- Europe measures bring cheer. Leaders of the 15 Euro-zone nations emerged from unprecedented weekend meetings with an outline of sweeping steps member countries should take to address the financial crisis, including government-issued guarantees and insurance, buying stakes in faltering companies, and stabilizing long-term maturities (statement). The measures were cheered by Asian and European markets, which posted healthy gains Monday (see below), and by IMF managing director Dominique Strauss-Kahn: "We have now a comprehensive response to the crisis, and I think the markets will reflect it," he said. "I hope that in a few weeks the peak of the financial crisis will be behind us." Euro-zone countries will begin implementing the plan Monday, and expect over the coming days to finalize the exact amount of money each state will earmark for crisis control.
- Central banks go green. The Bank of England, European Central Bank and the Swiss National Bank will offer unlimited dollar funds to help create liquidity in frozen short-term money markets (Fed statement). The central banks will conduct auctions of dollar funds in 7-, 28- and 84-day maturities at fixed interest rates. To facilitate the massive injection, the U.S. Fed said it would increase the size of its swap lines with the BoE, ECB and SNB "to accommodate whatever quantity of U.S. dollar funding is demanded." Commercial banks will be able to borrow any amount they want against 'appropriate collateral.' The Bank of Japan is considering a similar move to aid access to dollars.
- U.K. takeover sinks RBS. The U.K. government is set to buy majority stakes in Royal Bank of Scotland (NYSE:RBS), the nation's fourth-largest bank, and HBOS, its biggest mortgage lender. RBS will get £20B, with the government taking £5B in preference shares and underwriting £15B in capital. The aggressive move is aimed at shoring up the country's struggling financial system and flagging investor confidence, and falls in line with other governments across Europe which are taking radical steps to prevent systemic collapse. Shares of RBS are down 7.4% at 7:00 EDT. HSBC (HBC) is up 8.5%, and Barclays (NYSE:BCS) is up 7%.
- German banks climb on €470B rescue package. Shares of German banks were sharply higher Monday after the government agreed to a €470B bailout package, including €70B in capital injections and €400B in guarantees for interbank lending. "Both the state guarantee and the possible capital injection should help bring back confidence in the sector," Landesbank Baden-Wuerttemberg analyst Olaf Kayser said. At 6:40 EDT, Deutsche Bank (NYSE:DB) is up 12.9%, and Allianz (AZ) is +7.3%.
- A sweetened Morgan deal for MUFG. Morgan Stanley (NYSE:MS) and Mitsubishi UFJ (NYSE:MTU) continue to negotiate their $9B pact. Both sides want to keep the essence of the deal intact, while adding a few sweeteners for MUFG to compensate for the steep drop in Morgan's share price. Under the new terms, MUFG would receive only preferred shares instead of a mix of preferred and common shares, and the conversion price for convertible preferred shares would move down to the low $20s from $31. U.S. officials, in a potentially important precedent, urged a hesitant MUFG to proceed with the deal and promised its planned investment in Morgan would be protected.
- Santander in talks with Sovereign. Spain's Banco Santander (STD) is in advanced talks to buy the shares of Sovereign Bancorp (SOV) it doesn't already own after Sovereign approached the Spanish bank late last week. Santander is expected to pay around $3.81/share, Sovereign's closing price on Friday, in a deal that values the largest remaining U.S. savings and loan at about $2.53B. The Spanish bank has been considered a potential buyer ever since it got a 24.9% stake in Sovereign three years ago along with three seats on the board. The original agreement allowed Santander to bid for Sovereign after May 31 of this year but required the bank to bid at least $40/share. The restriction will likely be waived as Sovereign's shares are down 60% this year. A deal could be completed as early as today.
- Wachovia buyout hurried along. The Fed is fast-tracking Wells Fargo's (NYSE:WFC) $15.1B acquisition of Wachovia (NASDAQ:WB), which it says could be consummated within five days (statement). Wachovia said Sunday it will forego a shareholder vote on the issuance of preferred stock to Wells Fargo in favor of expediency. Shareholders still need to approve the proposed merger. Analysts say Wells Fargo is likely to sell or downsize Wachovia's investment-banking unit. I-banking is not Wells' strong suite.
- GM focused on growth? Sources say GM (NYSE:GM) and Cerberus discussed a swap in which GM would acquire Cerberus' 80% stake in Chrysler in exchange for its 49% stake in auto-lender GMAC, of which Cerberus owns the other 51%. Negotiations are at a standstill, but inactive talks could be renewed if markets stabilize. Meanwhile, in July, before exploring a swap with Chrysler, GM proposed a join-up with Ford (NYSE:F), which it ultimately rejected, breaking off talks in September. Analysts say almost-broke GM would need plenty of cash to swallow Chrysler. That anomaly, and the untimeliness of a deal, has them speculating there's more to the proposed combo than meets the eye.
- Private equity cuddling huge loan losses. Private-equity firms, including Apollo, Blackstone (NYSE:BX) and TPG, which bought billions of dollars of senior debt 'on the cheap' from top-tier banks like Citigroup (NYSE:C), Deutsche Bank (DB), and Royal Bank of Scotland (RBS), are sitting on major paper losses. The loans, bought for an average of $0.85 on the dollar, now trade for about $0.65. "The trouble is, things are still likely to get worse as the economy weakens. And private-equity firms acquired the leveraged loans with - yes - leverage. The selling banks financed the transactions, lending the buyers about 75% of the purchase price."
- Borrowing gets a smidgin cheaper. Borrowing costs fell modestly from Friday, with the three-month U.S. dollar Libor down to 4.75% from 4.82%, and three-month sterling Libor fixed at 6.27% vs. 6.285%. The TED spread - the difference between what banks and the U.S. government pay for three-month dollars - narrowed 7 BPs to 4.57%.
Earnings: Monday Before Open
- BE Aerospace (NASDAQ:BEAV): Sees Q3 EPS of $0.58 vs. $0.54 consensus. Sees Q4 EPS of $0.50 vs. $0.57. Sees full-year EPS of $2.00 vs. $2.84 and revenue of $2.5B vs. $2.88B. "We expect to report excellent financial results for the third quarter of 2008, but the near-term outlook has significantly deteriorated." [PR]
- Philips Electronics (NYSE:PHG): Ebitda of €128M vs. €168M consensus. Says it will slow down the completion of its share repurchase program. Shares -4.8% in Amsterdam. [PR]
- Strong gains across the board in Asia. Hang Seng +10.24% to 16,312. Shanghai +3.65% to 2,073. BSE +7.64% to 11,332. Tokyo closed.
- In Europe at midday, the bank rescue was front and center. London +4.4%. Paris +5.4%. Frankfurt +6.6%.
- U.S. futures indicate a strong open. Dow +4.1% to 8,712. S&P +5.05% to 936. Nasdaq +4.6%. Crude +4.6% to $81.28. Gold -0.33% to $856.20.
Monday's Economic Calendar
- 8:15 Fed's Hoenig speaks on regulation in Washington
- Notable earnings before Monday's open: FAST
- Notable earnings after Monday's close: XL
Seeking Alpha editor Rachael Granby contributed to this post.
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