Global Economy

Sanjay M · Post by **Sanjay M** » 14 Sep 2008 14:12

Leading plan for rescue would split up Lehman

svinayak · Post by **svinayak** » 14 Sep 2008 21:50

John Snow wrote:According to my sources, Henry M. Paulson, Jr. Secretary of the Treasury is
working more during week ends than during regular days.
Next week is already booked for WaMu crisis

Japan and CHina refused to bail out Lehman Brothers
Germany said yesterday that US should fix the mess before 7PM Sunday when the Asian Markets Open

Singha · Post by **Singha** » 14 Sep 2008 22:43

The Independent:-

Desperate companies turn to 'usurious' hedge funds

By Simon Evans
Sunday, 14 September 200

Smaller companies on the junior Alternative Investment Market (AIM) are being forced to borrow cash from hedge funds at "usury rates" in order to survive, Square Mile insiders have warned.

Some cash-rich fund managers are avoiding volatile equity and bond markets and instead lending to AIM firms, lured in by the prospect of earning giant fees.

"The kinds of costs involved in borrowing from some of these guys are huge," said one city chief executive. "But they have no alternative in many cases because traditional bank lending has dried up. It's like you or me being desperate enough to go and borrow from the local thug with a baseball bat."

The practice is thought to have crept in over the past few months as companies have suffered at the hands of the credit crunch during the summer.

A City stockbroker said: "We had a company that had no choice but to go to one of these. We were flabbergasted at the kind of rates involved.

"And it wasn't just the rates. Every six months, further arrangement fees kick in."

The source added: "Of course the risks of lending are now much higher, but not as high as some of these are charging. We are thinking of setting up our own lending arm and undercutting some of these guys. It's not what we do at the moment, but if this bear continues for another year it could be something for us to do next year."

Singha · Post by **Singha** » 14 Sep 2008 22:49

AIG and Wamu are going to be halal'ed soon.

but Merill Lynch has lost 38% in 4 days too. watch for this new bakra.

at this rate people need to start hoarding foodgrain, smoked fish and meat,
cooking oil and shotgun shells. we are going back to a agrarian barter economy.

Short sellers start to hit Merrill Lynch

Posted Sep 13th 2008 11:40AM by Douglas McIntyre
Filed under: Merrill Lynch (MER), Lehman Br Holdings (LEH)

Like Lehman (NYSE: LEH) before it, Merrill Lynch (NYSE: MER) is becoming a short-seller's dream. In the last five trading days, the stock has gone from almost $29 to under $17 on tremendous volume.

According to Reuters, "Looming large among investors' worries about Merrill are mortgage-backed securities and other structured debt held at two of its banking subsidiaries -- Merrill Lynch Bank USA and Merrill Lynch Bank & Trust Co."

The terrible trouble for Merrill and Lehman is that no one knows how badly their balance sheets have been damaged, not even their managements. As credit markets fluctuate and housing prices fall, the value of many financial instruments changes every day.

Bear Stearns was scuttled to a large extent because its large customers pulled out capital. Rumors will cause that.

With the rumors around Merrill, and the short-sellers' ability to fuel the fire, Merrill may be in for a awful week.

Sanjay M · Post by **Sanjay M** » 14 Sep 2008 23:24

Bernanke Signals No Rate Cut - Mistake?

I'm thinking that with the recent drop in commodities prices, and the rising danger of a deflationary cycle, Bernanke is making a mistake by not acting anticipatively to get ahead of this downturn. He needs to head off the deflation disaster by making a quarter-point cut sooner rather than later. He can use the recent hurricane disasters as a political excuse. As we know, rate cuts take time to work their magic, so it's better that he get them started sooner rather than later. Oh well, perhaps he's just trying to fool the markets, as he often has to do.

svinayak · Post by **svinayak** » 15 Sep 2008 04:08

Threat to Exports

The spread of the weakness abroad is threatening to undercut one of the U.S. economy's few strengths: exports, which accounted for virtually all of the growth in second-quarter gross domestic product. On Sept. 10, the Japanese government said the world's second-largest economy is ``deteriorating,'' and the European Commission forecast a recession for Germany.

``Not only is the U.S. in a recession, but the rest of the world is slowing down,'' Ford Motor Co. Chief Executive Officer Alan Mulally said in a Sept. 8 speech. ``I've never seen anything quite like it.''

The global slowdown does have one silver lining: It's sapping demand for everything from oil to soybeans, dragging down their prices and taking the edge off inflation. The Reuters/Jefferies CRB Index of 19 raw materials has tumbled 25 percent since hitting a record in July. Crude-oil prices dropped close to $100 a barrel this week from a high of $147.27 just two months ago.

John Snow · Post by **John Snow** » 15 Sep 2008 06:16

Lehman is going down, 11 pm we will know.
B of A walked away from Lehman.
Bracly's walked a way.....

SwamyG · Post by **SwamyG** » 15 Sep 2008 06:26

Merrill Lynch is near an 11th-hour deal with BoA to avoid deepening financial crisis.

Bear Stearns gone, Freddie and Fannie under government, Lehman hanging on thin threads, Merrill Lynch trying all it can from going over the cliff...........

AshokS · Post by **AshokS** » 15 Sep 2008 06:30

WaMu where are you.....

John Snow · Post by **John Snow** » 15 Sep 2008 06:39

WaMu is next week end assignment for Henry M. Paulson, Jr. Secretary of the Treasury

SwamyG · Post by **SwamyG** » 15 Sep 2008 07:38

BoA in a deal worth $44 billion to buy Merrill Lynch

Wow....AIG now working hard from going down. Goes to the Fed.... dunno if Fed is going to help. Fed did not help Merrill.

A very busy weekend.

