Super Moderator
Location: essex ma
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meanwhile, back in reality (bank crisis round 2)
look pretty much anywhere this morning and you will see the collapse of lehman brothers, the collapse and absorption of merrill lynch, the
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Wall Street in turmoil
By Francesco Guerrera in London, Krishna Guha in Washington and Greg Farrell in New York
Published: September 14 2008 23:48 | Last updated: September 15 2008 10:24
Wall Street was in turmoil on Monday after Lehman Brothers said it would file for bankruptcy protection and Merrill Lynch agreed a $50bn takeover by Bank of America.
BofA’s bold bid for Merrill came as the world’s top banks abandoned efforts to save Lehman and set out to build a firewall against further financial chaos with a $70bn liquidity pool to support other vulnerable institutions.
The moves capped a weekend of high drama that could lead to one of the most radical reshapings in Wall Street history and set the scene for a volatile day on global capital markets.
The Federal Reserve said it was making it easier for financial institutions to access Fed liquidity by easing terms on its borrowing facilities and accepting a much wider range of assets as collateral. The Fed meets to decide on interest rates on Tuesday.
It widened the set of assets eligible as collateral for loans of Treasuries to include all investment grade paper, and raised the size of these Treasury loans to $200bn.
The Fed also suspended rules that prohibit banks from using deposits to fund their investment banking subsidiaries.
The weekend’s dramatic events undermined confidence in financial stocks across Europe. Banks and insurance companies were the heaviest fallers on Monday while gold prices jumped higher as investors sought the safety of the precious metal.
The Markit iTraxx Crossover index, which measures the cost of insuring European junk-rated credit derivatives, widened 17 per cent on Monday to 640 basis points as the likelihood of defaults was perceived to be higher.
Monday’s market reaction will be closely watched by regulators and banking executives to gauge investor sentiment towards the credit crunch that has wreaked havoc on the financial sector for more than a year.
BofA’s rapid U-turn, which saw it abandon talks to buy Lehman and move to Merrill in the space of a few hours, will throw the spotlight on Morgan Stanley and Goldman Sachs. The two could soon become the only independent investment banks in the US.
Merrill’s board voted on Sunday night to approve BofA’s takeover all-stock bid, which was pitched at $29 a share. That is a premium of 70 per cent on Friday’s closing price of $17.05. Merrill’s shares have fallen nearly 70 per cent this year.
The sudden and dramatic turn of events came at the end of a weekend which saw top Wall Street executives locked in increasingly desperate talks over the future of Lehman and the state of the financial sector with Hank Paulson, US Treasury secretary, and Tim Geithner, president of the New York Federal Reserve.
However, bankers familiar with the talks said a rescue plan for Lehman had been seriously undermined after suitors Barclays of the UK and BofA, had walked away. Barclays pulled out in the afternoon after the US government refused to provide a guarantee to enable Lehman to continue trading until a deal had been completed.
Lehman, a 158-year-old firm that is one of the biggest names on Wall Street, said during the New York night that it would file for bankruptcy.
The filing is likely to cause thousands of job losses among Lehman’s 25,000-strong staff. On Sunday night a number of employees were seen leaving Lehman’s Manhattan headquarters with boxes stacked with their possessions, stationery and even some paintings.
In a separate move, regulators had prepared the ground for a Lehman bankruptcy by asking its derivatives counterparties to settle trades between themselves in a special trading session in the afternoon.
Merrill’s decision to enter talks with BofA, which has long coveted its rival’s large retail brokerage business, came after it became apparent that Lehman’s woes could spread to the rest of the investment banking sector in the coming weeks.
John Thain, Merrill's chief executive, who was attending the Lehman crisis talks, approached some rivals asking them whether they would be interested in bidding for his firm, according to people close to the situation.
Morgan Stanley, BofA and some foreign banks were contacted but many of them declined to pursue the talks because they had insufficient time to pore over Merrill’s complex trading books, they added. Merrill, Morgan Stanley and BofA declined to comment.
A takeover of Merrill would be a victory for Ken Lewis, BofA’s chief executive, who has long wanted to combine the lender’s commercial banking operations with Merrill’s army of retail brokers.
However, a deal could saddle BofA with more troubled assets. The bank bought the stricken mortgage-lender Countrywide and a purchase of Merrill would force it to clean up the bank’s trading books, which have already cost Merrill some $52bn in writedowns and credit losses.
Mr Thain, the former Goldman Sachs executive and former head of the New York Stock Exchange who joined Merrill last year after the departure of Stan O’Neal, is almost certain to leave the firm if the BofA takeover goes through.
He is a fervent supporter of John McCain, the Republican presidential candidate, and some experts expect him to seek a political career.
Copyright The Financial Times Limited 2008
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FT.com / In depth - Wall Street in turmoil
Wall Street's bloody Sunday
Quote:
The crisis gripping the US financial markets shows no signs of ending after an unprecedented weekend of drama
* Richard Adams
Has Wall Street ever seen a weekend like the one it has just been through? Perhaps, in the depths of the great depression - but nothing in recent memory, not even the collapse of the hedge fund LTCM 10 years ago, comes close to the drama and crisis that the US financial system is going through.
In case you haven't been paying attention, here's what's happening. Lehman Brothers, one of the largest and oldest US investment banks, is going bust, barring an unlikely last-minute government bailout. Merrill Lynch, for years one of the titans of Wall Street, hocked itself in a firesale to a rival, Bank of America. And AIG, one of the world's largest insurance firms, is begging for a $40bn emergency loan from the US government to stave off its own destruction. In the words of the Wall Street Journal: "The American financial system was shaken to its core".
