American Airlines files for bankruptcy

A worker walks underneath an American Airlines airplane at Miami International airport in Miami, Florida November 29, 2011. American Airlines and its parent company AMR Corp filed for bankruptcy on Tuesday after failing to win a labor deal with pilots and suffering from mounting fuel costs.

Credit: Reuters/Lucas Jackson

By Kyle Peterson and Matt Daily

American Airlines filed for bankruptcy protection on Tuesday to cut labor costs in the face of high fuel prices and dampened travel demand, capping a prolonged descent for what was once the largest U.S. carrier.AMR Corp, the parent of American Airlines, also filed for bankruptcy and replaced its chief executive.
The company, which employs about 88,000, has been mired for years in fruitless union negotiations, complaining that it shoulders higher labor costs than rival domestic and foreign carriers that have already restructured in bankruptcy.
United Continental Holdings Inc's United Airlines and Delta Air Lines Inc, both of which used Chapter 11 to cut costs and later found merger partners, are now the largest U.S. carriers. American ranks third.
"The world changed around us," incoming Chief Executive Tom Horton told reporters on a conference call. "It became increasingly clear that the cost gap between us and our competitors was untenable."
AMR named Horton as chairman and chief executive, replacing Gerard Arpey, who retired.
American plans to operate normally while in bankruptcy, but the Chapter 11 filing could punch a hole in the pensions of roughly 130,000 workers and retirees.
AMR pension plans are $10 billion short of what the carrier owes, and any default could be the largest in U.S. history, government pension insurers estimated.
Ray Neidl, aerospace analyst at Maxim Group, said a lack of progress in contract talks with pilots tipped the carrier into Chapter 11, though it has enough cash to operate. The carrier's passenger planes average 3,000 daily U.S. departures.
"They were proactive," Neidl said. "They should have adequate cash reserves to get through this."
PROBLEMS TO ADDRESS
Bankruptcy gives AMR a chance to pare less profitable operations, and could result in the sale of flight routes. The process also gives AMR more flexibility, according to Jack Williams, a professor of law at Georgia State University.
"There are considerable tax benefits that they will be able to use in a bankruptcy case, and they will be able to more aggressively manage their liabilities," Williams said.
But analysts question whether the bankruptcy will address operational shortcomings that have eroded revenue.
"Bankruptcy is not necessarily the be-all, end-all," said Helane Becker, an analyst with Dahlman Rose & Co. "They've got more problems to address in addition to the cost problem."
Shares of AMR closed Tuesday down $1.36, or 84 percent, at 26 cents, down from a 52-week high of $8.89 on January 7. Stock typically is wiped out in bankruptcy.
Shares of rival airlines rallied on expectations that reduced competition could boost fares. AMR had kept a lid on industrywide fares in its effort to keep its airplanes full.
United Continental shares closed up 6.3 percent at $17.63, Delta rose 5 percent to $7.80 and US Airways Group Inc climbed 4.4 percent to $4.46.
AMR shares were halted 28 times on the NYSE on Tuesday for triggering a circuit breaker rule, activated when a stock moves up or down at least 10 percent within five minutes.
SLIMMED-DOWN AMR
In its bankruptcy petition filed in Manhattan, AMR reported assets of $24.72 billion and liabilities of $29.55 billion. The company has $4.1 billion in cash.
One bankruptcy rule is "don't wait too long," Harvey Miller, a partner at Weil, Gotshal & Manges representing AMR, said at a court hearing. "Don't wait until the course is irreversible. That is what American Airlines is doing today."
AMR's bankruptcy filing showed few details about how the company would proceed, said Stephen Selbst, a bankruptcy attorney with Herrick Feinstein in New York.
"It's possible they are still in negotiations and don't want to put something on paper that might prejudice those negotiations," he said.
Experts believe AMR stands to save billions by restructuring its obligations in bankruptcy.
"AMR will no longer have its defined benefit pension plan, helping absorb nearly $7 billion in debt," Morningstar equity analyst Basili Alukos said.
"I imagine the company can save between $1.2 billion to $1.5 billion in labor costs, in addition to savings on repair and maintenance and better fuel burn," he said.
MERGER IN THE OFFING?
AMR said the bankruptcy has no direct legal impact on non-U.S. operations. It also said it was not considering debtor-in-possession financing.
But it could susceptible to unsolicited takeover bids from rival carriers. AMR has long said it could thrive on its own.
Robert Herbst, an analyst with AirlineFinancials.com and a former American pilot, said there was a "95 percent" chance American would join up with another carrier within two years.
"US Airways is probably toward the top of the list but it wouldn't be the only (potential merger partner)," he said.
A US Airways representative did not immediately return a phone call seeking comment.
Most large U.S. carriers are the products of mergers.
United Continental combined the former United Airlines and Continental Airlines, while Delta bought the former Northwest Airlines. US Airways was formed from a 2005 merger with America West Airlines.
US Airways and United Airlines filed for bankruptcy protection in 2002, and Delta and Northwest in 2005. US Airways had tried to buy Delta out of bankruptcy.
Japan Airlines Co, one of American Airlines' alliance partners, filed for bankruptcy last year.
American Airlines said it would remain an active member of the oneworld global airline alliance.
LABOR PAIN
American struggled with labor costs despite massive concessions from unionized workers in 2003, which enabled it to avoid Chapter 11 at the time.
"That deal wasn't good enough," former American chief Robert Crandall told Reuters. "The other airlines that went bankrupt cut their costs much deeper than American.
"If you look at all of the elements of the problem, they all stem back to costs," he said. "It hasn't cut capacity effectively given the constraints" that labor placed.
Contract talks with pilots hit a wall in recent weeks over wages, benefits and work rules. Talks with unionized flight attendants have also flagged.
"While today's news was not entirely unexpected, it is nevertheless disappointing that we find ourselves working for an airline that has lost its way," David Bates, president of the Allied Pilots Association, said in a statement.
A wave of pilot retirements this year prompted speculation of a Chapter 11 filing, given that the retirements could preserve pensions that might be at risk of being terminated.
"The 18-month timeline allotted for restructuring will almost certainly involve significant changes to the airline's business plan and to our contract," Bates said.
The case is In re: AMR Corp, U.S. Bankruptcy Court, Southern District Of New York, No. 11-15463.

Source : Reuters
 [tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

Borders files for bankruptcy, to close 200 stores

Borders Group Inc filed for bankruptcy protection and said it would close about one-third of its bookstores, after years of shriveling sales that made it impossible to manage its crushing debt load.

The long-expected Chapter 11 filing will give the second-largest U.S. bookstore chain a chance to try to fix its finances and overhaul its business in an attempt to survive the growing popularity of online bookbuying and digital formats.