Sanjay M · Post by **Sanjay M** » 15 Sep 2008 08:20

That first precedent-setting bailout deal arranged by Fed between JPMorgan and BearStearns has introduced a new type of moral hazard -- every white knight from that point on is now expecting/demanding similarly favorable terms from Fed before they'll agree to become buyers.

Once again, the market has adjusted - for better or for worse.

Sanjay M · Post by **Sanjay M** » 15 Sep 2008 08:36

Financial Times:

Stagflation is now a dwindling threat
Published: September 14 2008 17:27 | Last updated: September 14 2008 17:27
For the past year, policymakers in the high-income countries have been caught in a painful dilemma. Do they focus on the financial crisis or do they concentrate on rising headline inflation? For good or, more probably, ill, the dilemma is on its way to resolution. Contractionary forces are winning. If so, this does at last clarify priorities.

svinayak · Post by **svinayak** » 15 Sep 2008 09:09

http://www.stern.nyu.edu/globalmacro/BW ... Setser.pdf

For an excellent analysis concerning Foreign Central Bank purchases of U.S. instruments, see Roubini and Setser's "Will the Bretton Woods 2 Regime Unravel Soon? The Risk of Hard Landing in 2005-2006."

Introduction
The defining feature of the global economy right now is the $660 billion US current account deficit. The world’s largest economy – and the world’s preeminent military and geo-strategic power – is also the world’s largest debtor. The current account surpluses of most other regions of the world are the mirror image of the US deficit. The US absorbs at least 80% of the savings that the rest of the world does not invest at home. Barring an economic slump in the US or a major fall in the dollar, the US current account deficit looks set to expand significantly in 2005 and 2006.
The defining feature of the current international financial and monetary system is that it finances the United States’ enormous external deficit – and the associated fiscal deficit -- at low interest rates. The world’s central banks, not private investors, provide the bulk of the financing the United States needs to sustain its deficits. The total increase of in dollar reserves reported by the BIS, not US data, provides the best indicator of total “official” support for the US.1 In 2003, the world’s central banks added $440 billion of dollar reserves and, but for a $45 billion transfer from the People’s Bank of China to China’s state banks to recapitalize them, the total would have been closer to $485 billion. Central banks therefore financed 90% of the United States’ $530 billion current account deficit.2 We won’t know the exact figures on 2004 central bank dollar reserve accumulation until June 2005, but all available information suggest that the world’s central banks did not let the US down. Expect at least another $465 billion in financing from the increase in dollar reserves this year, and an overall foreign reserves increase of $700 billion. If that estimate proves correct, central bank financing will cover around 70% of the 2004 US current account deficit. The increase in central banks’ holdings of U.S. Treasuries has been large enough to finance almost all of the structural deterioration in the US fiscal deficit since 2001.
Michael Dooley, David Folkerts-Landau and Peter Garber, in a series of influential papers,3 have argued that the nations of the Pacific have constituted a new Bretton Woods system. In the original Bretton Woods system, Europe and Japan tied their currencies to the dollar; today the industrialized – and rapidly industrializing – Asian economies formally or informally tie their currencies to the dollar. Dooley, Folkerts-Landau and Garber, argue that this system of fixed and heavily managed exchange rates is fundamentally stable, and the intervention required to prevent Asian currencies from appreciating will continue to provide the bulk of the financing the US needs to run ongoing current account deficits For countries on the periphery, the benefits of stable, weak exchange rates exceed the costs of reserve accumulation. China relies on rapid export-led growth to absorb surplus labor of hundreds of millions of low-skill poor workers from its vast agricultural sector into the modern, industrial and traded sector.
1 Higgins and Klitgaard (2004) first made this point and estimated the gap between US-based and BIS-based figures on US dollar foreign reserves accumulation by world central banks.
2 Since the transfer of $45 b of Chinese reserves to their insolvent state banks is effectively a diversion of official foreign reserves, the effective financing of the US current account by foreign central banks in 2003 amounted to 88% of the US current account deficit.
3 See Dooley, Folkerts-Landau and Garber (2003, 2004a,b,c,d,e).
2
Continued reserve accumulation by Asian – and other – central banks, in turn, allows the US to continue to rely on domestic demand to drive its growth, and to run the resulting large current account deficits.4 Indeed, the external deficits financed through a new renminbi-dollar standard are far larger than any deficits associated with the original gold-dollar standard or the original Bretton Woods system.
Initially, Garber, Dooley and Folkerts-Landau suggested the new system of fixed and quasi-fixed exchange rates would last a generation, until China’s agricultural labor surplus was absorbed in a new urban industrial sector. More recently, Peter Garber backed off a bit, but he still maintained that the new Bretton Woods system would last another eight years. Michael Mussa has suggested it will not last another four years. We believe it may have difficulty lasting for another two years.
This paper argues that the current renminbi-dollar standard is not stable: the scale of the financing required to sustain US current account deficits is increasing faster than the willingness of the world’s central banks to continue to build up their dollar reserves. In the first section of the paper, we highlight the fundamental reasons why the Bretton Woods 2 international monetary system is unstable. In the second section, we argue that there is a meaningful risk the Bretton Woods 2 system will unravel before the end of 2006.
Sources of instability include:
• The intrinsic tension between the United States’ growing need for financing to cover its current account and fiscal deficits and the large losses that those lending to the US in dollars are almost certain to incur as part of the adjustment needed to reduce the US trade deficit.
• The significant internal dislocations in the US associated with rising trade deficits, along with distortions in the allocation of US investment stemming from the combination of cheap central bank financing and an overvalued US dollar. The expansion of the trade deficit associated with current renminbi-dollar peg is politically unfeasible: Social peace in China comes at the expense of political peace in the US. The interest rate subsidy provided by central banks’ purchases of dollar assets facilitates the expansion of US consumption and employment in interest-sensitive sectors. But it also discourages investment in the production of tradeables5, and thus implies that the adjustment ultimately required to bring the US trade deficit down will be more painful.
• The significant burden financing the United States imposes on Asian governments and the risks it poses to the stability of Asia’s domestic financial system.
o Asian central banks – and especially the People’s Bank of China - are bearing a disproportionate share of the “burden” of supporting a profligate United States: Asian reserve accumulation far exceeds Asia’s (large) current account surplus. Asian central banks effectively intermediate
4 Stephen Roach has argued that the world runs on two engines, with the US providing growth in world demand, and China growth in world supply. See Roach (2004).
5 See the discussion by David Hale, Financial Times, January 26, 2005.
3
between the world’s demand for Asian assets and the United States’ need for external financing.
o The enormous reserve growth required to sustain the Bretton Woods 2 system is hard to fully sterilize, particularly in China. The resulting increase in China’s money supply will lead to a resumption of domestic inflation, in addition to fueling a lending boom and asset bubble that will add to China’s already significant domestic financial weakness.
o Central bank balance sheets are increasingly exposed to large losses from their holdings of dollars. These losses are likely to be very large – a 33% renminbi appreciation currently implies a capital loss equal to 10% of China’s GDP. More importantly, the longer the end of the Bretton Woods 2 system is postponed, the larger the losses. China’s capital loss could easily exceed 20% of its GDP by 2008.
• The European Central Bank (ECB) will reduce pressure on Asian central banks by building up its dollar reserves through large-scale intervention. Politics matter: France and Germany are not willing to bankroll President’s Bush’s foreign and domestic policy choices. Moreover, the ECB lacks an institutional mandate to intermediate between European savings and America’s need for financing on an “Asian” scale. Rather than joining Asia governments in financing the US, the European governments are likely to join with the US to demand exchange rate adjustment in Asia – and barring such adjustment; a new burst of protectionism is more likely than sustained intervention.
• The institutional infrastructure behind the “Bretton Woods 2” system is too weak to support the pace of dollar reserve accumulation required to sustain the system. The country providing the system’s anchor currency – the US – is unfettered by any institutional commitment to protect the value of the world’s dollar reserves: it is formally free to pursue policies that increase its demand for reserve financing. Yet, as Barry Eichengreen6 has emphasized, the institutions to limit the risk that a central bank will opt out of the dollar-financing cartel are weak – far weaker than the institutions that buttressed the dollar-standard standard in the original Bretton Woods system. Many Asian economies do not even formally peg to the dollar and are under no requirement to continue to build up their dollar reserves. Oil exporters are already defecting, increasing the pressure on China (and a few others) to accelerate the pace of their dollar reserve accumulation.
The easiest prediction is always that current trends will continue: the world’s central banks will continue to add $450-500 billion to their dollar reserves every year, and in the process, provide most of the financing needed for the US to continue to run large current account deficits. Imbalances can last so long as they are financed. So long as private investors holding dollar-denominated assets expect the US current account deficit will be financed, they seem willing to hold on to their existing dollar claims, though perhaps not to add to their exposure as fast as the world’s central banks.

