Global scramble to calm financial world

NEW YORK — In one of the most dramatic days in Wall Street's history, financially troubled Merrill Lynch agreed to sell itself to Bank of America for roughly $50 billion while another heralded securities firm, Lehman Brothers, headed toward liquidation after failing to find a buyer, people briefed on the deals said.

And forced restructuring was ahead for the world's largest insurance company, American International Group, as the effects of the 14-month-old credit crisis intensified.

Fearing the impact on markets worldwide, 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, was to prevent a worldwide panic on stock and other financial exchanges.

Ten banks — Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley and UBS — each agreed to provide $7 billion.

The Federal Reserve also chipped in with more largesse in its emergency lending program for investment banks. The central bank announced late Sunday it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.

Fed Chairman Ben Bernanke said the discussions had been aimed at identifying "potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses."

Futures pegged to the Dow Jones industrial average fell almost 300 points in electronic trading Sunday evening, pointing to a sharply lower open this morning.

The humbling moves affecting the Wall Street giants, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year that has brought institutions to their knees over bad mortgage-finance and real-estate investments.

"My goodness. I've been in the business 35 years, and these are the most extraordinary events I've ever seen," said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

All potential Lehman buyers walked away after the U.S. Treasury refused to budge on its refusal to provide any takeover aid, as it had done six months ago when Bear Stearns faltered and earlier this month when it seized Fannie Mae and Freddie Mac.

Expectations that the 158-year-old Lehman would survive dimmed after Britain's Barclays withdrew its bid to buy the investment bank.

Barclays and Bank of America were considered front-runners to buy Lehman, which is foundering under the weight of $60 billion in soured real-estate holdings.

Insurance giant AIG, hit hard by deterioration in the credit markets, was said to be seeking a $40 billion bridge loan from the Federal Reserve as it tries to sell assets, including possibly its aircraft-leasing arm, International Lease Finance Corp., a big Boeing customer.

Meanwhile, Wall Street giant Merrill Lynch agreed to sell itself to Bank of America for $50.3 billion in stock, according to people briefed on the negotiations.

It was a remarkable fall from grace for the 94-year-old Merrill, whose corporate logo — a bull — has long symbolized Wall Street optimism.

But after a frantic weekend of talks between Wall Street executives and federal officials over the teetering Lehman, fear spread Sunday that Merrill, staggered by losses, might also falter

"It is an enormous shock," said Steve Fraser, a Wall Street historian. "Merrill was a kind of bedrock institution whose stability and longevity was taken for granted and was reassuring to people."

Charlotte, N.C.-based Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world's largest brokerage. A combination would create a global financial giant to rival Citigroup, the biggest U.S. bank in terms of assets.

The deal would not come without risks. Merrill Lynch, like many of its peers, has been struggling with tight credit markets and billions of dollars in assets tied to mortgages that have plunged in value. Merrill has reported four straight quarterly losses.

And Bank of America's own finances are far from robust. As consumer credit deteriorates, the bank has seen its profits decline, and the company is still trying to absorb embattled mortgage lender Countrywide Financial, which it bought in January.

The stunning developments took place as voters, who rank the economy as their top concern, prepare to elect a new president in seven weeks.

The events will likely spur a much greater focus by presidential candidates John McCain and Barack Obama and members of Congress on the need for stricter financial regulation.

Treasury Secretary Henry Paulson was huddled through the weekend at the New York Federal Reserve's fortresslike building in downtown Manhattan with executives from major banks and investment houses to hash out the fate of Lehman Brothers and to staunch the bleeding on Wall Street that threatened to shatter investor confidence around the globe.

"It's clear we're one step away from a financial meltdown," said Nouriel Roubini, chairman of the consulting firm RGE Monitor.

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.

Roubini said with no deal for Lehman, Merrill and the other investment firms would have been hit with a "run on the bank," as hedge funds and other clients withdraw funds and banks become reluctant to lend to them. Many of the investment banks rely on short-term loans to finance their day-to-day operations.

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. Roubini predicted they could drop an additional 15 percent.

The crisis has begun to slow the broader economy as banks make fewer loans and consumers have begun cutting spending.

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.

Compiled from The Associated Press, The New York Times and Bloomberg News