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Author: Subject: The Financial Meltdown Thread - The Private Sector's Role Is FINALLY Being Discussed

Zen Peach





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  posted on 9/15/2008 at 08:56 AM
quote:
Wall Street awakes to 2 storied firms falling

By JOE BEL BRUNO, CHRISTOPHER S. RUGABER and MARTIN CRUTSINGER, AP Business Writers
2 hours, 49 minutes ago



NEW YORK - When Wall Street woke up Monday morning, two more of its storied firms had fallen.

Lehman Brothers, burdened by $60 billion in soured real-estate holdings, filed a Chapter 11 bankruptcy petition in U.S. Bankruptcy Court after attempts to rescue the 158-year-old firm failed. Bank of America Corp. said it is snapping up Merrill Lynch & Co. Inc. in a $50 billion all-stock transaction.

The demise of the independent Wall Street institutions came as shock waves from the 14-month-old credit crisis roiled the U.S. financial system six months after the collapse of Bear Stearns.

The world's largest insurance company, American International Group Inc., also was forced into a restructuring.

And 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, according to participants who spoke to The Associated Press, was to prevent a worldwide panic on stock and other financial exchanges.

Ten banks Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS each agreed to provide $7 billion "to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets."

The Federal Reserve also chipped in with more largesse in its emergency lending program for investment banks. The central bank announced late Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.

Federal Reserve Chairman Ben Bernanke said the discussions had been aimed at identifying "potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses."

The European Central Bank, the Bank of England, and the Swiss central bank also made more short-term credit available to banks. European stocks fell sharply, with the FTSE 100 Index off 3.42 percent in London, the CAC-40 down 4.27 percent in Paris, and Germany's blue-chip DAX 30 falling 3.38 percent. Asian stock markets also tumbled, with India's Sensex sinking more than 5 percent. Japan and Hong Kong were closed for holidays.

Financial stocks were hard hit and the dollar fell against the pound and the euro.

Futures pegged to the Dow Jones industrial average fell more than 250 points in electronic trading Sunday evening, pointing to a sharply lower open for the blue chip index Monday morning. Asian stock markets also tumbled, with India's Sensex sinking more than 5 percent. Japan and Hong Kong were closed for holidays.

The stunning weekend developments took place as voters, who rank the economy as their top concern, prepare to elect a new president in seven weeks. It likely will spur a much greater focus by presidential candidates Republican John McCain and Democrat Barack Obama and members of Congress on the need for stricter financial regulation.

Samuel Hayes, finance professor emeritus at Harvard Business School, said the Bush administration may get a lot of blame for the situation, which could benefit Obama.

"Just the psychological impact of this kind of failure is going to be significant," he said. "It will color people's feelings about their well-being and the integrity of the financial system."

Lehman Brothers' announcement that it is filing for bankruptcy came after all potential buyers walked away. Potential suitors 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 Fannie Mae and Freddie Mac.

Employees emerging from Lehman's headquarters near the heart of Times Square Sunday night carried boxes, tote bags and duffel bags, rolling suitcases, framed artwork and spare umbrellas. Many were emblazoned with the Lehman Brothers name. Its businesses in Britain were placed in administration Monday, said the administrator, accounting firm PricewaterhouseCoopers, and employees carrying boxes and bags were walking out of Lehman's London offices.

TV trucks lined Seventh Avenue opposite the building, while barricades at the building's main entrance attempted to keep workers and onlookers from gumming up the steady flow of pedestrians flowing in and out of Times Square.

Some workers had moist eyes while a few others wept and shared hugs. Most who left the building quietly declined interviews.

People snapped pictures with cameras and their phones. Observers pressed up against a police barricade drew the ire of one man who emerged from the building and shouted: "Are you enjoying watching this? You think this is funny?"

Merrill Lynch, another investment bank laid low by the crisis that was triggered by rising mortgage defaults and plunging home values in the U.S., agreed to be acquired by Bank of America for 0.8595 shares of Bank of America common stock for each Merrill Lynch common share.

That values Merrill at $29 a share, a 70 percent premium over the brokerage's Friday closing price of $17.05, but well below what Merrill was worth at its peak in early 2007, when its shares traded above $98.

Charlotte, N.C.,-based Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world's largest brokerage. A combination of the two would create a global financial giant to rival Citigroup Inc., the biggest U.S. bank in terms of assets.