svinayak · Post by **svinayak** » 15 Sep 2008 09:14

http://angrybear.blogspot.com/2008/09/r ... ekend.html

If Lehman collapses expect a run on all of the other broker dealers and the collapse of the shadow banking system

Nouriel Roubini | Sep 13, 2008

It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.

svinayak · Post by **svinayak** » 15 Sep 2008 09:43

China is slowing down—what is the right time to boost growth and how should it be done?
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Louis Kuijs | Sep 14, 2008

China's economy is slowing down. After years in which growth seemed only to go up, the pace of growth is moderating, affected by the global slowdown and tightening measures introduced since the fall of 2007 to contain inflation. Nonetheless, data for August on investment and exports surprised on the upside and on current projections the economy is on track to slow down to a still robust pace in line with short run potential growth of about 10 % in 2008. This is after 2 years with growth of almost 12 %, significantly higher than potential growth.

Figure: Growth is moderating but broadly in line with potential
http://www.rgemonitor.com/asia-monitor/ ... it_be_done

Sanjay M · Post by **Sanjay M** » 15 Sep 2008 09:49

Uncle did not help Lehman get special waiver from NSG (No-credit Suppliers Group), and so now they are going to hit the markets like an H-bomb:

http://www.nydailynews.com/money/2008/0 ... amage.html

When Lehman invokes Chapter 11 of the NPT (Non-Payment Treaty), the ripple effects will shake the marketplace with a seismic effect. But to what extent will the markets rebound?

svinayak · Post by **svinayak** » 15 Sep 2008 09:53

Check this for the answer

mms://media2.bloomberg.com/cache/vmUV7PR4JGX8.asf

Possible 50% GDP global recession
Cost - 10% of the US GDP - $1T

Sanjay M · Post by **Sanjay M** » 15 Sep 2008 10:09

Haha, he said "the light at the end of the tunnel is an oncoming train"

you gotta admire his bold wit in the face of disaster

Sanjay M · Post by **Sanjay M** » 15 Sep 2008 10:36

BBC

05:14 GMT, Monday, 15 September 2008 06:14 UK

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 chance that the 158-year-old institution could collapse increased sharply after the strongest potential buyers pulled out at the weekend.
The move threatens to deal a further blow to the global financial system, as banks unwind their deals with Lehman.

Rishi · Post by **Rishi** » 15 Sep 2008 10:45

http://www.bloomberg.com/apps/news?pid= ... refer=home

Bank of America Agrees to Buy Merrill for $50 Billion After Shares Plunge

vina · Post by **vina** » 15 Sep 2008 13:05

Sanjay M wrote:Uncle did not help Lehman get special waiver from NSG (No-credit Suppliers Group), and so now they are going to hit the markets like an H-bomb:

.. Toldja that the financial whizz kinds can engineer a mega boom , just like Fizzicists!.. BRF ahead of the curve as always!

