age!And It's Not Lipstick On A Pig, It's The Economy Smarty! It's the War in Iraq!
It's Lehman Brothers and Merrill Lynch today!
It Time for a Change in Washington, not more of the same!
It's Big Government Bailouts and War Spending OUT OF YOUR POCKETS!
The big difference between Barack Obama and John Mc Cain is-
John Mc Cain and the republicans believe in Tax and Spend!
They bail out big businesses like Uncle Freddie Mac and Auntie Fanny May,
What is the republicans mantra of "Socialize the Corporate Losses and Privatize Corporate Profits"
September 15, 2008
Lehman Files for Bankruptcy;
Merrill to Be Sold
This article was reported by Jenny Anderson, Eric Dash and Andrew Ross Sorkin and was written by Mr. Sorkin.
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, filed for 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 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 cripple 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.
Fannie, Freddie rescue binds
taxpayers to housing market
The final tab may exceed that of the savings and loan bailout, depending on the depth of the housing slump.
By Mark Trumbull | Staff writer of The Christian Science Monitorfrom the September 9, 2008 edition
The US Treasury is poised to commit large sums – perhaps exceeding $100 billion – in its rescue of Fannie Mae and Freddie Mac, but the real cost to American taxpayers won't be known for years.
The tab will depend on how Washington runs these mortgage giants and how the housing market and economy perform.
A wide range of outcomes is possible, because the size of Fannie and Freddie is so large. With a $5 trillion book of home loans that they own, or have guaranteed, fractional changes in foreclosure rates can translate into tens of billions very quickly.
In a worst case, the cost could run well above the roughly $125 billion that taxpayers spent in the early 1990s to insure depositors in failed savings-and-loan institutions, some mortgage-market experts say.
In other scenarios the short-term infusion of cash might ultimately be recouped with little or no net cost to taxpayers.
What's clear is that every US taxpayer is now tethered directly to the troubled housing market. And the stakes are much higher than the $30 billion federal intervention to stave off bankruptcy at Bear Stearns earlier this year.
"This is Bear Stearns times 100 or Bear Stearns times 1,000," says Brian Battle, a vice president at Performance Trust Capital Partners, an investment firm in Chicago. How much taxpayers lose is "100 percent correlated" with the depth of the housing slump, he adds.
The more home prices fall, the higher foreclosure rates will become and the more losses will pile up at Fannie and Freddie. The less home prices fall, the less that any lender will lose when a loan defaults and the property is resold.
Fannie Mae and Freddie Mac are known as government-sponsored enterprises (GSEs), because they were chartered by Congress to create a more stable mortgage market. Over the past year, they have been fulfilling that mission, guaranteeing home loans or buying them outright. Amid a sharp decline in real estate sales and prices, investors have been willing to fund the so-called "conforming" home loans that carry a Fannie or Freddie imprimatur. That has helped keep mortgages relatively available and affordable.
But even though the GSEs were not conduits for the worst "subprime" lending, they are being hit by loan defaults, with Fannie and Freddie posting a combined second-quarter loss of $3 billion.
Their capital, the reserves available to cover future losses and continue funding new loans, fell to the point where the US Treasury Department intervened.
That followed a string of other federal actions in recent months. The Federal Reserve has loaned money to investment banks in addition to the $30 billion in credit it extended to facilitate the buyout of Bear Stearns by JPMorgan Chase.
Bank failures, after a long period of quiet, are rising. The Treasury's Federal Deposit Insurance Corp. could run through its insurance fund this year and may need additional money from the Treasury to protect insured depositors.
Now the Treasury is becoming an equity investor in Fannie and Freddie and a buyer of their mortgage-backed bonds.
The move is a bid to help restore calm to credit markets, possibly lowering the cost of mortgages and, by extension, helping the housing market recover. The more successful the effort is, the less it will cost taxpayers.
"The Treasury may have to put a couple hundred billion dollars into these [GSEs]," says Christopher Whalen, managing director of Institutional Risk Analytics, a firm that tracks the health of financial institutions.
But beyond the injections of capital to get through the current crisis, he says ongoing operations of Fannie and Freddie should reap profits for the Treasury – thus providing some long-term offset to the bailout's up-front costs.
"Hopefully the cost to the taxpayer will eventually be zero," he says. "It might even be positive. But it has to be done right."
Doing it right, in his view, depends on resolving the long-term structure of the two companies – a politically divisive issue that will be debated by Congress and the next president.
Mr. Whalen suggests that over time, the government should shed the large portfolios of loans that Fannie and Freddie currently hold. The GSEs should focus on their role as a conduit, guaranteeing loans for resale. If the fee for those guarantees is set right, it should be a profitable business – and he suggests that that business be nationalized.
Other finance experts and policymakers argue for other strategies, ranging from privatizing all GSE functions to nationalizing them as much larger entities than Whalen recommends. The Treasury's new "conservatorship" plan holds the door open to many options, including ultimately returning the companies to their former status as public-private hybrids – but with tighter regulatory supervision.
"In the short term, yes, a bailout's necessary," says Joseph Mason, a finance expert at Louisiana State University in Baton Rouge. "The question becomes, [is it] an opportunity to exit … the current egregious level of government involvement in housing finance?"