But the chain still faces questions about its longer-term survival in the face of competition from larger rival Barnes & Noble Inc and discounters such as Wal-Mart Stores Inc and Costco Wholesale Corp, as well as from Web retailer Amazon.com Inc and from Apple Inc in electronic books.

Borders President Mike Edward said his chain "does not have the capital resources it needs to be a viable competitor." He said the bankruptcy was essential for Borders to restructure its debt and still operate.
Borders, which was founded in 1971 and bought by Kmart in 1992, had liabilities of $1.29 billion and assets of $1.28 billion as of December 25, according to documents filed on Wednesday with the U.S. Bankruptcy Court in Manhattan. Borders has had net losses totaling $680.6 million since the beginning of its 2007 fiscal year.

The pioneer of book superstores plans to abandon some of its highest profile locations, closing a store in its hometown of Ann Arbor, Michigan, as well as one on Manhattan's Park Avenue.

All 200 closings will be superstores, and about 6,000 jobs will be affected, the company said. It has the option of closing up to 275 in all, according to court documents. It said the stores it wants to close lose a combined $2 million a week. The closings will start by Saturday. The company said it will honor gift cards.
Borders operates 642 stores, including about 500 superstores as well as more than 100 smaller Waldenbooks locations. Almost all of the stores closed by the company in recent years were Waldenbooks locations.

"Waldenbooks really is a specialty retailer," said Mark Freiman, a retail consultant with Focus Management Group. "Borders is category killer and essentially a category killer in book is going to go away. There is no question about it."

The largest U.S. bookstore chain, Barnes & Noble, has had success with its Nook e-reader and online store, allowing it to stay in contention with online book pioneer Amazon.com. Borders has lagged well behind.

Borders made a major strategic error in 2001 when it handed off its online business to Amazon. It relaunched borders.com in 2008, but in the first three quarters of 2010, online sales made up only 2.3 percent of revenues.

The chain's difficulties have been worsened by the revolving door in its executive suite in recent years. The company has had four chief executive officers in the past three years and two chief financial officers in 2010.
Sales declined by double-digit percentage rates in 2008, 2009 and in the first three fiscal quarters of 2010. During those nine months, sales came to $1.54 billion.

SMALL BOOST FOR B&N?
The bankruptcy could help sales of traditional books at Barnes & Noble, at least temporarily, analysts said. Credit Suisse estimates that 70 percent of Borders stores are near a Barnes & Noble store. Barnes & Noble operates 717 superstores.



Source : Reuters
  [tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

Japan Airlines files for bankruptcy protection

Japan Airlines filed for one of the country's largest bankruptcies, entering a restructuring that will shrink Asia's top carrier and its presence around the world.

A fleet of 279 aircraft, carrying nearly 12 million passengers a year on more than 400 routes, there's no doubt Japan Airlines is a high profile victim of recession.

The bankruptcy of the national flag carrier is a major blow for Japanese pride. JAL collapsed with $16.5bn of debt because the Japanese government is no longer willing to keep bailing it out.

About 15,000 workers will likely lose their jobs under JAL's administered restructuring, while the firm's creditors will suffer losses of more than $3bn.


RELATED NEWS

Bankrupt JAL scrambles to reassure passengers

Japan Airlines sought to reassure the travelling public Wednesday that it will keep flying despite declaring bankruptcy as its share price dropped to a new record low of just two US cents.

The debt-laden carrier apologised in full-page newspaper advertisements for causing "tremendous worries to customers" and promised that "JAL will keep flying" and that passengers' air miles will remain valid.

"Please be reassured and use us as before," the company pleaded.

The once iconic airline, a symbol of Japan's rise to prosperity, filed for bankruptcy protection Tuesday with 26 billion dollars in debt in the country's biggest post-war corporate failure outside the financial sector.
It is set to undergo a painful overhaul under a new corporate chief, with more than 15,600 jobs to be cut, reducing the workforce by a third, and many loss-making routes expected to be slashed.

JAL, which carries more than 50 million passengers a year, is set to receive almost 10 billion dollars in public funds and emergency loans under a three-year turnaround plan.

The Tokyo Stock Exchange will delist JAL shares by February 20, a move expected to wipe out shareholders' investments.

JAL shares were trading at a record low of two yen (two US cents), down three yen or 60 percent from Tuesday's close. The price could theoretically fall to a rock-bottom one yen.

"There are still people who are trading JAL, including those who are enjoying a one-month game, with the downside risk limited to one yen," said Hideyuki Higashi, a strategist at SMBC Friend Securities.

The company has made no announcement regarding its tie-up talks with American and Delta Air Lines, which are in a bidding war for a slice of the carrier, eyeing its lucrative Asian landing slots.

JAL is understood to prefer switching its alliance from the American Airlines-led oneworld grouping to SkyTeam with Delta.

But it is expected to take some time for JAL and Delta to clear anti-trust hurdles and get approval from US authorities for joint operations.

The government has tapped Kazuo Inamori, a 77-year-old entrepreneur, business guru and ordained Buddhist monk, to run the stricken airline during its overhaul, replacing Haruka Nishimatsu, who resigned as president Tuesday.

Yasuhiro Matsumoto, a credit analyst at Shinsei Securities, voiced optimism JAL will successfully implement the restructuring plan but said the company still lacks a solid long-term vision.

He said the turn-around plan involves "getting rid of money-losing businesses to return to profit and is not based on unfounded optimism that travel demand will grow in the future."

However, he said, the government still "has no growth strategy. It doesn't have a strategy on how JAL should design its international network."

The bankruptcy, shocking to many Japanese, dominated newspaper front pages.
The Nikkei business daily said debt-ridden JAL's failure should serve as a warning to other companies and the government in a country where the public debt now stands at about 180 per cent of gross domestic product.

"If you shun the pain that is ahead of you, greater pain will come someday," the Nikkei warned. "The fall of JAL, which shone in the past, sends this message to the state and companies."

Source : BBC AFP
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

Nine US banks seized in largest one-day haul

US authorities seized nine failed banks yesterday, the most in a single day since the financial crisis began and the latest stark sign that substantial parts of the nation’s banking industry are being crippled by bad loans.
The move brought the total number of failed banks in 2009 to 115 — their highest annual level since 1992 — with analysts expecting more to come. Among the lenders seized yesterday was Los Angeles-based California National Bank, in what was the fourth-largest US bank failure this year.

The largest institution to fail in the current financial crisis was Washington Mutual, which boasted US$307 billion (1,044 billion) in assets when it was shuttered in September 2008.

US Bancorp yesterday acquired the nine banks that had been held by FBOP Corp, picking up US$18.4 billion in assets and US$15.4 billion of deposits.

Visibly worried employees lined up to file into Cal National’s head offices in the heart of a deserted downtown Los Angeles on a chilly Friday evening, where they had their employers’ fate explained to them, regulators said.

