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WASHINGTON: The Federal Reserve and major global banks opened up fresh credit Sunday as markets braced for the collapse of giant Lehman Brothers in a tumultuous weekend for the financial system.
Lehman Brothers appeared on the verge of liquidation when no buyer emerged for the firm scarred by the subprime real estate meltdown, and some feared a domino effect that ravage the rest of the global financial system.
In related developments, news reports said Merrill Lynch, another storied Wall Street firm, had struck a deal to sell itself to Bank of America, and American International Group, one of the world's biggest insurers, was seeking emergency credit from the Federal Reserve.
The Fed said it was easing collateral requirements for the firms as it acted "to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution."
The collateral for the special emergency loans will be expanded to all investment-grade debt securities, the central bank said. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.
Treasury Secretary Henry Paulson, part of weekend discussions in New York to avert a new financial shock, said the actions "will be critical to facilitating liquid, smooth functioning markets, and addressing potential concerns in the credit markets."
While there was no official news on Lehman's fate, analysts expected a bankruptcy filing that could affect a range of companies dealing with the Wall Street giant, with a potential to worsen the global credit crunch.
In a sign of Lehman's fate, the Securities and Exchange Commission said it was "taking actions" to ensure the protection of the deposits of Lehman's brokerage customers, who are protected by SEC rules and an insurance fund.
In a related action, a consortium of 10 global commercial and investment banks announced plans to provide US$70 billion to help offset a credit squeeze.
Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, and UBS, said in a joint statement they "initiated a series of actions to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets."
They agreed to create a "collateralised borrowing facility" of US$70 billion, with each bank contributing US$7 billion, to help ease access to credit.
They also said they would work together "to help facilitate an orderly resolution" of the derivatives exposures between Lehman Brothers and its counterparties.
"These actions reflect the extraordinary market environment," the statement said.
The 10 banks would be able to tap this facility, with any bank eligible for up to one-third of the fund. The amount may be expanded if more banks join the programme.
As emergency weekend talks on Lehman's woes were being held in New York, a London source at British bank Barclays, who requested anonymity, said it walked away from negotiations because of concerns it would have to guarantee the 158-year-old US firm's trading commitments.
The news came as US Treasury and Fed officials scrambled to head off a collapse of Lehman Brothers which some say could send shockwaves through the global financial system.
"If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers," Nouriel Roubini, a New York University economist, said ahead of the latest announcement.
"It seems clear that a category five storm is making landfall in the US financial system and a lot of very messy stuff is hitting the fan," Michael Panzer, author of the book "Financial Armageddon," said on his blog.
The Wall Street Journal reported that 94-year-old Merrill Lynch agreed late Sunday to sell itself to Bank of America for roughly US$44 billion, which would be a premium to Friday's closing price.
The New York Times reported that AIG was seeking a US$40 billion bridge loan from the Federal Reserve in the face of a possible downgrade from credit ratings agencies that could spell its doom.
Citing a person briefed on the matter, the daily said rating agencies threatened to downgrade the insurance giant's credit rating by Monday morning, which would lead to a sharp outflow of cash.
- AFP/yb
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