Strategically, most industry analysts say it's a good fit. If the deal goes according to plan, Bank of America will be able to offer Merrill's retail brokerage services to its huge customer base. There is not a great deal of overlap between the two companies Bank of America does have an investment bank already, but it has never been terribly strong.

Where there is duplication, however, the combination of the two companies could result in more layoffs. Both Merrill and Bank of America have already cut thousands of investment banking jobs over the past year.

The deal would not come without risks, however. Merrill Lynch, like many of its Wall Street peers, has been struggling with tight credit markets and billions of dollars in assets tied to mortgages that have plunged in value. Merrill has reported four straight quarterly losses.

Bank of America's own finances are far from robust. As consumer credit deteriorates, the bank has seen its profits decline, and the company is still in the midst of absorbing the embattled mortgage lender Countrywide Financial, which it acquired in January.

Insurer AIG, hit hard by deterioration in the credit markets, said Sunday it is reviewing its operations and discussing possible options with outside parties to improve its business after a week when its stock dropped 45 percent amid concerns about the company's financial underpinnings.

The Wall Street Journal and The New York Times both reported early Monday on their Web sites that the American International Group is seeking an additional $40 billion in emergency funds possibly from the Federal Reserve to help it avoid a credit rating downgrade, which would make it more expensive for AIG to raise money. The insurer has already raised $20 billion in fresh capital this year.

AIG was working with New York Insurance Superintendent Eric Dinallo and a representative of the governor's office through the weekend to craft a solution that protects policyholders, according to Dinallo's spokesman David Neustadt.

"It's clear we're one step away from a financial meltdown," said Nouriel Roubini, chairman of the consulting firm RGE Monitor.

The meetings that began Friday night were a who's who of financial heavyweights: Treasury Secretary Hank Paulson, Timothy Geithner, president of the New York Fed, Securities and Exchange Commission Chairman Christopher Cox, and a host of CEOs, including Vikram Pandit of Citigroup Inc., Jamie Dimon of JPMorgan Chase & Co., John Mack of Morgan Stanley, Lloyd Blankfein of Goldman Sachs Group Inc., and Merrill Lynch & Co.'s John Thain.

For all their efforts, Lehman had to file for bankruptcy.

The end of Lehman may not stop the financial crisis that has gripped Wall Street for months, analysts said. More investment banks could disappear soon.

The independent broker-dealers "are going the way of the dodo bird," said Bert Ely, an Alexandria, Va.,-based banking consultant.

That's partly because some of the firms, particularly Merrill, made bad bets on real estate. But several analysts said that investment companies will need the deep pockets of commercial banks to survive the next few years.

On Sunday, there was also an emergency trading session being held at the International Swaps and Derivatives Association to "reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy." The ISDA, which arranges trades for derivatives, said it was allowing customers to make trades and unwind positions linked to Lehman.

Roubini said it's difficult to accurately gauge the health of companies like Merrill because their financial health depends on how they value complex securities. As a result, their finances aren't very transparent, he said.

That can lead to a loss of confidence in the financial markets, he said, which can overwhelm an investment bank even if it is financially healthy by some measures.

"Once you lose confidence, the fundamentals matter less," he said.

The common denominator of the financial crisis, analysts said, is the bursting of the housing bubble. Home prices have dropped on average 25 percent so far. Roubini predicted they could drop another 15 percent.

The crisis has begun to slow the broader economy as banks make fewer loans and consumers have begun cutting spending. Many economists are now forecasting that the economy could slip into recession by the end of this year and early next year.

That, in turn, could cause additional losses for commercial banks on credit cards, auto loans and student loans.

The Fed is widely expected to keep interest rates steady at 2 percent, below inflation, when it meets Tuesday. It was possible, however, that the central bank might decide in coming weeks to cut rates if such a move is seen as needed to calm turbulent financial markets.

The International Monetary Fund predicted earlier this year that total losses from the credit crisis could reach almost $1 trillion. So far, banks have only taken about $350 billion in losses.

Commercial banks are also starting to feel the pinch. Eleven have closed so far this year, including Pasadena, Calif.-based IndyMac Bank, which had $32 billion in assets and $19 billion in deposits.

Christopher Whalen, managing director of Institutional Risk Analytics, a research firm, predicts that approximately 110 banks with $850 billion in assets could close by next July. That's out of 8,400 federally insured institutions, he said, which together hold $13 trillion in assets.