“We’re getting ready to turn everything over to US Bank,” said Roberta Valdez, a spokeswoman for the Federal Deposit Insurance Corp, which helped supervise the transfer of FBOP’s assets. “They will continue to operate as normal in the interim,” she added, referring to lenders acquired from FBOP.

US Bancorp — which has been buying up distressed assets this year — is picking up the lenders once owned by FBOP, a private Illinois group with over US$18 billion in assets that owned banks in Texas, Illinois, Arizona and California.

Cal National is FBOP’s largest bank by branches. Others that will now go under the US Bancorp umbrella included BankUSA, Citizens National Bank, Madisonville State Bank, North Houston Bank, Pacific National Bank, Park National Bank, San Diego National Bank, and the Community Bank of Lemont.
“This transaction is consistent with the growth strategy that we have outlined many times in the past, which includes enhancing our existing franchise through low-risk, in-market acquisitions,” said Rick Hartnack, vice chairman of consumer banking for US Bancorp.

“This transaction adds scale to our current California, Illinois and Arizona footprints.”
In the “near future”, all nine lenders’ branches will be re-branded US Bank, which is the California-focused unit of US Bancorp’s that operates a network of more than 770 branches across Illinois, Arizona and California.

US Bancorp did not specify what would happen to the new employees it inherits.
Cal National operates 68 branches across Southern California with more than US$7 billion in assets. As of June 30, the lender maintained five times as much foreclosed property on its books and twice as many non-current loans as it had a year earlier, according to the Los Angeles Times, which first reported news of its evening takeover yesterday.

Cal National lost about US$500 million on heavy investments in Fannie Mae and Freddie Mac preferred shares, the newspaper added, referring to securities rendered nearly worthless by the government takeover of the mortgage firms last year.

According to FDIC data, Cal National was the fourth biggest bank failure this year in terms of assets, just edging out Corus Bank, seized Sept 11 with a flat US$7 billion of assets.
A bank official who answered the main number at Cal National’s headquarters said they could not talk at the time.

Banks are still cleaning up their balance sheets from the recent credit boom that fuelled banks’ appetite to extend loans, many with poor underwriting and triggers that caused borrowers’ payments to spike to unaffordable levels.

More lenders are expected to go under this year as the industry tries to get a handle on commercial real estate loans that will continue to worsen, as more strip malls go vacant and residential developments stall.
Banks held about US$1.7 trillion in commercial real estate loans at the end of September, according to Federal Reserve data, or about 15 per cent of their total assets. But to the extent these loans weaken, small banks are likely to be hit the hardest because larger banks were better diversified.

Banks that analysts say could risk big losses include Salt Lake City’s Zions Bancorp, Columbus, Georgia’s Synovus Financial Corp and Dallas-based Comerica Inc.

Before FBOP, US Bancorp bought Downey Savings of Newport Beach and PFF Bank & Trust of Pomona when those thrifts failed last November, the newspaper said. Just this month, US Bancorp bought 20 Nevada branches from BB&T Corp, which had acquired them as part of its deal to buy Colonial BancGroup Inc, it added


Source : TMI
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

After nine decades of short stories, Reader's Digest turns to Chapter 11

Reader's Digest Association, the venerable staple of doctors' waiting rooms and middle-class bedside tables, yesterday announced plans for voluntary bankruptcy as it became the latest victim of the advertising recession.

Equity investors, led by Ripplewood Holdings, who announced the $2.4bn acquisition in November 2006, will lose their entire $600m investment.

The pre-packaged Chapter 11 filing, agreed with senior lenders but contingent on agreement with other lenders, marks the latest media industry deal struck at the peak of the credit-fuelled buy-out market to head towards the bankruptcy courts.

Reader's Digest, launched by a husband and wife in New York in 1921 from one room under a Greenwich Village speakeasy, began as a mail-order collection of condensed articles from other magazines and evolved into a direct-mail pioneer and one of the world's largest publishers.

Nine of its 94 magazines have a circulation of more than 1m in the US alone, and its titles claim a combined global readership of 130m people in 78 countries.

But the group has been hit hard by changing reading habits and an advertising recession.

Advertising revenue from the flagship magazine fell 18.4 per cent last year, and is down another 7.2 per cent in the first six months of this year, according to the Publishers Information Bureau .

"The deal was done at the height of the frothy investment banking model, and the company was saddled with $2.2bn worth of debt," said Tom Williams, chief financial officer. Group revenues are down just 2 per cent this year, said Mary Berner, chief executive.

However, as cash flows came in below the Ripplewood-led buy-out group's expectations, it found itself struggling to make a $27m interest payment, due yesterday.

Ms Berner said the restructuring would not affect its operations or suppliers. "This is a balance sheet issue and not an operational issue," she said.

Source : Financial Times
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

Arcandor files for bankruptcy

German retailer Arcandor AG filed for bankruptcy protection Tuesday in an effort to salvage its department stores and its mail-order arm, a day after the government rejected its bid for state-backed emergency credit.

Arcandor said in a statement it filed with the district court in Essen, where it is based.

"Through filing for protection, our aim is to continue restructuring the company and its subsidiaries in an effort to ensure their survival," the company said.

Arcandor units including the Karstadt Warenhaus GmbH department stores and the Quelle GmbH mail-order company were involved in the filing.

Units not involved include travel operator Thomas Cook Plc, in which Arcandor holds a majority stake, and its home-shopping channel HSE 24, the statement said.

The government on Monday rejected a bid from Arcandor for euro437 million ($610 million) in state-backed credit.

"Following that, there was no sustainable financial perspective," the company said. "As of June 12, when short-term loans of euro710 million will be due, we will be insolvent."

Arcandor said that some 43,000 employees in Germany would be affected by the proceedings. They will receive their paychecks through August and then will be eligible to file for special state benefits.

"As part of the bankruptcy protection proceedings we will fight to maintain as many jobs and stores as possible," said Karl-Gerhard Eick, chairman of Arcandor's management board.

Chancellor Angela Merkel, who had repeatedly voiced skepticism about a government bailout of Arcandor, described the filing as "an unavoidable step whose opportunities should now be used."

"The pledges by the owners and creditors were absolutely not enough for us," Merkel told reporters. "We have to take care of tax money."

Merkel said Economy Minister Karl-Theodor zu Guttenberg would soon speak with Arcandor employee representatives "because the government has a great interest in being helpful."

"We have always said that an insolvency filing can offer the possibility to put the company on new feet and open up prospects for it," Merkel told reporters.

She said she saw opportunities for jobs in joining up with other companies, such as Metro AG, the owner of rival department store chain Kaufhof.

