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Thread: Financial and Economic Crisis

  1. #1
    Build the Tower Verre antinimby's Avatar
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    Default Financial and Economic Crisis

    In Frantic Day, Wall Street Banks Teeter


    Lehman Brothers headquarters in New York on Sunday.



    By ANDREW ROSS SORKIN
    Published: September 14, 2008

    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, people briefed on the deals said.

    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 tens of billions of dollars in losses because of bad mortgage finance and real estate investments.

    They culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials 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. Questions remain about how the market will react Monday, particularly to Lehman’s plan to wind down its trading operations, and whether other companies may still falter, like the American International Group, the large insurer, and Washington Mutual, the nation’s largest savings and loan. Both companies’ stocks fell precipitously last week.

    Though the government only a week ago took control of the troubled mortgage finance companies Fannie Mae and Freddie Mac, investors have become increasingly nervous about the difficulties of major financial institutions to 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.

    A weekend that was humbling for Lehman and Merrill Lynch and triumphant for 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 Downtown 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 will 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, meanwhile, eventually walked away from 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, walked away 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 was expected to seek bankruptcy protection for its holding company by late Sunday evening, representing the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago, people close to the matter said. Lehman’s subsidiaries were expected to remain solvent while the firm liquidates its holdings, these people said. Under this scenario, a group of banks have tentatively agreed to provide a financial backstop to assist in an orderly winding down of the 158-year-old investment bank. Such an agreement could expose those banks to losses on Lehman’s assets.

    Bart McDade, Lehman’s president, was at the Federal Reserve Bank in New York late Sunday discussing terms of Lehman’s dissolution with government officials. The Fed was expect to play a supporting role in the process by temporarily accepting lower-quality assets from banks in return for loans from the government.

    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 firm, 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 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 find save the firm, a person close to the matter said.

    The weekend’s events indicate that top officials at the Federal Reserve and the Treasury will take 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 tough-love message was a major change in strategy, but it remained unclear until at least Friday whether the approach was real or just posturing. If the Fed was faced with the genuine risk of another market meltdown, analysts said, it would be almost duty-bound to ride to a rescue of one kind or another.

    What few people anticipated was that the Treasury and Fed officials might reach for an even broader strategy.

    “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.”

    At first glance, the new strategy by Mr. Paulson and Mr. Bernanke represents a much purer and tougher insistence that Wall Street work out its own problems without government help.

    But that is only the first glance. If Bank of America acquires Merrill Lynch, its capital reserves would immediately fall below the minimum requirements for bank holding companies. Federal regulators, including the Federal Reserve, would have to show lenience for as long as it takes the capital markets to regain their confidence — which could be quite a while.

    And Merrill Lynch is hardly the only troubled financial institution on the horizon. Administration officials acknowledged this week that more bank failures are inevitable, and the main protection for depositors — the Federal Deposit Insurance Corporation — is likely to exhaust the reserves it has built over the years from bank insurance premiums.

    “What we need now is a systemic solution and to admit that this is an extraordinary situation,” Mr. Meyer said. Mr. Meyer said the government should go to the heart of the crisis — the mortgage market — and start buying up mortgage-backed securities in a broad rescue.

    That is similar to an approach urged by Alan Greenspan, Mr. Bernanke’s predecessor as chairman of the Federal Reserve. Mr. Greenspan, who long been a staunch opponent of government interference in the economy, said on Sunday that the Federal government might have to shore up some financial institutions.

    This is a once-in- a-half-century, probably once-in-a-century type of event,” Mr. Greenspan said in an interview on ABC. “I think the argument has got to be that there are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investment in an economy that on very rare occasions -- and this is one of them -- it’s desirable to prevent them from liquidating in a sharply disruptive manner.”

    Most economists contend that bailouts are often bad economic policy, because each rescue tends to encourage “moral hazard” – the tendency of institutions and investors to take even bigger risks because they assume the government will rescue them too.

    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 one week ago of Fannie Mae and Freddie Mac, the giant mortgage finance companies.