Individual customers are starting to get nervous about the financial health of their banks for the first time in generations, he said. Whalen's firm analyzes the safety and soundness of banks for business clients, but began receiving inquiries from individuals in the past two months for the first time, he said.

"If we don't get ahead of this, we are going to face a run on the retail banks by election day," he said.

http://news.yahoo.com/s/ap/20080915/ap_on_bi_ge/financial_meltdown




It's just mind-boggling that both Merrill and Lehman could end up like this. I knew alot of people that worked for Merrill. Some of those firms, you just thought they were there forever. Obviously not.

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Maximum Peach



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  posted on 9/15/2008 at 09:32 AM
quote:
"If we don't get ahead of this, we are going to face a run on the retail banks by election day," he said.

When our grandparents lived through this, the country was much smaller, population-wise, and we were much less dependent on foreign sources for our goods and services. One wonders how our society would hold up to a true panic like this.

 

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  posted on 9/15/2008 at 09:37 AM
quote:
quote:
"If we don't get ahead of this, we are going to face a run on the retail banks by election day," he said.

When our grandparents lived through this, the country was much smaller, population-wise, and we were much less dependent on foreign sources for our goods and services. One wonders how our society would hold up to a true panic like this.


All of our banking business goes to a small community privately-owned bank that encourages you to call and ask questions and review their balance sheets anytime you like. They didn't expose their mortgage portfolio to subprime at all...we left the big megabanks long ago. Too many fees and they treat you like dirt.

 

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  posted on 9/15/2008 at 09:37 AM
An hour into trading, the Dow is down 289 points. Less bad than feared.

 

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  posted on 9/15/2008 at 09:41 AM
Not as bad as the Duke and Duke disaster of the early eighties.

 

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  posted on 9/15/2008 at 09:44 AM
quote:
An hour into trading, the Dow is down 289 points. Less bad than feared.


Amazing numbers today. I've got all the majors involved in a pop-up ticker window. Looks like a financial Christmas tree. Crazy.

 

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  posted on 9/15/2008 at 11:21 AM
I'm glad we have some folks here who know about this stuff, because I really don't. I took a macro and a micro economics course in college during the 90s, but this just really doesn't interest me. I never really understood why we have a financial system where the people making the most money, make it speculating on whether someone else's hard work will make a profit. When it does, they make money, too. Anyone who makes money on stocks makes them because they are "smart" and had some money to invest. No effort on their part, and they profit on someone else's hard work. Or on someone else profitting on someone else, ....

At least that is the way it looks to me. I never uderstood why this has to be the best way to run the finances of a society, but it is the way we do business. Is this the best way? Do we need Wall Street? If Wall Street came crashing down, would it really hurt us in the long run, or allow us to make some needed changes? I'm really interested to hear what some of you think.

Then I want to hear why we even need an insurance industry, making billions in profits off other people's misfortune.

[Edited on 9/15/2008 by SantaCruzBluz]

 

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  posted on 9/15/2008 at 11:50 AM
quote:
Not as bad as the Duke and Duke disaster of the early eighties.


Orange Juice futures will get you every time.

 

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  posted on 9/15/2008 at 11:58 AM
quote:
quote:
Not as bad as the Duke and Duke disaster of the early eighties.


Orange Juice futures will get you every time.
Now I get it. I couldn't for the life of me figure out what the Duke and Duke disaster was...

 

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  posted on 9/15/2008 at 12:35 PM
In light of what's going on, I would expect a much bigger drop than what we're looking at now. I'm surprised it's holding up this well. Perhaps a lot of the losses have already been taken out.

 

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  posted on 9/15/2008 at 12:42 PM
quote:
It's just mind-boggling that both Merrill and Lehman could end up like this.
No doubt - pretty depressing news to wake up to today.

 

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  posted on 9/15/2008 at 12:45 PM
quote:
quote:
quote:
Not as bad as the Duke and Duke disaster of the early eighties.


Orange Juice futures will get you every time.
Now I get it. I couldn't for the life of me figure out what the Duke and Duke disaster was...


Will somebody 'splain this thing to me?

 

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  posted on 9/15/2008 at 12:51 PM
quote:
quote:
quote:
quote:
Not as bad as the Duke and Duke disaster of the early eighties.


