BofA to buy Merrill; Fed, 10 banks offer emergency loans

NEW YORK - A failed plan to rescue Lehman Brothers was followed Sunday by more seismic shocks from Wall Street, including an apparent government-brokered takeover of Merrill Lynch by the Bank of America.

A forced restructuring of the world’s largest insurance company, American International Group, also weighed heavily on global markets as the effects of the 14-month-old credit crisis intensified.

A global consortium of banks, working with government officials in New York, announced late Sunday a $70 billion pool of funds to lend to troubled financial companies.

The aim, according to participants who spoke to The Associated Press, was to prevent a worldwide panic on stock and other financial exchanges.

Ten banks — Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS — each agreed to provide $7 billion “to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets.”

The Federal Reserve also chipped in with more largesse in its emergency lending program for investment banks. The central bank announced late Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.

Federal Reserve Chairman Ben Bernanke said the discussions had been aimed at identifying “potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses.”

Futures pegged to the Dow Jones industrial average fell almost 300 points in electronic trading Sunday evening, pointing to a sharply lower opening for the blue chip index this morning. Asian stock markets were also falling.

Lehman Brothers may be forced to seek an orderly unwinding of its businesses. All potential buyers walked away after the U.S. Treasury refused to budge on its refusal to provide any takeover aid, as it had done six months ago when Bear Stearns faltered and last week when it seized Fannie Mae and Freddie Mac.

Expectations the 158-year-old Lehman would survive dimmed after Barclays PLC withdrew its bid to buy the investment bank. Barclays and Bank of America were considered front-runners to buy Lehman, which is foundering under the weight of $60 billion in soured real estate holdings.

Insurer AIG, hit hard by deterioration in the credit markets, said Sunday it is reviewing its operations and discussing possible options with outside parties to improve its business after a week when its stock dropped 45 percent amid concerns about the company’s financial underpinnings. It was working with New York Insurance Superintendent Eric Dinallo and a representative of the governor’s office through the weekend to craft a solution.

Merrill Lynch, another investment bank laid low by the crisis that was triggered by rising mortgage defaults and plunging home values in the U.S., agreed to be acquired by Bank of America for $29 a share, according to the Wall Street Journal.

That’s a premium to its closing price on Friday of $17.05 but only a fraction of its price of almost $100 a share early in 2007.