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- tejastech08
- Rep: 194
Re: Financial disaster?
http://www.nytimes.com/2008/09/15/busin … an.html?hp
After Frantic Day, Wall St. Banks Falter
In one of the most dramatic days in Wall Street's history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, said it would seek bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.
The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.
But even as the fates of Lehman and Merrill hung in the balance, another crisis loomed as the insurance giant American International Group appeared to teeter. Staggered by losses stemming from the credit crisis, A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive.
The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.
'My goodness. I've been in the business 35 years, and these are the most extraordinary events I've ever seen,' said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.
It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street and threatened the broader economy.
Early Monday morning, Lehman said it would file for Chapter 11 bankruptcy protection in New York for its holding company in what would be the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago, the Associated Press reported.
Questions remain about how the market will react Monday, particularly to Lehman's plan to wind down its trading operations, and whether other companies, like A.I.G. and Washington Mutual, the nation's largest savings and loan, might falter.
Indeed, in a move that echoed Wall Street's rescue of a big hedge fund a decade ago this week, 10 major banks agreed to create an emergency fund of $70 billion to $100 billion that financial institutions can use to protect themselves from the fallout of Lehman's failure.
The Fed, meantime, broadened the terms of its emergency loan program for Wall Street banks, a move that could ultimately put taxpayers' money at risk.
Though the government took control of the troubled mortgage finance companies Fannie Mae and Freddie Mac only a week ago, investors have become increasingly nervous about whether major financial institutions can recover from their losses.
How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation's growth rate has slowed.
What will happen to Merrill's 60,000 employees or Lehman's 25,000 employees remains unclear. Worried about the unfolding crisis and its potential impact on New York City's economy, Mayor Michael R. Bloomberg canceled a trip to California to meet with Gov. Arnold Schwarzenegger. Instead, aides said, Mr. Bloomberg spent much of the weekend working the phones, talking to federal officials and bank executives in an effort to gauge the severity of the crisis.
The weekend that humbled Lehman and Merrill Lynch and rewarded Bank of America, based in Charlotte, N.C., began at 6 p.m. Friday in the first of a series of emergency meetings at the Federal Reserve building in Lower Manhattan.
The meeting was called by Fed officials, with Treasury Secretary Henry M. Paulson Jr. in attendance, and it included top bankers. The Treasury and Federal Reserve had already stepped in on several occasions to rescue the financial system, forcing a shotgun marriage between Bear Stearns and JPMorgan Chase this year and backstopping $29 billion worth of troubled assets '” and then agreeing to bail out Fannie Mae and Freddie Mac.
The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman's stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.
Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their own precarious situation.
The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation's largest brokerage force and its name is known in towns across America, while Lehman's main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.
Knowing that investors were worried about Merrill, John A. Thain, its chief executive and an alumnus of Goldman Sachs and the New York Stock Exchange, and Kenneth D. Lewis, Bank of America's chief executive, began negotiations. One person briefed on the negotiations said Bank of America had approached Merrill earlier in the summer but Mr. Thain had rebuffed the offer. Now, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, the two parties proceeded with discussions.
On Sunday morning, Mr. Thain and Mr. Lewis cemented the deal. It could not be determined if Mr. Thain would play a role in the new company, but two people briefed on the negotiations said they did not expect him to stay. Merrill's 'thundering herd' of 17,000 brokers will be combined with Bank of America's smaller group of wealth advisers and called Merrill Lynch Wealth Management.
For Bank of America, which this year bought Countrywide Financial, the troubled mortgage lender, the purchase of Merrill puts it at the pinnacle of American finance, making it the biggest brokerage house and consumer banking franchise.
Bank of America eventually pulled out of its talks with Lehman after the government refused to take responsibility for losses on some of Lehman's most troubled real-estate assets, something it agreed to do when JP Morgan Chase bought Bear Stearns to save it from a bankruptcy filing in March.
A leading proposal to rescue Lehman would have divided the bank into two entities, a 'good bank' and a 'bad bank.' Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would have agreed to absorb losses from the bank's troubled assets, to two people briefed on the proposal said. Taxpayer money would not have been included in such a deal, they said.
