Federal officials and top bankers huddled in a feverish series of meetings this weekend in an effort to barricade the heart of the country's financial system against further fallout from the credit crisis, which has already wreaked hundreds of billions of dollars in damage.
The Federal Reserve Board announced that it would expand access to much-needed credit for financial companies that are struggling in the wake of this crisis, and 10 global banks agreed to buttress the
effort by providing $70-billion in a new lending program.
However, U.S. officials appeared unwilling to orchestrate a taxpayer-funded bailout for Lehman, whose stock has been savaged in recent weeks because of persistent concerns about its financial health. There was hope that the sale of Merrill Lynch, another firm hit hard by its exposure to toxic mortgages, could help assure stock markets that the most gangrenous limbs on Wall Street had finally been severed.
Meanwhile, regulators allowed an emergency trading session yesterday afternoon so traders could unwind their exposure to Lehman, creating a furious buzz of activity in the U.S. financial capital.
"This is an extremely, and I stress extremely, rare event," said Mohamed El-Erian, the chief executive of Pimco, the world's biggest bond fund.
The disappearance of Lehman and Merrill, coming just months after another firm, Bear Stearns, was forced to shutter, underscores how pervasive and unrelenting the current crisis has become: All of these brokerages managed to weather the Great Depression, which has become the standard barometer of financial strain.
"This is as big as 1929, 1930, 1931," said the head of one major investment bank. "This is wild. I've never seen anything like it. This is totally historic."
The extraordinary weekend of discussions was the latest attempt by U.S. Treasury Secretary Henry Paulson to corral the crisis. On the basis of his actions over the past few months alone, he would qualify as one of the most interventionist regulators in recent memory. He assisted the sale of Bear Stearns, opened a lending facility to banks, and, just last week, orchestrated a massive rescue of Fannie Mae and Freddie Mac, two government-sponsored mortgage giants that are vital cogs in home lending.
Bank of America, along with British bank Barclays PLC, were each considering a purchase of Lehman over the weekend, but when it became apparent the government would not provide help financing the deal, Bank of America quickly shifted gears and opened merger talks with Merrill.
The two sides announced a deal late last night in which Bank of America would buy Merrill for $29 a share, a premium of almost $12 to where the shares traded on Friday.
That coupling will wed one of America's largest retail banks with one of its largest retail brokerage networks. Indeed, save for Morgan Stanley and Goldman Sachs, Wall Street will soon be devoid of any large U.S. independent investment banks, and its complexion will bear a striking resemblance to Bay Street: large, well-capitalized "supermarkets" that offer a combination of retail, corporate and advisory services.
"The U.S. financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, N.J. "It's a new financial world on the verge of a complete reorganization."
Regulators have moved swiftly to deal with the problems on Wall Street, since it is at the epicentre of the mortgage problem: A catastrophe here could incite a domino effect, sending shockwaves throughout the global financial system.
Yet even if some of the problems have been ameliorated - and this remains a big "if" - there are troubling warning signs in the retail-banking and insurance sectors lurking on the horizon.
Washington Mutual, a thrift heavily involved in the mortgage business, has been hammered in the markets, prompting speculation that it could need a lifeline. Meanwhile, American Insurance Group, a leading insurer, held emergency talks this weekend, and is announcing a major restructuring tomorrow that is expected to include asset sales, and possibly a capital injection worth tens of billions of dollars.
"You have the largest credit crisis since the Great Depression. You have to expect this. It would be naive to expect only a few banks to fail. You have to expect carnage," said Rich Yamarone, head of economic research at Argus Research in New York. "This is the 'rip the Band-Aid off real fast' situation. You don't want to do it slowly."
The question now is how well U.S. retail banks can weather the storm.
There already have been signs of rising credit-card delinquencies and consumer-loan defaults. That could lead to a failure of smaller banks, which lack the capital cushion to deal with a rising tide of bad loans.
For the major institutions, however, one thing is clear: When the dust settles, Wall Street won't merely look different, it will act differently as well. Given the heightened role of the Federal Reserve Board and the U.S. Treasury, several senior bankers yesterday said they expect that to manifest itself in the future through much tighter regulation of the country's top banks.
Many of them, including Merrill and Bear Stearns, have been sternly criticized for their lack of risk controls, and for creating products that were complex, lacking in transparency, and - as shareholders can attest - reckless.
"More regulation and better regulation is coming," predicted one senior banker. "It's coming, it's coming, it's coming."