    Officials noted that Lehman’s downfall posed a lower systemic threat because it had been a very visible and growing risk for months, which meant that its customers and trading partners had had months to prepare themselves.

    Outside the public eye, Fed officials had acquired much more information than they had in 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.

    But James Leach, a former Republican congressman from Iowa and chairman of the House Banking committee, said the Fed and Treasury may not be able to avoid a broader rescue.

    “The Fed’s historic position is to object philosophically to a rescue role but in the end to do everything in its power to avoid anything that poses systemic risk,” said Mr. Leach, now a lecturer at Harvard.

    “My sense is that the systemic question will be the only question on the table if Lehman falters,” he continued. “If systemic risk is considered grave, the Fed, perhaps with Treasury playing at least an advisory role, will intervene.

    Copyright 2008 The New York Times Company

  2. #2
    Disgruntled Optimist lofter1's Avatar
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    WOW ...

    This is really crazy.

    Wonder how it would be if we didn't have pros and experts running all these big financial companies

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    I wonder how it would be if the "free market" was actually allowed to dictate what happens without government intervention. It won't affect folks with 401Ks or Stock, because we all actually own those stocks.

    This is abourt saving millionaires amd billionaires. I say let them drown. As for all those folks that will likely be laid off? They can use their votes in the upcoming election to do something about it.

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    Senior Member joe25's Avatar
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    If a family member of mine has an RIA with meryl lynch, is that bad or good?

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    As long as a person is not invested in a "general savings account" at these entities, their investment in mutual funds are safe - because they actually own shares of stock. However, in the case of bankruptcies, the "general savings accounts" are considered company assets. The savings accounts in these companies are not FDIC insured - to the best of my understanding.

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    Disgruntled Optimist lofter1's Avatar
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    NY TIMES front page Headlines at 11 PM sunday September 14, 2008:

    Offer for Merrill Accepted; Lehman Nears Liquidation


    ***

    Jittery Road Ahead

    By FLOYD NORRIS and VIKAS BAJAJ 23 minutes ago

    Wall Street and the federal government faced off over the weekend, raising worries of a sell-off when markets open on Monday.


    ***

    A.I.G. Seeks $40 Billion in Fed Aid to Survive

    By DEALBOOK 24 minutes ago

    The American International Group is seeking a bridge loan from the Federal Reserve as it faces a potential downgrade from credit ratings agencies.
    ***

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    Senior Member joe25's Avatar
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    Well its my uncle, he worked for wal-mart and they opened it with meryl lynch. I am not sure if it is general savings account. he hasnt touched it since 96. and he has about 3k in it.

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    Disgruntled Optimist lofter1's Avatar
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    maybe it's the full moon ...

    The headquarters of Lehman Brothers in New York on Sunday.


    Chip East/Reuters

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    Senior Member joe25's Avatar
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    ^ thats gotta suck

  10. #10
    Crabby airline hostess - stache's Avatar
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    joe, I'm not a financial expert but imo your uncle should park his 3K in an insured savings account for the time being.

  11. #11
    Disgruntled Optimist lofter1's Avatar
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    9.125.08 / 2 AM EDT:

    U.S. Futures Contracts Fall With the Dollar

    NY TIMES
    By KEITH BRADSHER

    7 minutes ago

    The dollar fell sharply against major currencies in Singapore,
    while futures contracts on American stocks nosed-dived ...

  12. #12

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    Lehman Bros files for bankruptcy



    The fourth-largest investment bank in the US, Lehman Brothers, has filed for bankruptcy protection, amid a growing global financial crisis.

    Lehman had incurred losses of billions of dollars in the US mortgage market.
    The move threatens to deal a further blow to the global financial system, as banks unwind their deals with Lehman.

    Merrill Lynch, also stung by the credit crunch, has agreed to be taken over by Bank of America in a dramatic weekend of events for Wall Street.
    Its impact is being felt around the world:

    Stock markets and the US dollar have tumbled in reaction to Lehman's collapse, with banking shares hardest hit.

