UK bank Barclays has bought some of the core assets of US investment bank Lehman Brothers for $1.75bn (£1bn).

Barclays bought Lehman’s North American investment banking and trading unit for $250m, and paid $1.5bn for its New York headquarters and two data centres.

Lehman – the fourth-largest investment bank in the US – filed for bankruptcy protection on Monday.

The deal, which comes after a weekend when Barclays refused to buy all of Lehman, needs bankruptcy court backing.

BBC Business Editor Robert Peston had said earlier that Barclays would not be interested in acquiring Lehman’s “toxic investments in the residential and commercial property markets”.

‘Growth opportunity’

As well as the investment banking and trading operations, Barclays is also acquiring Lehman’s fixed income, equities sales, and research departments in North America.

The deal could safeguard the jobs of about 10,000 employees working in the divisions.

The agreement was made not long after Lehman’s first bankruptcy hearing in a US bankruptcy court in Manhattan.

John Varley, chief executive of Barclays, said the proposed acquisition was part of a policy of “profitable growth on behalf of our shareholders”.

Lehman Brothers chief operating Herbert McDade said: “We have the opportunity to continue the growth and development of our US investment banking and capital market franchises with one of the leading financial institutions in the world.”

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The US Federal Reserve has announced an $85bn (£48bn) rescue package for AIG, the country’s biggest insurance company, to save it from bankruptcy.

AIG will get an $85bn loan, in return for an 80% public stake in the firm.

The rescue follows the collapse of US investment giant Lehman Brothers, which caused share prices to plummet across the world’s financial markets.

Meanwhile, Barclays said it had reached a deal to buy Lehman’s US investment banking and capital markets businesses.

The $250m deal, which is subject to approval from the bankruptcy court, will make the British bank the third biggest investment bank in the US.

Barclays will also purchase Lehman’s New York headquarters and its two data centres in New Jersey for $1.5bn.

Emergency meeting

The rescue of AIG – which has a trillion dollars in assets and insures bank loans around the world – prompted a tentative rally on Asian markets.

Wednesday trading saw gains in Tokyo, Taiwan, Singapore and Seoul, though prices in Hong Kong fell after starting higher.

The dollar also rose against major currencies.

The board of the Federal Reserve made its decision about AIG “with the full support of the Treasury Department”, it said in a statement, adding that the secured loan included conditions designed to protect “the interests of the US government and taxpayers”.

US Treasury Secretary Henry Paulson refused to bail out Lehman Brothers, the fourth-largest investment bank in the US, after it filed for bankruptcy protection on Monday.

“These are challenging times for our financial markets” US Treasury Secretary Henry Paulson

However, Mr Paulson said he supported the Fed’s move to assist AIG and said the move would protect taxpayers.

“These are challenging times for our financial markets,” he said.

Correspondents say the demise of AIG – which has policy holders in more than 100 countries and insures deals and investments across the globe – would have a far greater impact on financial markets than Lehman’s collapse.

Were the company to fail, many banks and investment funds in the US and around the world would lose their insurance cover at a time when defaults on payments are likely to rise.

The Governor of New York, David Paterson, said AIG had so many business interests it would be hard to predict how widespread its bankruptcy would have been felt.

“Its tentacles go further in to the avenues of business, as in mortgages, as in credit, as in hedge funds, as in countless ways that affect consumers, that affect drivers, that affect homeowners, affect passengers,” he said.

AIG had posted losses in each of the last nine months.

It was badly affected by the collapse of the US housing market, says the BBC’s business reporter Rob Young, owing to the underwriting payments it was forced to make when customers defaulted on their loans.

Market slump

The AIG plan calls for the government to seize up to 80% of the company and remove its management, in a similar fashion to the way it took control of mortgage giants Fannie Mae and Freddie Mac which were crippled by the US housing crisis.
The global financial community is reeling from Lehman’s demise

The White House welcomed the package, saying the deal was made “in the interest of promoting stability in financial markets and limiting damage to the broader economy”.

Meanwhile, the Fed has left interest rates unchanged at 2%. The BBC’s Matthew Price in New York said the bank had decided an interest rate cut would not help to alleviate the short-term financial crisis.

On Wall Street, the Dow Jones rallied on Tuesday, closing 141 points higher having on Monday suffered its worst day’s trading since the September 2001 attacks on the US.

But leading indices across Europe ended lower, with banking shares being the worst hit.

Central banks around the world responded by carrying out emergency measures to keep markets liquid.

The Bank Of England and the Bank of Japan injected £20bn (25bn euros; $36bn) and 2.5 trillion yen ($24.1bn; £13bn) respectively into their money markets.

The extra funding came as the interest rates at which banks lend to each other rocketed – as they did at the start of the credit crunch.

