Lehman Files for Chapter 11 Bankruptcy

After the leading contender to purchase Lehman Brothers walks away, the troubled investment bank files for Chapter 11 bankruptcy protection.
Author:
Publish date:

Updated from Sunday, Sept. 14

Lehman Brothers

(LEH)

filed for Chapter 11 bankruptcy protection Monday morning, according to several published reports.

The 158-year-old investment bank filed for Chapter 11 protection at 1:45 a.m. EDT in the Bankruptcy Court for the Southern District of New York, according to

The Wall Street Journal

. In a statement, Lehman said its board decided to file for Chapter 11 to "protect its assets and maximize value." Lehman said it plans to file certain motions so that it can continue to manage its operations.

None of the broker-dealer subsidiaries or other subsidiaries of Lehman will be included in the filing and all of the broker-dealers will continue to operate, the company said. Lehman customers, including those of its

Neuberger Berman

subsidiary may continue to trade or take other actions on their accounts.

Lehman's bankruptcy filing listed debts of $613 billion and named banks from Tokyo, Hong Kong, New York, Singapore, Taipei and elsewhere as unsecured creditors owed hundreds of millions of dollars, the

Journal

reported.

Lehman's fate appeared sealed after the top contenders to purchase it, including the U.K.'s

Barclays

(BCS) - Get Report

, walked away, saying they wouldn't support a deal that didn't include financial backing from the U.S. government or other banks,

The New York Times

reported Sunday on its Web site.

A group of banks will provide a financial backstop in order to help Lehman liquidate in an orderly fashion, and the

Federal Reserve

will accept lower-quality assets in return for loans, the

Times

reported.

The agreement by the banks and Fed to attempt to smooth the impact of a liquidation came out of a series of emergency meetings over the weekend at which government officials and top Wall Street executives tried to work out a rescue plan for Lehman. At the same time, employees of investment banks were scrambling to assess their own firms' exposure to Lehman and considering entering into credit default swap agreements with other banks that would effectively cancel out agreements they had with Lehman.

It appeared that a plan was coming together under which either Barclays or

Bank of America

(BAC) - Get Report

would purchase Lehman's "good assets," while Lehman's "bad assets" would be cordoned off in a "bad" bank, according to an earlier report in the

Journal

.

But that plan fell apart after it became clear that the government and multiple Wall Street firms would not provide financial support.

Bank of America ended up focusing its attention on another troubled investment bank,

Merrill Lynch

(MER)

, and by early Monday the two companies confirmed a merger agreement.

Government officials, including Treasury Secretary

Henry Paulson

, had said they were reluctant to provide funding or guarantees for a Lehman rescue. And New York Fed President Timothy Geithner pressed Wall Street chieftains Friday to come up with an industry solution for Lehman Brothers, according to an earlier report in the

Times

.

The government is finding itself increasingly on the hook for the credit crisis that began to envelope financial institutions last summer. Last week, it took over troubled mortgage giants

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

, and earlier this year, the Fed agreed to backstop

JPMorgan Chase's

(JPM) - Get Report

purchase of failing investment bank

Bear Stearns

.

Lehman this week entered what looked very much like the kind of death spiral that claimed Bear Stearns, as its shares shed 77% over the course of the week to close at $3.65 Friday.

Lehman shares plummeted more than 90% to 30 cents in recent trading.

This article was written by a staff member of TheStreet.com.