GLOBAL STOCK markets are expected to plunge today as two of the United States' largest banks held emergency merger talks last night and a third bank teetered on the verge of collapse.
Bank of America was reported last night to be in advanced talks to acquire Merrill Lynch for at least $38.25 billion in stock, while Lehman Bothers considered filing for bankruptcy after two possible bidders, including Bank of America, pulled out.
The US Treasury and the Federal Reserve have struggled for three days to prevent the investment bank from failing before markets open today.
Barclays, which had emerged as a leading candidate to acquire Lehman, pulled out first, contending it could not obtain guarantees from the government or other Wall Street firms to protect against potential losses on Lehmans assets.
Bank of America withdrew about three hours later, according to a person with knowledge of the talks. Banks and brokers began consolidating trades in which Lehman is involved to minimise the impact of a possible bankruptcy filing last night.
The refusal of the US treasury secretary, Hank Paulson, to underwrite the Lehman rescue - prompting Bank of America to withdraw - may have led to to last night's merger talks with Merrill.
John Thain, Merrills chief executive, and Kenneth Lewis, chief executive of Bank of America, were present at unsuccessful discussions during the weekend regarding the fate of Lehman Brothers Holdings Inc.
Lehman's collapse would put intense pressure on the US and global banking system, and attention would quickly turn to other investment banks, such as Merrill, with problem or "toxic" assets linked to the US property markets.
The merger between Bank of America and Merrill valuing Merrill at $25 to $30 per share could be announced as soon as this morning media reports said.
Merrill shares closed at $17.05 on Friday.
A Merrill Lynch spokeswoman and a Bank of America spokesman did not immediately comment.
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 haemorrhage capital. Last month Thain arranged to sell over $30 billion in packaged debt securities to Dallas-based private equity firm Lone Star Funds.
In spite of these exposures, the bank is seen by some as undervalued, given that it has the largest retail brokerage by assets under management and number of brokers. It also has a valuable 49.8 per cent stake in the profitable asset manager BlackRock .
''It could be a powerful fit,'' said Rick Meckler, chief investment officer at LibertyView Capital Management in New York.
But he added: "Merrill Lynch has significant exposures and Bank of America would need enough balance sheet to handle that."
US stock-index futures tumbled ahead of the market opening today on concern that a potential Lehman Brothers Holdings.
Bankruptcy will add to banks $514 billion of subprime-related losses at US banks.
''The collapse of this deal casts a dark cloud over Wall Street,'' said Frederic Dickson, who helps oversee $25 billion as chief market strategist at DA Davidson in Lake Oswego, Oregon.
''It also sends a message that the government is getting out of the bailout business and makes financial institutions like American International Group and WaMu look even more vulnerable.
Merrill Lynch International Bank, its largest banking business outside of the US is located in Ireland, which is also the European head quarters of Bank of Americas credit card business MBNA.
American International Group the largest US insurer, fell 46 per cent last week. and Washington Mutual Inc., the countrys biggest savings and loan, dropped 36 per cent on concern about their financial health.
Additional reporting Reuters, Bloomberg.
