From The Times
December 13, 2008

Fallout from Lehman Brothers collapse still spreading
Christine Seib in New York

When Dick Fuld left Lehman Brothers' headquarters at 745 Seventh Avenue for the last time on September 15, the broker-dealer he ran may have been defunct, but there were three like it still left. Three months after Lehman went bust, they are all gone and the reverberations of Lehman's collapse are still being felt across America.

All that remains of Lehman is bare bones. Two days after the bank declared itself bankrupt, Barclays bought Lehman's US investment banking business, its headquarters and two processing centres for $1.7 billion. Just over a week later, Nomura snapped up the European, Asian and Middle Eastern businesses. Last week, a management team gained control of the majority share of Lehman's coveted asset management arm.

The bank's fellow broker-dealers have also changed shape dramatically. On the day that Lehman went bust, Merrill Lynch announced that it would be bought by Bank of America in a $50 billion all-stock rescue deal. The so-called Thundering Herd had fallen into the hands of a conservative North Carolina-based financial behemoth.

The remaining two broker-dealers have become deposit-taking institutions. Fearful of another Lehman-style implosion, on September 22 the Federal Reserve gave Goldman Sachs and Morgan Stanley approval to morph into high street banks in the hope that a base of retail and commercial deposits would provide a much-needed cash buffer from the global financial storm.

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Lehman's surprise collapse - the market had expected the US Government to rescue the stricken bank just as it had organised the sale of Bear Stearns to JPMorgan six months earlier - set off a chain reaction around the world. The bank's default on $165 billion in unsecured debt hit investors with an estimated $120 billion in losses. The credit default swap (CDS) market, of which Lehman had been a major player, dried up. The commercial paper market, where investors had bought Lehman's debt, froze. Companies began eating up unused portions of credit lines and stashing the money away in fear that their lenders would pull their funding. As a result, banks quickly ran out of liquidity.

However, Lehman was not just Wall Street's problem. AIG teetered on the brink of collapse as investors and counterparties panicked about the insurance giant's own exposure to the estimated $60 trillion global CDS market. As a result the Federal Reserve was forced to abandon the moral-hazard high ground and hand over $85 billion in emergency money to AIG.

It took only a day for Lehman to infect mom-and-pop investors. Money market funds try to ensure that their net asset value (NAV) never slips below $1 so that they appeal to people wanting stable homes for retirement savings. But on September 16 the Primary Reserve Fund, the oldest money market fund in America, told its investors that its NAV had dropped to 97cents because of losses on $900 million worth of Lehman debt. When Primary “broke the buckâ€