Other Wall Street banks also balked at the deal, unhappy at facing potential losses while Bank of America or Barclays walked away with the potentially profitable part of Lehman at a cheap price.
For Lehman, the end essentially came Sunday morning when its last potential suitor, Barclays, pulled out from a deal, saying it could not obtain a shareholder vote to approve a transaction before Monday morning, something required under London Stock Exchange listing rules, one person close to the matter said. Other people involved in the talks said the Financial Services Authority, the British securities regulator, had discouraged Barclays from pursuing a deal. Peter Truell, a spokesman for Barclays, declined to comment. Lehman's subsidiaries were expected to remain solvent while the firm liquidates its holdings, these people said. Herbert H. McDade III, Lehman's president, was at the Federal Reserve Bank in New York late Sunday, discussing terms of Lehman's fate with government officials.
Lehman's filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firms, Lehman cannot hope to reorganize and survive. It was not clear whether the government would appoint a trustee to supervise Lehman's liquidation or how big the financial backstop would be.
Lehman has retained the law firm Weil, Gotshal & Manges as its bankruptcy counsel.
The collapse of Lehman is a devastating end for Richard S. Fuld Jr., the chief executive, who has led the bank since it emerged from American Express as a public company in 1994. Mr. Fuld, who steered Lehman through near-death experiences in the past, spent the last several days in his 31st floor office in Lehman's midtown headquarters on the phone from 6 a.m. until well past midnight trying to find save the firm, a person close to the matter said.
A.I.G. will be the next test. Ratings agencies threatened to downgrade A.I.G.'s credit rating if it does not raise $40 billion by Monday morning, a step that would crippled the company. A.I.G. had hoped to shore itself up, in party by selling certain businesses, but potential bidders, including the private investment firms Kohlberg Kravis Roberts and TPG, withdrew at the last minute because the government refused to provide a financial guarantee for the purchase. A.I.G. rejected an offer by another investor, J. C. Flowers & Company.
The weekend's events indicate that top officials at the Federal Reserve and the Treasury are taking a harder line on providing government support of troubled financial institutions.
While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed chairman, Ben S. Bernanke, and Mr. Paulson had warned that they would not put taxpayer money at risk simply to prevent a Lehman collapse.
The message marked a major change in strategy but it remained unclear until at least Friday what would happen. 'They were faced after Bear Stearns with the problem of where to draw the line,' said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisors, a forecasting firm. 'It became clear that this piecemeal, patchwork, case-by-case approach might not get the job done.'
Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger bailout of Fannie Mae and Freddie Mac.
Outside the public eye, Fed officials had acquired much more information since March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives. In the end, both Wall Street and the Fed blinked.
Re: Financial disaster?
Yeah, this country is about to enter uncharted territory. This is actually the tip of the iceberg. The government might be bailing out all sorts of industries in the next year. I'll try and find the article I was reading earlier tonight. Basically, our debt could double in the blink of an eye, which would pretty much sink us into a depression and cause a total collapse of the dollar. Hell, the bailout of Fannie Mae and Freddie Mac made the government guarantee all those trillions in mortgage debt. That's insane.
Time for these presidential candidates to talk issues, because they might be using dollar bills as toilet paper on Inauguration day.
- tejastech08
- Rep: 194
Re: Financial disaster?
Yep, could be a total disaster. I'm very curious to see what happens to the stock market this week. I just bought a car on Saturday, September 6th. Good news though is that I'm in an industry that's doing well right now (oil industry) so hopefully that continues.
Re: Financial disaster?
It'll go down, just hopefully not a complete "Black Monday" or anything. The Dow Jones is usually a good indicator or the avg of all stocks. Anymore a 200-300 loss can occur. If by Friday if it's gone down 1,000 from last week it's been a really bad week. if by 2,000 it will be a near crisis IMHO. Merrill Lynch's stock really tumbled in the last 2 years. It's something like 30% of what it was 1 1/2 years ago. Imagine having $3 Million & being ready to retire, and now having a million. Not enough to retire at 55 or 60 really, and live nicely at least. Granted I don't have that money but for people who had it it's a huge unexpected change in lifestyle.
