NEW YORK (Reuters) - Pimco's Bill Gross said on Sunday that a Lehman Brother's bankruptcy risks an "immediate tsunami" because of the unwinding of derivative and credit swap-related positions worldwide.
Talks to sell Lehman faltered Sunday, triggering concerns that the investment bank may be heading into bankruptcy by the end of the day and prompting banks to call an emergency trading session to unwind positions with the firm.
"It appears that Lehman will file for bankruptcy and the risk of an immediate tsunami is related to the unwind of derivative and swap-related positions worldwide in the dealer, hedge fund, and buyside universe," Gross, the chief investment officer of Pacific Investment Management Co (Pimco), told Reuters. Pimco oversees more than $812 billion in assets.
Indeed, a rare emergency trading session opened Sunday afternoon to allow Wall Street dealers in the $455 trillion derivatives market to reduce their exposure to a potential bankruptcy filing by Lehman.
U.S. regulators and bankers were making last-ditch efforts on Sunday to prevent toxic assets from ailing Lehman spilling into global markets and rupturing investor faith in the international financial system.
"The extraordinary trading session held today to facilitate a partial unwind of these positions saw very little trading -- perhaps $1 billion total -- but at much wider spread levels for corporate bonds," Gross said.
Barclays Plc, which had appeared to be frontrunner to take over Lehman -- excluding its toxic mortgage-related assets -- said it pulled out of the bidding, as top bankers and regulators met for a third day to try to resolve the crisis.
The British bank withdrew because the U.S. government wouldn't provide financial guarantees, according to a person familiar with the matter.
U.S. Treasury Secretary Henry Paulson remains strongly opposed to using government money in any deal aimed at resolving the Lehman crisis, a source familiar with his thinking reiterated on Sunday.
There were some glimmer of good news on Sunday.
Bank of America Corp was in advanced talks to acquire Merrill Lynch & Co Inc for at least $38.25 billion in stock, the New York Times said on Sunday, citing people briefed on the negotiations.
John Thain, Merrill's chief executive, and Kenneth Lewis, chief executive of Bank of America, were present at discussions over the weekend regarding the fate of Lehman.
A transaction valuing Merrill at $25 to $30 per share could be announced as soon as Sunday night, the newspaper said. Merrill shares closed at $17.05 on Friday.
Merrill has been hit hard by the credit crisis and has written down more than $40 billion over the last year.
"To some extent, the rumored bid for Merrill by Bank of America lends some confidence to all markets, although I am skeptical that BofA would pay such a premium on such short notice," Gross added.
(Additional reporting by Megan Davies in New York, Rachelle Younglai in Washington and Steve Slater in London)
Reporting by Jennifer Ablan, Editing by Andrea Ricci