WSJ: Tomorrow Will Be "The Mother of All Mondays"

[Mr. Peabody]

It's nice to see that our candidates are focused on lipstick and who went negative first while our financial sector crumbles.

September 14, 2008, 5:53 pm
The Mother of All Mondays
Posted by Tim Annett


Investors world-wide have rarely rolled out of bed to face a Monday morning quite like the one they’ll contend with this Monday.

Sundays have long been host to important corporate news, from big mergers to bankruptcies. But this weekend, in an extraordinary meeting that recalled the summit called ten years ago amid the meltdown of hedge fund Long-Term Capital Management and J. Pierpont Morgan’s efforts more than 100 years ago to rescue a series of ailing banks, Wall Street’s most senior deal makers and regulators raced to find a deal that would keep storied Lehman Brothers Holdings from collapse. At this hour, their efforts have yet to yield any fruit. Barclays, which had come to be viewed over the weekend as the most likely bidder for the badly ailing Lehman, pushed away from the bargaining table on Sunday. The main impediment appeared to be that the U.S. government is reluctant to backstop a deal, as it had amid the Bear Stearns meltdown in March.

If Lehman can’t find a life raft, it could lead to turmoil in the credit markets as traders rework credit-default swaps and other trades with Lehman at their center. Credit-default swaps traders were called to work Sunday, the Wall Street Journal reported, for a special trading session that would let Lehman counterparties offset their positions against each other. Equity markets could also be roiled Monday. The crumbling of a major Wall Street ins ution is likely to shake badly the confidence of investors who had hoped the Street would make it through the credit crisis without yet another large firm being swallowed up. What’s more, the economic backdrop looks dimmer than it did in March when Bear Stearns was pushed into the arms of Jamie Dimon.

Any forced selling of stocks or other securities by hedge funds and other big investors linked to Lehman could further destabilize the markets. Market sentiment has been fragile for months, causing wild gyrations that have given equities little chance to establish momentum in one direction or the other. Investors have skipped in and out of Treasurys and other safe-haven bets and money that was pushed into commodities bets has suffered amid the jarring drop in the price of oil and other raw materials since July.

One possible Lehman suitor, Bank of America, has reportedly meanwhile taken up merger talks with another brokerage giant that has been battered by the credit crisis – Merrill Lynch. Strategically, a union of Bank of America and Merrill Lynch would merge BofA’s sprawling retail banking business with Merrill’s vast brokerage network. Bank of America has a deep well of capital due to its massive deposit base. A deal could chase at least some of the gloom swirling around the financial sector because of Lehman. Merrill shares were slammed last week alongside Lehman.

Adding to the whorl, American International Group (whose shares were also clobbered last week amid growing concern about the extent of its losses on CDS and other derivatives) plans to disclose a restructuring on that Monday that is likely to include the sale of major assets, including its aircraft-leasing business, International Lease Finance Corp., the Journal reported today. The insurance giant, a component of the Dow Jones Industrial Average, is hoping to raise more than $10 billion. The company has already raised $20 billion in fresh capital this year.

UPDATE at 6:39 PM EDT: Dow Jones Industrial Average futures were down roughly 300 points in recent trading.

UPDATE at 6:48 PM EDT: The Journal is reporting that a Bank of America-Merrill deal is closer, with an all-stock deal expected at $26 a share or greater. However, the situation remained fluid and any deal could still falter. Meanwhile AIG plans to shift capital from its regulated insurance business to its holding company, a source has told the Journal. The move is intended to improve AIG’s liquidity position. The measures involve $40 to $50 billion in capital allocation and new capital, the source says.

UPDATE at 7:04 PM EDT: The Journal reports the Merrill board is meeting now to consider a deal. Merrill shares ended trading on Friday at $17.05, down 12% from where they began the day. The shares had fallen 68% for the year to date and 77% over the last 12 months.

[Anti.Hero]

[boutons_]

Lehman seems to be about to declare bankruptcy, gone.

