- Fed bailout for AIG. Facing imminent collapse, AIG (AIG) accepted an $85B two-year revolving federal loan that gives the government a 79.9% stake in the nation's largest insurer. The Fed had initially refused to get involved but after private-sector solutions failed to materialize, the Fed concluded that a "disorderly failure" of AIG could be disastrous to already-fragile markets. As part of the deal, senior managers including CEO Robert Willumstad will be replaced. Edward Liddy, formerly of Allstate (ALL), will become AIG's new leader. The loan does not require AIG to sell assets or liquidate, though this is the most likely way for AIG to repay the Fed, and the Fed retains the right to discontinue dividend payments.
- Implications of the AIG rescue. With some investors wondering why the Fed allowed Lehman to fail but rescued AIG only two days later, a Fed staffer obliquely commented that the markets were more prepared for a Lehman failure. Former Treasury counsel Peter Wallison elaborated "I can't imagine why the Fed would do this unless they were sure AIG's failure posed systemic risk." The Fed insists that taxpayers are protected by the terms of the loan, which holds AIG's assets as collateral, and taxpayers could reap a major profit through the Fed's equity stake if AIG ultimately rebounds. Despite AIG's cash crunch, many of its business divisions - including its main insurance unit and aircraft leasing unit - are still profitable and could prove to be attractive investments as AIG potentially puts pieces of the company up for sale. More politicians will likely call for an overhaul of the financial regulatory system, and some are considering the creation of an agency to buy bad debt. The rescue brings this year's tab for government bailouts and special loans to over $900B. Shares -30.7% in after-hours trading, to $2.60.
- Making a run at AIG's aircraft leasing business. Sources say Steven Udvar-Hazy, chairman of AIG's (AIG) highly successful aircraft-leasing unit, known as ILFC, is leading an effort to buy back the company - giving the troubled insurance giant much-needed cash and stabilizing an airline industry mainstay. It's not clear who the investors for ILFC, with over $17B of orders on its books, might be. Udvar-Hazy and his management team don't believe the company can continue to remain competitive under AIG's umbrella.
- Barclays is back. Two days after abandoning acquisition plans for the entire firm, Barclays (BCS) will buy Lehman's investment-banking division for $1.75B. Barclays President Robert Diamond called the purchase a "once in a lifetime opportunity" that includes Lehman's equities and fixed-income sales, trading and research businesses, commodities and foreign exchange, merger advisory and prime brokerage unit, as well as Lehman's New York headquarters and two data centers. The operations employ around 10,000 people, nearly two-fifths of Lehman's total workforce.
- NY Fed repays some Lehman loans. JPMorgan (JPM) lent units of Lehman Brothers $87B on Monday "to avoid disruption of financial markets," which the New York Fed has now repaid to JPMorgan. This means the NY Fed essentially loaned the funds to Lehman itself, marking an unprecedented expansion of the Fed's lending program. JPMorgan also advanced $51B to Lehman on Tuesday, but it is not yet clear whether the Fed will repay this amount as well.
- Fed stays put. The FOMC surprised Wall Street by leaving its fed funds target unchanged at 2%, saying it's already promoting 'moderate economic growth.' While acknowledging "strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters," the Fed said current measures still appear sufficient to help stimulate growth over time. It remains wary of hard-to-pinpoint inflationary pressures.
- Will Morgan be the next to merge? Despite market turmoil, CFO Colm Kelleher maintained that Morgan Stanley (MS) remains confident in its broker-dealer model and isn't looking to merge with a deposit-taking bank. However, senior officials at the nation's No. 2 investment bank admit that continued share price volatility might force the company to look for a merger partner, most likely a well-capitalized bank. Morgan has a strong balance sheet and better-than-expected Q3 results (see below) but analysts are increasingly betting that an independent Morgan won't survive, and CEO John Mack is anxious to avoid Lehman's mistake of ignoring buyout offers until it's too late.
- SanDisk rebuffs Samsung offer. SanDisk (SNDK) rejected a $5.9B takeover bid from chip maker Samsung. SanDisk said the $26/share cash offer, an 80% premium on Monday's closing price, undervalued the company, and that the firm remains open to a higher bid in the future. SanDisk shares soared 53%, to $22.95, in pre-market trading.
- Worst still to come. Expect more trouble from major financial institutions in coming months, IMF director general Dominique Strauss-Kahn says. "It is a very serious financial crisis." Despite current uncertainty, Strauss-Kahn sees the global economy recovering in 2009.
- Retail sales. ICSC retail chain-store sales fell 1.6% from a week ago, and gained 1.3% on the previous year. ICSC chief economist Michael P. Niemira said "given the fact we are in between sales drivers - back-to-school, summer clearance items, Halloween and early holiday shopping - consumers really had no motivation to shop." Redbook numbers showed national chain store sales fell 1.1% in the first two weeks of September vs. the previous month, but gained 1.4% vs. a year ago.
- Consumer prices. Consumer prices posted their first drop in nearly two years on lower energy costs and reduced inflationary pressures. The seasonally adjusted Consumer Price Index [CPI] fell 0.1% in August, in-line with consensus. Core CPI rose 0.2%, also in-line with consensus.
- Treasury International Capital. Data published yesterday showed foreign demand for U.S. assets in July grew at the weakest pace since August 2007. Total net purchases of U.S. long-term equities dropped to $6.1B vs. $53.4B the previous month.
- Housing numbers improve. The homebuilder sentiment index inched up two points. The monthly NAHB Housing Market Index for September showed improvement in all regions.
- Consumer confidence rises, for now. In polling completed before Wall Street's maelstrom over the last few days and the gas price shock, ABC's Consumer Comfort Index showed a sharp increase in consumer confidence, jumping to -41 from -47. Economists expected the index to stay steady at -47.
- Joblessness isn't only domestic. UK jobless claims jumped by 32,500 to 905,000 - the worst in more than 15 years. Unemployment inched up 0.1% to 2.8%. "The UK economy and the labor market are deteriorating at an increasingly rapid rate, and it looks as if a recession is a certainty," ING economist James Knightley said.
Earnings: Wednesday Before Open
Earnings: Tuesday After Close
- Adobe (ADBE): FQ3 EPS of $0.50 beats by $0.04. Revenue of $887.3M (+4.2%) vs. $876.7M. [PR]
- Darden Restaurants (DRI): FQ1 EPS of $0.61 in-line. Revenue of $1.77B (+20.9%) vs. $1.76B. [PR]
- Morgan Stanley (MS): Q2 EPS of $$1.32 beats by $0.54. Revenue of $8.05B (+1.1%) vs. $6.32B. [PR]
Today's Markets
- Asia markets closed mostly down. Nikkei +1.2% to 11,750. Hang Seng -3.6% to 17,637. Shanghai -2.9% to 1,929. BSE -1.9% to 13,263.
- In Europe at midday, London +1.3%. Paris +0.4%. Frankfurt +0.6%.
- U.S. futures: Dow -0.4%. S&P -0.6%. Nasdaq -0.5%. Crude +3.1% to $94.00. Gold +0.6% to $784.90.
Wednesday's Economic Calendar
- 7:00 MBA Mortgage Applications
8:30 Current Account
8:30 Housing Starts - consensus 0.95M
10:35 EIA Petroleum Status - Notable earnings before Wednesday's open: GIS
Seeking Alpha editor Eli Hoffmann contributed to this post.
Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.
After you finish reading Wall Street BreakfastSeeking Alpha's Market Currentswill keep you current all day long.
