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Lehman Brothers To File Bankruptcy, BOA Buys Merrill Lynch, Washington Mutual and AIG Uncertain

Posted by PATRICK EDABURN in At TMV, Economy.
Sep 15th, 2008 | Comments

Note: This is a corrected version of an earlier post in which I demonstrated Sunday Afternoon Brain Fog. Thank you to our attentive readers for pointing my error out.

As we feared (and as I tried to overlook) Lehman Brothers has announced they will file for Chapter 11 Bankruptcy protection, probably ending the 158 year history of the corporation. Hopes for a buyout by either Bank of America or Barclay’s collapsed when they were unable to get governmental guarantees to limit their losses.

In theory a Chapter 11 (as opposed to a Chapter 7) is a reorganizational bankruptcy which would allow Lehman to continue operations but it seems unlikely that this will happen. However the filing only includes the parent company (LBHI) and does not include the subsidiary companies.

Bank of America meanwhile has purchased Merrill Lynch for around $ 50 billion, creating a new financial supergiant.

Washington Mutual remains up in the air at this point. The company has lost a breathtaking 92% of its market value in the last year but does currently have a fairly large base of assets and deposits and there is currently hope that it will be able to make it through the current crisis.

As if things were not bad enough, AIG has now reportedly asked for a $ 40 BILLION loan from the government to bridge the gap in assets and avoid a stock downgrade that could cause them to collapse.

This has certainly not been a good summer for the financial markets though it should be pointed out that we are perhaps overcome by the concept of focus on the bad news. Commentators sometimes point out the need to focus on the fact that 94% of people have jobs versus the 6% do not. By the same token we should consider that while these banks do have serious problems, most banks do not.

Indeed Bank Of America has demonstrated strength today and most other leading banks are quite stable. It won’t be a pretty period as the economy adjusts to these collapses but I wouldn’t get out on the ledge just yet.

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mlhradio

I knew that we were "in trouble" when I clicked the TV over to CNBC and they were broadcasting live (Sunday night). That's my 'warning sign' - they almost never have live programming on the weekends unless something big is up.

The amount of hyperbole being thrown around on CNBC is breathaking. Stuff like "the largest shakeup in the history of the US financial market" and "recession for the ages". They've been wrong before, of course, but it certainly sounds doubleplusungood.

What's puzzling to me is how oil keeps falling - still down sharply falling below $100 a barrel despite a quarter of the US production currently offline and price spikes around the country. (Still in the $3.50 range around here, but the one station on the east end of town on the road to Houston jumped up to $4.40 this past afternoon because his supplier was charging that much. Anomaly, or a sign of things to come?)

Marlowecan

I think the high oil prices of the past few months are falling because the price was "artificially" high due to speculation on international markets, most analysts say. The "invisible hand" of the market cannot be resisted for long.

The fact that it is still falling . . .despite spikes across the country in anticipation of the hurricane, and production offline in place . . . is testimony to how supply and demand had little to do with the high price in the first place.

Yes, I agree, the economic news from Wall Street sounds "doubleplusungood".

I continue to be amazed that . . . as the banking meltdown continues . . . the Democrats and Senator Obama are not making it the centrepiece of their campaign.

Instead, we keep talking about lipstick, pigs and email. Surreal.

elrod

Marlowe,
I suspect we will be talking about the financial crisis quite a bit now.

Patrick,
The reason BofA is relatively strong is that it had not involved itself in investment banking up to this point. As a retail bank with relatively little exposure to the mortgage market Bank of America could avoid some of the trouble up to now.

The question now is whether or not BofA can manage these troubled assets they've taken over. My guess is they will do fine. During the Great Depression a handful of banks took over the bad assets of failing banks and persevered.

The bigger problem for the financial markets are the credit default swaps that help insure against corporate losses. Like mortgage-backed securities, these credit default swaps have the effect of linking assets across multiple financial institutions at once. So, if one major house fails, other banks stare at their respective navels and pull back from any expansive investment or lending. The effect is a dry-up of liquidity and a recession.

We'll know by later this week if the global financial system can absorb this shock.

bellisaurius

Ml, there are, of course,mny reasons why oil is falling at the moment (although gas will rise for a while until we see how the refineries have done post Ike), but the fact a proper recession is probably coming upon us is a major driver too.

Funny, but I was just debating with someone the other day about whether the economy is the worst it's ever been since the depression (activated more by the term "the worst", which always gets my devil's advocate going. Plus, anyone who talks about the economy as a whole and doesn;t know what terms like GDP means kinda get me started too), and then I read this today:

Greenspan says US in a once in a century financial crisis http://www.breitbart.com/article.php?id=0809141...

Well, I guess we'll know most of the fallout over the next week or so.

mikkel

Well at least the authorities are remaining calm and not panicking or letting there be undue risk with our money. Seriously they can stop saying "since the Great Depression" and into "ever."

There are reasons why the country didn't collapse during the Great Depression and it looks like they are hell bent on not heeding those this time.

Marlowecan

Elrod...

It looks like you may be right. Obama has started the week precisely on that note . . . linking McCain with Bush actions (or inactions) that have led to this situation.

http://news.yahoo.com/s/ap/20080915/ap_on_el_pr...

Elrod, I hope you are right in believing all will be fine. The Bush Fed on Sunday was scrambling like a procrastinating student at the last moment to pull something together before the Asian markets opened, to avoid a full-scale bloodletting. Not smart.

The scale of this hit must SURELY divert this election back to reality and real issues.

elrod

Marlowe,
I don't know that the whole system will be fine. I just think some players - retail banks in particular - may come out ahead. They didn't take full advantage of the Glass-Steagal repeal, after all.

AustinRoth

This is SO big, so potentially devestating and impacting (or it is at least an indicator of even more financial devastation to come) that I don't even want to think about it.

But I do. Others have said, correctly, that this is the REAL main, most important issue facing the US in the next administration.

In the end, leaving or removing the troops from Iraq will have almost no day-to-day impact on the majority of the country. This, however, could effect just about every single US resident.

Patrick E

Thanks for the comments so far.

I certainly agree that this is a big deal and if I implied otherwise I retract that impression. Lehmans collapse is huge as is the possible collapse of AIG.

However if you were watching the talking heads you would think that every bank in the country was ready to collapse and that everyone was going to lose their money.

Yes we have major problems but if you compare the number of banks and institutions in trouble or potential trouble versus those who are not in trouble, the not in troubles are in the massive majority.

It won't be pretty but I am pretty sure the US economy will still be around in 50 years.

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