    Central banks have moved to reassure markets. The US Federal Reserve has broadened its emergency lending scheme and the UK and European central banks have injected a total of $39bn (22bn; 28bn euros) into the financial system

    There are fears AIG, once the world's largest insurer, could also face collapse. It is taking steps to raise money amid reports it is seeking an emergency loan from the Fed.
    Bank of America's move to buy Merrill in a $50bn deal means that three of the top five US investment bank have fallen prey to the sub-prime crisis within six months.


    Anxious markets

    Stock markets in Europe and Asia dropped sharply and the dollar tumbled against the yen, the euro and the Swiss franc as Lehman's failure raised fears about the strength of the global financial system.

    The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence


    Robert Peston, BBC business editor

    The FTSE 100 index of leading UK shares was down 271 points, or 5%, at 5145.3 by midday. Banking shares have been particularly badly affected with HBOS down almost 30%.
    Wall Street is also expected to open lower in what is likely to be a tense day of trading.
    The Bank of England and the European Central Bank said they were monitoring developments and had pumped 5bn and $30bn respectively into money markets to help stabilise them.


    Talks collapse

    The chance that Lehman Brothers could collapse increased sharply after the strongest potential buyers pulled out at the weekend.

    Barclays and Bank of America had been in talks to rescue the bank but negotiations faltered when it became clear that the US Treasury was strongly opposed to using government money to help clinch a deal.

    The Treasury had given $30bn backing to Bear Stearns in order to secure its sale to JP Morgan in March.

    Greg Wood, the BBC's North America business correspondent, said that police had cordoned off the bank's headquarters in New York and staff were leaving with cardboard boxes as onlookers gathered to watch the bank's demise.

    "I think the whole history - 150 years of effort and hard work - that's the most saddening part for me," said one Lehman employee as she left the building.

    The bank, which employs about 25,000 staff worldwide, including 5,000 in the UK, was founded in 1850 by three brothers.


    'Extraordinary 24 hours'

    Lehman Brothers said it intended to file for Chapter 11 bankruptcy protection, which allows a company time to reorganise and devise a plan to pay creditors over time.

    It said that its broker-dealer division and asset management division Neuberger Berman Holdings would not be included in the filing.

    The accounting firm PriceWaterhouseCoopers said the UK operations of Lehman Brothers have been placed under administration, and the business would be wound down in an orderly fashion.

    Bank of America said it had agreed to buy investment bank Merrill Lynch for $50bn (28bn), in a deal that will create the world's largest financial services company.

    Three of the top five US investment banks have now fallen victim to the credit crunch. Lehman and Merrill join Bear Stearns, which was sold to JP Morgan for a knockdown price in March.

    The BBC's business editor, Robert Peston, said that it had been Wall Street's most extraordinary 24 hours since the late 1920s.

    He said that Merrill's sale was almost as shocking as Lehman's demise.

    "The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence," he said.
    Insurer in trouble

    In addition to Lehman and Merrill Lynch, problems at AIG, once the world's largest insurer, are also mounting.

    Reeling from losses on its exposure to real estate, AIG has sought $40bn from the Federal Reserve to shore up its finances, the New York Times has reported.

    To help prevent panic on financial markets, the Federal Reserve said for the first time it will accept stocks owned by banks as collateral for short-term cash loans, broadening its emergency lending programme.

    Also 10 of the world's biggest banks on Sunday agreed to establish a $70bn emergency fund, with any one of the banks able to able to tap up to a third of it should they face any liquidity problems.

  13. #13
    Chief Antagonist Ninjahedge's Avatar
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    I guess we have nothing to worry about.

    After all, stock never goes down in a 401K!!!!







    /me looks at 1K and wonders where the 400 went......

  14. #14
    Disgruntled Optimist lofter1's Avatar
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    Listening now to GWB as he stands outside the White House and speaks in depressed tones:

    Oh-so-relieved to hear that, while concerned, he thinks our financial situation is "resilient" in regard to what he calls the "adjustment" to the financial markets.

  15. #15
    Crabby airline hostess - stache's Avatar
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    Yes, I'm sure this is just another 'correction'.

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