Singha · Post by **Singha** » 15 Sep 2008 15:36

well the hedge funds, wall street and their friends in Govt all made their money. even if
they never get another job in their lives, the people who engineered this situation will
still live comfortably on their gains.

its the rest of us who are suffering from their machinations. I purchased 5kg rice at 29/kg
yesterday after scouring 3 shops to get the cheapest variety of sona mussorie. its
almost 50% up from 3 yrs back.

one thing that hasnt increased much if at all is fish

so atleast that pillar of
the the rice-n-fish third world types like me is holding up in India.

Singha · Post by **Singha** » 15 Sep 2008 16:01

NYT

The big insurance company, the American International Group, was seeking a $40 billion bridge loan Sunday night from the Federal Reserve, as it faces a potential downgrade from credit ratings agencies that could spell its doom, a person briefed on the matter said.

Ratings agencies threatened to downgrade the insurance giant’s credit rating by Monday morning, allowing counterparties to withdraw capital from their contracts with the company. One person close to the firm said that if such an event occurred, A.I.G. may survive for only 48 hours to 72 hours.

SwamyG · Post by **SwamyG** » 15 Sep 2008 18:25

Man, I always have been a lover of unorganized sector. Yes it is less efficient, but it needs to be there to check and balance the organized sector. Be it retail, banking, real estate, hospitality, insurance or you name it sector. I know several people in USA that would not go to a chain restaurant or shop, they support the local mom-n-pop shops. The economy needs a right balance between the organized and unorganized sectors.

Unorganized sectors can offer some solace when the organized sector starts to crumble.

Singha · Post by **Singha** » 15 Sep 2008 20:09

BW

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.
...........

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.

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.

.....
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.

Singha · Post by **Singha** » 15 Sep 2008 22:39

WSJ

Ultimatum by Paulson
Sparked Frantic End
By DEBORAH SOLOMON, DENNIS K. BERMAN, SUSANNE CRAIG and CARRICK MOLLENKAMP
September 15, 2008; Page A1

One of the most tumultuous weekends in Wall Street's history began Friday, when federal officials decided to deliver a sobering message to the captains of finance: There would be no government bailout of Lehman Brothers Holdings Inc.

Officials wanted to prepare the market for the possibility that Lehman could simply fail. The best way to do that in an orderly way would be to get everyone together in a room.

Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and his top New York lieutenant, Timothy Geithner, summoned some 30 Wall Street executives for a 6 p.m. Friday meeting at the Fed's offices in Lower Manhattan.

"There is no political will for a federal bailout," Mr. Geithner told the assembled executives, according to a person familiar with the matter. "Come back in the morning and be prepared to do something."

Over the next 48 hours, these marching orders developed into a nerve-wracking test of the ability of the U.S. financial system to hold itself together amid the worst series of shocks it has faced in decades.

By taking the rescue option off the table, the U.S. government was declaring that there are limits to its role as backstop-in-chief. A week earlier it had seized mortgage giants Fannie Mae and Freddie Mac, and months prior had brokered the sale of Bear Stearns & Co. to J.P. Morgan Chase & Co. But now, Washington appears to want Wall Street to largely fix its own problems, and feels that flailing institutions shouldn't expect the government to commit money to save them.

"We've re-established 'moral hazard,'" said a person involved in the talks, referring to the notion that the government should eschew bailouts, since financial firms might take more risks if they're insulated from the consequences. "Is that a good thing or a bad thing? We're about to find out."

One immediate impact: As Lehman's future darkened, Merrill Lynch & Co., another vulnerable firm, raced into the arms of Bank of America Corp.

This account of the weekend's events was compiled from interviews with Wall Street executives, traders, government officials and other participants in the talks.

Barring some last-minute, late-night alternative, Lehman will likely file for liquidation, people familiar with the situation said.

The storied firm's decline occurred in slow motion this year. Heavily exposed to troubled real-estate investments, the firm tried to raise fresh capital, only to be thwarted. The most recent disappointment came last Monday when a possible deal with a Korean bank faded, sending Lehman's shares down 45% the next day. They had already fallen 80% since the start of 2008.

On Tuesday and Wednesday, when Mr. Paulson called Wall Street CEOs to give them early notice of his no-bailout stance, some argued to him that the government needed to structure a rescue like that of Bear Stearns, according to people familiar with the matter. To prevent Bear Stearns's collapse in March, the Fed agreed to put up $30 billion to help complete the acquisition of the failing bank by J.P. Morgan Chase.

Repeating that move with Lehman, however, would create a terrible precedent, Mr. Paulson worried. Which other firms would take that as a cue to ask for U.S. government help -- and from what other industries? Detroit auto makers were already knocking at the door.

Mr. Paulson was also irked that Wall Street saw him as someone who would always ride to the rescue. And because Lehman's troubles have been known for a while, Mr. Paulson felt the market had had time to prepare.

In addition, Lehman had access to special emergency lending from the Fed -- something Bear Stearns didn't have when it was struggling. This was another reason Mr. Paulson there shouldn't be a Bear-like rescue for Lehman.

The government's no-bailout decision emerged as serious obstacle for Lehman's two most likely buyers, Bank of America and Barclays PLC. Indeed, this past Friday, federal officials monitoring talks to sell Lehman to Bank of America realized that deal probably wouldn't be consummated without federal backing.

That triggered the call for the Friday-evening meeting of financial titans. The gathering was attended by at least 30 executives, a Who's Who of Wall Street.

