Lehman Brothers and Merrill Lynch

[Edie]

The Wall Street Journal

 

September 15, 2008

 

Crisis on Wall Street as Lehman Totters, Merrill Is Sold, AIG Seeks to Raise Cash Fed Will Expand Its Lending Arsenal in a Bid to Calm Markets; Moves Cap a Momentous Weekend for American Finance

 

By CARRICK MOLLENKAMP, SUSANNE CRAIG and SERENA NG

September 15, 2008

 

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 Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers.

 

Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. On Sunday night, Bank of America was close to striking a deal to buy Merrill Lynch for about $44 billion, or $29 a share. Lehman was working on a possible bankruptcy filing that would allow most of its subsidiaries to continue operating as the firm is wound down.

 

A sense of foreboding gripped Wall Street as top executives feared collateral damage from a Lehman liquidation. Attention turned to Merrill Lynch, which boasts the largest force of retail brokers, and to American International Group Inc., the insurance giant. Both firms have seen their stocks get hammered, and their managements spent the weekend trying to come up with plans to reassure the markets.

 

"Monday will be a day of reckoning for the financial markets," said Carlos Mendez, senior managing director of ICP Capital, a boutique investment firm in New York. On Sunday, he said, "it was like a fire alarm went off and people ran in all directions."

 

AIG executives spent the weekend trying to raise cash, either from asset sales or a capital infusion from private-equity firms, or both. AIG executives were meeting with regulators to see if they could transfer capital from some of its subsidiaries to the holding company.

 

As worries spread across Wall Street that Lehman wouldn't survive, brokerage firms, hedge funds and other traders moved to disentangle themselves from trades with Lehman. When hopes of a potential sale dimmed, a quiet Sunday on Wall Street turned into a mad rush. Executives and traders hurried to their offices or worked their phones to unwind outstanding contracts with Lehman and to gauge their overall exposure.

 

Merrill, whose brokerage force is known as the "thundering herd," quietly engaged in discussions with Bank of America, which has retail bank branches stretching from coast to coast and has long coveted Merrill. Wall Street executives said the Federal Reserve may be involved in orchestrating the sale, figuring that it was "better to save the relatively healthy patient instead of the dying one," said a lawyer involved in the discussions.

 

"We are in uncharted waters here," said a top executive of a big bank. "If Merrill can pull off a deal this weekend, that would certainly help."

 

More here

http://online.wsj.com/article/SB122139688846233147.html

 

 

 

Holy crap. This is huge for all of us. Fasten your seat belts.

[viatroy]

I'm sure the Fed will ride to the rescue with some freshly minted new cash. It's hard for a chronically low income type such as myself to understand the ways in which this ripples at my end of the pond, other than whatever federal obligations are laid in our laps. Seems like a case of live by the sword, die by the sword, or perhaps just karmic returns on risk. Why should I care if the investor class takes a hit?

 

I have a pretty meager understanding of how Wall Street works. Someone enlighten me.

[mountain bed]

I'm sure the Fed will ride to the rescue with some freshly minted new cash. It's hard for a chronically low income type such as myself to understand the ways in which this ripples at my end of the pond, other than whatever federal obligations are laid in our laps. Seems like a case of live by the sword, die by the sword, or perhaps just karmic returns on risk. Why should I care if the investor class takes a hit?

 

I have a pretty meager understanding of how Wall Street works. Someone enlighten me.

I couldn't say it any better myself. I don't know anymore about this than you, but I've always had the overriding philosophy "if you can't afford to lose, you can't afford to play". Needless to say, I'm not a player.

[Edie]

I understand some but not all of this mess.

 

This article helped me to better understand it.

 

Even if you are not invested, the movements this weekend and over the last 15 months are affecting home values and the ability to get mortgages and equity loans. In other words, we're pretty messed up.

 

As I understand it, basically, banks are having less luck selling the future profits on loans (Mortgage Backed Securities) because the recent subprime meltdown made previous investments worth less than the amount promised, thus messing with investor confidence for future investment. Even with backing of the fed with Fannie and Freddie, not enough new investment was coming in to help the investment houses cover their own losses.

 

We are in uncharted territory here.

[EL the Famous]

i don't 'play' the market, but via my retirement accounts, my kids college account and the overall affect on the housing market that edie alluded to...i can't afford to 'lose' either, this is some bad shit.

[M. (hristine]

I'm about to inherit a fair amount of stock investments. I'm thinking I'll cash them in and fill my futon w/gold bars.

[cryptique]

This is what happens when the government strips away layer after layer of regulation of the financial industry and the foxes gain more and more control over the hen house.

 

I only wish it was easier to insulate myself from the crashing and burning of a bunch of greed-driven idiots whose gambles suddenly stopped paying off. I have a mortgage and a 401(k), and I'm a consumer, so there's really no way to avoid my own helping of the crunch.

 

I know very little about the financial game, but to me it always seemed like a lot of those people were in it strictly for their own personal gain, not for the good of their customers (or their country). They pushed for less and less oversight because they wanted to make shadier and shadier deals. Every time someone explains to me some of the structure of that industry, I get even more angry that we've allowed those people to exert so much power over our economy.

 

Seriously, it's like the whole thing is run by that baby in the brokerage commercials.

 

 

edit: I understand that this is probably a totally unfair characterization of financial professionals, but seriously, this is how it has long appeared from my perspective, even during the boom times.

[Spawn's dad]

I'm about to inherit a fair amount of stock investments. I'm thinking I'll cash them in and fill my futon w/gold bars.

 

 

I can always fall back on being a monk, so it doesn't matter much to me either way.

[NightOfJoy]

A friend wrote and sent this to me recently.........

 

Who do you feel is responsible for the biggest financial catastrophe of our time?

