- Bailout blueprint. Details of the government's $700B Wall Street bailout were 'frozen' Sunday, to enable Congress to begin voting on the bill, which leaves much of the bailout's mechanics at the discretion of the Treasury, Monday. The Treasury seeks to become market-maker for troubled mortgage-backed assets held by U.S. banks and some other financial institutions, thereby enabling firms to offload toxic holdings and bring life back to their balance sheets. The government could get approval for $250B immediately, $100B more if necessary, and the last $350B as long as Congress doesn't block it. The plan imposes some curbs on executive compensation at participating firms, including a ban on 'golden parachutes.' The Treasury will receive warrants for preferred shares in beneficiary firms, enabling taxpayers to share in the upside. Bush budget chief Jim Nussle thinks the measure will cost taxpayers considerably less than $700B (some think the White House will turn a profit). Rep. Barney Frank, the House Financial Services Committee chairman, predicts the measure would pass, though not by a large majority.
- Fed gains deeper control of short-term rates. The proposed bailout plan gives the Fed added control over short-term interest rates by allowing the Fed to pay interest on reserves deposited by financial institutions - encouraging banks to deposit excess funds with the Fed rather than dumping them into money markets and distorting the overnight federal funds rate. Former Fed policy advisor Marvin Goodfriend likes the measure, which he says will "enable the Fed to have credit policy that's independent of its monetary policy." Until now, the Fed indirectly achieved its target by buying or selling bonds on the open market. Paying interest on reserves puts a floor on the overnight rate, allowing the central bank to inject liquidity without driving down rates.
- More help for homeowners. The bailout plan as agreed on by Congress includes more aggressive steps to help homeowners, requiring the government to work to reduce loan balances and interest rates and to minimize foreclosures. Until now, most government efforts to help home owners have relied on voluntary measures by mortgage lenders. Critics say this approach hasn't helped, and some economists argue that direct government involvement could be a windfall for all taxpayers - including those who pay their mortgages on time.
- Vultures look to one-up Treasury. Vulture investors, who've been eyeing distressed assets for months, are likely to become more aggressive even as the Treasury implements its rescue plan. Vultures say they offer an advantage to some sellers, because unlike the government, they place no restrictions on executive compensation and don't demand stock warrants. Others, however, remain sidelined: they're unconvinced the government plan will cut a clear path for pricing the illiquid assets - which has been a sticking point on potential sales until now.
- Wachovia in talks with buyers. After its shares fell 27% on Friday amid concerns about its mortgage assets, Wachovia (NASDAQ:WB) held weekend talks with Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) to sell itself. By late Sunday evening, Wells Fargo appeared to be the more likely buyer, and sources familiar with the situation said the two firms were in advanced discussions. Though officials from the Federal Reserve and Treasury are involved with the negotiations as well, trying to push Wachovia to seal a quick deal to prevent further erosion of its deposit base, the government stopped short of offering financial guaranties to the buyer.
- U.K. seizes struggling bank. Unable to obtain credit and weighed down by troubled mortgage assets, Bradford & Bingley, the U.K.'s largest lender, was nationalized by the U.K. government. Spanish bank Santander (STD) will buy B&B's £21B deposit book and branch network for around £600M. The government will pay around £14B to enable the transfer to Santander, and another £4B to protect deposits not covered by the compensation plan.
- Fortis gets three-way bailout. Fortis, the largest Belgian financial-services firm, received a $16.3B rescue from three countries in the biggest European bailout since the credit crisis began. In exchange for the capital, Belgium will receive a 49% stake in Fortis' Belgian banking unit, the Netherlands will receive a similar stake in the Dutch banking unit, and Luxembourg will receive a 49% stake in convertible-shares in Fortis' Luxembourg banking unit. Fortis will also sell its stake in ABN Amro's consumer banking unit, but did not identify a buyer.
- ImClone's mystery suitor. Imclone (IMCL) is expected to announce today that it is in ongoing negotiations to sell itself to a major pharmaceutical firm for around $6.1B. ImClone has not named the mystery suitor, though speculation has focused on Pfizer (NYSE:PFE) and possibly Eli Lilly (NYSE:LLY). Sources close to the situation said a deal could be reached within days. Last week, ImClone rejected an improved $62/share bid from Bristol-Myers (NYSE:BMY), calling the bid too low.
- MUFG nears Morgan purchase. Mitsubishi UFJ (NYSE:MTU), Japan's biggest bank by market capitalization, is closing in on a deal to buy a 20% stake in Morgan Stanley (NYSE:MS) for $8-9B. An announcement is expected shortly.