Metro spokesman Ruediger Stahlschmidt said after Tuesday's filing for bankruptcy protection that his company was still interested in taking over some 60 of the 90 Karstadt department stores and their employees.

Metro has proposed a merger that would produce one large retail company, though negotiations so far have made little headway.

"We hope ... that we will be able to return to talks next week," Stahlschmidt said.

Earlier in the day, the Economy Minister Karl-Theodor zu Guttenberg had spelled out the requirements for any government backing, including "significant contributions" from its owners and a debt moratorium from creditor banks.

Arcandor shares fell 48 percent to close at euro0.55 on Tuesday.

Source : AP
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

The St. Regis Monarch Beach schedule for a Foreclosure Auction!

The St. Regis Monarch Beach, infamous as the hotel where American International Group sponsored a luxury retreat just days after accepting a federal bailout, has been scheduled for a foreclosure auction.

The companies that own the resort are in default on a $70-million loan from Citigroup Global Markets Realty Group, people knowledgeable about the debt said Tuesday.

Negotiations continue in an effort to avoid an auction, according to those sources. But unless something is worked out, the St. Regis will go on the block July 7, to be sold to the highest bidder, according to a "terms of public sale" document obtained by The Times.

The resort's troubles come as the recession and credit crunch have hammered the hotel industry, depressing room rates and occupancy levels and making loans all but impossible for hotel owners to get.

Resorts like the St. Regis, which cater to wealthy travelers and the high-end corporate retreat business, have seen some of the steepest declines in revenue.

Business is so bad -- and funding so expensive -- that hardly any hotels are being sold these days, and most are now worth 50% to 80% less than at the peak, said hotel broker Alan X. Reay of Atlas Hospitality Group in Costa Mesa.

Just this week, Sunstone Hotel Investors Inc. said it would turn the trendy W Hotel in downtown San Diego over to its lenders, part of a growing trend that Reay said was a "bloodbath."

The St. Regis -- which has several restaurants, a golf course and a private beach club -- has been hit by a steep drop in bookings, according to the people with knowledge of the situation.

Built by the Makarechian development family of Newport Beach, the property is current, for now, on two other mortgages totaling $230 million on the 400-room hotel and golf course, these people said, speaking on condition of anonymity because of the sensitivity of the situation.

When the Makarechians and their partners, including San Francisco's Farralon Capital hedge fund, refinanced the property and incurred $300 million in debt in 2007, credit markets had not yet seized up and the hotel's revenues were high enough to support the payments.

But that's no longer the case, these people said. Neither Citigroup nor representatives of the St. Regis would comment on the record.

The St. Regis always aimed to satisfy the smallest whims of wealthy people and high-end corporate travelers.

Before the hotel opened in 2001, Paul Makarechian, the 27-year-old scion overseeing non-residential projects for the family, took The Times on a tour, pointing out sweeping tapestries, elaborately stitched duvet covers matching fabric-draped headboards -- even motion sensors so employees would know without knocking if guests were present.

"If you're going to build a five-star luxury resort hotel that will outdo every other deluxe hotel on the planet, you don't scrimp on sheets," he said. "You don't scrimp on anything."

But in these times, perhaps a bit more austerity is in order.

Although the St. Regis is not directly on the waterfront, the Pacific Ocean is visible from its six restaurants and it boasts a five-star Mobil Travel Guide rating, compared with four stars for the nearby Ritz-Carlton and Montage resorts.

Guests can take a shuttle across the golf course to a private ocean-front club at Monarch Beach, the northernmost stretch of Dana Point, where they can sip cocktails after taking surfing lessons.

The St. Regis became something of an emblem of corporate excess and greed last October, as the global financial system was threatening to melt down.

The taint arrived by association with AIG, the giant New York insurer that, because of massive wrong-way bets on the mortgage markets, became the largest recipient of bailout money from the federal government.

Just weeks after receiving its first $85 billion in federal funds, AIG shelled out more than $440,000 at the St. Regis for rooms, wining and dining, spa treatments and rounds of golf to reward 100 top salespeople.

The Presidential Suite, which normally goes for $3,200, was booked for five nights, The Times reported.

The event was widely vilified and lampooned, and bookings at the St. Regis dropped by 20% in the months following it, St. Regis marketing director Michael Mustafa told Hotels Magazine.

By Mustafa's estimate, about a third of the drop-off was attributable to what the magazine termed the "AIG curse."

"My phone started ringing off the hook," Mustafa recalled. "That was the worst week of my life."

At the St. Regis, managers couldn't be reached for comment Tuesday. But it appeared the debt problem would not directly affect resort visitors. The Citigroup real estate arm is pursuing what is known as a non-judicial foreclosure, meaning no sheriff's deputies nailing notices to the hotel walls or sales on the courthouse steps.

Instead, the auction is to be held at First American Title Co. in Santa Ana.

Bidders would be vying for the hotel and golf course, but not the surrounding residential areas, including a yet-to-be-developed parcel on the hotel's south flank, which is owned separately by the Makarechian-Farralon partnership.

Citigroup itself is allowed to bid, according to the "terms of public sale" document. The Makarechians and partners also are likely to enter bids.

The package to be sold includes the obligation to pay the $230 million in senior mortgages on the property.

Source : HotelsMag
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

General Motors to File for Bankruptcy

GM - the biggest car manufacturer in the world until last year - will file for bankruptcy in the US courts as it seeks to restructure its stricken operations.

The US government is said to be planning to take a 60% stake in the Detroit company under a deal to provide an additional £19 billion in aid to help GM emerge from bankruptcy.

President Barack Obama is preparing to make a White House address in which it is understood he will reassure that a revived GM will come out of the restructuring process.

It is also thought that he will stress the government's commitment to staying out of the carmaker's business decisions, in spite of its majority ownership stake.

The Canadian government is also reportedly taking a 12.5% stake in GM and a United Auto Workers trust for health care expenses would get 17.5%.

Holders of GM corporate bonds are expected to receive a 10% stake, with the possibility of increasing their share to 25%.

GM, maker of Chevrolet, Buick and Cadillac cars and trucks, is expected to file for bankruptcy protection at 8am in the US (1pm BST). The move will not affect Magna International's rescue deal to buy GM Europe and the Vauxhall and Opel brands.

The bankruptcy - the fourth-largest of its kind in the world - is set to trigger an intensive two to three-month restructuring that will see thousands of US workers axed, with many dealerships and factories also closed.

GM plans to name veteran turnaround specialist Al Koch to serve as its chief restructuring officer to help the company through bankruptcy protection.

He will lead the separation of the carmaker's assets into a "new GM" and the remaining parts of the company that will form "old GM".

The "old GM" company is then set to be wound down once the company emerges from bankruptcy.

