The dramatic turn of events was prompted by the cataclysm of losses that has shaken the American financial industry over the last 14 months.
A global consortium of banks, working with government officials in New York, announced late Sunday 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.
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.
A forced restructuring of the world's largest insurance company, American International Group Inc., also weighed heavily on global markets.
The stunning weekend developments took place as voters, who rank the economy as their top concern, prepare to elect a new president in seven weeks.
Coming just a week after the government took control of mortgage lenders Fannie Mae and Freddie Mac, the magnitude of the industry's reshaping is staggering: Two of the most powerful firms on Wall Street, Merrill Lynch and Lehman, will disappear. This on the heels of Bear Stearns' collapse in March.
The weekend's once unthinkable outcome came after a series of emergency meetings at the Federal Reserve building in downtown Manhattan in which the fate of Lehman hung in the balance. In the meeting Federal Reserve officials and the leaders of major financial institutions were trying to complete a plan to rescue the stricken investment bank.
But as the weekend unfolded, Barclays and Bank of America, which had both considered buying all or part of Lehman, decided that they could not reach a deal without financial support from the federal government or other banks.
As a result, people briefed on the matter said late Sunday that Lehman Brothers would file for bankruptcy protection, in the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago.
Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, as its subsidiaries remain solvent while the parent firm liquidates, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government.
Lehman has retained the law firm Weil, Gotshal & Manges. The firm's restructuring head, Harvey Miller, also spearheaded Drexel's bankruptcy filing in February 1990.
The leading proposal to rescue Lehman had been to divide the bank into two entities, a “good bank” and a “bad bank.” Under that last scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank's troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.
But that plan fell apart on Sunday, all but assuring that Lehman would be forced to liquidate.
The end of Lehman may not stop the financial crisis that has gripped Wall Street for months, analysts said. More investment banks could disappear soon.
The independent broker-dealers “are going the way of the dodo bird,” said Bert Ely, an Alexandria, Va.-based banking consultant.
That's partly because some of the firms, particularly Merrill, made bad bets on real estate. But several analysts said that investment companies will need the deep pockets of commercial banks to survive the next few years.
Ely said similar shake-outs have happened in other parts of the financial industry, such as credit cards and thrifts. Bank of America acquired independent credit card issuer MBNA in 2005, for example, while credit card company Capital One Financial Corp. has diversified itself by purchasing regional banks in Louisiana, Texas and New York.
The common denominator of the financial crisis, analysts said, is the bursting of the housing bubble. Home prices have dropped on average 25 percent so far. The crisis has begun to slow the broader economy as banks make fewer loans and consumers have begun cutting spending. Many economists are now forecasting that the economy could slip into recession by the end of this year and early next year.
That, in turn, could cause additional losses for commercial banks on credit cards, auto loans and student loans.
The Fed is widely expected to keep interest rates steady at 2 percent, below inflation, when it meets Tuesday. It was possible, however, that the central bank might decide in coming weeks to cut rates if such a move is seen as needed to calm turbulent financial markets.