bank run blog

World markets fell dramatically today in reaction to the failure of Lehman Brothers, the takeover of Merrill Lynch, and fears about the collapse of AIG and Washington Mutual. The Associated Press reports :

“A stunning makeover of the Wall Street landscape sent stocks falling precipitously Monday, with the Dow Jones industrials losing 500 points in their worst slide since the September 2001 terrorist attacks. Investors recoiled after a shakeup of the financial industry that took out two storied names: Lehman Brothers Holdings Inc. and Merrill Lynch & Co.

The pullback, which erased about $700 billion in shareholder wealth, occurred across much of the globe as investors absorbed Lehman’s bankruptcy filing and what was essentially a forced sale of Merrill Lynch to Bank of America for $50 billion in stock. While those companies’ situations had reached some resolution, the market remained anxious about American International Group Inc., which is seeking funding to shore up its balance sheet. A faltering of the world’s largest insurance company likely would have implications far beyond that of Lehman, already the largest U.S. bankruptcy in terms of assets.”

From across the pond, the Times confirms that the effects are being felt across the board :

“Shares plummeted as fear spread through the financial system. Central banks unveiled urgent measures amid concerns that the financial system was entering a dangerous new phase. The Bank of England injected £5 billion of emergency lending into money markets.

The 5,000 Lehman staff in Britain were clearing their desks yesterday in the country’s biggest single loss of jobs for more than three years; some 6,000 people lost their jobs with Rover in April 2005. The majority of the bank’s 26,000 staff around the world are expected to lose their jobs.

Leading shares on both sides of the Atlantic suffered a battering. More than £50 billion was wiped off London’s bluechip shares as the FTSE 100 index tumbled by 212.5 points, or more than 4 per cent. It was the darkest day for the stock market since January 21, when it fell 5.5 per cent.

Investors were fretting over the financial health of banks that had lent Lehman money – and the fear that more big institutions would be wiped out. ‘It’s clear that we are one step away from a financial meltdown,’ Nouriel Roubini, a leading international economist, said.”

Associated Press : Stocks tumble amid new Wall Street landscape

Times : Lehman Brothers collapse sends shockwave round world

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

UBS is the second major financial institution to “voluntarily” agree to pay billions of dollars to buy back worthless paper they pushed on investors, in a bid to settle fraud allegations and avoid further prosecution. The Associated Press has the story of the UBS settlement :

“Swiss banking giant UBS AG agreed Friday to buy back nearly $20 billion in auction-rate securities from investors, a day after Citigroup Inc. reached a similar settlement with regulators for $7 billion as part of a wide-ranging investigation into the collapse of the market for the bond-like investments.

UBS will repurchase all $18.6 billion of the securities it sold and pay a fine of $150 million as part of an investigation led by New York Attorney General Andrew Cuomo into whether banks misled customers about the safety of the securities.”

The two huge deals concluded by state officials from New York and Massachusetts are being seen as a template for scores of similar settlements to come :

“The settlements with UBS and Citigroup provide parameters to other banks on how to resolve situations surrounding their sales of auction-rate securities, Cuomo said.

Bank of America Corp. and Bank of New York Mellon Corp. have both disclosed they received requests for information about the sale of auction-rate securities, and Merrill Lynch & Co. has said it will voluntarily repurchase $12 billion of the securities from clients.

Cuomo noted Merrill’s repurchase program falls short of the steps agreed to by UBS and Citigroup, and his office will continue to investigate the bank.

Both UBS and Citigroup will take charges tied to the repurchase of the securities because they will be forced to price them at their current market value and not at the par value being paid to repurchase them.”

full story

The Boston Globe reports that the UBS deal almost fell apart when the bankers realized the extent of their liability :

“After spending most of the week in a 25th-floor conference room a block from Wall Street, lawyers for UBS Financial Services Inc. got up and walked out of negotiations with regulators Thursday afternoon.

New York Attorney General Andrew M. Cuomo was asking for too large a fine, according to people involved in the case, and it looked like a deal to settle fraud charges over the Swiss bank’s sales of auction-rate securities was dead.”

The most interesting aspect of this story, which now involves all four major Wall Street investment banks, as well as many of the largest commercial banks in the world, is captured in the following passage from much further down in the Globe article (paragraph 15 of 20) :

“The Securities and Exchange Commission was a party to both the UBS and Citigroup settlements. But the nation’s top securities regulator did not levy fines against either firm at this time; it said it might down the road, if the banks don’t carry out promises. Galvin, who oversees the Massachusetts Securities Division, said the SEC has appeared more concerned about the welfare of the banks than of investors.

‘They’ve been fretting about the stability of these companies,’ Galvin said. ‘They’ve been saying, “We don’t want another Bear Stearns on our hands.”’”

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