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China’s central bank has cut interest rates for the first time in six years amid growing turmoil in global financial markets.

The key lending rate will fall to 7.2% from 7.47% with effect from Tuesday, while the amount of cash most banks must keep in reserve was cut by 1%.

The surprise move comes as US bank Lehman Brothers files for creditor protection and world shares tumble.

With inflation cooling, China is keen to maintain stable economic growth.

“We all knew that there would be monetary policy relaxation in China, but we didn’t expect the move would be so quick,” said Gao Huiqing, an economist at the State Information Centre, a government think tank.

All but the biggest banks will be allowed to reduce the proportion of deposits held in reserve from 25 September – the first time the central bank has cut reserve requirements since November 1999.

Pro-growth stance

Recent figures have shown that Chinese economic growth has slowed this year as a result of constrained demand for its goods from overseas markets.

The economy grew at an annual rate of 10.1% in the three months to June, down from 10.6% in the previous quarter and below the 11.9% seen for the whole of 2007.

Rising food prices helped to crimp growth as did the increasing cost of credit with six increases in interest rates last year aimed at bringing spiralling inflation under control.

Grain and pork shortages had pushed consumer prices to 11-year highs earlier this year, but government measures have helped to bring this figure down to 4.9% in August – a 14-month low.

This enabled Beijing to cut interest rates to boost consumer spending and offset a decline in demand for exports as the global economy slows.

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US consumer prices fell in August for the first time in nearly two years due to lower energy costs, data shows.

Labor Department figures showed the Consumer Price Index (CPI) was 0.1% lower month-on-month, and followed July’s 0.8% increase.

However on a yearly basis, prices were 5.4% higher.

The news comes as the US central bank meets to decide on interest rates, with some analysts saying the drop could make a rate cut more likely.

“If the Fed is thinking of cutting interest rates this afternoon, this gives them a little more freedom to do that,” said Robert McIntosh, lead economist at Eaton Vance.

It had been widely expected that the Federal Reserve would opt to leave interest rates on hold at 2%.

But in light of significant turmoil in the financial markets, and uncertainty over the health of the world’s largest economy, there are expectations that the central bank could lower rates.

The demise of Lehman Brothers and uncertainty over the future of insurance giant AIG, as well as the acquisition of Merrill Lynch by Bank of America have all added to market jitters.

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The US central bank has left interest rates unchanged at 2%, citing inflation concerns and rejecting calls for a cut.

While the Federal Reserve had been tipped to leave rates on hold, analysts said a cut looked more likely after Lehman Brothers filed for bankruptcy.

The Fed has sought to soothe nerves and earlier injected $70bn (£39bn) into markets to boost liquidity.

Central banks worldwide have faced the twin threat of quickening inflation and a wider economic slowdown.

“The downside risks to growth and the upside risks to inflation are both of significant concern to the committee,” the bank’s officials said.

Michael Wallace, an analyst at Action Economics said: “The Fed’s statement largely resisted market pressure for a more substantial capitulation.”

He said the assessment was “defiantly set at neutral”, in expressing worries about both slowing economic growth and inflation.

The decision to leave rates at 2%, as it has been since April, was a unanimous move.

US shares were volatile with the leading Dow Jones Industrial Average down 106 points to 10,811 after the news.

However, it later ended more than 140 points higher at 11,059.02 as investors interpreted the Fed’s decision as a sign that the economy was less fragile than some had feared.

Another factor boosting the market were reports that insurance giant AIG might be able to access a loan from the Federal Reserve, which would prevent the firm from collapsing.

Investment firm Lehman Brothers filed for bankruptcy on Monday, triggering market jitters and prompting a sharp fall in shares worldwide.

Fears have been raised that AIG could be the next firm to fold.

Serious risk

In light of such turmoil, certain traders had hoped the central bank would cut rates in a bid to boost the economy and warned that the Fed’s latest move could be seen negatively.

Ian Shepherdson, lead US economist at High Frequency Economics said: “Not to acknowledge the catastrophes of the next few days runs the very serious risk that the Fed will be seen as Nero, fiddling while Wall Street burns.”

While the Federal Reserve kept interest rates unchanged on Tuesday, it noted that stresses on financial markets had grown sharply and added that it would take further action if needed.

The central bank said “strains in financial markets have increased significantly and labour markets have weakened further”.

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Market turmoil after Lehman Brothers filed for bankruptcy has raised doubts over what the US central bank will do at its imminent rate-setting meeting.

Economists said the Federal Reserve might lower interest rates, having earlier expected them to stay on hold.

Markets worldwide slumped on Monday with the Dow Jones Industrial Average closing down more than 500 points.

