Lehman Brothers, one of the most prestigious players on Wall Street, filed for bankruptcy protection this morning after a frenzied weekend of negotiations failed to find a way of saving the company.
Heralding a tumultuous day in the financial markets, Lehman announced at around 5.30am BST that it will file for Chapter 11 bankruptcy protection, making it the biggest victim so far of the credit crunch and sub-prime crisis. It said it is making the move to "protect its assets and maximise value".
The collapse of Lehman – one of the biggest financial shocks in years - puts tens of thousands of jobs around the world at risk, including over 4,000 in the City and another 1,000 in High Wycombe.
It also sent shockwaves around the banking world, with commentators predicting that the damage could be felt across the industry and could help to push the UK into recession. The FTSE 100 plunged by almost 400 points this morning, and the Dow Jones industrial average is tipped to tumble by as much as 4%.
Until late last night, Lehman was locked in talks with potential buyers after the last-ditch restructuring plan it announced last week failed to deter investors and trading partners from fleeing.
Barclays pulled out of talks on Sunday evening, because it could not win the government guarantees it wanted to protect itself against future losses on Lehman's trading positions - thought to be as large as $300bn (£167bn). It said this morning that a deal would not have been in the best interests of its shareholders.
In a separate development that underlines the tumultuous state of the financial world, Merrill Lynch was taken over by Bank of America for $50bn - a move that will spare it Lehman's fate.
Most of Lehman's UK staff are based at its headquarters at Canary Wharf, where the mood was sombre this morning. Employees arriving for work this morning said they did not know anything about what was likely to happen.
One worker told the assembled journalists, who were kept away from the building by security staff, that "I'm as much in the dark as you but I can't talk to you. We've been told not to talk."
Speaking on BBC Radio 4 this morning, Liberal Democrat Treasury spokesman Vince Cable described the situation as "very grave".
"I think the least we are going to have to learn from this is that the whole of the financial sector simply cannot return to where it was before," Cable said. "It is going to have to be much more tightly regulated in the public interest."
Howard Archer, chief UK and European economist at Global Insight, warned that Lehman's fate will make the surviving banks even more reluctant to lend to each other.
"This increased the risk that the credit crunch will deepen and last for some considerable time to come, which in turn increases the already serious downside risks to growth in the UK and the Eurozone, and heightens the danger of recession," Archer warned.
Sub-prime woes
Merrill Lynch and Lehman both expanded aggressively into property-related investments, including so called sub-prime mortgages - loans to people on low incomes or with poor credit histories. The bank has lost $14bn in the past 18 months after being forced to take huge write-downs on the value of those investments.
The breakdown in talks between Barclays and Lehman came after government officials and senior Wall Street executives gathered for a third day at the US central bank, the Federal Reserve, in lower Manhattan, arriving in a funereal procession of black limos.
The Fed, and the US Treasury, had been hoping to secure a saviour for Lehman ahead of the Asian markets opening on Monday.
The collapse of Lehman sent traders rushing into government treasury bonds – seen as a safe haven in troubled times. The dollar fell against both the euro and the yen.
Peter Kenny, managing director at Knight Equity Markets in New Jersey, said the financial world is on the verge of a complete reorganisation. "The US financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before," he told Reuters. And Bill Gross, chief investment officer at Pacific Investment Management, warned of an "imminent tsunami" as dealers are forced to unwind complicated derivative and swap-related positions.
Alan Greenspan, the respected former chairman of the Fed, warned yesterday that other big institutions could yet be vulnerable; a shocking situation for Wall Street where the big investment banks had for so long enjoyed an air of invincibility.
Greenspan described the credit crisis as a "once-in-a-century" type of event. "There's no question that this is in the process of outstripping anything I've seen and it still is not resolved and it still has a way to go," he told ABC News.