GM was founded in 1908 by William Durant, who brought several car companies under one roof and developed the strategy of "a car for every purse and purpose" in the 1920s that was designed to appeal to consumers of all ages and financial status.

The group commanded more than half the US car market in the 1950s and employed more than 600,000 workers in the late 1970s, making it the largest private employer in the country.

It is still one of America's largest employers today, but will come out of its Chapter 11 process a far leaner firm, focusing only on its four core brands - Chevrolet, Cadillac, Buick and GMC.

Source : Independent
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

Job fears at clothing firm Viyella

Fears were mounting last night over the security of almost 700 jobs after another high street chain collapsed into administration.

Following a lunchtime meeting with staff, bosses of iconic women’s retailer Viyella announced they had “no alternative” but to place the firm in the hands of Birmingham administrators Poppleton (corr) & Appleby.

Due to the continued economic gloom surrounding the retail sector, Viyella said it could no longer be confident about its future prospects.

The firm has two stores in Wales – in Llandudno’s Victoria Centre and Monmouth’s Monnow Street – and a further 105 shops and concessions across the UK.

The future of its 645 staff now hangs in the balance but administrator Andrew Turpin said he was hopeful a buyer could be found.

Mr Turpin said: “The Viyella brand is trusted and respected both at home and abroad, and we expect that the prospect of a sale of the brand and the infrastructure will raise significant interest amongst other retailers. Indeed we have already been contacted by interested parties.

“We are currently assessing all options and, for the time being, allowing all the existing stores to continue to trade while a buyer is sought for the business.”

Source : WalesOnline
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

Polaroid files for Chapter 11 Bankruptcy

Consumer electronics company Polaroid Corp said on Thursday it had filed for Chapter 11 bankruptcy in order to facilitate its restructuring.

The maker of iconic instamatic cameras said its bankruptcy was due to events at Petters Group Worldwide, which has owned the company since 2005.

The founder of Petters is "under investigation for alleged acts of fraud that have compromised the financial condition of Polaroid and other entities owned by Petters Group," the company said in a statement.

"Polaroid and its leadership team are not subjects of the ongoing investigation involving Petters Group," Polaroid said.

The company said the restructuring should not impact its day-to-day operations and that it was not seeking additional debtor-in-possession financing.

"Polaroid has entered bankruptcy with ample cash reserves sufficient to finance the Company's reorganization under Chapter 11," it said.

The case is In re: Polaroid Corp, U.S. Bankruptcy Court, District of Minnesota, No. 08-46617

Source : Reuters
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

One of US Largest Toy Retailers - KB Toys Files For Bankruptcy

KB Toys Inc, one of the largest U.S. toy retailers, filed for Chapter 11 bankruptcy protection on Thursday, with a plan to close all its stores and begin liquidation sales in the middle of the holiday season.

KB Toys is the latest retailer to succumb to a sharp decline in consumer spending this year. Others like apparel retailer Steve & Barry's to jeweler Whitehall Jewelers Holdings filed for bankruptcy protection earlier this year and started selling their merchandise at deep discounts.

"The liquidity crisis is directly attributable to a sudden and sharp decline in consumer sales due to macro-economic forces," KB Toys said in court papers.

KB Toys, which runs about 460 stores, said it will try to find a buyer for its wholesale distribution unit as it conducts going-out-of-business sales.

KB Toys filed a petition in U.S. Bankruptcy Court in Delaware, along with eight affiliates, listing assets of $100 million to $500 million, and liabilities in the same range.

Shares in Hong-Kong based Li & Fung Ltd plummeted as much as 15 percent on Friday after the U.S. firm listed the Asian consumer goods exporter as its largest creditor with a claim of about $27.2 million. U.S. toymaker Mattel Inc was the next largest creditor, with a $1.3 million claim.

But Li and Fung -- which earned commissions as a procurement agent for KB Toys -- said its exposure actually stood at just $5 million, because much of the stated figure of $27.2 million was in fact owed directly by KB Toys to suppliers.

Li & Fung stock also suffered from steep losses in Hong Kong's broader market, after the collapse of a $14 billion rescue plan for ailing U.S. auto makers threatened to further hammer the already weakened U.S. economy. [ID:nSP399217]

KB Toys, which started in 1922 as a family-owned business, previously filed for bankruptcy protection in 2004 and emerged from bankruptcy in 2005 after selling itself to Prentice Capital Management Inc.

At that time, KB Toys got $20 million in funding from an affiliate of Prentice. In exchange for the funding and a seasonal overadvance credit facility of up to $25 million, the Prentice affiliate got 90 percent of the common stock, while the remainder was to be held by a trust for the benefit of unsecured creditors of KB Toys entities being reorganized.

KB Toys' liquidation sales will start about half way into the holiday shopping season, which traditionally kicks off on the day after the Thanksgiving holiday.

But worries are mounting about this year's holiday sales, which could be the worst since the early 1990s, as consumers facing higher costs, a credit crunch and mounting job losses cut back on spending.

KB Toys suffered a "sudden and sharp decline in consumer sales due to macro-economic forces" during its most critical selling season, Raymond Borst, the company's controller, said in a court affidavit.

For the period from Oct. 5 through Dec. 8, same-store sales dropped almost 20 percent from the year-earlier period.

KB Toys said it has 10,850 employees, about 6,515 of whom are seasonal. About 277 stores are located in malls and 30 operate seasonally and were set to close in January.

The company did not obtain traditional debtor-in-possession financing and instead is seeking court approval to use cash collateral to pay operating expenses, including payroll.

Source : Reuters
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

Retail Stores in New York are Going Out Of Business

A store advertises that it is going out of business Wednesday, Dec. 10, 2008, in New York. Consumers cut back on spending at retail stores for a record fifth straight month in November, another sign the recession that is already the longest in a quarter-century will translate into a dismal holiday shopping season.

Signs in the window indicate that the Otto Tootsi Plohound shoe store is closing Wednesday, Dec. 10, 2008 in New York. Consumers cut back on spending at retail stores for a record fifth straight month in November, another sign the recession that is already the longest in a quarter-century will translate into a dismal holiday shopping season.

Source : AP
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

Woolworths UK Starts CLOSURE Sale at 815 Outlets

Bargain hunters are expected to flock to Woolworths branches later as a store closure sale starts at all its 815 outlets across the country.

In what looks like the beginning of the end for the retailer, its administrator Deloitte has said that some shops could close for good by the end of the year.

Deloitte is also due to consult with Woolworths' 30,000 staff over the possibility of redundancies.

Talks over the sale of the leaseholds of individual stores are continuing.

It is thought that Sainsbury's, Asda, Tesco, the Co-op and discount chain Poundland are still interested in picking up some of the retailer's prime sites.

'Failing brand'

Explaining the store closure sale, Deloitte said that as "Christmas is clearly the busiest time of the year for retailers and it is prudent to do all we can to sell existing stock".

