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Lehman Brothers announced early Monday morning that it will file for bankruptcy,
becoming the largest financial firm to fail in the global credit
crisis, after federal officials refused to help other companies buy the
venerable investment bank by putting up taxpayer money as a guarantee.
The
failure of the nation's fourth-largest investment firm offers a
profound test of the global financial system, and government and
private officials had been bracing Sunday night for an upheaval in a
range of financial markets that have never before experienced the
bankruptcy of such a large player. To keep cash flowing normally
through these markets, the Federal Reserve announced new lending procedures, while 10 major banks combined to create a new $70 billion fund.
After
a marathon series of negotiations over the weekend, Federal Reserve and
the Treasury stepped aside to allow a wrenching transformation of Wall Street to proceed. After galloping to the rescue of other major financial
institutions in recent months, the federal government drew the line
with Lehman Brothers, ignoring pleas from would-be buyers of the
company who insisted on receiving federal backing for its troubled
assets.
Leaders of the Federal Reserve and Treasury Department
decided that Lehman was unlike the investment bank Bear Stearns, whose
sudden collapse in March threatened the world financial system, or Fannie Mae and Freddie Mac, whose potential insolvency did the same.
In betting that Lehman could be allowed to fail without catastrophic
consequences, New York Federal Reserve President Timothy F. Geithner,
Fed Chairman Ben S. Bernanke,and Treasury Secretary Henry M. Paulson, Jr., were making it clear that struggling financial firms cannot count on a bailout.
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