UPDATE: Lehman Files For Chapter 11, BoA Buys Merril Lynch

Wall Street is preparing for one of the largest bankruptcies in U.S. history as it becomes apparent that nobody wants to buy Lehman Brothers. Government officials are keeping the public’s overextended credit card sheathed as they race to keep the fourth-largest U.S. investment bank from failing before the start of trading tomorrow.

Both Bank of America and Barclays rebuffed the Fed’s entreaties to scoop up Lehman’s profitable parts.

Barclays said it was approached by the U.S. Treasury at the end of last week, and saw in Lehman “a potential opportunity to significantly enhance our investment banking and investment management franchise in key areas.”

`The proposed transaction required a guarantee for the trading obligations of Lehman Brothers which was potentially open-ended,” Barclays said in a statement. ` Barclays wasn’t willing to assume such an open-ended obligation.”

The US government had hoped to arrange a bailout under which other US investments banks – such as Citigroup, JPMorgan Chase, Morgan Stanley and Goldman Sachs – would finance a “bad bank” that would hold the most “toxic” investments of Lehman in the property and mortgage market.

The “good bank” or rest of the firm, including its investment and wealth management arms, would then be sold to another financial institution, for example Bank of America or the UK’s Barclays.

Although such a deal would have cost the other investment banks millions, it might have restored confidence in the sector and avoided a sharp drop in the share price of all banks.

However, it appears that this plan is falling apart.

Lehman’s lawyers are writing up the Chapter 11 papers as Wall Street and the Fed officials continue with their emergency meetings.

If nothing else, Bloomberg reports that the bankers and regulators were at least able to agree on a comprehensive mid-afternoon snack break:

At 11:30 a.m., five delivery-men arrived at the Fed building with carts of sandwiches, as the talks continued.

Lehman edges closer to insolvency [BBC]
Barclays Abandons Talks to Buy Lehman Over Guarantees [Bloomberg]
Lehman’s Fate Is in Doubt as Barclays Pulls Out of Talks [The New York Times]
(AP Photo/Mark Lennihan)

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