Others say the subprime lending debacle is evidence that a strong role for the government in housing finance remains needed. "Private securitization [of mortgages] in secondary markets is what caused this mess" in the real estate market, says Dan Immergluck, a housing expert at Georgia Tech in Atlanta.
Because the GSEs have long been viewed as having implicit federal backing, delaying or avoiding intervention might have added to the ultimate taxpayer tab.
What Taxpayers Get From
the Bear Stearns 'Bailout'
Is it a deft financial move? Or a nauseatin
g corporate handout?
The Federal Reserve's intervention in the collapse of investment bank Bear Stearns has clearly calmed financial markets that recently seemed on the verge of panic. Now comes the backlash. Some populist critics are asking why the feds can bail out Wall Street but not Main Street. And the die-hard free marketeers who run the Wall Street Journal's editorial page have decried Fed policymakers as "pushovers," arguing that the Fed's action enriches JPMorgan Chase, which is buying Bear Stearns, at taxpayer expense.
How to characterize the Fed's action is a matter of ideology more than anything else. But there's certainly some benefit to the public from the Fed's intervention. Here are some of the basic facts, which tend to get overlooked as the rhetoric heats up:
The Fed has extended a loan, not given away money. The central bank has agreed to lend JPMorgan $29 billion as an enticement to buy the troubled Bear and its liabilities. As collateral, JPMorgan is putting up $30 billion worth of mortgage-backed securities and other complex investments, which are basically the most problematic assets on Bear's books. JPMorgan has to repay the Fed loan with interest at the "discount rate," which is currently 2.5 percent.
The risk to the Fed—and to taxpayers—is what happens to those troubled securities, which the Fed is essentially insuring. If they end up being completely worthless, then the Fed would be out the whole $29 billion. Under the terms of the deal, JPMorgan would pony up the first $1 billion in losses.
The securities have some value, but nobody knows what it is. And that's basically the whole problem. The Fed and JPMorgan used accounting principles to come up with a "marked to market" value of $30 billion. But that's notional because right now there's no market for the securities—basically, nobody will buy them. The reason there are no buyers is that the value of the securities ultimately depends on how many mortgage holders default and other unpredictable factors—and the market is spooked. "These are complex, idiosyncratic securities," says Harvard Business School Prof. Josh Lerner. "Even a room full of Ph.D.'s, slaving for months to figure out what they're worth, could still end up way off."
Part of the reason there's so little confidence in the underlying value of mortgage-backed securities is that the initial valuations were obviously far too rosy. But how rosy is still unclear. Once the credit crunch eases, the housing market stabilizes, and the economy rebounds, it will be easier to figure out what they're worth, and buyers will likely emerge.
The Fed could lose something, but probably not $29 billion. The Fed hasn't released any analysis, but its number-crunchers have certainly discounted the value of the securities to account for all the failing mortgages bundled into them. To Bear Stearns and others who bought the securities before they depreciated, the losses have been severe. But since the securities are already marked down, so to speak, they'd probably have to sell at a steep discount for the Fed to lose a lot of money. "The Fed may not see a serious loss at all," says Susan Wachter of the University of Pennsylvania's Wharton School. "It could be just a couple billion, which is not a major bailout."
We won't know for awhile how much it will ultimately cost the Fed. Unlike investment banks, which rely on trading for liquidity and don't hold a lot of cash reserves, the Fed can hold on to the tainted securities indefinitely and sell when the market seems strongest. If it does lose money, the Fed will most likely fund the losses through its own operating streams. Ordinarily, the Fed, which is a government bank, earns a surplus through low-margin, high-volume loans to other banks, and remits its "profit" to the U.S. Treasury for government spending on other things. Any losses would come out of that surplus, and effectively constitute taxpayer money.
Doing nothing might have cost a lot more. The Fed could have let Bear Stearns careen into bankruptcy, which would have meant that the firm's lenders and other creditors would have received pennies on the dollar. That's why a run on Bear already seemed well underway when the Fed stepped in—creditors wanted their money back in full, not in part. And many analysts think a similar run would have materialized at other banks long on risky securities and short on cash.
Another worry is "counterparty risk." This refers to the way complex financial products peddled by one investment bank are woven into the portfolios of many others, which means that tugging on the fabric—by calling in loans, for instance—can destabilize the whole financial structure. The overall effect on an economy that's already teetering could have been dramatic. "Without a deal, take everything we've seen so far and multiply it by 10," says Lerner. "If there were a real panic and GDP shrunk by 5 percent, there'd be an immediate real cost to the government in terms of tax revenues—and to all of our prosperity."
Whether it's a bailout or not, the Fed's move benefits taxpayers directly. If you think the housing crunch couldn't get a whole lot worse, think again. "If the Fed had not stopped this," says Wachter, "the cost of mortgages would have risen, the values of houses would have declined even more than they already have, and the effect would immediately have hit the pockets of American homeowners."
It could happen again. If the economy gets worse and housing continues to nosedive, the value of mortgage-backed securities will fall even more, creating fresh vulnerabilities in the financial system. The Fed has deep pockets and could intervene again, but that could stoke inflation and cause other problems. Then again, that might be better than the alternative.
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