And that was just on Sunday. It doesn't pay to take the weekend off on Wall Street these days – it was just last Sunday that the US Treasury confirmed it was taking control of Fannie Mae and Freddie Mac – the vast American mortgage agencies – at a cost to the taxpayer estimated to eventually range between zero dollars and a few hundred billion.
And as the minutes ticked over from Sunday to Monday on the US east coast, Lehman Brothers finally threw in its towel and filed for bankruptcy. In one way or another it will be the end for a bank that started in Alabama back in 1844 – a sticky end considering that last year it had sales of $57bn and only a few months ago was named by Business Week magazine in its 50 top performing companies for 2008. (Business Week's citation, in hindsight, looks wise: "Still, the firm is highly leveraged. The final throes of the global credit contraction will test just how good it really is." Now we know.)
What links all these once-buoyant institutions? All of them – from Fannie Mae to AIG – have been caught up in the bonfire of the vanities that was the US housing market, the same underlying cause that six months ago saw the combined forces of Wall Street and Washington rush to prop up and then dismember another former investment banking stalwart, Bear Stearns.
As the housing market turned toxic, so the loans that Bear Stearns, Lehman Brothers, Fannie Mae et al, had cheerfully advanced, bought up, repackaged and insured, lost value. The Federal Reserve, abetted by the US Treasury, pumped cash into the financial markets to prevent them seizing up. But their efforts were hampered by the very financial instruments that the masters of Wall Street had invented. The blizzard of options and derivatives the banks have used in recent years are byzantine in their complexity, making it very difficult to value the potential losses on the books.
That's why the emergence of AIG may be the most troubling event of Wall Street's Bloody Sunday. While the fall of Lehman Brothers was no surprise – in recent weeks the bank has desperately tried to raise fresh capital and sell its most profitable arms – AIG is in a different league as (until recently) one of the largest financial institutions in the world of any type. It has (or it did have) a trillion dollars worth of assets. But despite all that, it too is suffering from the shaky mortgages it holds, as well as the mortgage insurance contracts it has underwritten. Now it needs to borrow money on the financial markets on anything other than punitive terms – and this is the root cause of its problem.
To raise funds AIG needs to show potential lenders what its assets are – and so is forced to put price tags on the swamp of mortgages and derivatives it is holding. As the New York Times reports, AIG has been valuing its mortgage junk bonds at far higher than the likes of Lehman Brothers, and so the hole in its accounts is bigger than expected.
If that's the case at AIG and Lehman Brothers, then the existential question facing Wall Street this morning – as it has on so many recent mornings – is how do you put a value on something that no one wants to buy? You can wait, and hope that something (a housing market recovery?) turns up. You can hope the government gets you out of the jam. But otherwise: when no one wants to buy something, its value diminishes towards nought. And until that problem is solved, next Sunday could be just as exciting as the last two. But we won't even have to wait that long: today is shaping up to be hectic as well, with credit rating agencies poised to downgrade AIG, and stock markets around the world opening to the sound of "sell" orders whizzing through the ethernet.
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Richard Adams: The mortgage monster created by US bankers is getting its revenge | Comment is free | guardian.co.uk
there is a simple bottom line, and there is the more complex one.
the simple bottom line is that this should be the end of the neoliberal world: o sure, you can export the worst features of industrial capitalism and shift roduction facilities place to place in search of the lowest wages and most politically pulverized workforce, and so long as cheap consumer goods keep showing up in the stores, there's no problem. "markets remain rational" to the extent that capitalist ideology has never been very good at taking account of what it actually correlates to in the world and besides working people are just extensions of machines in any event.
but here we have yet another wave of crisis at the level of capital itself, one which follows directly from the assumption that markets are rational, that regulation is an impediment, that left to themselves market actors make reasonable decisions because there's something magical that happens when capital is at stake, all fog goes away and even the most idiotic person suddenly becomes a rational actor--unless they do not hold capital, in which case they are of no consequence. the deregulation of banks has resulted in crisis upon crisis, beginning with the s&l problem of the bush administration and culminating so far in the disasters of the past couple weeks. the generation of financial arcana that circulates in transnational markets which have a shadow existence and no regulation whatsoever---institutions turn profits, shareholders and happy, executives derive obscene salaries and when the shit hits the fan...
no-one is responsible, the state steps in, market fundamentalism goes out the window, these actors are "too big to allow to fail" and here we are in the brave old work of capitalist oligarchy and it's lovely friend crisis, which is one of the features capitalism is most adept at producing.
it'll be interesting to see how this gets spun, how continuity is asserted in the face of it.
in "the harder they fall" there is a conversation between the main cop and the head of the fictional equivalent of studio one about the hunt for the "bad guy" who is played, i think, by jimmy cliff. the cops want to put an apb on the radio during top of the pops. the head of studio one says---you interrupt top of the pops for that and you better catch him. you disrupt the continuity of entertainment and you create a Problem.
what do you make of this?
surprised this monday morning?
what do you think the political consequences of this will be?
if none, how is that possible?
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a gramophone its corrugated trumpet silver handle
spinning dog. such faithfulness it hear
it make you sick.
-kamau brathwaite
Last edited by roachboy; 09-15-2008 at 03:42 AM..
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