US investment giant Lehman Brothers announced its bankruptcy early on Monday as the Federal Reserve and major global banks moved to shore up financial market shaken by the housing and mortgage crisis.
In a statement released after midnight, Lehman Brothers said it intended to file for bankruptcy "in order to protect its assets and maximize value."
The financial firm said the filing was authorized by its board of directors and will occur at the United States Bankruptcy Court for the Southern District of New York late in the day.
"Customers of Lehman Brothers, including customers of its wholly-owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts," the statement said.
The beleaguered Wall Street firm lost an estimated 3.9 billion dollars (2.7 billion euros) in its fiscal third quarter amid fresh writedowns on mortgage assets.
The bankruptcy announcement came after a last-ditch effort to find a buyer for the troubled investment bank collapsed Sunday.
A London source at British bank Barclays said it walked away from negotiations because of concerns it would have to guarantee the 158-year-old US firm's trading commitments.
In a related development, Bank of America said it was buying investment bank Merrill Lynch for 50 billion dollars in a transaction that creates the world's largest financial services company.
Following the acquisition, Bank of America would have the largest brokerage in the world with more than 20,000 advisers and 2.5 trillion dollars in client assets.
The shake-up on Wall Street came as the US Federal Reserve, eager to cushion the impact of the blow, said it was easing collateral requirements for the firms as it acted "to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution."
The collateral for the special emergency loans will be expanded to all investment-grade debt securities, the central bank said. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.
Treasury Secretary Henry Paulson, part of weekend discussions in New York to avert a new financial shock, said the actions "will be critical to facilitating liquid, smooth functioning markets, and addressing potential concerns in the credit markets."
While there was no official news on Lehman's fate, analysts expected a bankruptcy filing that could affect a range of companies dealing with the Wall Street giant, with a potential to worsen the global credit crunch.
The Securities and Exchange Commission said it was "taking actions" to ensure the protection of the deposits of Lehman's brokerage customers, who are protected by SEC rules and an insurance fund.
In a related action, a consortium of 10 global commercial and investment banks announced plans to provide 70 billion dollars to help offset a credit squeeze.
Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, and UBS, said in a joint statement they "initiated a series of actions to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets."
They agreed to create a "collateralized borrowing facility" of 70 billion dollars, with each bank contributing seven billion dollars, to help ease access to credit.
They also said they would work together "to help facilitate an orderly resolution" of the derivatives exposures between Lehman Brothers and its counterparties.
"These actions reflect the extraordinary market environment," the statement said.
The 10 banks would be able to tap this facility, with any bank eligible for up to one-third of the fund. The amount may be expanded if more banks join the program.
"It seems clear that a category five storm is making landfall in the US financial system and a lot of very messy stuff is hitting the fan," Michael Panzer, author of the book "Financial Armageddon," said on his blog.
Meanwhile, The New York Times reported that AIG was seeking a 40 billion-dollar bridge loan from the Federal Reserve in the face of a possible downgrade from credit ratings agencies that could spell its doom.
Citing a person briefed on the matter, the daily said rating agencies threatened to downgrade the insurance giant's credit rating by Monday morning, which would lead to a sharp outflow of cash.
The Wall Street Journal warned in an editorial on Monday that Americans should brace themselves for "a very rough Monday."