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Wall Street giant Lehman Brothers hanging by a thread as Greenspan warns of 'worst economic crisis I've ever seen'

By Karl West
Last updated at 12:13 AM on 15th September 2008

Wall Street giant Lehman Brothers is staring bankruptcy in the face after Barclays and Bank of America turned their backs on a rescue bid.

News of the prestigious bank’s perilous position will send shockwaves through fragile global markets and economies, including here at home, as the credit crunch worsens.

Experts claimed other banks could go to the wall and conditions were worse than those faced in the 1929 Wall Street Crash.

Lehman’s 4,000 workers based in the City of London, many of whom are now likely to face the axe.

It could also sparking a mass cull of jobs across the financial sector that could stretch into the tens of thousands.

Fears are rising that if Lehman goes down, the crisis of confidence in the sector could spread to others and spark a wave of panic selling when global stock markets open today.

Describing the prospect of Lehman's demise as 'Armageddon', one source warned a collapse could slash as much as 1,000 points off the value of America's main stock exchange, the Dow Jones.

Such a precipitous fall would drag other stock markets into the mire, including Britain’s bluechip index, the FTSE 100.

And is not only City workers who would be affected.

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* Britain IS in recession and 500,000 will lose their job by the end of the year, CBI warns

The value of pensions could be decimated impacting on ordinary people up and down the country further and deepening the economic gloom.

This all comes on the back of huge losses in the CIty in recent times.

The disaster for Lehman Brothers comes after nearly £100billion was wiped off the value of top companies in Britain a week ago.

The five-day fall on the stock market was the worst since the dotcom bubble burst six years ago.

It would also blow another hole in the government's attempts to relaunch the economy.

Further losses are expected when trading resumes this morning.

Last night moves were already afoot to try and restore confidence with reports suggesting that the Bank of America was trying to save the next bank in trouble, Merrill Lynch.

The BoA was desperately trying to strike a merger with Merrill after ditching talks with Lehman.

If no new funding is found before Wall Street opens today Lehman, will seek Chapter 11 bankruptcy protection.

This will protect the bank from its creditors while allowing it some breathing space to try and trade its way out of difficulties.

Accountancy giant PricewaterhouseCoopers has been lined up to run Lehman’s UK operations, which will be seen as bad news for staff.

Barclays and Bank of America were scared off from ‘writing a blank cheque’ for Lehman after the US authorities refused to provide guarantees that would protect them against potential losses from the stricken investment bank.

A Barclays spokesman confirmed that it had ended its interest.

"It's over as far as we are concerned. We had a team look at it over the weekend ... but we just couldn't write a blank cheque for that in the time we were given."

Bank of America - which was working on the bid with US private equity firm JC Flowers and Chinese state investment fund China Investment Corporation - was said to be unconvinced that a deal with Lehman was in the best interests of its shareholders.

A source close to the rescue talks, being led by the US government and central bank the Federal Reserve, warned that if Lehman goes under it could lead to other high profile financial outfits folding.

The investment bank was put up for sale as concerns about its long term financial viability hammered the group's shares down 80pc last week after it reported a £2.2bn quarterly loss.

Increasingly desperate talks to save the bank continued late into the night.

But these efforts came to nothing as Lehman’s last two hopes of a commercial rescue backed away.

The former head of America's central bank added to the growing crisis of confidence in financial markets last night saying he suspected "we will see other major firms fail".

Alan Greenspan, describing the banking crisis as the worst of his career and possibly the worst in a century including the 1929 Wall Street crash, added however that companies collapsing may not be a problem.

'It depends on how it is handled and how the liquidations take place,' he said.

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

Appearing on US TV, he said: 'Let's recognize that this is a once-in- a-half-century, probably once-in-a-century type of event' - the worst 'by far' in his career, he added.

'There's no question that this is in the process of outstripping anything I've seen, and it still is not resolved and it still has a way to go.

'And indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes.

'That will induce a series of events around the globe which will stabilize the system,' he added.

The US Federal Reserve and US Treasury secretary Hank Paulson stepped in at the weekend to summon the bosses of rival Wall Street banks - Goldman Sachs, Merrill Lynch, Citigroup, and JP Morgan Chase - to emergency talks.

They were asked to contribute to a fund that would buy Lehman's £15bn-plus of poor investments in commercial property and mortgage related assets.

This would help the authorities to clean up the troubled bank's balance sheet and make it more appealing to those interested in buying the rest of Lehman.

It is thought the Wall Street chiefs objected to being railroaded by the authorities into taking on all Lehman's risky investments, while BoA and Barclays were offered the good bits on the cheap.

A source said: 'They (the authorities) want to get something done before markets open in Asia.'

The speed at which the US authorities moved to find a solution to Lehman's woes echoes the swift sale of Wall Street rival Bear Stearns to JP Morgan Chase earlier this year.

It also follows last week's government-sponsored rescue of home loans giants Freddie Mac and Fannie Mae, which hit trouble because of the collapse of the subprime mortgage market in America.

However, Mr Paulson was adamant that no taxpayer funds would be used to sort out Lehman.

This is because the authorities do not want to be accused of excessive risk-taking by bailing out yet another irresponsible investment bank that took too many bad bets on the property market.