Two of the top U.S. banks succumbed yesterday to the subprime mortage crisis, marking what the Financial Times of London calls “one of the most radical reshapings in Wall Street history.”
Lehman Brothers announced it will make the biggest bankruptcy filing in history after a handful of prospective buyers signaled they were no longer interested in the firm. Merrill Lynch agreed to a snap $50 billion takeover bid from Bank of America. The turmoil shook stock markets across Europe and Asia this morning, and analysts expect a turbulent day when New York’s markets open.
The collapse of Lehman Brothers and sale of Merrill Lynch mark a new phase in the market turmoil of the past year. They also reflect a shift in U.S. government policy toward the crisis. Six months ago, the U.S. Treasury and Federal Reserve went to great lengths to save a smaller investment bank, Bear Stearns, and recently the Treasury announced a plan to bail out the mortgage-lending giants Fannie Mae and Freddie Mac. No such luck for Lehman Brothers – though the Treasury entered eleventh-hour meetings to try to find a buyer for the bank, it refused to cough up taxpayer money to protect it.
The Wall Street Journal’s Real Time Economics blog examines this decision and questions whether it will prove prudent.