Sometimes I'm not sure how much anyone can actually "control" economics as much as they just happen and are cycles. Alan Greenspan was thought to be a great thinker (was around sincce the 80's I think) & he started the whole low interest mess.
I don't think it will be a horrible day or week for the market, but I do think there will be alot of takeovers & bailouts in the next year or so. I really think in 20 years this country will only have 8 conglomorate corporations & banks.
Re: Financial disaster?
It'll go down, just hopefully not a complete "Black Monday" or anything. The Dow Jones is usually a good indicator or the avg of all stocks. Anymore a 200-300 loss can occur. If by Friday if it's gone down 1,000 from last week it's been a really bad week. if by 2,000 it will be a near crisis IMHO. Merrill Lynch's stock really tumbled in the last 2 years. It's something like 30% of what it was 1 1/2 years ago. Imagine having $3 Million & being ready to retire, and now having a million. Not enough to retire at 55 or 60 really, and live nicely at least. Granted I don't have that money but for people who had it it's a huge unexpected change in lifestyle.
Actually, there will be no indicators in the short term. The government just GUARANTEED backing of trillions in debt. The dollar looks lovely at the moment(especially to any foreign investors) because its not so risky when you have a desperate government putting guarantees on never ending debt.
Long term is where the meltdown comes into play. It creates a domino effect because each failing industry will expect a government bailout(hello auto and airline industry). Eventually the government will have to say no, and thats when the house of cards comes tumbling down.
Lets look at it like this. Not a great example, but good enough.:haha:
You run a lemonade stand. No one is buying your lemonade and you have huge silos full of it. You ask me for help, and even though I don't have the money, I bail you out and financially guarantee all that rotting lemonade. You're now a fat cat, because it no longer matters whether or not you have the ability to sell lemonade.
Also the "loan" used in bailing you out is the sweetest deal you ever received. The currency cannot go up in value, so each day you don't pay the loan, the less it is you actually have to pay.
This country is fucked.
Sometimes I'm not sure how much anyone can actually "control" economics as much as they just happen and are cycles. Alan Greenspan was thought to be a great thinker (was around sincce the 80's I think) & he started the whole low interest mess.
Yeah, and this is why Bush cant take all the blame on this. Hell, most of this garbage started on Clinton's watch, and no I'm not blaming him either.
The country lived above its means. For waaaaaaaaaay too long. Not only is the government and every industry in debt, so are the majority of americans.
Our chickens are coming home to roost.
I really think in 20 years this country will only have 8 conglomorate corporations & banks.
I agree.
Re: Financial disaster?
It creates a domino effect because each failing industry will expect a government bailout(hello auto and airline industry). Eventually the government will have to say no, and thats when the house of cards comes tumbling down.
Yeah, that really scares me. Probably the airline moreso than auto. To be honest, I think GM/Ford/Chrysler are going to possibly go under or be sold to another company(foreign?). People are just going to keep buying more & more foreign cars. Plus it's the pensions which really hurt them, and the thought of all those retirees possibly not getting what they worked hard for & were promised is upsetting. But isn't China going to be exporting cars soon? How can the US compete with that paying $60k to our employees while China probably pays them about $5,000US. ? I'd like to see US cars pull thru, it'd be great for the nation, but it's not guaranteed.
Airlines, I'd see a huge fear of selling them to a foreign investor (safety). Wouldn't surprise me if only a few remain. I really think Southwest is going to be the big winner, they probably have the least overhead, fat weight & pensions etc to pay out.
Yeah I wasn't solely blaming Bush there, I was pointing out that if people do blame him or mostly Greenspan, it was Greenspan who I think was in charge throughout a good part of the 80's & 90's & was thought to be an economic Einstein during those times. No easy answers. Buy American I suppose. That or expect to get nothing more than a 2-3% raise every year for the rest of our lives & see where we are when we're 65. It's fast becoming a global economy.
Re: Financial disaster?