Faced with the twin threats of high inflation and a slowdown, the bank kept interest rates on hold at 2% in August.

Lehman Brothers – the fourth largest US investment firm – filed for bankruptcy after failing to find a buyer at the weekend.

A main worry is that Lehman’s bankruptcy will make it even harder to gain access to credit – hitting both other large lenders but also small firms and US homebuyers.

“It puts a Fed rate cut back on the table” said Stuart Hoffman, lead economist at PNC Financial Services group.

A group of leading banks, including JP Morgan, Goldman Sachs and Citigroup, developed a $70bn (£38.9bn) pool that banks or brokerages can tap into to boost liquidity.

And the Federal Reserve took steps to improve access to emergency credit for struggling financial companies, by increasing the types of securities financial institutions could use to gain emergency funding.

Stocks falls

Lehman’s demise was not the only news creating market jitters on Monday, before which analysts had expected interest rates to remain on hold.

“This is the result of the mania for deregulation which began when Reagan was president” David Stowell, Portland, Oregon

Send us your commentsThe future of insurance giant AIG remained unsure, after reports that it had sought $40bn in emergency funding over the weekend from the government to shore up its finances.

Later on Monday the firm gained access to $20bn, thanks to New York State approval.

And Bank of America announced that it would buy Merrill Lynch in a $50bn deal.

Such uncertainty over the state of the markets and in particular key financial institutions prompted stocks worldwide to see sharp falls.

While the Dow Jones was down some 4% on Monday, the Standard & Poor’s 500 index shed 4.69% and the Nasdaq composite index ended 3.60% lower.

Leading European indexes had ended lower, including the UK’s FTSE 100 index which was 3.92% down.

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Chancellor Alistair Darling says that laws will be introduced to tighten the rules governing the UK banking system.

His comments came in a BBC interview as the world digested the fate of two of Wall Street’s historic banks – Lehman Brothers and Merrill Lynch.

He called the resulting turmoil in global shares inevitable, but added that “on the positive side” UK regulators were taking action.

Separately, UK bank Barclays said it is looking to buy certain Lehman assets.

Speaking to the BBC, Mr Darling said that governments, central banks and regulators around the world have made it clear they will do “everything that they possibly can to maintain stability in the financial system”.

He said this was demonstrated on Monday after the Bank of England, European Central Bank and US Federal Reserve all made billions of dollars of additional funds available to help out the money markets.

But he added: “Now that doesn’t mean that any government or regulator can say to people ‘look, nothing is going to go wrong’, and that we can somehow stop the huge economic forces and changes that are taking place at the moment.

“But what it does mean as we showed with Northern Rock last year, that there we had a problem; if we hadn’t done something about it, it could have infected the rest of the banking system so we took action and eventually we had to take Northern Rock over.”

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British bank Barclays is in talks to buy the core assets of Lehman Brothers – the US broker-dealer business and the mergers-and-acquisitions team.

Lehman – the fourth-largest investment bank in the US – filed for bankruptcy protection on Monday.

BBC Business Editor Robert Peston says Barclays does not want Lehman’s “toxic investments in the residential and commercial property markets”.

Nor, he says, does it want Lehman’s surviving, unsettled transactions.

However, our correspondent adds that Barclays does want the 8,000 to 10,000 US employees of Lehman – which it sees as formidable profit generators. But for the 5,000 Lehman staff in London, the outlook remains uncertain.

Market turmoil

In a statement, Barclays confirmed that it was discussing with Lehman Brothers the possible acquisition of certain assets “on terms that would be attractive to Barclays shareholders”.

“There can be no assurance that the discussions will result in an agreement. A further announcement will be made in due course,” Barclays added.

The collapse of Lehman, which had incurred billions of dollars of losses from the failing US mortgage market, has led to big falls on the global equity markets, with banking shares especially hard hit on worries that there could more victims.

There have also been fears that AIG, once the world’s largest insurer, could face collapse. On Monday, the State of New York announced a “multi-billion dollar financing plan” to help stabilise AIG’s finances.

In August, Barclays reported a 33% drop in pre-tax profits for the first half of 2008 following more credit crunch related write-downs.

The bank made £2.75bn, down from £4.1bn, which it said at the time was “acutely disappointing”.

Barclays said last month it had taken charges of £2.45bn for bad debts, including exposure to US sub-prime mortgages and other credit market problems.

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Wall Street bank Lehman Brothers has filed for chapter 11 bankruptcy protection after emergency talks to find a buyer failed.

Confidence in the 150-year-old investment bank – the fourth largest in the US – crumbled last week amid growing concerns that its large portfolio of mortgage-backed assets was worth far less than it was originally valued.

During the past year Lehman reported billion-dollar losses and saw its share price plummet more than 95%.

