The Back Alley Archives

NEW YORK (AP) -- A top investment banking official says U.S. and foreign banks are planning major steps to inoculate the global financial system as a bankruptcy filing by Lehman Brothers appeared likely.

The official said Sunday the banks would create a pool of money up to $50 billion to lend troubled financial companies. And officials at the U.S. Treasury and the Federal Reserve are expected to say they are prepared to make additional loans.

The plan comes as top government officials and Wall Street executives hold marathon meetings about Lehman's future.

The official says the Fed and Treasury are pushing Bank of America to buy Merrill Lynch. The person, with direct knowledge of the talks, was not authorized to speak publicly because the discussions were ongoing.

The American International Group is seeking a $40 billion bridge loan from the Federal Reserve, as it faces a potential downgrade from credit ratings agencies that could spell its doom, a person briefed on the matter said Sunday night.

Ratings agencies threatened to downgrade the insurance giant’s credit rating by Monday morning, allowing counterparties to withdraw capital from their contracts with the company. One person close to the firm said that if such an event occurred, A.I.G. may survive for only 48 hours to 72 hours.

A.I.G.’s sickly financial health emerged late into one of the most tumultuous days in Wall Street history. Lehman Brothers, the 158-year-old investment bank, is expected to file for bankruptcy protection Sunday night, while Bank of America has agreed to buy Merrill Lynch for $50.03 billion.

It has already raised $20 billion this year. But even that enormous capital raise may not be enough.

Though this past weekend was convened to focus on Lehman, the Wall Street chieftains who gathered at the Federal Reserve Bank of New York also pondered a solution for A.I.G. The firm had become one of the biggest underwriters of complex debt securities known credit default swaps, used as insurance for a wide range of products, including the mortgage instruments that have been the bane of Wall Street for the past year and a half.

A.I.G.’s stock has fallen 79 percent over the past year, closing on Friday at $12.14.