Orange Juice futures will get you every time.
Now I get it. I couldn't for the life of me figure out what the Duke and Duke disaster was...


Will somebody 'splain this thing to me?


http://www.imdb.com/title/tt0086465/

 

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  posted on 9/15/2008 at 12:58 PM
Mortimer & Randolph Duke...

 

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  posted on 9/15/2008 at 01:22 PM
Socialism is bad unless of course it involves bailing out a mismanaged failing large private sector corporation, then Socialism is fine.

 

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  posted on 9/15/2008 at 02:13 PM
10 years of no regulation or accountablility will get you 1929 all over again

 

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  posted on 9/15/2008 at 02:14 PM
quote:
quote:
Mortimer & Randolph Duke...








Actually, BOA buying out Merrill Lynch and Countrywide might now make them important enough for the Feds to bail them out later this year.

Yay.


I would have loved to have had the capital to buy the Countrywide loans. Absolute a$$load of money to be made there. Buying a portfolio that size was a no-brainer, especially at that price.

 

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  posted on 9/15/2008 at 02:17 PM
quote:
quote:
quote:
quote:
Mortimer & Randolph Duke...








Actually, BOA buying out Merrill Lynch and Countrywide might now make them important enough for the Feds to bail them out later this year.

Yay.


I would have loved to have had the capital to buy the Countrywide loans. Absolute a$$load of money to be made there. Buying a portfolio that size was a no-brainer, especially at that price.


Probably 2/3 of those loans will default.


Nah. Only 7% or so of that portfolio was delinquent (30 or more days late) at the time of the sale. I'd go as high as, oh, 20%. 75%? Can't go with ya there...

 

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  posted on 9/15/2008 at 02:29 PM
quote:
quote:
quote:
quote:
quote:
quote:
Mortimer & Randolph Duke...








Actually, BOA buying out Merrill Lynch and Countrywide might now make them important enough for the Feds to bail them out later this year.

Yay.


I would have loved to have had the capital to buy the Countrywide loans. Absolute a$$load of money to be made there. Buying a portfolio that size was a no-brainer, especially at that price.


Probably 2/3 of those loans will default.


Nah. Only 7% or so of that portfolio was delinquent (30 or more days late) at the time of the sale. I'd go as high as, oh, 20%. 75%? Can't go with ya there...


Most of those people that got loans with them couldn't get loans anywhere else. Credit reports were a non-factor in most of what they've got.


That's where I get the 20% number. The Countrywide portfolio was huge. Even if up to 50% of those products were ARMs, payment-option ARMs or stated no-docs, you can still modify the best ones (the people that make their payments - I worked in subprime for five years - 90% of our portfolio paid on time) into a fixed and make some money.

BTW, it's not so much that people got loans they couldn't get anywhere else...it's that anyone could get a loan...

 

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  posted on 9/16/2008 at 08:53 AM
quote:
Fed pumps $50B into nation's financial system

By JEANNINE AVERSA, AP Economics Writer
53 minutes ago



WASHINGTON - Urgently trying to keep cash flowing amid a Wall Street meltdown, the Federal Reserve on Tuesday pumped $50 billion into the nation's financial system to help ease credit stresses.

The Federal Reserve Bank of New York's action comes in addition to its regular market operations to inject $20 billion into the system slated for the day.

The maneuver takes place as Federal Reserve Chairman Ben Bernanke and his central bank colleagues prepare to meet to decide their next move on interest rates and conduct a fresh assessment of the country's financial and economic troubles.

Some believe the financial system turmoil raises the odds the Fed will cut rates. Others still predict the Fed will hold its key rate steady at 2 percent.

In the last few days, the American financial system has been badly shaken as bad bets on dodgy mortgage-backed securities claimed more Wall Street giants.

Lehman Brothers, the country's fourth-largest investment bank, filed for bankruptcy protection. A weakened Merrill Lynch, deciding it couldn't go it alone anymore, found help in the arms of Bank of America. Now, the insurance giant American International Group is dangerously wobbling. Against this backdrop, Wall Street on Monday plunged 500 points, the most since the September 2001 terror attacks.

To help grease the financial plumbing Monday, the Fed pumped a total of $70 billion into the system through open market operations.

http://news.yahoo.com/s/ap/20080916/ap_on_bi_ge/fed_credit_crisis




Maybe the Fed should just start paying off all the delinquent mortgages, that'll fix everything right up...