Stunning Fall for Main Street’s Brokerage Firm

http://www.nytimes.com/2008/09/15/bu...15merrill.html


A.I.G. Seeks $40 Billion in Fed Aid to Survive

http://dealbook.blogs.nytimes.com/20...ive/index.html


Capitalists and un/bad regulated markets sure know how to do their business, and never hurt any of the rest of us.

Heads the capitalists win, tails the taxpayers lose.

Private profit, public risk

Righties, tell us again how wonderful regulation-free markets are brilliantly the best thing since canned bacon?

[Nbadan]

Dubya's plunge protection team is heating the telecom lines this weekend.....

[Biernutz]

It's been reported that Lehman will go into bankruptcy Monday. The feds won't bail it out. The CEO is said to contributed to it's downfall.
http://www.reuters.com/article/reute...41059120080914

Update----
Bank of America to Buy Merrill Lynch for $29/Share

WSJ.com

[spurster]

Don't worry. McCain/Palin will fix it by cutting earmarks.

[2centsworth]

Don't worry. McCain/Palin will fix it by cutting earmarks.

there's no fixing the problem. However, Obama may use it as an excuse for the government to now enter the financial industry. I hope the one lesson people learn is how crucial a balance sheet is to running any business. The balance sheet of the United States is a mess. Cutting earkmarks/government spending is just the beginning of what needs to be done. A drastic cut in en lements needs to take place or else the US will also file chapter 11.

Of course Obama's strategy is to add more en lements.

[KenMcCoy]

Righties, tell us again how wonderful regulation-free markets are brilliantly the best thing since canned bacon?

First, let's not forget that it was Clinton who deregulated the banking industry in 1994 and again in 1997.

Second, this is exactly what is supposed to happen with capitalism. Strong, well run companies survive while inefficient, poorly run companies fail. As long as the gov't doesn't bail them out, I don't see what is wrong with that.

[boutons_]

"I hope the one lesson people learn is how crucial a balance sheet is to running any business."

no, the one lesson is that huge financial ins utions, even private ones, must show their financials in full transparency, and what they must show must be legally required and clear, and the regulations seriously applied.

Then investors and regulators can decide for themselves if the company is well run and worthy of being invested in.

"this is exactly what is supposed to happen with capitalism. Strong, well run companies survive while inefficient, poorly run companies fail."

so dubya's financial people who rescued/re-nationalized fannie and freddie, and rescued Bear, are anti-capitalism?

Remember, a nationalized f & f worked great for decades until f & f were allowed, esp under dubya, to abuse their role a govt-backed.

As always, free markets work very poorly, as today shows, when not regulated.

If any private company, eg investment banks, is too big to be allowed to fail, then it's too big to be unregulated.

SEC/Treasury/FED have ALL failed to protect Americans from Monday's like this, and from the entire mortgage crisis.

[2centsworth]

"I hope the one lesson people learn is how crucial a balance sheet is to running any business."

no, the one lesson is that huge financial ins utions, even private ones, must show their financials in full transparency, and what they must show must be legally required and clear, and the regulations seriously applied.

Then investors and regulators can decide for themselves if the company is well run and worthy of being invested in.

"this is exactly what is supposed to happen with capitalism. Strong, well run companies survive while inefficient, poorly run companies fail."

so dubya's financiapl people who rescued, pre-nationalized, fannie and freddie, and rescued Bear, are anti-capitalism?

As always, free markets work very poorly, as today shows, when not regulated.

Boutons this problem has little to do with regulation. The problem was how these companies underwrote mortgages. Instead of using credit and the assets of the buyer in underwriting they instead tried to use statistical modeling. Very similar to how insurace is underwriten. For example, 1 out of 1000 people ages 25 to 30 will die this coming year. They decided to considr mortgages rhe same wa saying 1 out of 1000 would defaylt when in fact the rate of default was significantly higher with 100percent financing and bad credit.

[boutons_]

"insurance"

people dying or getting sick is a well-known actuarial basis. Insurance companies have taken hits of 10s of $Bs and not folded. yes, I'm aware of the re-insurance market.

