THE firestorm in the US financial sector has escalated almost beyond imagination. Two pillars of investment banking failed to survive the weekend, and there are fears the world's largest insurer is on the brink of collapse.
Lehman Brothers, 158 years old, began the largest bankruptcy in history when it filed a Chapter 11 petition yesterday in the US Bankruptcy Court in New York. In a sworn statement filed with the court, Lehman's chief financial officer, Ian Lowitt, said there was "no viable alternative".
At the same time, Merrill Lynch, 94 years old and with 60,000 employees worldwide, sold itself for a third of its value 18 months ago to the Bank of America.
Wall Street, saddled with toxic US mortgages, is rapidly re-creating itself. The turmoil is likely to spread to Australia, dampening economic growth and ripping value from superannuation funds. Australian shares dropped 1.5 per cent yesterday.
Late last night London's FTSE 100 index was down about 5 per cent, while central banks across the world tried to help by pumping money into the financial system. Australian economists said the Reserve Bank would be more inclined to cut interest rates soon to check the local fallout.
US Federal Reserve and Treasury officials and the investment banks spent the weekend trying to thrash out a deal to, if not save the banks, then prevent their failure from causing a crisis of confidence through the rest of the financial sector. But unlike when Bear Stearns collapsed in March, the Government refrained from putting taxpayers' money on the line. Unable to find a buyer, Lehman Brothers Holdings was left with little choice but to file for bankruptcy.
At Lehman Brothers Australia, staff arriving for work yesterday did not know whether they would last the week. The 130 staff are due to be paid on Friday.
Before Bear Stearns's failure, there were five main investment banks on Wall Street. Only two now survive, with Morgan Stanley and Goldman Sachs increasingly isolated.
"There is no way to sugar-coat the extraordinary events of the past 48 hours," said Amy Auster, the head of international economics at ANZ.
As the shock of Lehman's failure settles in, there are concerns about which firm will be next to falter. American International Group, the world's largest insurance company and the sponsor of Manchester United, appealed to the US Fed for a $US40 billion ($48.8 billion) bridging loan at the weekend. Without fresh capital there was a chance the company might not survive the next couple of days, The New York Times reported.
In Australia, the cost of borrowing between large corporations has ballooned and falling share prices are slashing the value of superannuation funds.
The average exposure to US stocks could be about 5 per cent of the total value of Australian funds, said Andrew Keevers, the associate director of research at Rainmaker Information.
The chief economist at Westpac, Bill Evans, said plunging confidence could restrict the availability of credit as lenders tightened purse strings.
The US dollar fell as confidence in the nation's economy faltered.
