By Dan Wilchins and Jennifer Ablan
NEW YORK (Reuters) - Global markets plummeted on Mondayafter investment bank Lehman Brothers filed for bankruptcyprotection, rival Merrill Lynch agreed to be taken over and theFederal Reserve threw a life line to the battered financialindustry.
As a deepening crisis took new, bigger victims, The U.S.Federal Reserve said for the first time it would accept stocksin exchange for cash loans and 10 of the world's top banksagreed to establish a $70 billion (39 billion pound) emergencyfund, with any one of them able to tap up to a third of that.
On a black Sunday for Wall Street, frantic attempts to finda rescuer for Lehman failed, and troubled insurer AmericanInternational Group asked the Fed for a lifeline, according tonews reports.
The events signal a seismic shift in Wall Street's powerstructure with big name investment banks biting the dust andmajor banks like Bank of America and JPMorgan Chase becomingthe survivors.
"It's a return to pure capitalism, the survival of thefittest -- the government can't and won't bail everybody out,"said Justin Urquhart Stewart, investment director at 7Investment Management in London.
"Investors will now retreat to the trustworthy banks,though that's not a phrase that trips off the tongue easilynowadays."
Bank of America agreed to buy Merrill Lynch in an all-stockdeal worth $50 billion, seeking a bargain as the world'slargest retail brokerage sought refuge from fears it could bethe next victim.
"It's just shockingly fast how it happened," an employeefor Merrill in Asia said. "It's hard to believe there will beno more Merrill Lynch," he said of his firm, known as TheThundering Herd.
Asian and European stock markets tumbled as the worriesabout Lehman counterparty risk and further financial marketturmoil sent investors scurrying for safe havens such as gold.
The FTSEurofirst 300 index of leading European shares fell5 percent, led by falling bank stocks such as UBS, down 10percent.
Shares in U.S. banks trading in Frankfurt tumbled, withLehman plunging 80 percent and Morgan Stanley, Citigroup andothers all in retreat. Frankfurt-listed shares in AIG fellalmost 30 percent.
Merrill's shares offered a rare bright spot and itsFrankfurt-based shares jumped 36 percent. Bank of America saidit had agreed to buy Merrill in an all-share deal for theequivalent of $50 billion, or $29 a share, almost $12 a shareabove Friday's closing price.
Lehman said it filed for Chapter 11 bankruptcy protectionand was attempting to sell assets, becoming Wall Street'shighest-profile bankruptcy since junk bond specialist DrexelBurnham Lambert succumbed in 1990. Lehman's European armappointed administrators, who said they would wind down thebusiness in as orderly a manner as possible.
Lehman's petition followed three days of talks between bankCEOs and regulators at the Fed's fortress-like Manhattanbuilding.
"This shows the U.S. government is saying 'enough' aftersaving other institutions and that they see Lehman as a privateaffair. I think today and tomorrow there will be a panic on themarkets," said Marie-Pierre Pillon, head of equity and creditresearch at Groupama Asset Management in Paris.
S&P500 share futures fell more than 3 percent, signallingU.S. stocks will open sharply lower, and the dollar tumbled.
The euro jumped to as high as $1.4479, up 1.7 percent fromFriday, while U.S. Treasury yields dropped to five-month lowson concern about the stability of the U.S. financial system andas investors increased bets the Fed will cut interest rates.
SHAKE-UP
With Lehman and Merrill out of the picture, three of thetop five U.S. investment banks have effectively departed thescene inside six months. Bear Stearns was acquired in a firesale by JPMorgan in March.
Barclays emerged as a front-runner to buy Lehman late onSunday after Bank of America pulled back, but it was deterredby the U.S. government's unwillingness to provide a financialbackstop to potential losses.
Lehman collapsed under the weight of toxic assets, mainlyrelated to real estate, that are now worth only a fraction oftheir original prices.
In its bankruptcy filing, Lehman said Citigroup, Bank ofNew York Mellon, Japan's Aozora Bank and Mizuho Financial Groupwere among its top unsecured creditors.
The cost of insuring banks against default jumped and onecredit analyst said without the positive Merrill takeover newsthe market could have seen "one of the most brutal days onrecord."
LINE IN SAND
Lehman employees streaming into its European headquartersin London's Canary Wharf financial district were met bytelevision cameras, a swarm of reporters and a beefed-upsecurity team.
"I guess times are tough and we've got to face the music... Everyone is worried about their job, it's inevitable," saidone banker entering the building, adding a company-wide meetinghad been set for Monday morning.
Other employees said staff were clearing desks, packingpersonal belongings and saying farewells to colleagues.
Scores of Lehman employees began showing up at dawn at thecompany's New York headquarters, many dressed in casualclothes. Most were carrying duffel bags and suitcases, as ifthey were planning to pack up and leave.
The New York Times also reported that AIG, once the world'slargest insurer, had made an approach to the Federal Reserveseeking $40 billion in short-term financing.
Authorities sought to prop up market confidence withannouncements late on Sunday. The Fed said it would acceptequities as collateral for emergency loans, and laid out aseries of steps to calm markets and brace for Lehman'scollapse.
In addition to broadening the collateral it will acceptfrom investment banks for direct Fed loans, it said it wouldincrease the amount of Treasury securities it auctions on aregular basis under one of its lending programs.
One of the catalysts for this weekend's events was thestance of U.S. Treasury Secretary Henry Paulson, who opposedusing government money to resolve the Lehman crisis after aweek earlier bailing out mortgage lenders Freddie Mac andFannie Mae, wary of accusation of encouraging excessiverisk-taking by bailing out the bank.
(Additional reporting by Steve Slater, Sitaraman Shankar,Brian Gorman, Jane Baird and Olesya Dmitracova in London;Editing by Andrew Callus and Maureen Bavdek)
