Wall Street banks continue to self-destruct

Wall Street is in turmoil as Merrill Lynch found shelter in a $44bn takeover by Bank of America and Lehman Brothers headed towards filing for bankruptcy.

BofA’s bold bid for Merrill came as the world’s top banks appeared close to abandoning efforts to save Lehman and set out to build a firewall against further financial chaos with a $50bn liquidity pool to support other vulnerable institutions.

Update: Lehman Bros. has filed for bankruptcy.

The Federal Reserve said it was making it easier for financial institutions to access Fed liquidity by easing terms on its borrowing facilities and accepting a much wider range of assets as collateral. The Fed meets to decide on interest rates on Tuesday. The moves capped a weekend of high drama that could lead to one of the most radical reshapings in Wall Street’s history.

It widened the set of assets eligible as collateral for loans of Treasuries to include all investment grade paper, and raised the size of these Treasury loans to $200bn.

The Fed also suspended rules that prohibit banks from using deposits to fund their investment banking subsidiaries.

BofA’s rapid U-turn, which saw it abandon talks to buy Lehman and move to Merrill in the space of a few hours, will throw the spotlight on Morgan Stanley and Goldman Sachs. The two could soon become the only independent investment banks in the US.

Looks like McBush will have to find someone else to be his number one cheerleader on Wall Street. John Thain will probably be out looking around for a new job. BofA certainly ain’t going to think well enough of his performance to keep him on at Merrill-Lynch.

Maybe he’ll be taken on as McCain’s primo fundraiser?

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