Talks by Barclays and Bank of America to buy Lehman Brothers have collapsed [Reuters]

The British arm of the bank was placed under the administration of acountants PriceWaterhouseCoopers on Monday to defend itself from creditors.

Talks with Britain's Barclays Bank and the Bank of America over the weekend faltered after the potential buyers said they were not convinced that Lehman, which last week announced a loss of $3.9bn in just three months, would be a good buy for shareholders.

Asian markets had dropped by up to 3.6 per cent before the announcement on Monday due to talk of a collapse at the fourth largest US investment bank.

The Chapter 11 file will not include Lehman's broker-dealer operations and extra units.

Lehman aims to sell its broker-dealer operations and is still involved in talks with potential buyers over its investment management division.

Economic doldrums

Some analysts believe a Lehman collapse could trigger a shake up of the entire US financial system which has been stuck in the economic doldrums since the mortgage crisis hit more than a year ago.

"It's a new financial world on the verge of a complete reorganisation."

Max Keiser, a financial analyst, said that there would be more casualties due to the lack of credit banks need to stay alive under the neo-liberal capitalist model.

"You're talking about $700 trillion worth of debt in the global economy. The entire GDP [Gross Domestic Product] of the world is something like $60 trillion, so this has a long way to go as you deflate all of this debt back to something more sustainable."

Keiser said that those nations with natural resources, such as oil in the Middle East, and savings, like China, would survive.

"It is only a doomsday scenario for America and Britain, who have been living on borrrowed money for generations.

"The US dollar is now finished as the world's reserve currency and we will see now some other country rise up and take its place, most probably China."

Safety Measures

The US Federal Reserve and a banking consortium had already announced measures to offset a further credit crunch in the wake of a Lehman bankruptcy.

The consortium of 10 global commercial and investment banks had said earlier that it would provide $70bn "to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets".

Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, and UBS, said in a joint statement that they had agreed to create a "collateralised borrowing facility" of $70bn, with each bank contributing $7bn, to help ease access to credit.

"These actions reflect the extraordinary market environment," the banks said in a statement.

Emergency credit

The announcement came moments after the US Federal Reserve announced new steps to ease access to emergency credit for struggling financial companies, by broadening the collateral to be used for central bank loans.

The end of bidding for Lehman prompted a rare emergency trading session on Sunday which market sources said was initiated by the US Federal Reserve with the aim of reducing risk associated with any Lehman bankruptcy.

The lack of a government guarantee to resolve the Lehman crisis is the main reason Barclays decided to exit the negotiations, according to a person familiar with the talks.

So far this year, the government has bailed out mortgage giants Freddie Mac and Fannie Mae, and saved Lehman rival Bear Stearns from going under by extending it cheap loans and allowing its forced sale to another rival, JPMorgan Chase.

Meryll Lynch purchase

Within hours of the collapsed Lehman talks, there were reports of talks involving the takeover of Merrill Lynch & Co and the expected sale of assets by American International Group.

Bank of America announced early on Monday that it was to buy Meryll Lynch for $80bn - creating the world's largest financial services company in the process.

Over the weekend Alan Greenspan, the former US Federal Reserve chairman, projected the failure of "other major financial firms" but added that this did not need to be a problem.

"It depends on how it is handled and how the liquidations take place," he said on US broadcaster ABC.

"And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers."

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