the issues will be addressed, and the classic signposts just aren't there," the American Bankruptcy Institute's Williams said.
"Once the company goes into bankruptcy, this is going to be an opportunity to look under the hood, and we might not like what we see."
(Additional reporting by Chelsea Emery, Aarthi Sivaraman, Megan Davies, Euan Rocha, Paritosh Bansal, Emily Chasan and Robert MacMillan; editing by John Wallace, Leslie Gevirtz)