- Lehman's failure still causing global damage. In hindsight, Lehman Brother's failure turned out to be costlier than almost anyone imagined. Lehman's Sept. 15 bankruptcy filing set off a chain reaction in credit markets, accelerating the demise of insurance giant AIG (NYSE:AIG) and causing widespread losses. The mayhem pushed Goldman Sachs (NYSE:GS) and Morgan Stanley (MS) to become bank-holding companies, and ultimately prompted the government's $700B rescue plan. Financial repercussions from the fallout are still echoing globally. Some critics argue the systemic crisis of the last two weeks could have been avoided if the government had stepped in to rescue Lehman.
- Goldman pushing to expand. Goldman Sachs (GS), now a bank-holding company, is looking to buy up to $50B in assets from troubled U.S. banks as part of its transition into commercial banking. Goldman wants to expand its deposit base through acquisitions.
- Goldman denies AIG vulnerability. Goldman Sachs (GS) called a NY Times story that claimed it had about $20B in exposure to troubled insurance giant AIG (AIG) 'seriously misleading.' The report said Goldman was AIG's biggest trading partner, and that its potential collapse could saddle Goldman with a massive loss - in contrast to a recent comment by Goldman CFO David Viniar that the firm's exposure to AIG was immaterial. "For the avoidance of doubt, our exposure to AIG is offset by collateral and hedges and is not material to Goldman Sachs in any way," a Goldman spokesman said Sunday.
- AIG gets ready to slim down. Trying to repay an $85B government loan, AIG (AIG) may sell between 15-20 of its businesses, including its aircraft leasing unit, a stake in a large reinsurer and billions of dollars worth of properties. Media reports say it has agreed to sell a 25% stake in the London City Airport for about £250M to Global Infrastructure Partners, whose shareholders include Credit Suisse (NYSE:CS) and GE (NYSE:GE). AIG's Asian operations may be attractive to Aviva, ING Group (NYSE:ING), China Life (NYSE:LFC) and HSBC (HBC). Bidders on other assets could include Zurich Life, Allianz (AZ), AXA (AXA) and Swiss Re (OTC:SWCEY).
- AT&T re-directs to new sat-TV provider. AT&T (NYSE:T) switched its satellite-TV provider to DirecTV Group (NASDAQ:DTV) from Dish Network (NASDAQ:DISH). DirecTV now has deals with all the major U.S. phone companies. Dish, on the other hand, no longer has deals with any phone companies, calling into question the company's prospects. Dish has stumbled recently, posting a loss in subscribers, failing to move aggressively into hi-def programs and remaining overly focused on the low end of the market.
- Hedge fund hemorrhage. The $2T global hedge fund industry will shrink sharply as leverage becomes scarcer and more expensive, the world's largest hedge fund allocator says. 33-40% of funds may go dry, with arbitrage funds - which rely heavily on leverage - hardest hit. "I would not be surprised if, 12-18 months down the line, the $2T had become $1.5T," Christophe Bernard says. "There are too many weak players." 350 funds shuttered in H1, vs. 563 in all of 2007. "Darwinism is survival of the most adaptable. Those that can change to meet the current circumstances will do well and those that can't will go to the wall."
- Liquidity still scarce. The central banks of Japan, Australia and the ECB pumped billions of dollars and euros into money markets Monday as more financial institutions run into trouble both in the U.S. and abroad.
- The pound gets pounded. The pound took its biggest beating against the dollar in 15 years after the U.K. nationalized troubled lender Bradford & Bingley. The pound also fell against the euro as U.K. mortgage approvals hit nearly ten-year lows.
- Asia markets struggled Monday. Nikkei -1.26% to 11,744. Hang Seng -4.29% to 17,881. BSE -4.89% to 12,461. Shanghai closed.
- Europe is deep in the red. London -2.85%. Paris -2.75%. Frankfurt -2.65%.
- Futures have not managed to muster any strength. Dow -1.62%. S&P -1.71%. Nasdaq -1.91%. Crude -3.1% to $103.58. Gold +0.39% to $892.80.
Monday's Economic Calendar
- 8:30 Personal Income and Outlays
3:00 PM Farm Prices
8:45 PM Fed's Hoenig speaks on U.S. economy
- Notable earnings before Monday's open: CC, WAG
Seeking Alpha editor Rachael Granby contributed to this post.
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