Using the same basis for mortgages has obviously failed. There should be in place regulations that prevent re-selling bundled (suspect + non-suspect) debt obligations to the rest of the planet, so the lenders can keep on selling (bad) mortgages.

There will be of course always tricks for companies, esp big companies with best corporate lawyers and financial talent, to get around regulations, since that's the nature of what they do to make more $$, no matter how unethical (companies have no ethical status), no matter how damaging their shenanigans are.

Basic operating principle: NEVER trust capitalists and corps because they will betray that trust to individuals over with their enormous power and political influence.

How do you express your paranoia? Just like the paranoid Founding Fathers. You make laws and regulations and checks/balances, AND, your have the police force in place to enforce the regulations, and serious punishment, not wrist-slaps, including shutting down.

And I'd like to see removed the scam where a company settles for $1B penalty with no admission of wrongdoing. What a ing farce.

[2centsworth]

"insurance"

people dying or getting sick is a well-known actuarial basis. Insurance companies have taken hits of 10s of $Bs and not folded. yes, I'm aware of the re-insurance market.

they could plan their premiums accordingly. Mortgages should have never been underwritten this way. The premium(credit spreads) were no where near enough to compensate. Plus, the consumers receiving mortgages were buying way too much house, and can you blame them since there was little to no underwriting. This created a real estate bubble that is bursting.

Using the same basis for mortgages has obviously failed. There should be in place regulations that prevent re-selling bundled (suspect + non-suspect) debt obligations to the rest of the planet, so the lenders can keep on selling (bad) mortgages.

the billions of dollars of losses should prevent this from occuring in the future. Companies with good balance sheets will make a fortune.

There will be of course always tricks for companies, esp big companies with best corporate lawyers and financial talent, to get around regulations, since that's the nature of what they do to make more $$, no matter how unethical (companies have no ethical status), no matter how damaging their shenanigans are.

long-term the well run companies last. sometimes companies make mistakes, but we are the wealthiest and most transparent country in the world because of our financial markets.

[boutons_]

"should prevent this from occuring in the future"

... when entire financial structure of USA is at risk (as was said with Bear, F&F, Lehman, and now AIG), the regulations should prevent the disaster, not shut the barn door afterwards.

Was this disaster so opaquely impossible to see coming? I have a buddy who is loan broker in CA, he said the "stated income", no proof, for borrowers was a huge scam. Now, stated income is replaced with several proofs, which is an easy, simple regulation, protecting both parties.

When the hit the fan, the word from the Wall St was that not even Wall st could know who was risk, who had done what, the multi-layered complexity rendered the securitized market totally opaque. Nobody foresaw Fuld/Lehman going under. Total opacity.

"most transparent country in the world because of our financial markets"

comparing a (domestic) flower to a pile of (foreign) makes any flower smell pretty good, doesn't it. We can all rest assured that the foreign capital that has $Ts invested in US, are feeling 100% confident that USA's financial system is solid.

I read where it was the Chinese who decided to pull the plug on F&F, threatening to pull their money out if US didn't save F&F. iow, the USA "free market" is no longer able to control itself with sovereign funds, etc owning so much of the country.

I remember a point where it was illegal for foreigners to own/control a US airline. What a silly concept, with foreigners holding the US by the $short and $curlies.

again, private gain, public risk; heads Wall st wins, tails taxpayers lose.

[MannyIsGod]

Why does anyone bother responding to boutons? Would you debate a re ed child?

[Aggie Hoopsfan]

Why does anyone bother responding to boutons? Would you debate a re ed child?

POTD.


Aside from that, I'm glad they let Lehman fail. Tired of seeing America be on the hook for some greedy ass Wall Street pricks.

[Anti.Hero]

POTD.


Aside from that, I'm glad they let Lehman fail. Tired of seeing America be on the hook for some greedy ass Wall Street pricks.

As we await the government's response to AIG, the automakers, and so on.

The damage is done.

[boutons_]

AIG to be allowed to borrow $20B from its subsidiaries. So far, taxpayers aren't gouged.