September 15, 2008
Sunday, September 14th is already being called Black Sunday for Wall Street as troubled
financial giants Lehman Brothers, Merrill Lynch and AIG were all desperately
seeking lifelines for survival as frenzied behind-close-doors meetings happened
around the clock. And today might well become Black Monday if the cloud of the
current financial crisis does not lift.
U.S. financial stocks and markets are getting
battered unmercifully today as worried investors react to the uncertainty and
instability of the U.S. financial system happenings.
Today
Lehman Brothers filed for bankruptcy protection. Long hours were put in over
the weekend to find a Lehman buyer, but apparently a savior was not found and
they are headed toward bankruptcy after all potential buyers walked away. They
were spooked by the U.S. Treasury's refusal to provide any takeover aid, as
it had done six months ago when Bear Stearns faltered and earlier this month
when it seized mortgage giants Fannie Mae and Freddie Mac.
Bank of America (NYSE: BAC) said it has agreed
to buy Merrill Lynch & Co. Inc. (NYSE: MER) in an all-stock deal worth around
$50B. Hopefully BOA can absorb this Merrill acquisition and flourish. If BOA
can pull it off, the good news is that they will now own one of the best and
largest retail brokerages in the country.
Perhaps the biggest news is related to shares
of American International Group (NYSE: AIG). AIG gapped down at the open more
than 50%, and was down as much as 65%. AIG, hit by $18 billion in losses over
the past three quarters from guarantees it wrote on mortgage derivatives, worked
feverishly to put together a plan that would stave off rating downgrades, after
Standard & Poor's threatened to cut the insurer's ratings on Friday. AIG
is seeking a $40B bridge loan from the government to continue as they liquidate
assets. They do not have long to find a solution as investors lose confidence
and the stock continues to plunge.
Two weeks ago the government took over the mortgage
giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) which was a shocking
bailout by the government.
The downfall of these major independent Wall
Street institutions comes around six months after the collapse of Bear Stearns
and 14 months after the beginning of the credit crisis, sparked by bad mortgage
finance and real estate investments.
A global consortium of banks, working with government
officials in New York, announced a $70 billion pool of funds to lend to troubled
financial companies. The aim of the bank consortium, is supposed to prevent
a worldwide panic on stock and other financial exchanges as the government is
signaling that it will not continued to bail out Wall Street, The government
is saying that they are continuing to work on reducing financial market disruptions
and minimize the impact of these financial market developments on the broader
economy.
The housing crisis and sub-prime mortgage meltdown
is the root cause of these financial troubles. Home prices have dropped on average
25 percent thus far, and some analysts are predicting that they could drop further
before things bottom out and the market starts to firm up.
The credit crisis is slowing the broader economy
as a whole. Credit gets tighter and banks make fewer loans. As a consequence,
consumers start cutting spending. Economists have been saying for months we
were, are or, will soon be in a recession. Every week it changes but if the
base of our financial system does not stabilize, we could quickly slip into
a full-blown recession by the end of this year and early next year.
It is way too early for investors to start thinking
about playing a bottom in this market. There is still bound to be more shakeout
ahead for some of the smaller players. It will be interesting to see whether
this carnage in the financial markets will prompt the Federal Reserve to cut
interest rates this week. The Fed has indicated that they would be vigilant
against inflation and have indicated they might hold firm or raise interest
rates to hold prices in check but inflation worries are probably less of a concern
at the moment compared to the stabilization of the financial institutions around
which our whole credit system is based.
It’s too early to tell when the worm
will turn and things will stabilize and the bleeding will stop in the financial
markets, but we will all be keeping a close eye on things.
Other Bank Stocks today:
American International Group (NYSE: AIG). Down
55%
Washington Mutual (WM): Down 19%
Wachovia CP (NYSE: WB): Down 21%
Merrill Lynch (NYSE: MER): Up 18%
Bank of America: (NYSE: BAC): Down 15.5%
Fannie Mae (NYSE: FNM): Down 15%
Freddie Mac (NYSE: FRE): Down 13%
Citigroup (NYSE: C): Down 12%
