Sunday, September 14, 2008

US Financials Falling Like Dominoes

Sept. 14 (Bloomberg) -- Lehman Brothers Holdings Inc. prepared to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm and Wall Street prepared for its possible liquidation.

Lehman and its lawyers are getting ready to file the documents for bankruptcy protection tonight, said a person with direct knowledge of the firm's plans. A final decision hasn't been made, though none of the other options being considered appeared likely, the person said, declining to be identified because the discussions haven't been made public.

Sept. 14 (Bloomberg) -- Bank of America Corp. agreed to buy Merrill Lynch & Co. for about $44 billion, a person with knowledge of the deal said, after shares of the third-biggest U.S. securities firm fell by more than 35 percent last week and smaller rival Lehman Brothers Holdings Inc. neared bankruptcy.

Bank of America and Merrill reached a deal in principle, according to the person, who declined to be identified because the deliberations were private. A final merger agreement hasn't been signed yet, the person said. The boards of Merrill and Bank of America approved the transaction this evening, the Wall Street Journal reported, citing unidentified people familiar with the matter.

Sept. 14 (Bloomberg) -- American International Group Inc., the insurer struggling to avoid credit downgrades, is seeking a $40 billion bridge loan from the Federal Reserve as it tries to sell assets, the New York Times reported.

The insurer has turned down a private-equity investment because it would have meant handing over control of the company, the Wall Street Journal said on its Web site, citing unnamed people. AIG may get access to the Fed's borrowing window in an ``extreme liquidity scare,'' Citigroup Inc. analyst Joshua Shanker said in a Sept. 12 research note.


mohican said...

For those who missed it - things just went from bad, to worse, and now worse than that. Worser!?

realist said...

Thank you for your very informed and well prepared posts. I have enjoyed and learned from them.

Vancouver real estate has been buoyed by the high tides of global credit expansion, the receding of which has bankrupted Wall Street's titans (that, incidentally, survived the 1930's). Bob Hoye refers to this as the greatest train wreck in the history of credit markets. It is an understatement to say that this situation is bearish for Vancouver RE. And it certainly will worsen.

Paul said...

what a bloody mess

M- said...

Glad my money's out of the markets, and in the safe hands of the banksters!

Sooo... what's the deal with the premium that BOA reportedly paid for Merrill? It doesn't make sense to me, that at this time with things all going to hell, that they'd pay such a high premium for ML...

mohican said...

They used garbage stock to pay for some other garbage stock.

ValueMonkey said...

Who knows? Anyone with the skills to review M-L's books is a more skilled financial analyst than I.

Maybe BoA expects a mark-up in assets or maybe they just see good value in among the toxic bits.

I do think BoA is a conservative bank which has a good probability of surviving this credit implosion.

Isn't the best time to buy when the market is full of fear?

ValueMonkey said...

Mohican, good point about the use of stock for the M-L purchase.

Personally I think this "crisis" is good, not bad. The credit bubble has gone on too long and we're witnessing the destruction of poor credit practices and (hopefully) a return to sober financial policies. Lehman's filing for bankruptcy, and Merill Lynch being taken over by BoC are signs of healthy capital market behaviour. Those that drank heavily from the toxic credit pool should fall. Those that didn't should live on. Without this cycle, markets would not have a mechanism for returning to long-term "efficiency".

Of course, the potential for speculators and the over-leveraged to suffer during this period is high. So its bad from this perspective. From a well-capitalized buyer's perspective, this market is a dream. Its time to look for deals.

jesse said...

"They used garbage stock to pay for some other garbage stock."

I didn't read if there were any behind-the-scenes loan guarantees, either now or promised later when the dust settles.

Looks like stockholders of BoA don't like being diluted. Surprise surprise.

mohican said...

Good points about the crisis being a good thing. I agree. It is kind of like ripping a band aid off - do it fast and move on.

It appears as if Bank of America is swallowing up anything it can so it becomes "too big to fail" and if they really run into trouble they can have the backstop of the federal government. They also probably wanted the retail brokerage arm of M-L which is quite profitable.

BofA has still not absorbed the Countrywide transaction and it is way too difficult to see where they sit financially to make an informed decision about the stock.

jesse said...

BoA was already pretty big. Does it really need MER to "shore-down" its balance sheet and guarantee a bailout?

alexcanuck said...

Not so much balance sheet changes they are after, just get big enough with fingers in enough pies that the Fed will bail them out. Too big to be allowed to fail. Lehman was made an example of, Phony and Fraudy were too big to fail. World-wide repercussions is what they're after.
At least that explanation makes as much sense as any alternates I've come across.

Jason said...

My brother is a VP at BOA in NYC...there were some serious incentives to ensure BOA were willing to play with Merrill.

ValueMonkey said...

Another good point about the Countrywide acquisition, but its a small snack (~$4B) compared with M-L deal (~$50B). As long they use stock rather than cash for these transactions, then they shouldn't be diluting their capitalization ratio too much. I think the risk is in a potential run on the bank where there capital starts to evaporate, but in this scenario where do the customers run to?

I figure BoA knows what its doing, but I admit I can't read this from the financial statements. So I keep the cash stuffed in my mattress. :-)

patriotz said...

I do think BoA is a conservative bank which has a good probability of surviving this credit implosion.

BOA's nickname is "Bank of Amigos" because they give mortgages, loans, and credit cards to illegal immigrants.

Doesn't sound two conservative to me.

Also let's remind everyone that keeping an institution running and preserving shareholder equity are two different things.

VanTOVan said...

Meredith Whitney and Nouriel Roubini seem to be getting more and more face time as this debacle unfolds. This article from Reuters
is particularly unsettling.
The Oppenheimer & Co analyst also expects fewer mortgages to be available for prospective homeowners, as she sees no hope for the return of the mortgage securitization business.

"All this creates a recipe for meaningfully lower U.S. house prices," Whitney said.

Translation: the US housing market ain't seen nothing yet.

What she's talking about sounds like what happened in the UK--the lending dried up and then housing started to collapse. My impression is that in the States the housing market collapsed under its own weight and lending hasn't dried up all that much... yet.

It looks like BC's getting the US style of housing collapse. Anyone have an idea about what's in store for the mortgage securitization market in Canada?

ValueMonkey said...

Also let's remind everyone that keeping an institution running and preserving shareholder equity are two different things.

Agreed. And if I could tell this by looking at the current financial data, then I'd consider whether BoA was a good investment. With my current skills and the data available, I can't do this. So I'm leaving BoA out of my portfolio. My "conservative" characterization is based on comments I see from other conservative investors. So I speculate BoA knows what its doing, but I don't invest in my speculation. I invest in what I know.

BOA's nickname is "Bank of Amigos" because they give mortgages, loans, and credit cards to illegal immigrants.

Yeah, I've read a bit about this. Basically, they'll give people credit cards without showing an SSN. I believe they need a BoA bank account without a history of overdraft. This doesn't sound crazy to me.

As for the mortgages to immigrants, I believe other banks were involved in this practice. Not BoA.