Wall Street Breakfast: Must-Know News 15 comments
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- Goodbye, Lehman Brothers. After talks with potential buyers failed and the government refused to stage a rescue, Lehman (LEH) announced it will file for bankruptcy. With $600B in assets and $550B in debt outstanding, a forced liquidation could send shocks reverberating through other companies and markets. The SEC said customer accounts are protected, but analysts expect bondholders could get around 60-80 cents on the dollar, or less. The bankruptcy filings will cover the holding company only, as Lehman is still looking to sell its brokerage and asset-management units. Wall Street held an unprecedented emergency trading session on Sunday to allow traders to offset the risks from derivatives trades with Lehman and to begin unwinding billions of dollars of contracts before the Monday morning open.
- Adios, Merrill Lynch. Bank of America (BAC) has agreed to buy Merrill Lynch (MER) for about $50B in stock, or $29/share, a 70% premium over Friday's closing price. With $52.2B in subprime-related losses and writedowns, and share price down over 80% from its peak last year, Merrill rushed to sell after Lehman's failure. Federal officials made it clear during the frenzied negotiations that they supported a sale and were concerned that Merrill might become the next subprime casualty. The deal, scheduled to close in the first quarter of next year, gives BofA a sales force with nearly 17K brokers managing $1.6T for customers. With the demise of Bear Sterns, Lehman, and Merrill, Goldman Sachs (GS) and Morgan Stanley (MS), both due to report earnings this week, are the last of the Big Five still standing.
- AIG holds out the begging cup. In an effort to forestall a credit downgrade, AIG (AIG) has asked the Federal Reserve for an extraordinary $40B bridge loan which it will repay with proceeds from asset sales including its domestic automotive business and its annuities unit. If AIG's credit rating is downgraded, counterparties will be able to withdraw capital from their AIG contracts, which some say could spell the company's downfall within 48-72 hours. Previously, AIG rejected an $8B bid from buyout firm J.C. Flowers & Co. that would have allowed it to buy all of AIG at some point in the future, and two other firms withdrew bids at the last minute over concerns about AIG's financial health. As an insurer, AIG is not presently covered by the Fed's already-modified lending facility for brokerages. It remains to be seen whether the Fed will agree to AIG's loan request.
- Fed loosens standards to buoy Wall St. As Wall Street struggles to survive this weekend's financial storm, the Fed has widened the collateral it will accept when providing loans to investment banks, and will now accept much riskier assets such as stocks, junk bonds, subprime mortgage-backed securities and even whole mortgages. The Fed also expanded its program for lending Treasuries to bond dealers by $25B, to $200B total. Fed policy makers will meet Tuesday to set their benchmark interest rate for this month and next. Economists expected the Fed to leave the rate unchanged at 2%, and the Fed will likely stick to this forecast, but Wall Street's recent troubles do raise the possibility that the Fed's next move could be a rate cut.
- Banks build loan system. Ten of the world's biggest banks have committed to creating a $70B lending facility to help ease global liquidity problems and limit volatility in an "extraordinary market environment." Each bank will commit $7B, and will be able to borrow up to a third of the total facility. The available financing may grow as more banks are permitted to join. The ten bank consortium includes: Bank of America (BAC), Barclays (BCS), Citigroup (C), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), JPMorgan Chase (JPM), Merrill Lynch (MER), Morgan Stanley (MS) and UBS (UBS).
- Oil falls on minimal Ike damage.Crude oil finally dipped below the $100 mark, falling 4.5% to $96.65 (5:43 AM), its lowest level in seven months. The price dropped as Hurricane Ike faded away without causing major damage to Gulf Coast oil refineries, and the 20% of U.S. refining capacity that had been shuttered before the storm prepared to re-start production. Lehman's bankruptcy filing also led concerns that a worsening credit crisis will further slow the economy and cut into oil demand.
- Ciba sold for 32% premium. BASF SE (BASFY.PK), the world's largest chemical company, will buy Ciba Holding (CSBHY.PK) for $5.5B to better compete in the paper additives market through increased scale. BASF is hoping the deal will help its troubled paper division, which has been hurt by softened demand and higher input costs. The offer is a 32% premium on Ciba's closing price on Friday.
- No takers for Take-Two. Electronic Arts (ERTS) is dropping its unsolicited $2B bid for Take-Two Interactive Software (TTWO). The offer, made seven months ago, would have joined two of the largest video games publishers. EA had long insisted that it needed to integrate Take-Two's games into its portfolio by the holiday season in order for its $25.74/share offer to be viable. Take-Two consistently rejected the offer as too low.
Today's Markets
- Asia markets closed sharply down. BSE -3.4% to 13,531.27. Taiwan -4.1% to 6,052.45. Straits Times -3.3% to 2,486.55. Nikkei, Hang Seng and Shanghai were closed for holidays.
- In Europe at midday, London -4.1%. Paris -4.8%. Frankfurt -3.6%.
- U.S. futures indicate a steep fall at the opening. Dow -3.2%. S&P -3.9%. Nasdaq -2.9%. Crude -3.7% to $97.40. Gold +1.9% to $779.30.
Monday's Economic Calendar
- 8:30 Empire State Mfg Survey
9:15 Industrial Production
Seeking Alpha editor Eli Hoffmann contributed to this post.
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This article has 15 comments:
IMHO
But doesn't everyone.
The collapse of all these financials is creating major buying opportunities like we haven't seen in years. They are having to liquidate equities with no market price buyers.
Hogwash ! For a true explanation please see the article by Mike Stathis on Seeking Alpha Sept. 11th entitled "Greenspan Get Lost". By his actions, Mr. Redspan has cost American Taxpayers up to 10 trillion dollars. In addition, world bankers will now be far more reluctant to trust U. S. paper in the future.
1. Chris Dodd or is it "Dudd" and Barney Frankes are the arhitects of mortgage disaster should imo join the architect of Enron debacle;
2. George "no veto" Bush who betrayed his constituency and didn't learn much from his personal experience of S&L meltdown.
At least the Exxon skipper was drunk....
You love the creative markets and the profits that are made, until excessive greed takes it over the edge, then you cry "socialism" and ask who was regulating the market.
The sub-prime mortgage meltdown was due to a Ponzi scheme of totally bad mortgages written by banks and lending companies and passed along as investment bundles paying extraordinary returns.
Greed exceeded caution and prudent risk taking..
When times are good, you yell "Leave the markets alone!." When it goes through tough corrections, you cry "Why didn't you stop me?"
I don't understand what Bush did? Was he the one in charge of banking regulation? Did he force you to take out an ARM mortgage? Washe in charge of the SEC?
You gotta put up some facts.
Where did Bernanke get his education on priorities and proactive policy decisions -- FEMA?????
When is the last policy decision our government made that was proactive and successful????????