Mr. Geithner laid out two potential scenarios. One involved an orderly dismantling of Lehman that would essentially end its existence. But he also suggested that Wall Street firms come up with their own solution -- perhaps by joining forces among themselves to remove Lehman's riskiest and most toxic assets. That move would make Lehman more attractive to potential buyers, but would also require Wall Street firms to commit their own scarce money to the cleanup.

Mr. Paulson told the group it was in their interest to find a solution. "Everybody is exposed" to Lehman, Mr. Paulson said, according to two people in attendance.

Most of the Wall Street executives present at the meeting listened and asked questions, but didn't show what hand they might play. The meeting broke up just after 8 p.m. Friday.

Finding a Buyer

Saturday morning, the CEOs and their closest advisers reconvened at about 9 a.m. and broke into groups to discuss various scenarios. Lehman representatives weren't present.

One group focused on the possible dismantling of Lehman; it included both government officials and Wall Street representatives. Among the things the group discussed was having every bank borrow from the Fed under an emergency lending provision it has offered since the collapse of Bear Stearns. With that borrowed money, the banks would buy up Lehman's assets, preventing it from filing for bankruptcy.

The other main track focused on finding a buyer. Either Barclays or Bank of America would buy Lehman's "good assets," such as its stock-trading and analysis business, people familiar with the matter say. Lehman's more toxic real-estate assets would be placed in a "bad" bank containing about $85 billion in souring assets. Other Wall Street firms would inject some capital into the bad bank to keep it afloat. The goal would be to avoid a flood of bad assets pouring into the market, pushing prices even lower.

But getting Wall Street firms to cooperate among themselves, without government assistance, was proving tough. Several CEOs openly questioned why they should bear the cost of Lehman's problems when others who also face exposure -- such as institutional investors, hedge funds and foreign investors -- aren't being asked to do the same.

Morgan Stanley CEO John Mack raised serious questions, saying that this time it was Lehman and next time it would be Merrill, according to people in attendance. "If we're going to do this deal, where does it end?" he said, according to a person familiar with the matter. Other bankers in the room felt the same way, this person added.

By noon on Saturday, Bank of America hadn't budged from its position that it needed government support to consummate a deal. The bottom line: It was effectively out of the running.

Outside the Fed's downtown New York headquarters, a fortress-like building of stone and iron, a fleet of black limousines waited for the bankers inside. At one point, they blocked the narrow streets around the building, causing a traffic jam that had to be broken up by the Fed's uniformed guards.

Bankers and Fed staffers milled outside, smoking cigarettes and talking on their cell phones about subjects such as counterparty risk, a normally arcane matter of contract law, suddenly front and center. On one occasion, in the men's bathroom, a trio of bank CEOs debated the merits of a rescue plan.

The bond- and derivative-trading heads of major investment banks, assuming that a deal to save Lehman was a diminishing possibility, gathered to discuss how to deal with their exposure to minimize havoc Monday when markets opened.

Shortly after 5 p.m., a clutch of Fed staffers left the building. The day hadn't gone well. The government and potential buyers remained miles apart, mainly due to the bailout issue. Wall Street executives left in cars parked in a garage to avoid being photographed by the waiting press.

One person in the Fed meetings Saturday night described them as "the world's biggest game of poker."

With different doomsday scenarios being batted around the meeting rooms, some participants felt the government would blink and do a bailout. "This is going to go down to the last second," one participant said.

With Bank of America backing away from a deal, the enormity of a potential bankruptcy filing by Lehman started settling in. Even understanding Lehman's current trading positions was tough. Lehman's roster of interest-rate swaps (a type of derivative investment) ran about two million strong, said one person familiar with the matter.

Overnight, the outlines of possible deals started to crystallize. The idea that Wall Street firms would fund a "bad bank" full of Lehman's problematic assets was dead. Unlike when Wall Street firms stepped in to bail out hedge fund Long-Term Capital Management a decade ago, today's banks are much weaker. Some were loathe to provide support when a rival like Barclays might still buy Lehman.

By Sunday morning, the U.K.'s Barclays looked like the sole potential buyer. That further minimized the chances of a government bailout: If the Bush administration wouldn't help to fund a Wall Street solution, aiding a foreign buyer was even less likely.

Lehman employees followed their firm through news reports. One manager said he was encouraging his staff to show up Monday and hang tough for a few more days. "It is not like there are a million jobs to go to," he said.

The Chance to Transform

Barclays pushed ahead, eager at the chance to transform itself into a U.S. powerhouse at potentially a fire-sale price. Its advisers thought the U.S. Treasury could be persuaded to support a foreign buyer. By Sunday morning in London, after working around the clock for three days, the British bank -- whose roots date to the late 1600s as a goldsmith banker in London -- thought it had a shot. Documents were drawn up to pitch the deal to investors and journalists.
[Timeline]

During the afternoon on Sunday, two Fed policeman wheeled a large, double-decker cart filled with cakes, cookies, sandwiches, chips and bottles of water into the Fed building.

But soon after, Barclays was threatening to walk as it argued with the Fed and Treasury over seemingly mundane matters, such as whether it would have to hold a shareholders' meeting to ratify any deal. Barclays was still insisting on some kind of federal financing.

By the middle of Sunday afternoon, Barclays was out. Its plan -- to buy Lehman's subsidiaries -- was contingent on government support, which wasn't coming.

At a meeting held at the Fed offices, Mr. Paulson, Mr. Geithner and Securities and Exchange Commission Chairman Christopher Cox addressed a group of about one dozen banking chiefs. Their message was steadfast: They would not put up money to assist in salvaging Lehman. In the meetings with Mr. Paulson were his chief of staff, Jim Wilkinson, and two advisers, Dan Jester and Steve Shafran, both of whom used to work at Goldman Sachs.

