HoneyBadger
YourWorstNightmare.
Member since 10/06 15979 total posts
Name:
BahBahBlackJeep
|
Financial meltdown rocks Wall Street - Got this from MSN Money
Financial meltdown rocks Wall Street
Lehman Bros. hits a dead end and heads for bankruptcy after Barclays and Bank of America bail on acquisition discussions. BofA will instead buy Merrill. AIG reported to be preparing a sweeping plan to sell assets and bolster capital.
By Charley Blaine and Elizabeth Strott
Wall Street spun into crisis mode this morning as Lehman Bros. (LEH, news, msgs) said it will file for bankruptcy, worries grew about the future of American International Group (AIG, news, msgs) markets around the world were tumbling.
Shares of Lehman plunged $3.44, or 94.3%, to 21 cents per share. AIG shares slumped $5.25, or 43.2%, to $7.10 this morning.
News of Lehman's demise sent stocks plunging this morning, but the indexes were well off their lows by late morning.
At 10:55 a.m. ET, the Dow Jones Industrial Average plunged 206 points to 11,215, weighed down by AIG and Bank of America (BAC, news, msgs). The Nasdaq Composite Index plummeted 23 points to 2,238, and the Standard & Poor's 500 Index was down 17 points to 1,234.
One glimmer of good news came at Lehman's expense: Bank of America, which had been in talks to buy Lehman, instead turned to Merrill Lynch (MER, news, msgs), offering to buy it for $29 per share. Still, that price tag is a mere 30% of its all-time closing high.
Lehman said it is exploring the sale of its broker-dealer operations and is in advanced discussions to sell its investment-management business. Lehman also said its subsidiaries will continue to conduct business. The company employs more than 25,000 people around the world.
A deal between Lehman, the fourth-biggest investment bank, and Bank of America fell apart after the Treasury Department stood firm in its position that it would not fund any sort of bailout for the company. The same held for British bank Barclays (BCS, news, msgs). This morning, Barclays said a deal was not in the best interests of its shareholders.
On Sunday, the International Swaps and Derivatives Association held an emergency trading session to help banks and securities companies unwind their counterparty deals with Lehman.
"The collapse of (a) deal casts a dark cloud over Wall Street," Frederic Dickson, chief market strategist at D.A. Davidson, told Bloomberg News. "It also sends a message that the government is getting out of the bailout business and makes financial institutions like AIG and Washington Mutual (WM, news, msgs) look even more vulnerable."
Another analyst agreed: "However painful these events, they represent a necessary, albeit Darwinian, correction," Standard & Poor's analyst Cathy Seifert said today.
AIG: 'Everything's on the table'
The Street is now waiting to see what will happen with AIG , another firm that has been struggling amid the mortgage crisis. The insurance giant will reportedly announce an asset saletoday after having turned down a capital infusion by a group of private-equity firms led by J.C. Flowers, because an option tied to the deal would effectively give them the reins to the company, The Wall Street Journal explained.
AIG instead is looking to the Fed for a $40 billion bridge loan, The New York Times reported. AIG had been planning to announce a reorganization next week.
Rumors circulated this morning that Warren Buffett's Berkshire Hathaway (BRK.A, news, msgs) and Germany's Allianz would buy a stake in AIG, according to flyonthewall.com.
"We're reviewing everything," Nicholas Ashooh, an AIG spokesman, said over the weekend. "Everything's on the table."
Ratings agency Standard & Poor's put the company on CreditWatch negative, stating that "additional market value losses will place some strain on the company's resources. "AIG's potential access to the capital market may be more restricted in the short term," said Standard & Poor's credit analyst Rodney Clark.
AIG's problem is not a liquidity issue; rather, if the company gets downgraded, it will have trouble raising capital. AIG hired JPMorgan Chase to help advise the company to prevent a downgrade, CNBC reported Sunday.
AIG could sell its aircraft-leasing division, International Lease Finance Corp., which it considered spinning off earlier this year, along with other assets, according to The Wall Street Journal. The paper reported that AIG will shift capital from its regulated insurance business to a holding company.
AIG was downgraded this morning by Merrill and Citigroup; its stock plunged 30% on Friday.
Bank of America to buy Merrill
After walking away from the acquisition of Lehman, Bank of America turned to Merrill, buying itfor $50 billion, or $29 per share, in stock. Shares of Merrill jumped $4.29, or 25.2%, to $21.34 on the news, as the offer represents a 70% premium to Friday's closing price of $17.05. Shares of Merrill fell 12% on Friday as worries about its future mounted. Merrill stock is down more than 68% over the past year.
Bank of America shares fell $5.09, or 15.1%, to $28.65.
"Why would Bank of America do this?" asked analyst Nancy Bush, of NAB Research, in an interview with The Wall Street Journal. "Ken Lewis always likes to buy the biggest thing he can. So why not this? You are master of the universe, basically."
There was chatter over the weekend that Treasury Secretary Hank Paulson was the key force in Merrill's decision to sell, but many people on Wall Street believe Merrill's move was based on a combination of pressures, some from Paulson and the Federal Reserve and some based on fears that Merrill would be the next domino to fall.