Nick Hood from the business rescue experts Begbies Traynor said it was the beginning of the end for Woolworths.

"This has been a failing brand for a long time," he said.

"It just never kept pace with the change in the High Street, it's core DVD and CD business has been taken away by the online trade."

"It's been very, very difficult - it just hasn't been as fleet footed as many of its rivals".

Deloitte had held talks to sell the business as a going concern to potential buyers including former Woolworths chief executive Sir Geoff Mulcahy and Dragon's Den star Theo Paphitis, but no deals could be reached.

Debt mountain

Woolworths went into administration on 26 November with £385m of debt.

The firm's music, DVD and games distribution subsidiary, Entertainment UK, is also in administration.

Last week, rival retailer Zavvi, which is a customer of Entertainment UK, said the situation was causing shortages of certain products in its stores.

Media publishing business 2Entertain, in which Woolworths owns a 40% stake is not in administration. The other 60% of this business is owned by BBC Worldwide, the BBC's commercial division.

Woolworths had been due to celebrate its 100th anniversary next year. Its first UK store opened in Liverpool in 1909.

Source : BBC
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession global recession layoff job cut]

GM's Possible Bankruptcy

Devastating.

That's the word being used to describe the impact on Michigan and its largest city, Detroit, should financially ailing automaker General Motors file for bankruptcy protection.

"It would be devastating," said Liz Boyd, spokeswoman for Gov. Jennifer Granholm, who is already anticipating the state's new budget will face a revenue shortfall.

"It would be a devastating blow," said Dana Johnson, chief economist at Comerica Bank, noting that the "relentless decline" in automotive employment over the last eight years was the main cause of the weakness in the Michigan economy.

Michigan's September seasonally adjusted unemployment rate hit 8.7 percent, up from 7.3 percent in September 2007, also topping the U.S. rate of 6.1 percent. Unemployment in the Detroit area that month stood at 8.5 percent, higher than the year-ago rate of 7.9 percent.

Johnson said the automotive industry accounts for 3.5 percent of the jobs in Michigan, compared with only 0.6 percent nationally.

"No state has more concentrated auto employment than Michigan." he said, adding there was probably an even higher concentration of those jobs in the Detroit area.

Detroit also hosts GM's headquarters in the downtown Renaissance Center, where a slew of white-collar workers are employed.

"The income tax is the issue," said Melanie Shaker, a municipal analyst at Fitch Ratings. "The potential loss of GM is a big vulnerability for the Detroit economy, which is already struggling."

A GM bankruptcy would be incorporated into the city's current "BBB" rating with a negative outlook in terms of the number of job cuts and their time frame, she said, as well as the resulting affect on Detroit's income tax, which is levied on both residents and nonresidents and on corporations.

Worsening budget problems loom for the governments.

Detroit's new Mayor Kenneth Cockrel pegged the city's current deficit at up to $126 million as of last month, but a report from the city council's fiscal analysis division points to an accumulated deficit of at least $132 million.

The city has also yet to finalize a lease transaction for the Windsor Tunnel or an alternative plan to raise $65 million for the current budget.

Granholm, whose state has been through a series of tough budgets, is presuming the need for executive order cuts in the spending plan for fiscal year 2009, which began October 1, according to Leslee Fritz, a state budget office spokeswoman.

She said a serious conversation about a GM bankruptcy would have been laughable several months ago.

"Now we have to have those conversations," Fritz added.


Source : Reuters

[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession]

Bankrupt Alitalia to be Sold to Cai

The Italian government has agreed to sell the bankrupt airline Alitalia to a business consortium.

The move paves the way for the re-launch of the troubled carrier after a two-year hunt for a buyer.

The Italian group, Cai, is paying 1.05bn euros (£878m; $1.3bn) for Alitalia, including its debts.

The administrator overseeing Alitalia's bankruptcy must now formally approve the move, but has already said he will give this sale the go-ahead.

With no other bidders in the fray and Alitalia's cash likely to run out this month, the Cai group's takeover was never in any danger of being rejected.

Foreign partner

The airline filed for bankruptcy in August, weighed down by high labour costs, strikes, surging oil prices and political interference.

The Italian government's approval on Wednesday is the final stage in a drawn-out rescue process for the airline.

It came a week after the European Commission told Alitalia, to repay a 300m-euro loan to the Italian government, which the Commission said amounted to illegal state aid.

While the sale still faces opposition from some trade unions at Alitalia which have rejected new labour contracts under the takeover - it is now going ahead.

Protesting workers have led to the cancellation of hundreds of flights over the past 10 days and Alitalia has said it will have to cancel 100 flights a day this month.

However, Cai's chief executive, Rocco Sabelli, said he was confident of success.

"We are working to bring this complex and delicate operation to an end and the big interest that we have seen from all potential foreign partners shows we are on the right path," he said.

Cai is expected to pick either Air France-KLM or Lufthansa as a partner for Alitalia, which is now expected to be re-launched in early December.

The conclusion of this deal - after Alitalia's search for a buyer that included a failed auction and a failed takeover by Air France-KLM - is being seen as as success for Prime Minister Silvio Berlusconi who had promised to save Alitalia.

Source : BBC
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession]

Circuit City Seeks Bankruptcy Protection

Any retailer that was weak before the economic downturn appears likely to end up as one of its victims. The latest example is Circuit City, one of the nation’s largest electronics retailers, which filed for bankruptcy protection on Monday after months of declining sales.

The company said bankruptcy reorganization would help it win back vendors worried about being paid, and that a $1.1 billion line of credit would keep goods flowing to Circuit City stores through the crucial holiday season. But outside experts said the prospects of long-term survival for a chain in Circuit City’s position were bleak.

The company’s problems go back a decade, and it had long been faulted by Wall Street analysts for poor strategic decisions. The dismal economy of recent months finally sent the company over the edge. Analysts foresee similar bankruptcy filings by other retailers that turn in a poor performance this holiday season.

“The environment is the nail in the coffin, but Circuit City has been going through a turnaround for many years,” said Stacey Widlitz, an analyst with Pali Research.

In the 1980s, Circuit City was one of the nation’s strongest retailers. But then came a series of critical missteps.

“In the 1990s, they signed cheap real estate leases in inferior locations, and sealed their fate doing that,” Ms. Widlitz said. Many of the spaces were too big and made for an uninviting shopping experience. As its fortunes worsened, Circuit City laid off thousands of its most experienced salespeople last year to save money, killing morale at the stores and angering customers.

Meanwhile, analysts said, its archrival, Best Buy, secured better real estate, offered better service and adapted more quickly to a difficult marketplace for electronic goods.

