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Merrill Sale May Soften Crisis

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By ANDREW ROSS SORKIN

The New York Times

Published: September 15, 2008

NEW YORK - In one of the most dramatic days in Wall Street's history, Merrill Lynch agreed to sell itself to Bank of America for roughly $50 billion to avert a deepening financial crisis while another prominent securities firm, Lehman Brothers, hurtled toward liquidation after it failed to find a buyer, people briefed on the deals said.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter of a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of tens of billions of dollars in losses because of bad mortgage finance and real estate investments.

They culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials with hopes of avoiding a downward spiral in the markets stemming from a crisis of confidence.

A forced restructuring of the world's largest insurance company, American International Group Inc., also weighed heavily on global markets as the effects of the 14-month-old credit crisis intensified.

"My goodness. I've been in the business 35 years, and these are the most extraordinary events I've ever seen," said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

A global consortium of banks, working with government officials in New York, late Sunday announced the creation of a $70 billion pool of funds to lend to troubled financial companies. The aim, according to participants who spoke to The Associated Press, was to prevent a worldwide panic on stock and other financial exchanges.

Ten banks - Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS - each agreed to provide $7 billion "to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets."

The Federal Reserve also chipped in, adding to its emergency lending program for commercial and investment banks. The central bank announced late Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.

Federal Reserve Chairman Ben Bernanke said the discussions had been aimed at identifying "potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses."

Futures pegged to the Dow Jones industrial average fell almost 300 points in electronic trading Sunday evening, pointing to a sharply lower open for the blue chip index this morning. Asian stock markets were also falling.

How Will The Market React?

It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the past year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street. Questions remain about how the market will react today, particularly to Lehman's plan to wind down its trading operations, and whether other companies may still falter, including American International Group and Washington Mutual, the nation's largest savings and loan. Both companies' stocks fell precipitously last week.

Though the government only a week ago took control of troubled mortgage finance companies Fannie Mae and Freddie Mac, investors have become increasingly nervous about the difficulties major financial institutions face in recovering from their losses.

How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the past year, with unemployment increasing as the nation's growth rate has slowed.

What will happen to Merrill's 60,000 employees or Lehman's 25,000 employees remains unclear.

The weekend negotiations, humbling for Lehman and Merrill Lynch and triumphant for Bank of America, based in Charlotte, N.C., began at 6 p.m. Friday in the first of a series of emergency meetings at the Federal Reserve building in Downtown Manhattan.

The meeting was called by Fed officials, with Treasury Secretary Henry M. Paulson Jr. in attendance, and it included top bankers. The Treasury and Federal Reserve had already stepped in on several occasions to rescue the financial system, forcing a shotgun marriage between Bear Stearns and JPMorgan Chase this year and backstopping $29 billion worth of troubled assets - and then agreeing to bail out Fannie Mae and Freddie Mac.

The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman's stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.

Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their own precarious situation. The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation's largest brokerage force and its name is known in towns across America, while Lehman's main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.

Cementing The Deal

Knowing that investors were worried about Merrill, John A. Thain, its chief executive and an alumnus of Goldman Sachs and the New York Stock Exchange, and Kenneth D. Lewis, Bank of America's chief executive, began negotiations. One person briefed on the negotiations said Bank of America had approached Merrill earlier in the summer but Thain had rebuffed the offer. Now, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, the two parties began talks.

On Sunday morning, Thain and Lewis cemented the deal. It could not be determined whether Thain will play a role in the new company, but two people briefed on the negotiations said they did not expect him to stay. Merrill's "thundering herd" of 17,000 brokers will be combined with Bank of America's smaller group of wealth advisers and called Merrill Lynch Wealth Management.

For Bank of America, which this year bought Countrywide Financial, the troubled mortgage lender, the purchase of Merrill puts it at the pinnacle of American finance, making it the biggest brokerage house and consumer banking franchise.

Rescuing Lehman

A leading proposal to rescue Lehman would have divided the bank into a "good bank" and a "bad bank." Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would have agreed to absorb losses from the bank's troubled assets, two people briefed on the proposal said. Taxpayer money would not have been included in such a deal, they said.

Other Wall Street banks balked at the deal, unhappy at facing potential losses while Bank of America or Barclays gained the potentially profitable part of Lehman at a cheap price.

For Lehman, the end essentially came Sunday morning when its last potential suitor, Barclays, walked away from a deal, saying it could not obtain a shareholder vote to approve a transaction before this morning, something required under London Stock Exchange listing rules, one person close to the matter said. Other people involved in the talks said the Financial Services Authority, the British securities regulator, had discouraged Barclays from pursuing a deal. Peter Truell, a spokesman for Barclays, declined to comment.

Lehman was expected to seek bankruptcy protection for its holding company by late Sunday evening, representing the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago, people close to the matter said. Lehman's subsidiaries were expected to remain solvent while the firm liquidates its holdings, these people said.

Under this scenario, a group of banks have tentatively agreed to provide a financial backstop to assist in an orderly winding down of the 158-year-old investment bank. Such a deal could expose those banks to losses on Lehman's assets.

Information from The Associated Press was used in this report.

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