"I think (CEO) John Thain at Merrill is the ultimate realist," Bush said to the Journal. "He knows if Lehman goes under he is not far behind. He wants to cut the best deal he can."
Thain will likely stay on at the merged company for several months, with BofA CEO Ken Lewis continuing to run it. Merrill and BofA said the deal will be 3% dilutive to earnings in 2009 and break even in 2019; the companies expect the merger to be completed by the end of the first quarter in 2009.
Wall Street is now left with two brokerages: Goldman and Morgan Stanley (MS, news, msgs).
"I think the Merrill Lynch deal is terrific for the market," Don Drapkin, Lazard International vice chairman, told CNBC. Drapkin suggested that, with Merrill in strong hands, world markets could withstand the loss of Lehman.
Both Lehman and Merrill have been in the spotlight recently because of exposure to risky mortgage-backed securities; in July, Merrill reported a second-quarter loss of $4.65 billion and wrote down $9 billion in bad mortgage bets.
"Anyone else who has these toxic assets, if they haven't made a full confession, they better do it now," Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel, told Reuters. "These assets may be hard to unwind, but they can unwind your firm. Lehman tried to deny reality until the bitter end."
Morgan Stanley this morning said it believes a potential acquisition by JPMorgan of Washington Mutual would be a strategic positive for JPMorgan (JPM, news, msgs) according to flyonthewall.com. WaMu would give JPMorgan a presence in the West and Southeast and increase core deposit funding to 32% from 28% of managed earnings assets.
Fed takes steps to help
The Federal Reserve late Sunday announced plans to help "provide additional support to the financial markets," including an expansion of its lending facilities to brokerages. The Fed opened its lending window to non-banks after the Bear Stearns rescue in March, but no investment banks had tapped the window as of Wednesday.
The Federal Open Market Committee meets tomorrow
"Today we are looking forward," the Treasury's Paulson said in statement released Sunday.
Read the Fed's statement
"We are seeing a fundamental redefinition of the financial landscape. It is not happening according to a master plan; it is happening because of a series of crises," Mohamed El-Erian, Pimco co-CEO, told CNBC. Pimco is the world's biggest bond fund. "We are seeing a shift in a policy response from focusing on institutions to starting to focus on the system."
A group of 10 banks also took action to help the liquidity picture for the financial markets. The consortium includes JPMorgan and Goldman Sachs (GS, news, msgs), each of which will contribute $7 billion to the loan program. Bank of America, Barclays, Citigroup (C, news, msgs), Credit Suisse (CS, news, msgs), Deutsche Bank (DB, news, msgs), Merrill, Morgan Stanley and UBS (UBS, news, msgs) are the other banks involved.
Over the weekend, Lehman hired law firm Weil, Gotshal & Manges to work on a potential bankruptcy filing. Weil is the law firm that advised Drexel Burnham Lambert when it filed for bankruptcy protection in 1990.
Lehman's problems escalated last week after Korea Development Bank walked away from talks, forcing the company to announce plans to slash its dividend, sell 55% of its investment-management business and spin off some of its commercial real-estate portfolio. Lehman also pre-announced a $3.9 billion loss for the third quarter.
Jitters have plagued the financial sector for a year. Bear Stearns was rescued by the Federal Reserve and JPMorgan six months ago, in a deal that delivered Bear to JPMorgan for a mere $10 per share. Bear stock had traded at $170 per share in March 2007.
And the Treasury Department took over beleaguered mortgage companies Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) a little more than a week ago, sending their shares reeling.
Reaction: Fed wants out of bailing out
In an interview on Sunday, former Fed chief Alan Greenspan sounded supportive of the course federal authorities have set.
"There are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investments in an economy that on very rare occasions, and this is one of them, it's desirable to prevent them from liquidating in a sharply disruptive manner," Greenspan said on ABC's "This Week" with George Stephanopoulos.
"This is a once-in-a-half-century, probably once-in-a-century type of event,'' Greenspan said. "We shouldn't try to protect every single institution. The ordinary cost of financial change has winners and losers."
Ike wreaks havoc on Texas
Hurricane Ike slammed into the southeast coast of Texas this weekend, killing nine people and leaving 4.5 million people without electricity. But light, sweet crude oil fell $4.90 this morning to $96.28 a barrel, when it became clear that the storm had not brought heavy damage to oil rigs.
The storm could cost insurers as much as $18 billion, according to insurance forecasting firm Eqecat. AIR Worldwide said that, at a minimum, Ike would cost $8 billion.
Hurricane Katrina, which devastated New Orleans in September 2005, cost insurers $41.1 billion.
The U.S. Minerals Management Service said that at least 10 oil and natural gas platforms in the Gulf of Mexico were damaged or destroyed by Ike. Any significant damage could push the price of oil and gasoline higher.
"It's too early to say if it's close to Katrina- and Rita-type damage," Lars Herbst, regional director for the service, told The Associated Press. Hurricanes Katrina and Rita, which struck within days of each other, destroyed 108 platforms.
Andy Rosenbaum contributed to this story.
|