Honestly though I think alot of these financial companies have only themselves to blame. IMHO the dot com bust hurt the economy in the US around 99-00. Then 9/11 rejuvinated fears of a market crash. That is about when the fed lowered interest rates to near record lows, in an effort to keep the economy afloat, basically doing them a favor. That is when these financial and mortgage companies started whoring our loans, giving crazy bassackwards loans to people they knew wouldn't afford it 3-5 years later, and no one had the forsight to stop it. Mostly because everyone else was doing it. If Prudential was pulling in record $$ per quarter giving out these crazy loans, Countrywide would look foolish if they said no. So they all jumped in, got their quick buck & "Hooray!!" and now bailed out. The thing is, the people who run alot of these companies don't care about the long term. Getting $20 billion a year, they can be CEO for 3 years, the company can go under, and they're set for life plus their next 5 generations. I'm sure there's people in middle & lower management who knew, but CEO's & Boardroom execs don't care about what those people have to say. It's just regular office politics & horseshit.
Re: Financial disaster?
Yeah, Greenspan entered the scene on Reagan's watch. I think Clinton should have cut him loose in his 2nd term because his policies played a huge role in inflating the market. Remember those speculators in the mid 90's saying the Dow would probably reach 40,000?? Earth to speculators: Reality check needed urgently. The dow is barely above what it was when they said that shit. We've basically been running in place with a blank check ever since.
Our auto industry is in shambles, and I know this sounds very "un-american" of me, but I would not bail them out. This move would send us into a tail spin like I mentioned above, but our markets need a serious correction and there's no point in people trying to delay the inevitable. Our auto industry twiddled their thumbs while americans bought up all the SUVs that they didn't even need and the industry didn't plan ahead. About a week ago I saw some young guy putting five bucks in gas in one of those huge SUVs. Too funny. That probably got him around the block. Had he(or his parents) been smart and bought something reasonable and not something as a status symbol to impress his friends, that 5 bucks would have been enough for him to drive to Stockton. In the SUV he probably barely made it home.
McCain had massive balls when he was in Detroit earlier this year and told them their industry was never coming back. People bitched at his comments, but he's right. Its not coming back. We sold our souls to China and other foreign countries(why? We got nothing of value out of it) and now its time for reality.
"Buy american" is no longer the answer. The american company likely had its goods made in sweat shops in China or India.
The disaster is going to happen on McCain or Obama's watch. McCain wants to cut taxes which doesn't help, and Obama wants tons of spending programs and our country cant sustain itself on even bigger deficits.
I hope they are forced into talking about this at the debates.
Re: Financial disaster?
That is when these financial and mortgage companies started whoring our loans, giving crazy bassackwards loans to people they knew wouldn't afford it
Yep. That was the beginning of the end. Great example:
My aunt's husband bought a home in 2002(might have been 01, I forgot). He doesn't work. Neither did she. She was on disability because she had MS, and he didn't do jack shit. They got the loan and the home. They had nothing to back that loan either. No offense to my aunt since she's dead, but that is and was a cosmic joke. Of course they took out mortgages and other crap so they could have spending money and then they were in a ton of debt. They sold it after they couldn't squeeze anymore spending money out of it, and they didn't have anything but chump change after it was sold.
They also bought two new cars which got repossessed. Why two people who don't work, one disabled, would need two brand new cars is just mind boggling.
God only knows what will happen to that house now(foreclosure in the near future I'm sure), and you can bet your ass that van and truck are rotting on some lot somewhere.
Re: Financial disaster?
damn...this isn't good...I feel lucky that I was instilled with a little more common sense. The status symbol game is a whole monster in itself. The American Dream is a status symbol...
All your points are well taken...the dot coms, the policies of greenspan (who was asked to keep the machine running, and that's exactly what he did), the mortgage fire sale.
A bunch of American jobs sent to other countries. It is utterly absurd to think that high up execs did not have the foresite to see this coming. The corporation model gives these people free reign.
No skin off of their asses...while we all try to compensate over the next couple of years, they'll be using the dollar bill to light their cigars.
