Banking News Roils Markets


As Wall Street ponders the effects of the Lehman Brothers Holdings Inc.’s bankruptcy and Bank of America Corp.’s acquisition of Merrill Lynch & Co. investors are wondering whether today’s developments will tarnish the U.S.’s image as a leader among world financial markets. Before the end of the trade today, the announcements made by the two storied banks, helped cause the New York Stock Exchange to plummet more than 500 points, and caused European markets to tumble. Markets in Asia were closed for holidays.

In an early-morning announcement, Lehman Brothers said it was filing for Chapter 11 bankruptcy protection after attempts to rescue the 158-year-old firm, which was struggling under $60 billion in bad real-estate holdings, failed. Lehman said that none of its broker-dealer subsidiaries or other units would be included in the bankruptcy filing and all of its broker-dealers will continue to operate. Bank of American also said in a statement early Monday that it would acquire Merrill Lynch in an all-stock transaction valued at $50 billion.

“The major investors including mutual funds, pension funds, and private-equity investors are moving money from the stock market to the Treasuries and Bond markets,” says Samuel D. Melvin, a mortgage planning agent at Desert State Mortgage, LLC. “This increases the value of the treasury and market bonds, which in turns takes pressure off of mortgage interest rates, driving them lower.”

Last week Lehman shares lost 45% after the financial company announced a third quarter loss of $3.9 billion. Standard & Poor’s Ratings Services said today that it removed Lehman from CreditWatch and lowered its long-term counterparty credit rating to ‘SD’ (selective default, meaning payments may not be made on some financial obligations), from ‘A’.

“I think it serves to cause all banks to look at transactions a little bit more conservatively,” says Bob Nesbitt, president of the Alabama division of Atlanta-based Citizens Trust Bank (No. 6 on the B.E. 100s Banks list with $338 million in assets). “The investment firms are traditionally firms that buy securities including mortgaged backed securities. As they have more problems it will cause their underwriting to be a little bit more stringent, which will in turn cause commercial banks to be a little more careful in their lending practices.”

Meanwhile, Bank of America’s acquisition of Merrill Lynch will create a company that will rival Citigroup Inc., the biggest U.S. bank, in terms of assets. By adding Merrill Lynch’s more than 16,000 financial advisers, Bank of America would have the largest brokerage in the world with more than 20,000 advisers and $2.5 trillion in client assets, Bank of America said. The combined company would have strong positions in retail brokerage and wealth management.

“Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders,” Bank of America Chairman and Chief Executive Officer Ken Lewis said in a press release. “Together, our companies are more valuable because of the synergies in our businesses.”

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