Equity Conversion Plan

The fall-out from the Lehman bankruptcy is already gaining momentum.  Bank of America, who was a last-minute suitor for Lehman Brothers is now rumored to be looking at a possible acquisition of Merrill Lynch.  CEO Lewis has been agressive in picking up assets hammered by the mortgage meltdown, including the fire-sales acquisition of Countrywide in the early days of the credit crunch.  This would be akin to doubling-down on the company’s bet that the asset writedowns will be manageable moving forward and will ultimately lead to a massive upside for Bank of America.

From Yahoo!:

Bank of America Corp (BAC.N) is in advanced talks to acquireMerrill Lynch & Co Inc (MER.N) for at least $38.25 billion in stock, the New York Timessaid on Sunday, citing people briefed on the negotiations.

The deal comes as bankers and regulators met in New York to figure out whether to rescue Lehman Brothers Holdings Inc, and if so, how. Those talks seemed increasingly likely to result in Lehman’s liquidation.

Merrill’s talks with Bank of Americaare “advanced,” according to the New York Times, and a transaction valuing Merrill at $25 to $30 per share could be announced as soon as Sunday night, the newspaper said. Merrill shares closed at $17.05 on Friday.

A Merrill Lynch spokeswoman and a Bank of America spokesman did not immediately comment. The Wall Street Journal also reported the talks.

Merrill has been hit hard by the credit crisis and has written down more than $40 billion over the last year.

The bank has also attempted to sell off much of the toxic debt that has been causing the company to hemorrhage capital. Last month, Thain arranged to sell over $30 billion in repackaged debt securities to Dallas-based private equity firm Lone Star Funds.

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Lehman Brothers will file for bankruptcy protection tonight or tomorrow morning according to the New York Times.  This marks the uncerimonious end of the 158 year-old Wall Street institution.  A much different end result than the government-brokered Bear Stearns bailout to be sure.  Because of the bankruptcy law around financial services firms the company must liquidate, and cannot reorganize and continue operating.

From the New York Times:

Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government.

But Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firm, Lehman cannot hope to reorganize and survive as a going concern. It will instead liquidate its holdings.

It was not clear whether the government would appoint a trustee to supervise Lehman’s liquidation, or how big the financial backstop would be.

Lehman’s broker-deal subsidiaries would not be a part of the bankruptcy filing. Those entities must file under Chapter 7 rules, which are the procedures for liquidation, under the assumption that it is the best way to protect customers. The Securities Investor Protection Corporation would handle the liquidation of such brokerages, and bankruptcy lawyers say that customers are likely to receive their holdings back.

Lehman just wasn’t able to get out of its own way.  After making huge bets on subprime and Alt-A mortgages with the purchase of BNC Mortgage and Aurora Services, they were unable to unwind their exposure before the bottom fell totally out.

You can read more about the Lehman bankruptcy here and here.

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