bank run blog

After the momentous events of the weekend, markets worldwide are down sharply, with all 30 Dow component stocks negative for most of the morning so far. The Associated Press reports :

“Stocks tumbled and Treasury bond prices soared Monday as investors reacted to a stunning reshaping of the landscape of Wall Street that took out two storied names: Lehman Brothers Holdings Inc. and Merrill Lynch & Co. The Dow Jones industrial average fell more than 330 points.

Stocks posted big losses in markets across much of the globe as investors absorbed bankruptcy plans at Lehman and Merrill Lynch’s forced sale to Bank of America for $50 billion in stock. And perhaps most ominously, American International Group Inc. is asking the Federal Reserve for emergency funding. The world’s largest insurance company plans to announce a major restructuring Monday.

The swift developments are the biggest yet in the 14-month-old credit crises that stems from now toxic subprime mortgage debt.”

CNN, like all major news outlets now, is using the Great Depression as the reference standard, but one quoted analyst was more accurate when he admitted that the US economy is really in uncharted territory :

“Art Hogan, chief market strategist for Jefferies & Co., said the magnitude of the financial industry fallout is unprecedented, and could only be compared to the Great Depression of the 1930s or the railroad bankruptcies of the 1800s.

‘We’ve never witnessed this before,’ said Hogan. ‘There’s no road map for this.’

He said that over the course of the week, investors will be closely watching AIG, Washington Mutual and other banks to see who will be the next to get ‘embraced by a white knight.’”

Associated Press : Stocks stumble amid new Wall Street landscape

CNN Money : Stocks plummet on Lehman and Merrill

News about the extraordinary events of the weekend continues to filter out of New York, where high-level talks at the Federal Reserve addressed insolvency crises at no less than four major institutions. The unprecedented situation was recently updated by the New York Times :

“In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, 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 Sunday night, another crisis loomed as the insurance giant American International Group appeared to teeter. 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.”

A report in the Financial Times describes the scene at Lehman’s New York Headquarters :

“A steady stream of employees carrying boxes and bags came out of Lehman Brothers’ mid-town Manhattan headquarters as darkness fell on Sunday evening and bankruptcy loomed for the 158-year-old Wall Street institution.

Its neon-lit facade still flashing brightly, employees coming out of the building said they had been told to come to work on Monday, but that it could be their last day there.”

New York Times : In Frantic Day, Wall Street Banks Teeter

Financial Times : Lehman employees prepare for exit

After a weekend of tense and reportedly acrimonious meetings at the New York Fed, negotiations to save all or part of Lehman Brothers broke down on Sunday, with the regulators unwilling to offer much in the way of easily identifiable federal funds, and the remaining financial institutions, many of them insolvent themselves, refusing to accede to government pressure to share the losses from Lehman’s unwinding.

Barclays Bank dropped out this morning, and Bank of America decided it would rather acquire Merrill Lynch than Lehman. At this hour, the 158-year-old investment bank is expected to announce its bankruptcy. Bloomberg is reporting :

“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 still wasn’t made, though none of the other options being considered appeared to have much standing, the person said, declining to be identified because the discussions haven’t been made public.”

CNBC reports on the special derivatives trading sessions that were held this afternoon :

“Bank of America sent a note to derivatives traders Sunday saying “Banks, brokers started netting Lehman trades from 2 p.m. today … trades netted are contingent on Lehman bankruptcy by midnight.” The note continued “If no Lehman bankruptcy, netting of trades to be cancelled,” meaning Bank of America’s assumption of Lehman’s side of trades would end.

‘It’s a way of lessening the pressure before Wall Street opens up tomorrow. The more they can reduce the total brokerage book for Lehman, the less heart-ache there will be for counterparties if Lehman files,’ Carlos Mendez, senior managing director of ICP Capital in New York.

The International Swaps and Derivatives Association called a special session from 2 p.m. to 4 p.m. but traders said that was purely symbolic. They intended to trade through the night.

The cost of insuring the bonds of investment bankers blew out in trading on Sunday.”

