Lehman files for bankruptcy

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Lehman Brothers, the fourth largest US investment bank, has filed for bankruptcy protection "in order to protect its assets and maximise value".

The British arm of the bank was placed under the administration of acountants PriceWaterhouseCoopers on Monday to defend itself from creditors.

The banks assets, worth $600bn, will be divided up and 25,000 people could lose their jobs.

Talks with Britain's Barclays Bank and the Bank of America over the weekend faltered after the potential buyers said they were not convinced that Lehman, which last week announced a loss of $3.9bn in just three months, would be a good buy for shareholders.

Within hours of the collapse of those talks, details emerged of a deal by Bank of America to takeover Merrill Lynch - the third largest investment firm - and the expected sale of assets by American International Group, the world's largest insurance company.

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Asian markets dropped by up to 3.6 per cent amid fears of an imminent collapse of Lehman, while US markets fell sharply at the opening bell of the New York Stock Exchange, dropping more than 3 per cent.

Lehman's Chapter 11 file will not include its broker-dealer operations and extra units.

The bank aims to sell its broker-dealer operations and is still involved in talks with potential buyers over its investment management division.

Al Jazeera's Matthew Moore, at the London Stock Exchange, said: "Henry Paulson, the US treasury secretary, was adamant that this time around, no money would be spent on bailing out yet another investment bank.

"Just over a week ago they put in billions to prop up Fannie Mae and Freddie Mac, but those are two crucial mortgage giants which also have a bearing on how foreign investors treat the United States and how they treat the dollar."

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Economic doldrums

Some analysts believe a Lehman collapse could trigger a shake up of the entire US financial system, which has been stuck in the economic doldrums since the mortgage crisis hit more than a year ago.

"The ordinary course of financial change has winners and losers."

Alan Greenspan, former US Federal Reserve chairman

"The US financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before," Peter Kenny, managing director at Knight Equity Markets in New Jersey, said.

"It's a new financial world on the verge of a complete reorganisation."

Max Keiser, a financial analyst, told Al Jazeera that there would be more casualties due to the lack of credit banks need to stay alive under the neo-liberal capitalist model.

"You're talking about $700 trillion worth of debt in the global economy. The entire GDP [Gross Domestic Product] of the world is something like $60 trillion, so this has a long way to go as you deflate all of this debt back to something more sustainable."

Keiser said that those nations with natural resources, such as oil in the Middle East, and savings, like China, would survive.

"It is only a doomsday scenario for America and Britain, who have been living on borrrowed money for generations.

"The US dollar is now finished as the world's reserve currency and we will see now some other country rise up and take its place, most probably China."

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Safety Measures

The US Federal Reserve and a banking consortium have announced measures to offset a further credit crunch.

The consortium of 10 global commercial and investment banks had said earlier that it would provide $70bn "to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets".

Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, and UBS, said in a joint statement that they agreed to create a "collateralised borrowing facility" of $70bn, with each bank contributing $7bn, to help ease access to credit.

"These actions reflect the extraordinary market environment," the banks said.

The Federal Reserve, meanwhile announced new steps to ease access to emergency credit for struggling financial companies by broadening the collateral to be used for central bank loans.

The end of bidding for Lehman prompted a rare emergency trading session on Sunday, which market sources said was initiated by the US Federal Reserve with the aim of reducing risk associated with any Lehman bankruptcy.

The lack of a government guarantee to resolve the Lehman crisis is the main reason Barclays decided to exit the negotiations, according to a person familiar with the talks.

So far this year, the government has bailed out mortgage giants Freddie Mac and Fannie Mae, and saved Lehman rival Bear Stearns from going under by extending it cheap loans and allowing its forced sale to another rival, JPMorgan Chase.

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Merill Lynch purchase

Bank of America, meanwhile, announced early on Monday that it was to buy Merill Lynch for $50bn, creating the world's largest financial services company in the process.

Merril Lynch has cut thousands of investment banking jobs this year, and its stock values were sliding just last week.

Ken Lewis, chairman and CEO of Bank of America, said in a statement: "Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders.

"Together, our companies are more valuable because of the synergies in our businesses."

Adding to investor worries was a report that American International Group Inc, one of the world's largest insurers, had asked the US Federal Reserve for a $40bn bridge loan.

Over the weekend Alan Greenspan, the former US Federal Reserve chairman, projected the failure of "other major financial firms" but added that this did not need to be a problem.

"It depends on how it is handled and how the liquidations take place," he said on US broadcaster ABC.

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"And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers."

Some analysts, however, have graver predictions for the future, comparing the current credit crisis to the Great Depression the world faced in the late 1920s.

Andrew Critchlow, the managing editor for Dow Jones Middle East, told Al Jazeera: "It's difficult to see how financial markets can stabilise. From an investor's view, they'll only be caught catching a falling knife.

"The sentiment is, we're not at the bottom of the market yet ... there's lots of scary potential problems that could come out of the woodwork here," he said.