America’s financial institutions were sent reeling Monday, after the country’s fourth-largest investment bank, Lehman Brothers Holdings, filed for bankruptcy .

When takeover talks by Barclays Plc and Bank of America were abandoned yesterday, the 158-year-old bank collapsed under the subprime mortgage crisis it helped to shape. Lehman had become the biggest underwriter of mortgaged-backed securities in the US real estate market. The bank’s failure is the biggest bankruptcy filing in history with more than $613bn of debt listed.

Lehman joins more than 10 banks over the past 12 months to be battered by the credit crunch, including Bear Stearns, AIG, Countrywide, Wachovia, WaMu, and others.

Government officials wanted to avoid a bailout similar to Bear Stearns, which saw the Federal Reserve loan nearly $29bn as part of JPMorgan Chase’s takeover. Lehman’s fate was ultimately sealed over the weekend when Bank of America and Britain’s Barclay Bank – the two “white knight” investors leading rescue talks – left the negotiating table.

Bank of America instead announced it would acquire Merrill Lynch in a distress sale of $50bn in shares. Merrill’s financials had also been rocked by US credit troubles, having written down more than $40bn worth of assets over the past year.

Immediate effects of the bankruptcy are being felt both in the US and abroad. UK operations of Lehman were placed in administration under the accounting firm PriceWaterHouseCoopers while the company attempts to reorganize. Over 5,000 workers in the UK lost their job today after the collapse.

Here is a video of the Employees being cut off and their reactions:

PriceWaterHouseCoopers said in a news conference today that liquidating Lehman’s assets are more complex than the company’s experience disposing of Enron’s European assets, which took over six years to slog through.

What happens next is somewhat uncertain, but its likely to involve Lehman’s assets being devalued and sold as quickly as possible. That, in theory, would contribute to the vicious cycle hitting the US economy. Devalued assets would have a negative impact those that relied on Lehman for financing as well as other banks. Credit gets tighter, which makes it more difficult for people to get a home loan. That in turn makes it harder sell houses, further depressing home values, which then damages mortgage assets of other banks — and the cycle continues.

The US Federal Reserve hopes to keep bank borrowing costs low by adding $70bn in reserves to the banking system.

Follow more on the fallout of Lehman’s bankruptcy at Bloomberg and The Times. ®

Source – The Register

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