Circuit City is still the nation’s second-largest dedicated consumer electronics retailer after Best Buy, with more than 700 stores. Last week it said it would close 155 of them, open fewer new ones, renegotiate some leases and cut staff members at its headquarters.

The retailer had been limping along for months, its shares losing more than 90 percent of their value since the beginning of the year. Sales for the three months ending in August fell 13.3 percent.

No liquidation of Circuit City is imminent; the company filed under provisions of the bankruptcy code that would allow it to keep operating while it revamped and sought fresh financing. James A. Marcum, vice chairman and acting president and chief executive of Circuit City Stores, said Monday that the company intended to live on beyond Christmas and to emerge stronger than before. He said the public could have confidence in doing business with the company.

“The decision to restructure the business ... should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively,” he said.

Most electronic products sold at Circuit City and other stores are backed by manufacturers’ warranties. Circuit City said it would continue to accept returns as before and to honor its add-on warranties, which were secured by third-party financial institutions, and its gift cards.

While Circuit City’s troubles mean that Best Buy can gain additional market share, that company will face stiff competition. Discount stores like Wal-Mart and Costco and the online retailer Amazon.com have become significant players in electronics sales.

Even in the best of economies, electronics is a difficult business. For one, the clock is ticking the moment a piece of technology hits the shelf. The more time passes, the more its value depreciates. Second, unlike a few years ago, it is not hard to sell a flat-panel television set anymore, said David A. Schick, an analyst at Stifel Nicolaus. Consumers are familiar with the features and many would rather sacrifice expert sales advice for a bargain at Wal-Mart or an Internet retailer.

In a down economy, only the best electronics operators survive.

“Every time the consumer has a hiccup or a slowdown, an electronics player goes bankrupt,” said Mr. Schick, ticking off bygone names like Crazy Eddie and CompUSA.

David J. Urban, a professor of marketing at Virginia Commonwealth University’s business school in Richmond, where Circuit City has its headquarters, said that making job cuts just before Christmas indicated Circuit City’s dire financial situation.

“The question is how much longer after that are they going to be able to survive?” he said. “If you have to do this to be able to ensure you’ll have adequate merchandise for the holiday season and its already the 10th of November, it’s not good.”

Stephen Hoch, a professor of marketing and the director of the Jay H. Baker Retailing Initiative at the Wharton School at the University of Pennsylvania, said it had become hard for retailers “to shrink dramatically and gracefully.” Many that get into trouble, he said, end up disappearing.

Source : NewYorkTimes
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic]

Sterling Airways Goes Bankrupt and Leaves Hundreds Stranded at Airport

Icelandic-owned Sterling Airways has cancelled all flights, leaving hundreds of passengers stranded at London Gatwick and thousands stranded across Europe.

The low-cost airline, which flies from Gatwick to Copenhagen, Stockholm and other Scandinavian cities, said it was filling for bankruptcy and blamed the Icelandic financial crisis for its decline.

The airline is owned by Iceland's Northern Travel Holdings and employs around 1,100 staff.
It flew to 40 destinations, mainly from its hubs in Copenhagen, Oslo and Stockholm.

The airline issued the following information:

Dear customers, employees and other stakeholders,

During the last few weeks, the management, board of directors, and the shareholder of Sterling Airlines A/S have been fighting a battle to keep the company alive. Sadly, this has not had a positive outcome, and we have therefore decided to file for bankruptcy which will be done later today.

Background

During the last three years, Sterling Airlines A/S has been through a lot of changes and since acquired by new shareholders in spring 2005 the company has taken on a merger with Maersk Air A/S. In 2005, the total loss of both airlines exceeded 800 MDKK and both owners wanted out one way or the other. Therefore, all jobs in both airlines were at stake and so was also the competitive landscape in Scandinavian aviation since only the presence of a low cost carrier would ensure healthy competition and pricing on the market.

The merger process started in the autumn of 2005 and lasted until mid-year 2006, and by that time we employed over 1,200 employees with far more job security than before, and we had expanded our route network to enable more customers in Scandinavia to travel for less money.

Our operation was progressing positively and our finances were improving considering the massive losses that had been encountered in the preceding years. In 2007, we were doing very well and saw that more and more customers were choosing Sterling, and we ended the year with a positive EBITDA (operational profit) for the first time in many years.

Oil and financial crisis

With the global financial recession that started in the autumn of 2007, Sterling by winter 2007 – 2008 was seeing signs of stagnation in the market. Significant fuel cost increases, and at the same time a planned heavy expansion of our activities, made us more exposed than we would have been otherwise.

By spring 2008, the airline industry was hit by decreasing demand and rapidly increasing fuel prices. That led to Sterling accumulating large losses. During summer and autumn the management of Sterling implemented a restructuring plan of the company resulting in a reduction in fleet and manpower, and a pull-out of a lot of loss-making activities, without compromising our services. The full effect of these actions were planned to have impact start of 2009.

To get the company restructured, the shareholder of Sterling gave financial support from the end of July 2008 to the end of September 2008 transferring 444.5 million DKK to the company. The plan was to continue financial support into 2009. On the 29th September 2008, the Icelandic financial environment started to collapse. Over a 3 to 4 weeks period, the whole financial system melted down, and that resulted in our shareholder being unable to continue his support to the company. Negotiations have been conducted with several potential investors, but it was impossible to make ends meet. The inevitable result is that Sterling Airlines A/S has no option but to file for bankruptcy.

Sterling Airlines’ trademark has always been excellent staff and service. Among the staff the Sterling spirit will continue to exist. We have made our mistakes over the years. But hopefully we have done more right than wrong, and at least we have made the market more competitive to the benefit of our customers.

Information to Sterling Passengers

Customers who have directly purchased their tickets on Sterling’s website will unfortunately not be refunded neither will their return flights. You therefore have to book your return flights with another airline company.

If you have paid for a flight by credit card, we advise you to contact your bank or credit card company to ask for a possible refund.

Customers who have booked their flights through a travel agency or tour operator should initially contact them.

Passengers who have booked their tickets through Sterling, but is flying with Norwegian, should contact Norwegian directly on one of the below phone numbers:

+47 21490015 (from outside Norway)
815 21 815 (from Norway)

Passengers currently staying abroad in hotels, or hiring a car through Sterling business partners, are still able to stay in their hotel or keep the hired car for the relevant period of time, as such services are paid for through our business partners and not Sterling. However as for your return flight, you will need to find alternatives for your final destination.

Please note that if you have booked your travel/hotel/car through a travel agency or tour operator, please contact them upon your return for possible refund of expenses for your return flight.

We understand that most travel insurance does not protect holders from airline insolvency but should you have taken insurance please contact your insurance company for clarification.

We will later put on a FAQ and hope that this will help you in this very unfortunate situation.

