- Banks tussle over Wachovia. Citigroup (C) and Wells Fargo (WFC) took their battle over Wachovia (WB) to the courts this weekend. On Saturday night, Citigroup persuaded New York state trial-court judge Charles Ramos at his beach home in Connecticut to extend its exclusivity agreement with Wachovia until Friday. On Sunday night, a state appeals-court judge overturned the ruling, questioning Ramos' authority to rule outside the NY state. Meanwhile, Fed officials and execs from Citi and Wells Fargo were up late Sunday trying to resolve the dispute. The lead solution, sources say, involves divvying up Wachovia's branches by geographic area (Citi would get Wachovia's branches in the Northeast and mid-Atlantic regions, and Wells would take those in the Southeast and California), Wells buying its asset-management and brokerage units, and neither bank receiving FDIC assistance.
- EU leaders try to buoy domestic markets. As Eurozone leaders debate responses to the banking crisis and possible coordination, governments are trying to shore up their domestic markets. BNP Paribas (OTCQX:BNPQY) agreed to buy Fortis' Belgium and Luxembourg units after a government rescue failed. Denmark and Germany decided to offer full guaranties on bank deposits. The German government and financial institutions put together a $68B rescue package for Hypo Real Estate. The U.K. announced it was ready to offer further support, possibly including additional capital, to banks in financial difficulty. Shell-shocked Europe bourses are suffering heavy intraday losses (see below).
- German savings guarantee spooks continent. A small group of EU leaders met over the weekend to discuss solutions to the financial crisis that has started to grip Europe's banking system after Germany refused to support France's suggestion of a pan-European bailout fund, and abruptly changed its policy from a week earlier after it announced the government would fully guarantee all German bank deposits. As Europe's economic superpower, the move puts pressure on other European leaders to follow suit. The EU's 27 finance ministers will meet in the coming weeks to try and hammer out details of a potential accord.
- Borrowing costs rise, again. The cost of borrowing in euros for three months, or Euribor, hit a record of 5.35%, its seventh straight record-breaking day. The one-month rate rose 2 BPs to 5.15%, reaching an all-time high for a fifth day. The cost of borrowing dollars overnight, Libor, jumped 37 BPs to 2.37%, while three-month Libor fell five BPs to 4.29%. The TED spread - the difference between Treasurys and what banks pay to borrow in dollars - was at 3.89% today; it averaged just 0.39% in the first half of 2007.
- Ghost of deflation reappears as commodity prices dive. Commodities markets are poised to post their biggest annual decline since 2001 as slowing economic growth erodes demand for raw materials, and investors bail out of leveraged positions. The value of the 19 commodities in the CRB Index has plunged 43%, or $280.6B billion, from its July 3 peak - a loss larger than its entire worth just two years ago. "The day of steadily rising commodity prices is over," financial economist Chris Rupkey said. "A lot of the demand for commodities has been speculation, and now that demand is falling away because of fear taking hold in the market." The plunge has economists worried about the danger of deflation as a lack of credit strangles growth, pushing housing prices even lower, leading to more defaults, and even tighter credit etc. - a phenomenon one money manager calls a vicious deflationary cycle.
- BoA pays out for 'predatory lending.' Bank of America (BAC) has agreed to settle claims regarding certain risky loans originated by Countrywide Financial. The deal, which will apply to borrowers who took out subprime loans or option adjustable-rate mortgages, will cover almost 400,000 borrowers and could be worth up to $8.4B. BoA will have to modify the terms of these loans, where possible, for borrowers who are seriously delinquent or likely to become so, and will try to refinance borrowers into the government's Hope for Homeowners plan. The settlement is likely to be the largest 'predatory lending' settlement in history.
- ImClone's mystery suitor becomes new owner. ImClone (IMCL) agrees to be acquired by Eli Lilly (LLY) for around $6.1B, putting an end to Bristol-Myers' (BMY) repeated attempts at a hostile takeover. The deal values ImClone at $70/share, a 51% premium over ImClone's closing price before Bristol made its first $60/share bid, and a 7% premium over Friday's closing price of $64.96. It is unclear what will happen with Erbitux, as both Bristol and ImClone claim the rights to the blockbuster cancer drug.
- U.K. retail failures forecasted. Begbies Traynor, the U.K.'s largest firm dealing with corporate insolvency, expects to see a wave of retailer failures in the U.K. at the beginning of 2009. The retailers are nearing the end of a "banking honeymoon" which should last through Christmas, at which point banks are expected to become far less patient. Begbies has 323 retailers on its "watch list" with at least a 70% chance of failing, and warns there are few white knights to rescue companies in distress.
- Bank losses could triple to $1.7B. As banks begin to tap the government's toxic asset bailout plan, it's likely they'll be saddled with losses as much as triple the $586B they've already swallowed - because the assets are still being carried on their books at more than their value. Also, assuming TARP allows the prices of distressed assets to rise, yields on other bonds could be driven down relative to their benchmarks, prompting additional losses. JP Morgan analyst Christopher Flanagan estimates total losses of $1.7T.
- Bonds intrigue both bulls and bears. Some strategists and economists are bullish on Treasurys, even though yields are already below the fed funds target rate, because they're almost sure the Fed will lower rates again. Futures price in an 84% probability of a 0.5% cut by the FOMC's Oct. 29 meeting, having seen no chance of a cut just a month ago. Bond bears, meanwhile, think we may be close to a bottom, especially if the Fed's $700B rescue plan succeeds in unlocking credit markets, encouraging investment in riskier debt.
- Crude slips below $90. Crude dipped below $90 overnight (low: $89.07) on fears a global financial crisis will further eat away at demand for oil and other commodities. "What happened over the weekend was further evidence of the spread of this financial crisis to Europe," energy analyst Victor Shum said. "This deepens the sentiment that we're going to see a more widespread economic slowdown or even recession, and that's no good for oil demand." Some think OPEC may defend $80/barrel. Gold soared more than 3% in early morning trading (high: $863). Volatile two-directional trading indicates the markets can't decide whether gold will or won't re-establish itself as a safe-haven for equity- and currency-weary investors.
- Shopping centers empty out. Mall vacancies are at their highest since 2001 as retailers shutter underperforming stores amid soft sales. Apartments, meanwhile, continue to shine in an otherwise dismal real-estate market, benefiting from struggling home sales. Mall vacancy rates climbed to 6.6% in Q3 from 6.3% in Q2; strip mall vacancies increased to 8.4% from 8.1%. Apartment vacancy rates rose a milder 0.1% to 6.1%. "Almost every retailer has slowed their expansion by 50% to 70% for 2008," Shopping Center Group's David Brinbrey says.
- Asia markets saw deep shades of red on Monday. Nikkei -4.25% to 10,473. Shanghai -5.23% to 2,174. Hang Seng -4.97% to 16,804. BSE -5.61% to 11,824. Jakarta -10.03%.
- Europe struggled in the early going. London -3.3%. Paris -5.9%. Frankfurt -5.5%.
- U.S. futures are shaky, but have climbed off of overnight lows. Dow -2.06%. S&P -2.37%. Nasdaq -2.2%. Crude -4.83% to $89.30. Gold +3.32% to $860.90.
Monday's Economic Calendar
- 9:00 Former Fed chief Volcker and vice-chief Ferguson speak on financial supervision
11:30 Treasury's Ryan speaks at industry conference
12:00 Fed's Evans speaks on economic outlook in Texas
12:00 Fed's Fisher speaks on Fed, economy
Seeking Alpha editor Rachael Granby contributed to this post.
Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.