Somber Mood

The mood turned somber as it became clear that the group would have to turn its attention to dismantling Lehman in a way that didn't seriously disrupt the financial system. Soon the group began discussing the mechanics of such a plan.

A sense of foreboding descended over the rival bankers. They focused on the fear that drove down shares in Lehman, worried that would now spread to Merrill, another storied name facing losses from mortgage-related holdings, despite the reputation of its wealth-management business.

"I think the government is playing with fire," said a top executive of a big bank.

The worry for Merrill, said people briefed on the conversations, was that as its stock tumbles, its credit rating could change, increasing its cost of borrowing. Faced with rising borrowing costs -- a key expense for giant Wall Street financial firms -- its business might be severely crimped. As well, as concerns mount, its trading partners might stop doing business with it.

Many in the room began to wonder when Merrill would sell itself. "Tonight, or tomorrow?" said one of these people in an interview. In fact, within a few hours, the bankers learned that Merrill was in talks to be acquired by Bank of America.

As word that a Barclays deal was off filtered across Wall Street, traders scrambled to extricate themselves their various financial transactions with Lehman. Traders at many Wall Street firms were told to come to work immediately.

The European Central Bank was also in a state of high alert on Sunday, with employees in divisions from money-market operations to financial stability camped out in the bank's 37-story glass-and-steel tower in Frankfurt, preparing for what Monday might bring. "We are in the hands of the Americans," said one employee.

--Aaron Lucchetti, Serena Ng, Jon Hilsenrath, David Enrich, Joellen Perry and Matthew Karnitschnig contributed to this arti

John Snow · Post by **John Snow** » 15 Sep 2008 23:13

After Lunch I just strolled down Wall Street, the mood with suit tie wallahs and xie looking things is vey sombre and dow(n) cast the swagger and swing of the derrier is less amplified than usual days

Sanjay M · Post by **Sanjay M** » 16 Sep 2008 02:19

Oh well, at least it didn't happen on September 11th.
That allows for a few days recovery between disaster anniversaries.

SwamyG · Post by **SwamyG** » 16 Sep 2008 02:56

American depositors should worry says an Economist. Don't such articles create more panic and change the perceptions of aam admi? If they start to run the banks, gosh it would be financial catastrophe.

paramu · Post by **paramu** » 16 Sep 2008 05:21

Looks like baby-boomers are screwed really bad. Their 401K must have reduced a lot (a lot more if they had thought mortgage backed bonds were a stable investment). Some of them must have lost their bank savings when banks like IndyMac collapsed. For rich, their private investment must have gone down a lot when these financial institutions collapsed.

What is left?
Govt. to screw up social security and medicare.

archan · Post by **archan** » 16 Sep 2008 07:31

Guru log,
I do not understand this finance and bijnis stuff...being a bone headed science wallah. Can someone explain in aam abdul's terms what it means to me? all of my tiny savings of my stay in unkil's land is in an ING savings a/c. Koi khatra hai? should i look into moving part of it elsewhere?

Nayak · Post by **Nayak** » 16 Sep 2008 08:09

http://www.nytimes.com/2008/09/16/busin ... wanted=all

Change Arrives, With a Sense That Wall St.’s Boom Times Are Over

By LOUISE STORY and EDMUND L. ANDREWS
Published: September 15, 2008

The old Wall Street is giving way to a new one.
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As the tectonic shifts within the American financial industry shook the world’s markets on Monday, many experts predicted that events of the last 72 hours heralded a new period of painful change for Wall Street.

The predictions were sobering. Investment banks will be smaller. Their profits will be leaner. Jobs in finance will be scarcer. And the outsize role of Wall Street in the nation’s economy will shrink.

That is the extreme case. But as investors tried to comprehend the abrupt downfall of two of Wall Street’s mightiest firms — Lehman Brothers, which spiraled into bankruptcy, and Merrill Lynch, which rushed into the arms of Bank of America — even optimists said the immediate future would be difficult. Treasury Secretary Henry M. Paulson Jr. and the Federal Reserve are paving the way for the few strong survivors to lead an industry turnaround, while letting the weaker ones fail or be subsumed by larger rivals.

“We’ve gone from a golden era of banking and financial services,” Kenneth D. Lewis, the chief executive of Bank of America, said in a press briefing on Monday, as the bank he heads prepared to buy Merrill Lynch.

“It’s going to be tougher,” Mr. Lewis said. “There are going to be fewer companies, and we are going to have to be better at what we do.”

A debate is raging over what lies ahead for Wall Street now that only two major American investment banks, Goldman Sachs and Morgan Stanley, remain independent. While Wall Street has gone through tough times before only to emerge bigger and stronger, some question whether the industry can rebound quickly after using high levels of leverage, or borrowed money, to binge on risky investments. Those investments have proved to be disastrous. Worldwide, financial companies have reported more than $500 billion in charges and losses stemming from the credit crisis — a figure some experts say could eventually exceed $1 trillion.

Missteps in the mortgage market cost Merrill Lynch, a brokerage that is synonymous with Wall Street to many people on Main Street, more than $45 billion over the last year. Its sale could be a step toward the broader consolidation within the industry.

“We are all in this business conditioned to cycles in crises and we’re also conditioned to markets snapping back relatively quickly because the crisis can be identified and measured,” said Donald B. Marron, chief executive of the private equity firm Lightyear Capital, which is focused on financial services, and former chief of PaineWebber Group. “What’s different now is you can’t do either."

A marriage of Bank of America and Merrill Lynch in a sense would hark back to the past. During the Depression, Congress separated commercial banks, which take deposits and make loans, from investment banks, which underwrite and trade securities. The investment banks were allowed to do business with less oversight, while commercial banks operated with tighter supervision.