Why did Lehman fail?

Lehman Brothers is considered one of Wall Street’s biggest dealers in fixed interest trading and was heavily invested in securities linked to the US sub-prime mortgage market.

With these investments now shunned as high risk, analysts say it was inevitable that confidence in Lehman Brothers would likely be hit – particularly after the collapse of Bear Stearns earlier this year.

In its June to August period last year, the bank said it would make write downs of $700m as it adjusted the value of its investments in residential mortgages and commercial property.

One year on this figure soared to $7.8bn, which last week resulted in Lehman reporting the largest net loss in its history. The bank also admitted that it still had $54bn of exposure to hard-to-value mortgage-backed securities.

Despite having access to cash reserves, worried investors pummelled the firm’s shares last week after talks to raise billions of dollars from outside investors ran into a brick wall.

How does it affect me?

Nobody has a Lehman Brothers cheque book or current account. The company is an investment bank that specialises in big and complex deals and investments.

Despite this, Lehman’s collapse will probably be felt by millions of people around the world – at least indirectly.

Most of our banks and pension funds have dealings with Lehman, or with firms like hedge funds that traded extensively with Lehman.

Unwinding Lehman’s complex deals could take weeks or months. During that time the global financial system will be snarled up. Many banks won’t know for sure how much they are exposed to Lehman, and will have difficulty freeing up the money in those deals.

This in turn is likely to intensify the credit crunch, with potentially dire consequences for businesses and consumers.

And the dramatic collapse of Lehman Brothers has also shaken the financial markets, with share prices slumping around the world.

Are any other firms in trouble?

Well, for starters there is Merrill Lynch, another large US investment bank. In a surprise move, Bank of America agreed on Sunday to buy Merrill Lynch.

The fear was that investors would have started a witch hunt for the next bank with heavy exposure to debt linked to mortgages, the value of which continues to tumble, and Merrill Lynch would have been the likely suspect.

The biggest worry, though, is insurance giant AIG. Reports suggest that AIG has asked the US central bank for a $40bn bridging loan.

If AIG is in trouble, it would directly affect millions of consumers and companies around the world. It would also hurt the whole financial system.

And compared to AIG, the crisis surrounding Bear Sterns and Lehman is small beer.

Why didn’t the US Treasury save Lehman Brothers?

When Bear Stearns ran into trouble, the US Treasury made the terms favourable for JP Morgan Chase to buy it.

And just last week, the US government effectively nationalised Fannie Mae and Freddie Mac, which between them own or guarantee about half of the $12 trillion US mortgage market.

So already the US tax payer has been put at risk of shouldering the burden of billions of dollars of losses, and it is becoming politically less acceptable for the government to keep bailing out private companies.

By not giving UK bank Barclays a guarantee for Lehman’s trading obligations as part of a deal to buy the business, analysts say the US Treasury has put a line under its willingness to use public money to rescue banks which have made wrong decisions.

Instead, government officials have focused on supporting the financial system in other ways, announcing measures to ease access to emergency credit for struggling financial companies.

How big is Lehman Brothers?

Founded in 1850 by three immigrants from Germany, Lehman Brothers has been a prominent investment bank in Wall Street for decades.

It operates at a wholesale level, dealing with governments, companies and other financial institutions, employing 25,000 people worldwide, including 5,000 in the UK.

Its core business includes buying and selling shares and fixed income assets, trading and research, investment banking, investment management and private equity.

As the crisis in financial markets has gathered momentum, it has seen its share price collapse from $82 to less than $4 – a fall of 95%.

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Bank of America is to buy Merrill Lynch in a deal worth $50bn (£28bn) that will create a new financial giant.

The deal came amid a hectic weekend on Wall Street, with Lehman Brothers announcing that it would file for bankruptcy protection.

There were worries that Merrill would be the next bank to lose the confidence of investors as it has been hit hard by bad mortgage debt.

Merrill has written down more than $40bn of assets in the past year.

Under the terms of the deal, Bank of America will pay about $29 for each Merrill share.

While that represents a 70% premium to the closing share price on Friday, Merrill’s share price stood at $50 in May and was above $90 at the start of 2007.

‘Great opportunity’

“Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders,” said Bank of America chairman and chief executive Ken Lewis said in a statement.

“Together, our companies are more valuable because of the synergies in our businesses.”

The deal will also see three Merrill Lynch directors join the board of Bank of America.

“Merrill Lynch is a great global franchise and I look forward to working with Ken Lewis and our senior management teams to create what will be the leading financial institution in the world with the combination of these two firms,” said John Thain, Merrill’s chairman and chief executive.

The deal – which is expected to be completed early next year – has been approved by directors of both companies, but now will need the approval of shareholders and regulators.

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