Wall Street giant Lehman Brothers hanging by a thread as Greenspan warns of 'worst economic crisis I've ever seen'
By Karl West
Last updated at 1:21 AM on 15th September 2008
'More big firms will fail': Greenspan
The fourth biggest investment bank in the world was today staring bankruptcy in the face.
Lehman Brothers was left on the brink of collapse after Barclays and the Bank of America both turned their backs on a rescue bid.
Describing the prospect of Lehman’s demise as ‘ Armageddon’, one source warned it could slash as much as 1,000 points off the value of the main U.S. stock exchange, the Dow Jones.
Such a precipitous fall - described by one expert as like a 'tsunami' - would drag other stock markets into the mire, including Britain’s FTSE 100.
Lehman has 4,000 workers based in London, many of whom are now likely to face the axe.
The crisis could also spark a cull of tens of thousands of jobs across the financial sector.
And it is not only workers in the City and Canary Wharf who will be left reeling if Lehman collapses.
The value of pensions could be seriously dented, affecting ordinary-people up and down the country, the credit crunch squeeze on mortgages could deepen and the Government’s attempts to relaunch the economy could suffer.
There are also fears of a ‘domino effect’ with Lehman’s rival Merrill Lynch and insurance giant AIG – Manchester United’s shirt sponsor – also seen as being at risk.
The U.S. authorities were involved in searching for a solution to Lehman’s woes – hoping to repeat the swift sale of Bear Stearns to JP Morgan Chase earlier this year.
Alan Greenspan, the former chairman of the U.S. Federal Reserve, warned yesterday that he believes ‘we will see other major firms fail’. He added: ‘We shouldn’t try to protect every single institution. The ordinary course of financial change has winners and losers.’
He described the current banking crisis as possibly the worst in a century – including the 1929 Wall Street Crash.
Last night moves were already afoot to try to restore market confidence with reports suggesting that the Bank of America was now trying to save Merrill Lynch.
The BoA was desperately trying to strike a merger with Merrill after ditching talks with Lehman.
If no new funding is found before Wall Street opens today, Lehman will seek Chapter 11 bankruptcy protection.
PricewaterhouseCoopers has been lined up to run Lehman’s UK operations, which will be seen as bad news for staff.
Barclays and Bank of America were scared off from ‘ writing a blank cheque’ for Lehman after the U.S. authorities refused to provide guarantees to protect them against potential losses from the stricken investment bank.
Lehman was put up for sale as concerns about its long term financial viability hammered the group’s shares. It reported a $3.9billion (£2.2billenders-lion) quarterly loss last week.
Increasingly desperate talks to save the bank continued late into the night, but these efforts came to nothing.
U.S. treasury secretary Hank Paulson had stepped in at the weekend to summon the bosses of rival Wall Street banks – Goldman Sachs, Merrill Lynch, Citigroup, and JP Morgan Chase – to emergency rescue talks.
They were asked to contribute to a fund that would buy Lehman’s £15billion-plus of ‘toxic’ investments in commercial property and mortgage-related assets.
This would have helped the authorities to clean up the troubled bank’s balance sheet and make it more appealing to those interested in buying the rest of it.
However, the Wall Street chiefs objected to being railroaded into taking on all of Lehman’s risky investments, while BoA and Barclays were offered the good bits on the cheap.
The involvement of the U.S. authorities follows the decision to ‘nationalise’ mortgage Fannie Mae and Freddie-Mac.
But Mr Paulson is adamant that no taxpayer funds will be used to sort out Lehman.
This is because the authorities do not want to be accused of excessive risk-taking by bailing out yet another ‘ irresponsible’ investment bank that took too many bad bets on the property market.
The economy is in a recession and will not recover for at least a year, the Confederation of British Industry will warn today.
The business lobby group will also claim an extra 500,000 workers could lose their jobs by the end of next year.
Richard Lambert, director general of the CBI, said both businesses and consumers were suffering a ‘very uncomfortable time’.
Although official figures do not confirm the county is in a recession – defined as two consecutive quarters of negative GDP growth – Government statistics often lag behind the true state of the economy.
http://www.dailymail.co.uk/news/worldnews/article-1055736/Wall-Street-giant-Lehman-Brothers-hanging-thread-Greenspan-warns-worst-economic-crisis-Ive-seen.html
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