Bloomberg : Lehman Said to Prepare Bankruptcy Filing After Buyers Withdraw

CNBC : Lehman Brothers Plans to File for Bankruptcy Shortly

Lehman Brothers Holdings entered the weekend on the verge of collapse, and many analysts were expecting the announcement of some sort of sale before the markets opened. That hasn’t happened, and consequently the investment bank is now facing a potentially disastrous week.

In the meantime, a trio of articles from the British press highlight different aspects of the drama unfolding behind the scenes at Lehman. The Independent reports Lehman chief in race against time :

“Lehman Brothers chief executive, Dick Fuld, is in a race against time to rebuild the investment bank’s battered balance sheet and set out a reason for the company to remain independent amid growing calls for new leadership or a sale of the company.

Mr Fuld, the longest-serving chief executive of an independent Wall Street bank, will this week redouble his efforts to find buyers for major assets, as Lehman prepares to close the books on another quarter of multibillion-dollar losses.”

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Fuld won’t make it through the current crisis, according to the Observer, which reports Lehman chief faces internal coup :

“Richard Fuld’s days as Lehman Brothers chief are numbered as a plan is being hatched within the troubled Wall Street investment bank to strip him of his executive duties.

The planned coup comes amid rumours a Korean investor is planning either a sizeable investment in Lehmans or an outright acquisition of the firm.”

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The Times has an interesting piece on a company bailout for its own senior executives, Lehman Brothers payout for top staff :

“Lehman Brothers is working on plans to compensate senior executives for the huge loss of value in their share options, alongside plans to raise capital.”

The move is seen as necessary to retain key staff :

“Alongside plans to shore up the balance sheet, Lehman executives are said to be planning a morale-boosting exercise to prevent a potential exodus of its senior staff.

Following the 85% collapse in the firm’s share price, lucrative share options awarded to executives and bankers have been all but wiped out.

‘There has been talk at a senior level about finding some form of compensation for the loss of value in the share options,’ said a source.”

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The shocking discovery by Wall Street and Washington that government-backed mortgage repackagers Fannie Mae and Freddie Mac are insolvent and must be bailed out soaked up most of the media’s attention bandwidth today, but another major story continues to unfold as Lehman Brothers careens towards collapse. The Guardian ran this report from Reuters :

“Shares of Lehman Brothers plunged to nine-year lows and stock in other Wall Street firms declined as new signs of distress in financial markets spooked investors.

Lehman fell as much as 23 percent, before recovering to be down more than 15 percent late Friday afternoon, far outpacing the drop in rivals such as Merrill Lynch & Co, which lost 5.33 percent and Goldman Sachs Group Inc, which declined 5.15 percent. Morgan Stanley fell 1.4 percent.

In the last two weeks, Lehman has lost about a third of its market value, and the company’s shares now trade at less than half their book value, or the net accounting value of its assets, which typically signals extreme distress.”

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Some media outlets are giving credence to the company’s protestations that they are the target of mailicious rumors circulated by short sellers. The New York Times helped Lehman spread the anti-rumor :

“Like Bear before it, Lehman has been battered by an almost daily dose of market rumors. Thursday’s batch included speculation that Pimco, the giant California-based bond fund, and SAC Capital, a large hedge fund, had stopped doing business with Lehman. Representatives for both Pimco and SAC said the rumors were not true and that they continued to do business with Lehman.

‘The shorts are going after anyone who is levered and doesn’t have an exit plan,’ said one senior trader who is not authorized to speak for his institution.”

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An article in the Wall Street Journal tacitly recognizes that the investment bank will eventually be taken over by another major financial institution :

“Lehman Chief Executive Richard Fuld Jr. has expressed little interest in selling the investment bank he has led as CEO since 1993. It isn’t clear how actively Lehman is considering potential deals with strategic investors or raising additional capital. Lehman raised $6 billion in new capital last month, but the capital-raising environment is becoming increasingly difficult, partly because of how much cash Wall Street firms have pulled in already.”

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