But after Congress repealed those Depression-era laws in 1999, commercial banks began muscling in on Wall Street’s turf. As the new competition whittled down profit margins, investment banks used more of their capital to trade securities and also began developing financial derivatives to fuel profits.

Now, executives like John A. Thain, the chief executive of Merrill and a former Goldman executive, say investment banks will need large bases of deposits to shore up their capital for times of trouble. “As we go forward, size is going to matter,” Mr. Thain said Monday.

Mr. Paulson has told Wall Street executives that he isn’t happy about the shrinking number of investment banks, even though his own former firm, Goldman Sachs, is one of the two that are likely to benefit from the industry shakeout.

Mr. Paulson has told executives that greater consolidation on Wall Street could increase risk in the financial system, because the risks will be concentrated in a smaller number of firms. But Treasury officials view risk as the lesser of two evils, if the alternative is to prop up sick firms and increase instability.

Meanwhile, the Federal Reserve is expanding its back-door channel for financing what officials hope is an orderly shakeout on Wall Street.

But the Fed, and ultimately the taxpayers, could get left holding the bag. In allowing investment banks to post collateral that includes stocks, junk bonds and subprime mortgage-backed securities, the Fed said it would be mirroring the rules of two industry-operated overnight lending systems, known as tri-party repo systems, operated by JPMorgan Chase and Bank of New York.

Fed officials have themselves expressed concern that those lending programs needed to reassess their practices because lenders were holding collateral that might prove difficult to sell. In recent years, financial institutions have been making loans based on relatively less liquid assets, Donald Kohn, vice chairman of the Federal Reserve, warned in a speech last May.

What seems to be clear to most everyone on Wall Street is that the era of high-octane trading profits and deals fueled by extreme bank borrowing is over, at least for now. That will clamp down profits across the industry for some time. Just as Americans are finding it harder to borrow to build a new room or to buy a new car, big players on Wall Street are being forced to rein in the amounts they borrow.

Borrowed money kept the lights on at investment banks like Lehman, because such pure investment banks do not have the consumer deposit base.

Wall Street has always used other people’s money to amplify its profit, but in recent years, the use of debt ballooned. The finance industry’s credit market instruments increased more than one and a half times in the last decade, to $15 trillion last year, according to Moody’s Economy.com, and climbed at a pace that was two times faster than the growth of the broad economy.

At its peak last year, investment banks had borrowed $32 on average for every dollar of their assets, according to research from Ladenburg Thalmann. The borrowing helped the industry turn record profits, hire more people and pay out eye-popping bonuses. And it pumped up financial stocks, making them the largest segment of the Standard & Poor’s 500-share index from 2001 until this spring.

“This is a bubble in financial services that was very similar to every other bubble,” said Olivier Sarkozy, the head of financial service investing at the Carlyle Group, a private equity firm.

Already, Wall Street firms are reducing their debt levels, and regulators are expected to create new rules about leverage, liquidity and capital levels. The rules, if strict, could force Goldman and Morgan Stanley to merge with a bank that has customer deposits, a steady source of capital, and thus is buffered from collapse.

Wall Street veterans are divided over the extent of the industry’s problems. Some point out that Wall Street tends to go through a downturn or outright crisis every four or five years, and that it usually recovers quickly. But others argue what is happening now represents the end of a 30-year credit “superbubble” that affected the financial sector just as much as it did consumers.

Whatever the case, the financial sector seems poised for lower paydays across the board. “They can’t borrow, so they’re going to have cut down,” said Peter J. Solomon, chairman of an independent investment bank that bears his name. “As they cut down, they will have to fire people.”

The weekend’s events already increased analysts’ expectations of job losses. Most of Lehman’s 24,000 employees could lose their jobs, and Bank of America, the new owner of Merrill, is known for cost-cutting. Moody’s Economy.com raised its New York area job-loss figures on Monday by 20,000 people, to 65,000 by 2010.

“Massive leveraging created massive financial wealth, and that’s over,” said Orin Kramer, a partner at a hedge fund called Boston Provident and chair of the New Jersey State Investment Council.

As Wall Street firms of all size reduce their borrowing to reduce risk, it comes in some cases at the cost of higher profits. The shift has forced senior executives to rethink business models, and more firms are focusing on their tried and true asset management units. Industry observers say the firms are grappling with the loss of relationship banking that occurred 30 years ago.

“Wall Street for a number of years has been gripped by a quiet crisis, beneath all the financial wizardry and mathematical formulas, beneath all the financial engineering, there has been an increasingly desperate search for new sources of profit,” said Ron Chernow, the author of a book about J. P. Morgan’s empire, called “The House of Morgan.”

Wall Street reinvents itself all the time. Many executives say it will do so again, even as storied firms and others face questions about their futures.

“This industry is a dynamic industry that has evolved in unanticipated ways in the last 30 years and created pools of earnings that previously did not exist," said James P. Gorman, co-president of Morgan Stanley.

Nayak · Post by **Nayak** » 16 Sep 2008 08:10

http://www.nytimes.com/2008/09/16/busin ... wanted=all

Life After Lehman Brothers

By BEN WHITE and MICHAEL M. GRYNBAUM
Published: September 15, 2008

Even in the final hour, Dick Fuld could not let go.
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Treasury Secretary Henry M. Paulson Jr. spoke to reporters at the White House on Monday.
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Treasury Secretary Henry M. Paulson Jr. spoke to reporters at the White House on Monday.

As midnight approached on Sunday and the world anticipated a bankruptcy filing from Lehman Brothers, Mr. Fuld, the bank’s pugnacious chief executive, continued to work the phones, desperate to find a buyer for a venerable franchise he had saved from near death in the past.

After Bank of America and Barclays walked away on Sunday, unwilling to do a deal without government support, Mr. Fuld called anyone he could think of, including Morgan Stanley, that might agree to a last-second transaction, people involved in the matter said.

