First Lehman, then Merrill Lynch. What's next?

Source: http://www.newsweek.com/

In a few tumultuous hours, the U.S. financial sector shrank significantly Sunday night. Efforts to prop up Lehman Brothers failed and Bank of America struck a deal to buy Merrill Lynch.

Capping a frenetic weekend of attempts to arrange a rescue for the foundering brokerage, Lehman Brothers said early Monday morning that it would file for Chapter 11 bankruptcy in a fashion that would allow many of its units to continue to operate for the time being.

Meanwhile, Merrill Lynch, one of the investment banks that considered being part of a consortium to rescue Lehman, agreed to be bought by Bank of America for $50 billion, or $29 a share. The agreed price is a healthy 70-percent premium to Merrill's closing share price Friday of $17.05, but far below the $100-plus level its stock traded at in early 2007. It's a 38-percent premium to Merrill's book value of $21 a share.

Merrill has been caught, like Lehman, with huge exposures to mortgages and mortgage securities, though it has aggressively moved to unload those from its books in recent weeks. A deal would help it escape the fate of Lehman, which sought bankruptcy protection after Barclays walked away from buying it. Bank of America was also in the running to buy all or part of Lehman and apparently decided Merrill was better prey.

Regulators and the banking industry took dramatic steps Sunday night to cushion the markets from the effects of Lehman's collapse: Major banks organized a $70 billion fund to help each other out; the Federal Reserve committed to accept lower-quality collateral for loans from its emergency window; and the SEC took steps to protect Lehman's brokerage customers. Meanwhile, American International Group is expected to announce a sweeping reorganization Monday, with plans to sell off an array of assets and businesses.