The U.S. financial crisis severely deteriorated on Sunday night when one of the world's biggest banks filed for bankruptcy and another was sold to the Bank of America.

Lehman Brothers Holdings Inc, founded in 1850, filed for Chapter 11 Bankruptcy just after midnight EDT. The filing, which will not include its broker-dealer subsidiaries or other units, including Neuberger Berman, marks the first bankruptcy of a Wall Street firm in nearly 20 years.

Over the weekend, U.S. Treasury Secretary Henry Paulson attempted to work out a rescue plan with top financial banks, asking them to inject $35 billion into a deal to save Lehman. But unlike with the Bear Stearns credit crunch in February, the government itself was unwilling to use taxpayer money to bail out the 158-year-old investment bank.

Potential buyers Barclays and the Bank of America rejected deals to rescue the financial institution because of the government's lack of funding.

As of Friday, shares of Lehman had fallen by 97% since the start of the year, valuing the bank at about $3 billion. In stark contrast, the bank actually controls more than $600 billion of assets.

Minutes after the announcement, Bank of America announced it will acquire the world's biggest brokerage firm, Merrill Lynch & Co. for $50 billion U.S.

The Bank said it would pay $29 a share for the firm, a 70% premium to Merrill's share price based on Friday's closing price. The transaction is set to close in the first quarter of 2009, and three directors of Merrill will be joining the Bank of America board.

"Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders," Bank of America Chairman Ken Lewis said. "Together, our companies are more valuable because of the synergies in our businesses."

Merrill has written down more than $40 billion over the last year.

After the announcment, the U.S. dollar was down against the yen, pound sterling and the euro.

Dow Futures were down 309 points to 11141, or by 2.70%, and S&P Futures were down 42 points to 1215.25 or by 3.34%.

By Megan Ainscow
©CEP News Ltd. 2008