It's a New Landscape on Wall Street

Wall Street will wake up to a new landscape today, as Lehman Brothers teeters on the edge of bankruptcy and Bank of America works to complete an acquisition of Merrill Lynch. Analysts and market watchers are touting the Bank of America deal — which emerged late yesterday after its talks to acquire Lehman Brothers fell apart — as providing some closure to the crisis that seemed to come to a crescendo over the weekend.

Click Images for Slideshow

AP Photo/Craig Ruttle

Merrill Lynch Chairman and CEO John Thain, left, listens as Bank of America Chairman and CEO Ken Lewis speaks at a news conference today at New York.

"If there is a last-minute bidder for Lehman Brothers and the Merrill deal actually happens, that would be significant closure," the chief executive of Wall Street Strategies, Charles Payne, said. "It looks like a bloodbath right now but could actually get better as the session moves on."

The Wall Street Journal's Web site reported that Bank of America is set to acquire Merrill for $29 a share, or $44 billion. While the acquisition price is a 70% premium over its share price of $17.05 at the market's close Friday, it is a 63% discount from its 52-week high of $78.66.

Meanwhile, the Federal Reserve announced last night it was broadening the collateral it will accept from financial institutions to increase the liquidity in the markets.

"In close collaboration with the Treasury and the Securities and Exchange Commission, we have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses," the Federal Reserve Board chairman, Ben Bernanke, said. "The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets."

There was a flurry of activity over the weekend, as the Treasury secretary, Henry Paulson, Merrill Lynch's chief executive, John Thain, and officials from the Fed and the SEC huddled at the New York Federal Reserve building in Lower Manhattan to engineer the acquisition of Lehman Brothers and stem further market disruptions.

Despite their efforts, the two likeliest buyers of Lehman, Bank of America and the British bank Barclays PLC, pulled out of talks, possibly in response to indications from the Fed that it would not provide a backstop in cases of losses. Adding to the bleak outlook was news that giant insurer American International Group, which was slammed by short-sellers in recent weeks, will disclose an extensive restructuring plan today.

If Lehman cannot locate a buyer, the bankruptcy of what until last week was the fourth largest American securities firm could wreak havoc on the markets. Not only does Lehman boast $550 billion in debt, which could create a web of losses if the bulk is not repaid, but it is counterparty to an unknown quantity of credit derivative swaps. Derivatives traders were busy throughout the weekend working to unwind many of their positions in the hopes of stemming losses, while other businesses with counterparty risk also spent the weekend scouring their books.

While the fate of Lehman Brothers could not be secured, the deal struck between Merrill and Bank of America would have some positive effects, analysts said.

Namely, it would protect Merrill from attacks from short-sellers, who borrow securities and sell them in the hopes the prices will drop and they will be able to buy them back for less, pocketing the difference. Already, short-sellers likely contributed to Merrill losing about one-third of its shareholder value last week. Its peers, Citigroup and Morgan Stanley, lost 2% and 4%, respectively.

"There has been a huge amount of money made on short-selling, and if Lehman goes under, all that money would be available to attack the next target, Merrill Lynch," a banking analyst at Ladenburg Thalmann & Co., Richard Bove, said.

"Merrill Lynch was next on the short-sellers' hit list," a managing director of Institutional Risk Analytics, Christopher Whalen, added.

Merrill wouldn't be the only beneficiary of the deal, analysts said. Bank of America would gain Merrill's 16,000-person retail sales force, a large equity underwriting business, and a significant presence outside of America, specifically in India and Japan.

"Bank of America would also get 49% of Black Rock, and in addition to their own money manager operations, they would probably have the largest money management company in the world," Mr. Bove said. He added that while there were synergies between the firms, the $29-a-share purchase price for Merrill "makes no sense, particularly if Lehman is bankrupt."