Sunday "crisis" on Wall Street portends "day of reckoning" Monday

The Wall Street Journal reports:

The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. faced the prospect of liquidation, and Merrill Lynch & Co. was close to a deal to sell itself to Bank of America Corp. ...

A sense of foreboding gripped Wall Street as top executives feared collateral damage from a Lehman liquidation. ...

"Monday will be a day of reckoning for the financial markets," said Carlos Mendez, senior managing director of ICP Capital, a boutique investment firm in New York. On Sunday, he said, "it was like a fire alarm went off and people ran in all directions."

AIG executives spent the weekend trying to raise cash, either from asset sales or a capital infusion from private-equity firms, or both. AIG executives were meeting with regulators to see if they could transfer capital from some of its subsidiaries to the holding company.

As worries spread across Wall Street that Lehman wouldn't survive, brokerage firms, hedge funds and other traders moved to disentangle themselves from trades with Lehman. When hopes of a potential sale dimmed, a quiet Sunday on Wall Street turned into a mad rush. Executives and traders hurried to their offices or worked their phones to unwind outstanding contracts with Lehman and to gauge their overall exposure. ...

The U.S. dollar, which had strengthened in the past few weeks, fell against all four of its major rivals on Sunday -- the euro, the Swiss franc, the U.K. pound and the Japanese yen. ...

Lehman, a 158-year-old firm that started as an Alabama cotton brokerage, and Merrill, with its trademark bull logo, have been pillars of Wall Street for much of the past century. With the demise of Bear Stearns, three of the Street's five major independent brokers could end up disappearing, leaving only Goldman Sachs Group Inc. and Morgan Stanley.

"We have never seen anything like this," said analyst Glenn Schorr, who covers the investment banks for UBS AG. "There have been tough situations like Long-Term Capital Management and the crash of 1987, but the problem here is there is leverage in the securities under the microscope and in the banks that own them. And to try and unwind it all at once creates a one-way market where there are only sellers, and no buyers."

The convulsions could lead to even tighter credit, higher borrowing costs and moribund capital markets, as securities firms and commercial banks try to further limit risk and preserve capital. Those moves could cause the U.S. economy to slow further.

The New York Times quotes one hedge-fund CEO as saying: "This is an earth-shattering event, this is like a tectonic plate shifting event. This is welcome back to Black Monday."

Then there's this:

The United States is mired in a "once-in-a century" financial crisis which is now more than likely to spark a recession, former Federal Reserve chief Alan Greenspan said Sunday. ...

Asked whether the crisis, which has seen the US government step in to bail out mortgage giants Freddie Mac and Fannie Mae, was the worst of his career, Greenspan replied "Oh, by far."

"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," Greenspan said.

"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."