Update: Here’s a more complete story about BAC buying MER:

In a rushed bid to ride out the storm sweeping American finance, 94-year-old Merrill Lynch & Co. agreed late Sunday to sell itself to Bank of America Corp. for roughly $44 billion.

The deal, which was being worked out in 48 hours of frenetic negotiating, could instantly reshape the U.S. banking landscape, making the nation’s prime behemoth even bigger. The boards of the two companies approved the deal Sunday evening, according to people familiar with the matter.

 

It looks like a deal is for Lehman is unlikely. First the WSJ:

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.

The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan & Co. earlier this year, drew a line in the sand with Lehman. It refused to provide a financial backstop to potential buyers.

One little glimmer of hope:

Some executives involved in the Lehman discussions held out hope that an 11th-hour reprieve would materialize. Under one scenario aimed at limiting the ripple effects of Lehman’s demise, a group of about 15 banks were in discussions Sunday to pool about $100 billion, which would be used to buy assets of the battered securities firm, according to one person familiar with the situation. Details were being finalized Sunday night. One possibility is that the Federal Reserve will support the move by opening its wholesale-borrowing window and relaxing collateral requirements for borrowers.

The WSJ Market Beat Blog is reporting that BAC and MER have reached a deal:

UPDATE at 8:44 PM EDT: Bank of America has reached a deal to buy Merrill Lynch for $29 a share, sources tell the Journal. The boards of both companies have approved the deal.

The NYT Deal Book Blog is saying that Lehman is expected to file bankruptcy tonight:

According to people briefed on the matter, Lehman Brothers will file for bankruptcy protection on Sunday night, in the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago.

Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government.

MarketBeat Blog is also reporting that the Fed will expand lending:

UPDATE at 8:37 PM EDT: The Journal, citing bankers, reports that the Federal Reserve will expand its lending facilities, with the central bank expected to accept a wider range of collateral, including equities, for short-term loans. The moves are expected to be temporary.

Jesus, they’re going to take equities?