 

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  posted on 9/16/2008 at 09:06 AM
quote:
Fed may cut interest rates again after all
Tuesday September 16, 7:57 am ET
By Martin Crutsinger, AP Economics Writer
Turbulent financial markets could be setting stage for Federal Reserve to cut interest rates


WASHINGTON (AP) -- With turbulence hitting financial markets as a global credit crisis claims heavyweight victims, suddenly the possibility of a reduction in interest rates by the Federal Reserve is back on the agenda.

Economists were split on whether the central bank would actually cut a key rate when officials meet Tuesday, but it was widely agreed that the Fed will at least open the door to reducing rates in the weeks ahead if financial markets do not stabilize.

Wall Street had a very tough day Monday, with the Dow Jones industrial average tumbling by 504 points in the steepest slide since the September 2001 terrorist attacks.

"Given the meltdown in markets, a rate cut is becoming fairly possible," David Wyss, chief economist at Standard & Poor's in New York, said in a comment echoed by other economists.

That represents a significant change from just a few days ago when the widely accepted view was that the Fed was finished cutting interest rates and the next move would be to start raising rates, but probably not until next year.

However, the stunning developments of the past two days as the 14-month credit crisis claimed its biggest victim yet have led economists to rethink their views. Lehman Brothers filed for bankruptcy protection on Monday after marathon talks over the weekend failed to produce a willing buyer for the nation's fourth largest investment bank.

No white knight would step forward after Treasury Secretary Henry Paulson held firm to the position that the federal government would not step in and supply any money to help facilitate a sale, unlike what was done six months ago when the Federal Reserve put up a $29 billion loan with Paulson's backing to support the sale of another investment bank, Bear Stearns, to JP Morgan Chase.

Briefing reporters at the White House, Paulson insisted that the administration had made the right decision.

"I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers," Paulson said Monday.

The Fed did announce on Sunday that it was expanding its efforts to supply more cash to the financial system as a way of helping other financial firms that might be facing problems in the wake of the Lehman bankruptcy filing.

However, many economists believe the effort will end up not being enough to calm markets. For that reason, they say the chances of a Fed rate cut -- most likely occurring between meetings -- has risen. Another factor that might influence the Fed is the recent jump in unemployment, which surged in August to a five-year high of 6.1 percent as companies shed another 85,000 jobs.

"Looking back to the '70s, over the last five recessions, the Fed has pretty much slashed interest rates until the unemployment rate has peaked each time," said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi.

David Jones, an economist at DMJ Advisors, said he believes the Fed will signal that it is now more inclined to cut rates than to raise them but will stop short of actually cutting rates.

"I believe they will say that the financial crisis has greatly increased the downside risks to growth and those risks now far outweigh the risks of inflation," he said.

The central bank has gotten some good news on inflation recently with the sharp fall in oil prices with crude closing below $100 per barrel on Monday for the first time in six months.

That big decline in energy prices helped trigger the largest drop in wholesale prices in nearly two years in August and economists believe that a report to be released Tuesday will also show that consumer prices dropped in August.

The Fed started a year ago with an aggressive effort to cut interest rates, pushing the federal funds rate down from 5.25 percent to 2 percent, where it has been since the Fed's last rate cut in April.

http://biz.yahoo.com/ap/080916/fed_interest_rates.html


 

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  posted on 9/16/2008 at 09:30 AM
Apparently there's some concern that other central banks have stood on the sidelines and that a rate cut in the US without others might be limited in impact. But inflationary pressures ease as oil drops. Either way, it will be news.

 

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  posted on 9/16/2008 at 09:35 AM
quote:
Apparently there's some concern that other central banks have stood on the sidelines and that a rate cut in the US without others might be limited in impact. But inflationary pressures ease as oil drops. Either way, it will be news.


Bad day in Asia. The Nikkei, Hang Seng, Shanghai Composite, all got the crap kicked out of them, all that Lehman investment money all over the place. (Of all the times to have a holiday - Asian markets were closed yesterday) Oil did drop significantly there, though - down to $91.87 on the Tokyo electronic.

 

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  posted on 9/16/2008 at 09:46 AM
Sounds like AIG now on brink, too.

 

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  posted on 9/16/2008 at 02:41 PM
Nice recovery today..

The trading session is almost over and the Dow is +138.....

 

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