Asian Market Update: LEH prepares bankruptcy; Merrill bought by BofA; Private equity walks away from AIG.

Several reports suggest that Lehman Brothers is working on a possible bankruptcy filing that would allow most of its subsidiaries to continue operating as the firm is wound down. A group of banks will provide a financial backstop to help provide an orderly winding down of the investment bank, said people close to the matter. The New York Times suggested that changes to the bankruptcy code will mean that counterparties to Lehman's credit default swaps can seize their collateral at any time, posing an enormous risk to financial markets.

- Reports suggest that Merrill Lynch agreed late Sunday to sell itself to Bank of America for roughly $44 billion (about $29/share, reports suggest it will be an all-share transaction). "Inside the Fed meetings in Lower Manhattan this weekend, there was a general worry that Merrill could be the next to fall after Lehman," writes the WSJ. "Through the weekend, federal officials including Federal Reserve Bank of New York head Timothy Geithner made it clear that they strongly encouraged a deal to sell Merrill, said people familiar with the matter." Singapore's Temasek, Merrill's largest holder, said it will examine all of its options regarding its investment.

- Private equity walks away from AIG: The American International Group is seeking a $40 billion bridge loan from the Federal Reserve, as it faces a potential downgrade from credit ratings agencies that could spell its doom, a person briefed on the matter told the New York Times on Sunday night. The paper reports that JC Flowers, KKR and TPG withdrew their AiG plan. Latest reports suggest that AIG is pulling together a survival plan that includes selling off some of its most valuable assets. Ratings agencies threatened to downgrade the insurance giant's credit rating by Monday morning, allowing counterparties to withdraw capital from their contracts with the company. One person close to the firm said that if such an event occurred, A.I.G. would survive for only 48 hours to 72 hours.

- Emergency measures announced to calm markets: A group of global commercial and investment banks have established a collateralized borrowing facility, with ten banks each contributing $7 billion to the fund ($70 billion in total). The facility will be available to these participating institutions for liquidity up to a maximum of one third of the facility for any one bank. It is anticipated that the size of the facility may increase as other banks are permitted to join the facility. PIMCO's Bill Gross suggested that the establishment of such a fund will reduce the chances of a Fed rate cut on Tuesday. The Fed also announced temporary plans to expand its lending facilities following Lehman's meltdown, taking on a wider range of collateral (including equities for short-term loans). The New York Times reported that the heads of major financial institutions urged Geitner, the president of the Federal Reserve Bank of New York, and Treasury Secretary Paulson to reinstate a temporary rule to limit short-selling. In an attempt to calm markets, Australia's RBA injected a net A$1.3B in its daily market operations.

- Extra trading session on Sunday sees thin trading: The International Swaps and Derivatives Association Sunday said it had organized a "netting trading session" to reduce risk from a potential Lehman Brothers bankruptcy. The session began at 14:00 EDT and was originally scheduled to run until 16:00 EDT, but was extended until 18:00 EDT. Trades are contingent on a bankruptcy filing at or before 23:59 EDT. PIMCO's Bill Gross said that very little trading was done in Sunday's session, adding that Lehman's bankruptcy risks an immediate tsunami related to unwinding of derivative positions. (Note: We did not receive a LEH press release before the stated deadline)

- Forex: Wall Street's meltdown weighed on the USD, sending EUR/USD to the highest level in a week. USD/JPY dipped below the 200day MA at 106.40, while GBP/USD broke above 1.8100. Between 17:00 EDT and 0:19 EDT: EUR/USD +1.44%, GBP/USD +0.58%, USD/JPY -2.24%, AUD/USD -0. 28%, USD/CHF -1.67%, AUD/JPY -2.57%, NZD/JPY -1.99%.

- Equities: At 0:20 EDT the S&P/ASX200 is -2.50%, last trading at 4,782.20. Japanese, Korean and Hong Kong markets are closed for a holiday. Asian equities fell sharply, with 2yr U.S. Treasuries price moving to a 5mnth high. Financials did most of the damage to the S&P/ASX200, with the benchmark trading at the lowest level since January 2006. Macquarie Bank traded lower by more than - 7.0%, NAB is declining by about -5.0% and Babcock and Brown is off by -15%. Taiwan's Taiex index fell to its lowest point since November 2005.

- Commodities: Nymex crude oil lost -2.11% between 18:00 EDT and 0:20 EDT, last trading at $99.06/bbl. Gold gained +2.83%, last trading at $785.90/oz.