Another day another line in the sand drawn

The Federal Reserve Board announced an $85 billion loan to AIG in exchange for a 79.9% equity stake in the company. The Fed, along with the US Treasury, consider AIG too big, too interconnected to fail. The good news is the Fed might actually turn a profit on the deal. The Fed's hope is that AIG will be able to ride out the current storm in the credit markets and get back on its feet again. When that occurs, the Fed will cash in their equity stake and pay back the loan. Let's hope this works.
Apparently the "line in the sand" the Fed drew with Lehman Brothers can shift. It seems that sand line is actually calculated on a case by case basis. The criteria being how big the company is and what impact its failure will be on the US and world economy. Lehman Brothers just didn't qualify for a direct bailout. A year ago LEH's market capitalization was $33 billion, now it's in bankruptcy proceedings and selling off its assets at bargain basement prices. Barclays bank is offering $250 million for LEH's North American investment banking and trading operations. Barclays is also paying $1.5 billion for the LEH New York headquarters and 2 New Jersey data centers. The deal is subject to approval by the bankruptcy court. The deal would save almost 10,000 LEH employees from job loss. This makes me believe the court will have no problems with it, unless it considers the price way,way,way too low.
Here's another interesting development in the LEH bankruptcy, JPMorgan Chase (JPM)advanced LEH $87 million Monday morning to allow LEH to continue its trading operations and avoid disruptions to financial markets. The New York Federal Reserve Board reimbursed JPM for this. Apparently the treasury secretary's refusal to bail out LEH did not apply to loans made after no deal was reached and LEH decided to file chapter 11 bankruptcy. On Tuesday, JPM advanced LEH another $51 million. The bankruptcy court judge also appointed JPM as LEH's clearing house for its trading operation during the proceeding. This means that JPM has put $138 million into LEH to fund its trading operations in 2 days. This is over 50% of Barc's offer of $250 million for trading and investment banking operations. What this means is beyond me, if anyone out there has any knowledge on this please share it in the comments section.

Praise for The Feds!!!

Here in Mt. Washington, It is Monday morning and the Federal Reserve Board's meeting failed to arrange a buyer for Lehman Brothers(LEH). The Feds refused to provide any funding or guarantees for a buyer of LEH so no one offered to buy it. Bank of America, one of the potential buyers of LEH did buy Merrill Lynch(MER)for $50 billion. LEH will file for chapter 11 bankruptcy protection.
I am very pleased with the feds decision not to fund the purchase of LEH. The American taxpayers have already bailed out too many companies. We cannot afford to keep protecting investors from the risks they took on when they invested in subprime real estate. The credit markets need a correction and the sooner it starts the sooner the markets will recover. In my opinion, the bailout of Fannie Mae/Freddie Mac was good money after bad. Hopefully I am wrong and the Fannie/Freddie buyout will help stabilize the market in the long term. Today and this week will be an interesting one for Wall Street and the financial services sector of our economy.

P.S. Remember yesterday's post saying that LEH was the most urgent concern? The meeting also was concerned about other financial services firms in dire straits. Two of the other firms on the short list of troubled companies are Washington Mutual, the largest savings bank in America and American International Group(AIG), one of the world's largest insurance companies. More to come on these companies soon.

Another weekend another bailout!!

As if Mondays aren't inherently bad already, The New York Federal Reserve board convened a meeting between federal finance officials and executives of major banks, thrifts and investment firms Friday night. Lehman Brothers (LEH), the USA's 4th largest investment firm was the major and most urgent reason for the meeting. On Wednesday, Sept 10, LEH CEO Richard S. Fuld announced a plan to sell the company. He proposed taking the real estate holding which are dragging LEH's stock value down and transferring them to a separately held and traded new company. Then majority shares of the remaining institutional and personal money management units would be sold to raise much needed cash. Bloomberg news reported that LEH received bids for these units for approximately $5 Billion. Fuld proposed the sale after negotiations for a capital investment from the Korea Development Bank stopped without an infusion for LEH.
Apparently this was not good enough or fast enough for the Feds. Timothy Geithner, president of the New York Federal reserve board started the meeting Friday night by advising the executives present to come up with a bailout plan or run the risk of being the next company to face liquidation, bankruptcy or takeover. Meetings continued Saturday and are expected to continue on Sunday as well. LEH share price closed Friday (9/12/08) at $3.65,the trading range on Friday was $3.17 - $4.22, the 52 week range was $3.17-$67.73. This makes Friday's close a loss of over 90% from the 52 week high. No wonder the feds are acting so quickly.
Another reason the Fed is acting quickly is to reassure Foreign Banks that their holdings of LEH and other US financial services companies bonds will not suffer sudden losses. This weekend European Union finance ministers met in Nice, France to discuss the economic downturn started by the decline of the US sub-prime market. German Finance Minister Peer Steinbrueck told reporters that "The news from the United States is bad." He also expressed hope that the LEH situation would be resolved before Monday's Asian Markets opened for trading. How did the US ever get to the point where we have to reassure the world of our ability to withstand market corrections?? Maybe it's time to let LEH fail and spare the US treasury and its financiers, the American taxpayers another expensive bailout. Who knows??
To the government's credit, treasury secretary Henry Paulson is insistent that there will be no cash bailout from the US treasury this time. Most of the banks that are considering buying LEH want the US to inject some cash into the deal a la Bear Sterns in March 2008. Hang in there Hank, we're counting on you.