Salar posted on September 15, 2008 21:06
Lehman had incurred losses of billions of dollars in the US mortgage market.
The move threatens to deal a further blow to the global financial system, as banks unwind their deals with Lehman.
Merrill Lynch, also stung by the credit crunch, has agreed to be taken over by Bank of America in a dramatic weekend of events for Wall Street.
The deal came amid a hectic weekend on Wall Street, with Lehman Brothers announcing that it would file for bankruptcy protection. There were worries that Merrill would be the next bank to lose the confidence of investors as it has been hit hard by bad mortgage debt.
Merrill has written down more than $40bn of assets in the past year.
Under the terms of the deal, Bank of America will pay about $29 for each Merrill share.While that represents a 70% premium to the closing share price on Friday, Merrill's share price stood at $50 in May and was above $90 at the start of 2007.
Merrill Lynch sought to bolster its balance sheet and reduce its risk last night when it announced moves to raise $8.5 billion (£4.27 billion) and the sale of $11.1 billion worth of high-risk mortgage-backed securities.
The group said it would record a $4.4 billion writedown in its third-quarter from the sale of the securities, known as collateralised debt obligations (CDOs), or pools of mortgage bonds, in a disposal that represented the majority of Merrill’s remaining CDO portfolio.
Merrill said it planned to raise $8.5 billion by selling shares equivalent to more than a quarter of its market capitalisation in a move that will significantly dilute the existing investors’ ownership.
Some $3.4 billion of the shares will be acquired by Temasek, the Singaporean wealth management fund. Temasek is already an investor in Merrill, after buying 87 million shares in December.