Markets in Turmoil by Lehman Failure and Merrill Sale

NEW YORK (Reuters) – Global markets plummeted on Monday after investment bank Lehman Brothers filed for bankruptcy protection, rival Merrill Lynch agreed to be taken over and the Federal Reserve threw a life line to the battered financial industry.

As a deepening crisis took new, bigger victims, The U.S. Federal Reserve said for the first time it would 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 failed, and troubled insurer American International Group asked the Fed for a lifeline, according to news reports.

The events signal a seismic shift in Wall Street’s power structure with big name investment banks biting the dust and major banks like Bank of America and JPMorgan Chase becoming the survivors.

“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.”

Bank of America agreed to buy Merrill Lynch 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.

“It’s just shockingly fast how it happened,” an employee for Merrill in Asia said. “It’s hard to believe there will be no more Merrill Lynch,” he said of his firm, known as The Thundering Herd.

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 index of leading European shares fell 5 percent, led by falling bank stocks such as UBS, down 10 percent.

Shares in U.S. banks trading in Frankfurt tumbled, with Lehman plunging 80 percent and Morgan Stanley, Citigroup and others all in retreat. Frankfurt-listed shares in AIG fell almost 30 percent.

Merrill’s shares offered a rare bright spot and its Frankfurt-based shares jumped 36 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 bankruptcy protection and was attempting to sell assets, becoming Wall Street’s highest-profile bankruptcy since junk bond specialist Drexel Burnham Lambert succumbed in 1990. Lehman’s European arm appointed administrators, who said they would wind down the business in as orderly a manner as possible.

Lehman’s petition followed three days of talks between bank CEOs and regulators at the Fed’s fortress-like Manhattan building.

“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 fell more than 3 percent, signaling 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.