Those who have paid by credit card are advised to contact their bank or credit card company to ask for a possible refund.

Customers who have booked their flights through a travel agency or tour operator should initially contact them.

Source : eturbonews
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic slowdown financial collapse world recession]

Lehman Files for Bankruptcy; Merrill Is Sold

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.

But even as the fates of Lehman and Merrill hung in the balance, another crisis loomed as the insurance giant American International Group appeared to teeter. Staggered by losses stemming from the credit crisis, A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive.

The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.

“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street and threatened the broader economy.

Early Monday morning, Lehman said it would file for Chapter 11 bankruptcy protection in New York for its holding company in what would be the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago, the Associated Press reported.

Questions remain about how the market will react Monday, particularly to Lehman’s plan to wind down its trading operations, and whether other companies, like A.I.G. and Washington Mutual, the nation’s largest savings and loan, might falter.

Indeed, in a move that echoed Wall Street’s rescue of a big hedge fund a decade ago this week, 10 major banks agreed to create an emergency fund of $70 billion to $100 billion that financial institutions can use to protect themselves from the fallout of Lehman’s failure.

The Fed, meantime, broadened the terms of its emergency loan program for Wall Street banks, a move that could ultimately put taxpayers’ money at risk.

Though the government took control of the troubled mortgage finance companies Fannie Mae and Freddie Mac only a week ago, investors have become increasingly nervous about whether major financial institutions can recover from their losses.

How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation’s growth rate has slowed.

What will happen to Merrill’s 60,000 employees or Lehman’s 25,000 employees remains unclear. Worried about the unfolding crisis and its potential impact on New York City’s economy, Mayor Michael R. Bloomberg canceled a trip to California to meet with Gov. Arnold Schwarzenegger. Instead, aides said, Mr. Bloomberg spent much of the weekend working the phones, talking to federal officials and bank executives in an effort to gauge the severity of the crisis.

The weekend that humbled Lehman and Merrill Lynch and rewarded Bank of America, based in Charlotte, N.C., began at 6 p.m. Friday in the first of a series of emergency meetings at the Federal Reserve building in Lower Manhattan.

The meeting was called by Fed officials, with Treasury Secretary Henry M. Paulson Jr. in attendance, and it included top bankers. The Treasury and Federal Reserve had already stepped in on several occasions to rescue the financial system, forcing a shotgun marriage between Bear Stearns and JPMorgan Chase this year and backstopping $29 billion worth of troubled assets — and then agreeing to bail out Fannie Mae and Freddie Mac.

The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman’s stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.

Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their own precarious situation.

The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation’s largest brokerage force and its name is known in towns across America, while Lehman’s main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.

Knowing that investors were worried about Merrill, John A. Thain, its chief executive and an alumnus of Goldman Sachs and the New York Stock Exchange, and Kenneth D. Lewis, Bank of America’s chief executive, began negotiations. One person briefed on the negotiations said Bank of America had approached Merrill earlier in the summer but Mr. Thain had rebuffed the offer. Now, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, the two parties proceeded with discussions.

On Sunday morning, Mr. Thain and Mr. Lewis cemented the deal. It could not be determined if Mr. Thain would play a role in the new company, but two people briefed on the negotiations said they did not expect him to stay. Merrill’s “thundering herd” of 17,000 brokers will be combined with Bank of America’s smaller group of wealth advisers and called Merrill Lynch Wealth Management.

For Bank of America, which this year bought Countrywide Financial, the troubled mortgage lender, the purchase of Merrill puts it at the pinnacle of American finance, making it the biggest brokerage house and consumer banking franchise.

Bank of America eventually pulled out of its talks with Lehman after the government refused to take responsibility for losses on some of Lehman’s most troubled real-estate assets, something it agreed to do when JP Morgan Chase bought Bear Stearns to save it from a bankruptcy filing in March.

A leading proposal to rescue Lehman would have divided the bank into two entities, a “good bank” and a “bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would have agreed to absorb losses from the bank’s troubled assets, to two people briefed on the proposal said. Taxpayer money would not have been included in such a deal, they said.

Other Wall Street banks also balked at the deal, unhappy at facing potential losses while Bank of America or Barclays walked away with the potentially profitable part of Lehman at a cheap price.

For Lehman, the end essentially came Sunday morning when its last potential suitor, Barclays, pulled out from a deal, saying it could not obtain a shareholder vote to approve a transaction before Monday morning, something required under London Stock Exchange listing rules, one person close to the matter said. Other people involved in the talks said the Financial Services Authority, the British securities regulator, had discouraged Barclays from pursuing a deal. Peter Truell, a spokesman for Barclays, declined to comment. Lehman’s subsidiaries were expected to remain solvent while the firm liquidates its holdings, these people said. Herbert H. McDade III, Lehman’s president, was at the Federal Reserve Bank in New York late Sunday, discussing terms of Lehman’s fate with government officials.

Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firms, Lehman cannot hope to reorganize and survive. It was not clear whether the government would appoint a trustee to supervise Lehman’s liquidation or how big the financial backstop would be.

Lehman has retained the law firm Weil, Gotshal & Manges as its bankruptcy counsel.

The collapse of Lehman is a devastating end for Richard S. Fuld Jr., the chief executive, who has led the bank since it emerged from American Express as a public company in 1994. Mr. Fuld, who steered Lehman through near-death experiences in the past, spent the last several days in his 31st floor office in Lehman’s midtown headquarters on the phone from 6 a.m. until well past midnight trying to save the firm, a person close to the matter said.

A.I.G. will be the next test. Ratings agencies threatened to downgrade A.I.G.’s credit rating if it does not raise $40 billion by Monday morning, a step that would cripple the company. A.I.G. had hoped to shore itself up, in party by selling certain businesses, but potential bidders, including the private investment firms Kohlberg Kravis Roberts and TPG, withdrew at the last minute because the government refused to provide a financial guarantee for the purchase. A.I.G. rejected an offer by another investor, J. C. Flowers & Company.

The weekend’s events indicate that top officials at the Federal Reserve and the Treasury are taking a harder line on providing government support of troubled financial institutions.

While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed chairman, Ben S. Bernanke, and Mr. Paulson had warned that they would not put taxpayer money at risk simply to prevent a Lehman collapse.

The message marked a major change in strategy but it remained unclear until at least Friday what would happen. “They were faced after Bear Stearns with the problem of where to draw the line,” said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisors, a forecasting firm. “It became clear that this piecemeal, patchwork, case-by-case approach might not get the job done.”

Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger bailout of Fannie Mae and Freddie Mac.

Outside the public eye, Fed officials had acquired much more information since March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives. In the end, both Wall Street and the Fed blinked.

Source : NewYorkTimes
[tags : recession bankrupt collapse retrenchment financial news collapse stagnation economic]