Global financial system reacts to U.S. meltdown

Facing tumult in financial markets, the Federal Reserve said it will allow Wall Street firms to use risky assets, such as equities and junk bonds, as collateral for emergency loans. It also got 10 major banks to contribute $7 billion each to an emergency borrowing facility. (The New York Times) European and Asian central banks said they are ready to act, too, if needed. (Reuters) Markets in Japan, Hong Kong, and South Korea were closed today, but other Asian markets closed sharply lower, and Europe was solidly in the red early today. (AP in Yahoo! Finance) “The tectonic plates beneath the world financial system are shifting, and there is going to be a new financial world order that will be born of this,” said Peter Kenny at Knight Capital Group. (Bloomberg)

Lehman files for bankruptcy

Lehman Brother filed for Chapter 11 bankruptcy protection after weekend talks with potential suitors, notably Barclays and Bank of America, fell apart. The collapse of the 158-year-old firm, the No. 4 U.S. investment bank, is the largest bankruptcy filing in history, with $613 billion in listed debt. (Bloomberg) “Lehman decided to play chicken with the market, and they lost,” said James Ellman at hedge fund Seacliff Capital. The bankruptcy filing doesn’t cover Lehman subsidiaries, which are expected to be liquidated. (Reuters) U.S. officials, including Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, worked to broker a deal but said the government would not bail out Lehman or backstop its assets. (The New York Times)

Bank of America buys Merrill Lynch, AIG falters

Bank of America agreed to buy Merrill Lynch in an all-stock deal worth $50 billion. The price, $29 a share, is 70 percent higher than Merrill’s stock price Friday; Merrill traded at $50 a share in May and more than $90 a share in January 2007. (Reuters) The merger will make Bank of America, already the largest U.S. consumer bank, the No. 1 retail brokerage, too. BoA will also become a giant in investment and business banking. (Los Angeles Times) Meanwhile, insurance giant AIG reportedly asked the Federal Reserve for a $40 billion bridge loan to stave off a credit-rating downgrade, and thus likely doom. The unprecedented request, if accepted, could prove a precedent for other struggling non-bank firms, such as GMAC. (The New York Times)