UPDATE: The Street spent the afternoon preparing for a Lehman (LEH) liquidation, and the firm is now expected to file for bankruptcy.
In other news, Bank of America is now close to buying Merrill for $25-$30 a share (in stock–which could rapidly depreciate). If the firms don’t do a deal tonight, Merrill’s stock will probably collapse at the open.
EARLIER: It is presumably still possible that Barclays could come back, now that it’s clear Paulson won’t cave, but bankruptcy seems far more likely. And, contrary to the fears of those who envision a global financial collapse, that should be fine: That’s what Chapter 11 is for:
As word that a Barclays deal was off filtered across Wall Street, credit derivative traders scrambled to unwind their outstanding contracts with Lehman and shift their positions to other banks. CDS traders at many Wall Street firms were told to come to work immediately.
With many trading desks open, investors rushed to buy credit default swaps tied to other brokerages and corporations, sending the cost of protection on investment banks such as Goldman Sachs and others sharply higher. One senior trader said Bank of America is offering to face Lehman’s counterparties in CDS trades, as long as the swaps don’t reference Lehman’s own debt.
In a statement on Sunday, the International Swaps and Derivatives Association, a trade group whose members include many large dealers, said a “netting trading session” will take place between 2 p.m. and 4 p.m. on Sunday to allow Lehman’s counterparties to offset their positions against each other.
“The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy filing,” it said, adding that trades conducted during this period “are contingent on a bankruptcy filing on or before 11.59 p.m. New York time” today. If no filing takes place, the trades will be canceled, ISDA said.
Meanwhile, Bank of America (BAC), the former Lehman frontrunner, has now turned to the next-most-imperiled firm on the Street: Merrill Lynch.
Bank of America and Merrill Lynch & Co. Inc. are in merger discussions, according to people familiar with the matter.
The talks come amid a Wall Street scramble to sort out a potential liquidation of Lehman Brothers Holdings Inc.
Bank of America had considered buying Lehman, but when those talks failed to result in a deal, BofA turned its attention to Merrill, which is considered a better fit for the bank.
Much remains uncertain and conditions were fluid.
See Also: Lehman Death Throes (Complete)
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