In a breathtaking day that saw the map of U.S. finance dramatically redrawn, Lehman Brothers Holdings Inc. teetered toward collapse while Merrill Lynch raced into the arms of Bank of America and reportedly agreed to be acquired for $50 billion.

What was merely a quiet, unseasonably hot Sunday for most New Yorkers will be long remembered on Wall Street as one of the industry’s most astonishing days. The repercussions of the day’s events will be felt in New York and throughout its financial services industry for years to come.

In the early hours of Monday, September 15, Lehman Brothers said it was planning to file for bankruptcy under Chapter 11, and Bank of America announced that it was planning to buy Merrill Lynch.

Though both Lehman and Merrill had prized their independence for many decades, they were done in by the credit crisis that left them stuck with billions of dollars in toxic mortgages stuck on their books.

Topping off the drama, insurer American International Group was planning to reveal a dramatic restructuring plan that would involve shedding billions in assets.

The news was by far most dire at Lehman, a proud name that traces its roots on Wall Street to the 1850s, making it older than Goldman Sachs or any other major brokerage firm.

Talks with Bank of America or Barclays to acquire the ailing investment bank fell apart on Sunday afternoon, apparently because those two institutions wanted government guarantees that were not forthcoming to protect them against losses in Lehman’s mortgage portfolio.

Many Wall Street firms called their traders back to work on Sunday afternoon to try to unwind their complex derivatives transactions with Lehman. A special trading session was held, the International Swaps and Derivatives Association said, to help market participants “reduce their market risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy filing.”

The next step for Lehman appears to be bankruptcy and liquidation. It would be by far the largest such failure in Wall Street history, exponentially larger than the 1990 collapse of Drexel Burnham Lambert. Most, if not all, of Lehman’s 25,000 employees would figure to lose their jobs in such a scenario.

Bank of America, after deciding it wanted no part of Lehman, turned its eyes to Merrill Lynch and a deal was quickly struck Sunday evening, September 14, according to The Wall Street Journal. Merrill has been socked with tens of billions in losses during the credit crisis, though its sales force of about 17,000 retail brokers remains a valuable asset.

Still, the abrupt sale of Merrill is a stiff blow to the reputation of chief executive John Thain, a former top Goldman Sachs and New York Stock Exchange executive who was brought in late last year with a reputation as “Mr. Fixit.”

Under Thain’s watch, Merrill suffered billions in painful write-downs and it recently agreed to sell billions of mortgage-related assets at a steep loss. But the firm still had significant mortgage exposures, and when Lehman’s stock plunged by 77 percent last week, Merrill was also hit hard and Thain evidently had no more cards to play. The sale to BofA would end 94 years of independence for Merrill.

It isn’t clear how many of Merrill’s 60,000 employees stand to lose their jobs, but there doesn’t appear to be a great deal of overlap between Merrill and BofA, a giant commercial bank that for years has struggled to build a significant business on Wall Street.

Finally, AIG, which has also suffered tens of billions in mortgage-related losses, is preparing to sell its enormous aircraft-leasing business, according to The Wall Street Journal, in addition to some insurance-related assets.

Filed by Aaron Elstein of Crain’s New York Business, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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