In one of the most dramatic days in Wall Street's history, Merrill Lynch agreed to sell itself to Bank of America on Sunday for roughly $50-billion to avert a deepening financial crisis while another prominent securities firm, Lehman Brothers, hurtled toward liquidation after it failed to find a buyer, people briefed on the deals said.
The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of tens of billions of dollars in losses because of bad mortgage finance and real estate investments.
The developments caused two immediate counter-reactions. Late Sunday, a group of global banks and securities firms announced a $70-billion loan program that financial companies can tap to help ease a credit shortage that threatens global financial markets.
Also, the Federal Reserve announced steps including broadening the types of assets that investment banks can put up to get emergency loans from the Fed.
Sunday's developments culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to avoid a downward spiral in the markets stemming from a crisis of confidence.
It remains to be seen whether the sale of Merrill, which was worth more than $100-billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street. Questions remain about how the market will react today, particularly to Lehman's plan to wind down its trading operations, and whether other companies may still falter, like the American International Group, the large insurer, and Washington Mutual, the nation's largest savings and loan. Both companies' stocks fell precipitously last week.
This acts as a signal to the marketplace that banks, brokerages and other financial companies can lean on the fund to take care of borrowing needs.
The pending bankruptcy of Lehman is likely to have a big impact on Florida government finance. Three Florida agencies hold nearly $600-million in Lehman Brothers stock and corporate securities, and also use the bank as an adviser and broker.
The State Board of Administration, which manages Florida's pension fund and 32 other accounts, holds Lehman stock and corporate securities originally worth $406-million.
The SBA also paid Lehman $2.2-million last year for investing pension assets, about $500,000 for managing money in a fund used by state agencies and about $5.2-million in broker's fees. Lehman also earns fees from other companies for selling their securities to Florida.
Florida's Division of Treasury, which invests state revenue and trust fund money, holds $141.3-million in Lehman securities.
Citizens Property Insurance Corp., the state-run insurer of homes and condos, owns Lehman securities with a market value of more than $35-million.
Though the government only a week ago took control of the troubled mortgage finance companies Fannie Mae and Freddie Mac, investors have become increasingly nervous about the difficulties of major financial institutions to recover from their losses.
How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation's growth rate has slowed.
A weekend that was humbling for Lehman and Merrill Lynch and triumphant for Bank of America, which is based in Charlotte, N.C., and is a top bank in Florida, began at 6 p.m. Friday in the first of a series of emergency meetings at the Federal Reserve in Manhattan.
The meeting was called by Fed officials, with Treasury Secretary Henry Paulson in attendance, and it included top bankers.
The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman's stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.
Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their own precarious situation.
The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation's largest brokerage force and its name is known in towns across America, while Lehman's main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.
On Sunday morning, Kenneth D. Lewis, Bank of America's chief executive, and Merrill chief executive John A. Thain cemented the deal.
For Bank of America, which this year bought Countrywide Financial, the troubled mortgage lender, the purchase of Merrill puts it at the pinnacle of American finance, making it the biggest brokerage house and consumer banking franchise.
Bank of America, meanwhile, eventually walked away from its talks with Lehman after the government refused to take responsibility for losses on some of Lehman's most troubled real-estate assets.
Lehman was expected to seek bankruptcy protection for its holding company by late Sunday, representing the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago, people close to the matter said. Lehman's subsidiaries were expected to remain solvent while the firm liquidates its holdings.
Merrill Lynch is hardly the only troubled financial institution on the horizon. Administration officials acknowledged this week that more bank failures are inevitable, and the main protection for depositors — the Federal Deposit Insurance Corporation — is likely to exhaust the reserves it has built over the years from bank insurance premiums.
Most economists contend that bailouts are often bad economic policy, because each rescue tends to encourage "moral hazard" — the tendency of institutions and investors to take even bigger risks because they assume the government will rescue them, too.
Both Paulson and Bernanke worried that they had already gone much further than they had ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger bailout one week ago of Fannie Mae and Freddie Mac, the giant mortgage finance companies.
Officials noted that Lehman's downfall posed a lower systemic threat because it had been a very visible and growing risk for months, which meant that its customers and trading partners had months to prepare themselves.
Outside the public eye, Fed officials had acquired much more information than they had in March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives.
James Leach, a former Republican congressman from Iowa and chairman of the House Banking committee, said the Fed and Treasury may not be able to avoid a broader rescue.
"The Fed's historic position is to object philosophically to a rescue role but in the end to do everything in its power to avoid anything that poses systemic risk," said Leach.
""If systemic risk is considered grave, the Fed, perhaps with Treasury playing at least an advisory role, will intervene, he said.
Times staff writer Sydney Freedberg contributed to this report, as did New York Times writers Jenny Anderson and Eric Dash.