Lehman in Bankruptcy, AIG Struggling, BofA Buys Merrill Lynch, Fed to Lend Against Weak Collateral...

Major Wall Street investment firms continue to collapse tonight as Lehman Brothers, the 125 year old investment firm filed for Bankruptcy within the last half-hour. Also, Bank of America has announced it is buying investment firm Merrill Lynch for the over-priced amount of $50 billion in an all stock transaction. The BofA purchase of Merrill comes on the heels of its purchase of Countrywide Financial. The purchase is a huge risk for BoFA. Should the real estate market collapse significantly worsen further destroying the Countrywide loan portfolio, BofA could take significant hits to its capital base.

In a separate announcement, the United States Federal Reserve will now accept all investment grade bonds, plus equity (Stock) securities as collateral for loans to Wall Street investment banks. The big problem here is that many firms can and are losing their investment grade credit ratings at the drop of a hat. So in essence the U.S. Government is basically using as collateral for taxpayer loans, financial instruments issued by companies that may not survive.

Bloomberg News is also reporting that largest insurer AIG is desperately trying to secure a bridge loan from the U.S. Government in an effort to keep its investment grade rating. A ratings downgrade to AIG will put tremndous pressure on the company and possibly drive its shares into the ground.

It is likely that Merrill Lynch would have followed Lehman down a slippery slope. The purchase price of $29 per share that BofA is paying for Merrill tacks a ridculous $12 per share to Merrill's Friday closing share price of $17.

Other major U.S. banks still have significant markdowns on mortgage-backed securities they hold. Citigroup is number one on the list. The size of the company's portfolio makes heavy markdowns problematic for the firms capital reserves.