Wall Street Breakfast: Must-Know News

• AIG's problems... After asking the Fed for a $40B bridge loan yesterday, and talks with several buyout firms failed, AIG's (AIG) borrowing needs shot up to $70-75B, prompting ratings downgrades from Moody's, S&P and Fitch Ratings. The credit downgrade could trigger as much as $14.5B in collateral calls, and up to another $5.4B in early termination fees, and puts the company's survival in jeopardy. If AIG doesn't secure financing by Wednesday, it may be forced to file for bankruptcy. Kenneth Lewis, CEO of BofA (BAC), said "I don't know of a major bank that doesn't have some significant exposure to AIG," making a potential AIG failure "a much bigger problem than most that we've looked at." Shares -60.8% to $4.76 at yesterday's close.
• ...and partial solutions. New York state, where AIG is based, threw the troubled insurer a lifeline to the tune of $20B by allowing the firm to access funds tied up in regulated subsidiaries. The move buys AIG some time, but doesn't solve the company's underlying capital problems. Strongly encouraged by a Fed seeking private-sector solutions, JPMorgan Chase (JPM) and Goldman Sachs (GS) are trying to arrange $70-75B in loans for AIG through a syndicate of banks. Some private equity firms, including TPG and Kohlberg Kravis Roberts, are potentially interested in buying specific AIG assets but are unlikely to contribute to a capital infusion.
• Lehman failure fallout. Banks may accelerate efforts to shift the $62T credit-default swaps [CDS] market to a central clearinghouse or exchange. The decade-old CDS market has been privately negotiated and unregulated, which means Lehman's (LEH) failure could leave behind billions of dollars in losses for trading partners, and trade offsetting could last into 2009. Japanese banks, largely unscathed by the credit crunch, were among the top bank lenders to Lehman, raising the possibility that unrecovered loans could cause problems for some smaller Japanese banks. Oppenheimer's Meredith Whitney thinks the credit crunch will worsen, and investors have "underappreciated" how much liquidity is going to evaporate from the market place in light of Lehman's failure. Barclays (BCS) is in talks to buy some Lehman assets, with an eye to preserving many of Lehman's jobs and operations.
• Central banks shows us the money. Central banks across the world reacted to Wall Street's financial turmoil: the Fed added $70B in reserves to the banking system; Bank of Japan added $24B to its financial system; China lowered its benchmark rate for the first time in six years; the Reserve Bank of Australia added $3.6B to the financial system over two days; the ECB added $42.7B to Euro-zone money markets; BoE added $9B in three-day funds for banks. Investors also expect major central banks to cut their key interest rates soon, as the focus moves from preventing inflation to heading off recession.
• Newspapers cry foul on Yahoogle ad deal. The World Association of Newspapers [WAN] announced its opposition to an advertising deal between Yahoo (YHOO) and Google (GOOG) and is trying to get E.U. and U.S. regulators to block the deal on antitrust grounds. Already under investigation by the U.S. Justice Department, the online giants say the deal only affects the North American market but WAN said European papers would be affected too. Representing around 18,000 newspapers worldwide, WAN is concerned that the deal will lower its profits and will give Google "unwarranted" market power. The Newspaper Association of America, a member of WAN, broke rank and remained neutral, which is good news for Google/Yahoo since regulators will likely give U.S.-based papers special weight in assessing the deal.
• HP slashes jobs. Hewlett-Packard (HPQ) will fire 24,600 employees, or 7.5% of its workforce, in an effort to realize savings from its recent purchase of Electronic Data Systems. The job cuts will come over the next three years, with about half being replaced by jobs in new areas of its services business. resulting in forecast annual savings of $1.8B once the cuts are completed. HP also announced it will take a $1.7B charge in FQ4 ending in October in connection to the acquisition and restructuring.
• Empire data shows strong contraction. New York State's Empire Manufacturing survey fell to -7.41 in September from +2.77 in August, vs. an expected +1.50. The upside of the strong contraction was a sharp fall in inflationary pressures.
• Industrial numbers drop. August's industrial production fell 1.1%, worse than the expected 0.5% drop. Capacity utilization was 78.7% vs. 79.4%

Today's Markets

• Asia markets closed down. Nikkei -4.9% to 11,609.72. Hang Seng -5.4% to 18,300.61. Shanghai -4.5% to 1,986.64. BSE -0.1% to 13,518.80.
• In Europe at midday, London -2.4%. Paris -1.3%. Frankfurt -1.6%.
• U.S. futures: Dow +0.1%. S&P -0.1%. Nasdaq +0.6%. Crude -2.6% to $93.19. Gold -0.6% to $782.40.

Tuesday's Economic Calendar

• 7:45 ICSC Retail Store Sales
  8:30 Consumer Price Index
  8:55 Redbook Chain Store Sales
  9:00 Treasury International Capital
  1:00 PM NAHB Housing Market Index
  2:15 PM FOMC Announcement
  5:00 PM ABC Consumer Confidence Index
• Notable earnings before Tuesday's open: BBY, GS, IRF, KR
• Notable earnings after Tuesday's close: ADBE, DRI

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[eddie6442:]

I am a small investor, having made 199 trades this year. The only trades I will "ever" make in the future are SELLS of my existing stocks. All proceeds will go into CD's.
WHY?
Because the SEC allows NAKED SHORT SALES!!!!!!!!!
Gone for good...........

2008 Sep 16 08:26 AM

[KEL:]

THINK LEHMAN CAN BE A BUY

2008 Sep 16 08:55 AM

[Tom Armistead:]

Now would not be a good time to implement that strategy


On Sep 16 08:26 AM eddie64 wrote:

> I am a small investor, having made 199 trades this year. The only
> trades I will "ever" make in the future are SELLS of my existing
> stocks. All proceeds will go into CD's.
> WHY?
> Because the SEC allows NAKED SHORT SALES!!!!!!!!!
> Gone for good...........

2008 Sep 16 08:57 AM

[david roper:]

Hey, eddie64, don't forget the "uptick rule" is gone as well for most other stocks other than financials. That move by the SEC was very disappointing and not welcomed by me but it was great for the hedge funds.

2008 Sep 16 09:04 AM

[captainjohann:]

Bush and his crony capitalists have made money and the small investor is carrying the can even throughout world where chinese and Indians are caryrying american paper.

2008 Sep 16 09:06 AM

[NNP:]

Where is Eli?

2008 Sep 16 09:45 AM

[JCCIII:]

I am also a small investor, like eddie64. While not as negative as eddie, I also do not understand how a naked short seller is allowed to sell that which he/she does not own; it just does not make sense to my logical mind.

2008 Sep 16 10:29 AM

[wallyjm:]

you voted for bush two times how do you like the results?

2008 Sep 16 12:58 PM

[long_on_oil:]

The total outstanding shares of a company should be the total that can ever be traded. Naked shorts allow more shares than the company has outstanding to be traded and this should never be. If Obama corrects anything I hope it is this.
I am not usually political but if I remember right all the problems we are facing now have come to light during the past 2 years since we put the Democrats in charge of the congress. The dems promised they would take care of the high price of gas 2 years ago and we put them in. Well we all know what has happened since we put in the democrat congress.

2008 Sep 16 04:59 PM

[messy:]

With the AIG PROBLEM...the Greenbergs gutted the company....I am running for GOLD. The rest of this year....I AM BUYING GOLD AND SILVER STOCKS. Why you ask? Because they are a hedge against the Bushing of America.

2008 Sep 18 08:32 AM