Lehman bankrupt, Merrill Lynch snapped up
Auteur : BY VINNEE TONG The Associated Press
Du : 16/09/2008
NEW YORK — Lehman Brothers, a 158-year-old investment bank choked by the credit crisis and falling real estate values, filed for Chapter 11 bankruptcy protection from its creditors on Monday and said it was trying to sell off key business units.
The filing was made in the U.S. Bankruptcy Court in the Southern District of New York by Lehman Brothers Holdings Inc., the bank’s holding company. The case had not yet been assigned to a judge.
Lehman’s last hope of surviving outside of court protection faded Sunday after British bank Barclays PLC withdrew its bid to buy the investment bank.
Besides Lehman’s collapse, the financial community was hit by news Monday that Merrill Lynch will be taken over by the Bank of America.
Lehman learned at a last-minute meeting on Friday with federal officials that it would not be getting any emergency funding to give it the liquidity it needed, chief financial officer Ian Lowitt said in an affidavit.
Lehman fell under the weight of US$60 billion in soured real estate holdings and tighter a credit market that forced it to seek court protection.
The Lehman bankruptcy spilled over onto Canada’s financial sector, with Canadian Imperial Bank of Commerce revealing it has about $25 million worth of exposure to the insolvent Wall Street brokerage. The $25-million value is considered mark-to-market, which is the value of those assets at their current market worth, rather than its book value.
Sun Life Financial Inc., a major Toronto-based life insurance company, said it holds $334 million of Lehman bonds and about $15 of Lehman derivative financial instruments. The company said it expects to take a charge to its earnings in the third quarter, but the amount is dependent on the amount of expected recoveries and other factors.
As Lehman’s financial health deteriorated over recent months, Lowitt said Lehman had \"explored various options to restructure operations, reduce overall cost structure, and improve performance.\" He said executives took a two-pronged approach to saving the company: selling its investment management division and separating troubled real estate assets from the rest of the company.
\"Management believed that divorcing the real estate assets from the rest of the company would relieve the pressure on the company,\" he said in the affidavit.
In an effort to calm the markets, Lehman announced its third-quarter results on Wednesday — a week earlier than planned — but Lowitt said that \"did little to quell the rumours in the markets and the concerns about the viability of the company.\"
He said the uncertainty made it impossible for Lehman to continue outside of court protection.
The filing had been made so hastily that the company had not yet filed motions by Monday morning that are typically made on the first day, such as asking the court for permission to continue paying employees.
Many Lehman employees seen entering its headquarters in Midtown Manhattan tucked their chins down to avoid talking to the media and others who had lined up behind metal barriers in front of the building.
Meanwhile, Merrill Lynch’s shotgun sale to Bank of America will create the largest financial services company in the United States — one that some believe is too big to fail. Still, no one is breathing easy just yet.
The deal keeps Merrill from a Bear Stearns-style fire sale or a complete meltdown like Lehman Brothers while removing a major player that some expected to be the next shoe to drop in the credit crisis. At the same time, it will enable BofA to expand the financial services it offers to its already huge customer base.
Still, the challenges are enormous: The two companies have starkly contrasting cultures. Billions of dollars of bad debt remain on Merrill’s books, while BofA still faces huge consumer credit losses. And the deal was slapped together in less than two days — meaning that the two financial powerhouses involved might not know exactly what they are getting themselves into.
\"It’s a big gamble,\" said Alois Pirker, senior analyst at Aite Group, a financial services advisory and research firm. \"They could be the number one financial services firm in all areas. But if it doesn’t work out, it could go very badly.\"
The deal, originally valued at US$50 billion, happened as bank and government officials met over the weekend to decide what to do about the ailing Lehman Brothers Holdings Inc., which ended up filing for bankruptcy. In an attempt to avoid the same fate as Lehman, Merrill Lynch & Co. — whose stock has also been plunging lately — says it asked Bank of America Corp. if they would be interested in a deal.
Bank of America shares fell $7.19, or 21 per cent, to $26.55 on Monday, and Merrill shares up just a penny to $17.06. Under terms of the transaction, Bank of America would exchange 0.8595 shares of Bank of America common stock for each Merrill Lynch common share. Based on BofA’s closing price of $26.55 Monday, the deal was valued at less than $40 billion, or $22.82 a share.
BofA has been trying for years to successfully build an investment banking arm, and Merrill does fit that bill.
But the obstacles are huge — and not just in terms of Merrill’s risky mortgage-backed assets, which led ratings agency Standard & Poor’s to cut its credit rating on Bank of America on Monday.