Wall Street giants' downfall triggers global shockwaves

Frankfurt/Tokyo: Central banks mobilised worldwide on Monday to reassure financial markets frightened by the bankruptcy filing of Lehman Brothers and sale of Merrill Lynch - Wall Street giants which many people once considered too big to fail.

The response began with the US Federal Reserve, which said overnight that central banks, regulators and supervisors were in close contact on an international scale and monitoring events as they unfold. It also announced emergency measures for lending operations which effectively relax the terms on which banks can borrow from the central bank.

In Europe, the European Central Bank (ECB), as well as the German, French and British authorities all responded in turn.

The ECB held a money market operation where it allotted 30 billion euros in one-day liquidity to banks. The Bank of England put an extra £5 billion (Dh32.75 billion) into the financial system after receiving bids of nearly five times the amount of three-day funds available. The Swiss National Bank also provided extra liquidity to the money market.

In Asia, officials at Japan's central bank confirmed that the authorities were monitoring the situation closely.

The dollar and stocks tumbled in Asia and Europe, and safe-haven debt soared after emergency weekend talks failed to save 158-year-old Lehman from becoming the latest victim of the credit crisis.

Wall Street's woes have led to talk that the US Federal Open Market Committee may opt to cut interest rates from two per cent when it meets today. Fed fund futures jumped yesterday to indicate an 88 per cent probability of a cut to 1.75 per cent today.

Lehman filed for bankruptcy protection after the weekend talks produced no alternative, but the gloomy news on Wall Street's health went even further than that.

It was also announced that Bank of America had agreed to buy Merrill Lynch in an all-stock deal worth $50 billion, seeking a bargain as the world's largest retail brokerage sought refuge from fears it could be the next victim of the credit crunch.

Insurer American International Group Inc, working to stave off rating downgrades and shore up the capital of its holding company, has made an unprecedented approach to the Federal Reserve seeking $40 billion in short-term financing, the New York Times reported.

Ten of the world's top banks agreed to set up a $70-billion emergency fund, with any one of them able to tap up to a third of that.

New steps

The Fed, preparing for yesterday's market opening, said what it had to say on Sunday night. Among the emergency measures adopted, it will start accepting equities as collateral for cash loans at one of its special credit facilities for the first time in its 90 year history.

"We have been and remain in close contact with other US and international regulators, supervisory authorities, and central banks to monitor and share information on conditions in financial markets and firms around the world," Fed Chairman Ben Bernanke said in a statement.

The ECB said it was "ready to contribute to orderly conditions in the euro money market". The Bundesbank, Germany's central bank, said the country's banks have a "manageable" exposure to Lehman. It was in touch with partners at home and abroad, it said. The Swiss National Bank said it would respond "flexibly and generously" to money markets and followed that up with the offer of extra liquidity to prevent nervous lenders from clogging the financial system.

In its regular daily money market operation, the Reserve Bank of Australia added A$2.1 billion ($1.7 billion, Dh6.25 billion) in cash. That was well above the market's estimated need of A$828 million.

Money markets seized up as the credit crisis triggered by US mortgage defaults broke last year. Since then global banks have written off more than $400 billion in credit market losses.

Analysts said cash and words may not be enough to steady market nerves. "There is now speculation that the Fed might decide an emergency rate cut to help the market absorb the stress. This cannot be excluded if signs of meltdown materialise," said Marco Annuziata, global chief economist at Unicredit in London. "But we think the Fed will try to avoid this step."

Timeline: Through the years

1844: Henry Lehman, an immigrant from Germany, opens a small dry goods store in Montgomery, Alabama, in 1844.

1850: Henry is joined by brothers Emanuel and Mayer and they name the business Lehman Brothers.

1858: The Lehmans — who take cotton from farmers to settle accounts and trade the cotton for money and merchandise — open a New York office.

1860s: After the Civil War, they move to New York and establish the New York Cotton Exchange.

1887: Become members of the New York Stock Exchange.

1889: Lehman underwrites its first public offering, for the International Steam Pump Company.

1929: The Lehman Corporation is created, a closed-end investment company.

1930s: Lehman underwrites the IPO of DuMont, the first television manufacturer.

1960: Opens a Paris office.

1962: With Salomon Brothers, Merrill Lynch and Blyth and Company, Lehman forms an association nicknamed the "fearsome foursome" that challenges the major firms for underwriting business.

1972: Becomes one of the first investment banks to open an office in London to take advantage of the booming bond market in Europe.

1984: American Express acquires Lehman Brothers and merges it with Shearson.

1986: Seat on the London Stock Exchange.

1988: Seat on the Tokyo Stock Exchange.

1993: American Express divests Shearson, and the independent firm once again becomes known as Lehman Brothers.

1994: Lehman becomes independent through a public stock offering and Lehman Brothers Holding Inc common stock begins trading on the New York and Pacific stock exchanges.

1994: Richard Fuld Jr takes the top job at Lehman.

1999: Lehman establishes an alliance with Bank of Tokyo-Mitsubishi for Japanese mergers and acquisitions.

2001: Under pressure to cut costs, Fuld decides to pay staff less and in stock, rather than lay off employees.

2002: Lehman establishes its wealth and asset management division and acquires Lincoln Capital Management's fixed income business.

2007: Lehman posts record-high net revenues, net income and earnings per common share (diluted) for a fourth consecutive year and the highest volume of trade on the London Stock Exchange for a third year in a row.