void of existence

Wall Street was convulsed yesterday by the most dramatic events yet in the unfolding credit crisis, as Lehman Brothers filed for bankruptcy and Merrill Lynch agreed to be bought for $50bn as it sought to secure its future.

Lehman Brothers’ options ran out late on Sunday after it failed to find a buyer, leaving more than $600bn owed to creditors in the US, Europe and Asia. Thousands of staff at the fourth largest bank on Wall Street face redundancy.

Stony-faced workers streamed into the bank’s head office just above Times Square in midtown Manhattan yesterday, some with large sports bags to carry away the contents of their desks.

As well as dozens of journalists, a growing number of tourists photographed the scene. One worker leaving the office yelled out to the onlookers: “You’re watching history, man.”

It took just 48 hours of negotiations for Merrill to bargain away its 94-year history as an independent Wall Street brokerage by agreeing to the all-share deal. As with Lehman, it is likely to involve large job losses in New York but also in London, as the new owner of the firm nicknamed the “thundering herd” seeks to cut costs of $7bn a year.

Merrill’s chief executive, John Thain, made initial contact with Bank of America on Saturday morning while he was holed up at New York’s Federal Reserve for talks about the collapse of Lehman Brothers.

“Expectations for difficulties in the marketplace following Lehman’s bankruptcy really led us to start thinking about what sort of transactions made sense for us,” Thain told a press conference yesterday.

The crisis in the US financial markets, which began 13 months ago, appears to be escalating. Bear Stearns, another large investment bank, came close to failure and was bought at a knock-down price in March, and a little over a week ago Washington was forced to bail out Fannie Mae and Freddie Mac, which are behind half the mortgages in the US.

The failure of Lehman Brothers is the end of one of the oldest firms on Wall Street, its roots going back to 1850. It is a devastating blow for the chief executive, Richard Fuld, who has been with Lehman his entire career and run the business since 1994. The bank employs more than 25,000 people, including 4,500 in the UK.

The firm was brought to its knees by ill-judged investments in mortgage finance and other real estate. In the third quarter, the business reported losses of $3.9bn after taking huge writedowns on the value of those investments.

Last Wednesday, Lehman announced a series of measures to cut its exposure to real estate and raise cash, but Wall Street was not convinced and confidence in the firm evaporated. Its shares had lost almost 95% of their value this year.

The Lehman bankruptcy is the largest ever in terms of assets held. Outside Lehman’s New York offices yesterday, one excitable news anchor described the scene as the “ground zero of the financial crisis”.

Workers at the bank said management had still not made any announcements internally. “People are getting their resumes together, but it is not the best time to be looking for a job in financial services,” said one man, who asked not to be named. “Dick Fuld probably held on too long. If something had been done a few months ago, we could probably have survived or we could have been acquired instead of going bankrupt.”

The company has filed for Chapter 11 bankruptcy protection, allowing it to liquidate assets, which could take months or possibly years, while creditors are kept at bay. Lehman said it was exploring the sale of its broker-dealer subsidiaries, which were not included in the bankruptcy. It is also looking for buyers of its investment management division, including the asset manager Neuberger Berman.

The Financial Services Authority in London asked banks in the UK to disclose their exposure to Lehman.

The Lehman offices in the UK were essentially cut adrift and put into administration. There was an immediate ban on trading and staff were told to clear their desks. “It was surprisingly calm – there was a kind of blitz spirit in the sense that we were all in it together,” one banker said. “It was made clear that there was no desire to have us hanging around.”

Many have been told to return today for a briefing from the administrators. Employees hope to learn, among other things, whether they will receive monthly pay cheques due on September 21. “There’s quite a lot of anger that things were allowed to get to this stage,” he added.

Officials from the US treasury and the Federal Reserve had worked furiously to prevent Lehman going bust, and spent the weekend in meetings with Wall Street executives. Hope faded however when the two leading contenders, Barclays and Bank of America, walked away. Both had sought guarantees from Washington over Lehman’s bad debts, a similar deal to the one brokered for Bear Stearns when JP Morgan acquired the firm. But the political will to pump further taxpayers’ money into Wall Street wilted.

Renowned for its logo of a rampaging bull, Merrill Lynch was founded in 1914 by two entrepreneurs – Charles Merrill and Edmund Lynch – who met at a YMCA after moving to Manhattan.

Merrill employs 60,000 people in 40 countries. But the credit crunch has exposed huge liabilities on mortgage-related securities; Merrill has written off losses of more than $19bn and has been obliged to raise money from sovereign wealth funds from Singapore and the Middle East.

Bank of America trumpeted the deal as an opportunity to put together its vast US network of high-street banks with Merrill’s roster of 16,000 financial advisers to provide an all-round service of stockbroking and investment to retail clients. The combined organisation will hold $2.5 trillion of clients’ assets.

Describing the combination as a “major grand slam home run”, Bank of America’s chief executive Ken Lewis insisted that it was worth paying a premium of 1.8 times the book value of Merrill’s assets.

At the official announcement of yesterday’s deal, at Bank of America’s headquarters, while both chief executives wore almost identical grey suits and red ties, Lewis grinned broadly while Thain clenched his hands, answered few questions and frowned down at the table.

Profiles

Richard Fuld
Chief executive Lehman Brothers

One of the toughest bankers on Wall Street has steered Lehman through difficult times and last week was confident about its future, telling investors it had faced adversity before and each time emerged stronger. Fuld, 62 , who took over in 1994, led the firm after it was spun out of American Express and restored its fortunes after it was hit by the collapse of hedge fund Long-Term Capital Management in 1998. He has just failed to surmount the most difficult challenge of his career.

John Thain
Chief executive Merrill Lynch

John Thain has been chief executive of Merrill Lynch since last December. He said yesterday that when he took over at one of Wall Street’s biggest investment banks he did not expect to sell it less than a year later. But Thain is no stranger to deal-making. He turned the New York Stock Exchange into the first transatlantic stockmarket in his three years at the helm, converting it from an ailing not-for-profit business into a public company and masterminding a takeover of bourse operator Euronext.

Ken Lewis
Chairman, chief executive and president, Bank of America

Ken Lewis, chairman, chief executive and president of Bank of America, was all smiles at yesterday’s press conference for the Merrill deal. He has long wanted to move America’s largest consumer bank into investment banking. Lewis has developed a taste for banks weakened by the credit crunch. This year he bought the US mortgage lender Countrywide. The 61-year-old grew up in Georgia, the son of a nurse and an army sergeant. He is a graduate of Stanford’s executive programme.

Robert Willumstad
Chairman and chief executive American International Group

Robert Willumstad took over the top job at leading insurer American International Group in June, saying he would review its assets in the coming months. “Nothing is off the table and there are no sacred cows,” he said. But the world’s largest insurer has seen its shares plunge in recent weeks as it reels from the effects of the credit crunch. Willumstad, 62, joined AIG from Citicorp, where he was known as a hands-on manager. He has spent his entire career in financial services. He grew up on Long Island and lives in New York.