 

I'm sure there are plenty of candidates but a leading perpetrator in my opinion (and a lot of economists) is ex-Senator Phil Gramm, who is heir apparent to be the Secretary of Treasury if McCain wins in November AND who is his current advisor on financial matters.

 

Let me share with you some interesting facts about ex-Senator Phil Gramm....

 

In the 1990's as chairman of the Senate banking committee, he routinely turned down SEC chairman Arthur Levitt's request for more money to police Wall Street; during this period the SEC's workload shot up 80%, but it's staff grew only 20%. Gramm also opposed an SEC rule that would have prohibited accounting firms from getting too close to the companies they audited - in fact, according to Levitt, Gramm warned him that funding would be cut if he tried to adopt this rule (ok - now think Enron)....

 

In 1999, Gramm pushed through a historic banking deregulation bill that decimated Depression-era firewalls between commercial banks, investment banks, insurance companies, and securities firms, setting off a wave of merger mania.

 

But his most cunning coup on behalf of his friends (you did know that now he is some mucky muck with a Swiss Bank, UBS) in the financial services industry-friends who gave him millions over his 24 year congressional career came on Dec. 15, 2000. Clinton and Republican controller Congress were trying to hammer out a 384B spending bill and he slipped in a 262 page measure called the Commodity Futures Modernization Act - google it - it's fondly referred to as the Enron Loophole - crafted by Enron lobbyists. It exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed.

 

8 years earlier, Mrs. Phil Gramm, Wendy, was a Commodity Futures Trading Commission chairwoman and had pushed through a rule EXCLUDING Enron's energy futures contracts from government oversight. Wendy later joined the Houston-based company's board, and in the following years her Enron salary and stock income brought between 900K and 1.8M into the Gramm household.

 

Enron's loophole is really insignificant compared to what his provision unleashed in the financial markets. Because of the swap-related provisions of Gramm's bill-which was supported by Greenspan and Summers, a $62 TRILLION remained utterly unregulated, meaning on one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

 

Do you think Gramm even gives a rat's ass that HIS bill set off this financial free for all? Probably not because he certainly reaped the rewards. In 2003, Gramm left the Senate to take a highly lucrative job at UBS, Switzerland's largest bank, which had been able to acquire investment house PaineWebber due to his banking deregulation bill.

[M. (hristine]

I can always fall back on being a monk, so it doesn't matter much to me either way.

[Spawn's dad]

or a boy toy. can rich broads still afford boy if the markets collapse?

[M. (hristine]

If they have stacks of gold bars for mattresses I reckon so.

[Spawn's dad]

are you hitting on me?

[cryptique]

[watch me fall]

i don't 'play' the market, but via my retirement accounts, my kids college account and the overall affect on the housing market that edie alluded to...i can't afford to 'lose' either, this is some bad shit.

Same here, but replace 'kids college account' with 'retiring early account'. My 401k has been shitting the bed for the last few quarters already. Not good.

[Duck-Billed Catechist]

Good time to buy?

[MattZ]

I am hearing rumors that BofA wanted Lehman to fail and went into the negotiations this weekend with this in mind because they had their eyes on Merrill all along. Talk about a high stakes game of chess. Wow. BofA knew that if Lehman failed, that the market would then turn to Merrill as the next most likely to fail. Gave BofA the upper hand in their offer to buy Merrill. Shareholders may feel that they have no choice but to ok the deal.

 

FWIW, rumors are that AIG is teetering and could be next... UBS too. Yowsers.

[miss jayne]

Wow Edie thanks for the article I think.... here is a quote from an SF gate article

 

Christopher Whalen, managing director of Institutional Risk Analytics, a research firm, predicts that approximately 110 banks with $850 billion in assets could close by next July. That's out of 8,400 federally insured institutions, he said, which together hold $13 trillion in assets.

 

and the full link

 

http://www.sfgate.com/cgi-bin/article.cgi?.../f184402D70.DTL

 

and the CNN money link

 

http://money.cnn.com/

 

I've been saying the money "feels really funny" for a couple of years now. It will be interesting to see how things go today and the rest of the week...as for me I'm off to sell some plants. (alot more beautiful than mutual funds in my opinion )

[jenbobblehead]

I'm about to inherit a fair amount of stock investments. I'm thinking I'll cash them in and fill my futon w/gold bars.

Dude, that is what my stepfather did. although they aren't in his futon.

[jenbobblehead]

I guess now is not the time to move out of Grandfather's basement and look for our own house, huh?

 

*sigh*

Now I know Yeti is never going to pay us back for his surgery.

[Duck-Billed Catechist]

I guess now is not the time to move out of Grandfather's basement and look for our own house, huh?

Might be.

[cryptique]

I guess now is not the time to move out of Grandfather's basement and look for our own house, huh?

Actually, if you have any kind of downpayment, this might be the perfect time. Sounds like there's a confluence of low prices and low rates right now, and there should be plenty of inventory to choose from.

 

If I thought we'd have much chance of getting back what we paid for our house (or more), I'd be thinking about putting it on the market and looking for an upgrade.

 

Sadly, I doubt we'd be able to sell for $10K less than we paid right now, despite all the money we've put into the place in the last three years.

[jenbobblehead]

Just sounds like it will be really quite difficult to get a mortgage...

[Duck-Billed Catechist]

They have to make money somehow. Might as well be selling mortgages to credit-worthy borrowers*.

 

 

*You are right, though, I understand that some credit-worthy borrowers are having trouble getting mortgages.

[M. (hristine]

Just sounds like it will be really quite difficult to get a mortgage...

If you guys are seriously thinking about buying a house, now is the time. Take your digits to lenders. It's their job to sort it out. Then you know what you have to work with.