No savior could be found, and about 12:30 Monday morning, Lehman sent out a press release announcing its intention to seek bankruptcy protection. Lehman’s 25,000 employees learned of the filing through the media, with no direct communication coming from Mr. Fuld or other Lehman executives.

Just a couple of hours later, Lehman workers began arriving at the bank’s London headquarters in Canary Wharf and were summoned to a companywide meeting.

“It’s over,” said Christian Meissner, the co-head of Lehman’s European and Middle Eastern operations, as he explained that bankruptcy administrators were now in charge of the 158-year-old investment bank.

Camera crews and dazed workers milled around Lehman’s London office as four police officers guarded the building’s entrance.

“People are just packing their things and leaving, and many didn’t even come in,” a Lehman employee said. “We were basically told to do our expenses and get our personal belongings.” Hours later, Lehman’s already decimated shares opened for trading in New York and quickly dropped 94 percent, to 21 cents, making a company that only last February had a market value of $46 billion now worth about $145 million.

As the day began in New York, Lehman workers were also forced to dodge reporters and camera crews as they trickled in to work.

In front of the bank’s Midtown headquarters, the artist Geoffrey Raymond set up a caricature painting of Mr. Fuld that employees and passers-by could write on. Mr. Raymond has done similar portraits of other fallen Wall Street titans like James E. Cayne, the former chief executive of Bear Stearns.

Comments on Mr. Fuld’s painting included, “I hope his villa is safe” and “Lehman is well capitalized,” a reference to previous comments about the bank’s cash position.

Lehman’s bankruptcy filing, which came after regulators refused to extend to Lehman the same kind of relaxed borrowing terms they had offered to other investment banks Sunday night, set off a cascade of events around the globe that will play out for months as creditors lined up to recoup losses, stricken employees awaited word on how long they might receive their paychecks and benefits, and Lehman’s counterparties rushed to limit their exposure.

Lehman executives scrambled on Monday to offer incentives to keep employees the bank needs to help wind down trades and sell assets. Those sales began in earnest on Monday as Lehman sought bids for $852 million worth of leveraged loan commitments, according to data from Standard & Poor’s. It is also seeking buyers for its broker-dealer business and its investment management division.

Lehman is already battling to avoid “job abandonment,” in which workers simply stop showing up even though they have not been formally laid off.

Some of that was clearly happening on Monday as some of Lehman’s trading floors were only about two-thirds full. A rush of résumé-writing signaled the melancholy of an institution in its final days.

The recent tears were absent from the scene, replaced by sad-eyed smiles and gallows humor. The bankers’ dress code was mostly out: while a few holdouts kept their ties knotted firmly, most of the traders moved around in jeans, casual shirts, even sneakers. One young employee showed up in a green Lehman T-shirt.

Many employees toyed with their résumés in full view of colleagues. Others perused job-listing Web sites — Wharton’s alumni site was popular — and compared notes about job recruiters.

“What have you heard?” was a common question, mostly met with shrugs and silence. No one seemed to know their specific fate; no staff meetings had been announced, and cries went up whenever media outlets posted a new tidbit about the firm’s liquidation.

Some wondered whether Mr. Fuld, who is now viewed with deep anger by many inside the bank, would address the workers and explain exactly what they could expect.

The problem was, Lehman executives did not know what to tell them and feared how ugly such a meeting could turn.

“Can you imagine what that would be like right now?” said one executive, predicting the venom likely to be spewed at Mr. Fuld.

On the foreign exchange trading floor, on the third floor of Lehman’s glass skyscraper on Seventh Avenue, pairs of traders, their brows furrowed, whispered to one another at the ends of aisles; some perused the bankruptcy papers that their superiors had filed just hours earlier. One trader examined the Wikipedia entry for “conservatorship.”

Many employees barely glanced at their monitors, ignoring the increasingly dire headlines in favor of small talk with glum-looking neighbors.

“I’ll have to figure something out before I run into money problems. What about you?” one man asked a colleague, who sat slumped in his chair, sneakers kicked up on a table. “What will you do then?” one woman asked another. “I guess, go back to school?” came the uncertain reply.

Bottles of alcohol popped up on the equity trading floor around noon. A dark, squat bottle of Don Julio tequila shared desk space with a keyboard; two rows over, a glass container of 80-proof Monte Alban Mezcal appeared only half full. Pizza arrived soon afterward, two dozen boxes of square-cut slices that were quickly devoured.

A yellow Post-it note was taped to one monitor; “Get back to BlackRock” was scrawled on it.

Restrooms were a common site of commiseration. “How you holding up?” one employee asked the man standing next to him. The pained reply: “Not much you can do at this point.”

Some employees peered out at the Seventh Avenue streetscape below, where double-parked news trucks and camera operators jockeyed for position outside the building’s front entrance, the only way in or out after the company shut off several side doors on Monday morning.

Even as employees pondered their fate on Monday, Lehman sought buyers for its broker-dealer business, with Barclays thought to be a leading contender.

Lehman also continued an auction for its investment management division, which includes the money manager Neuberger Berman. Potential buyers include the private equity groups Kohlberg Kravis Roberts, Hellman & Friedman, Bain Capital and Clayton Dubilier & Rice. Lehman was initially hoping to get about $5 billion for a 55 percent stake. It is now trying to sell the entire operation, which is headed by George H. Walker, a cousin of President Bush. The sale was initially expected to take weeks, but Lehman is likely to move as fast as possible to prevent employee defection that could lower the value of the business.

As Lehman began to wind down on Monday, executives at other banks continued to express amazement that Mr. Fuld did not move much faster to seek a buyer, as John A. Thain did in reaching a deal to sell Merrill Lynch to Bank of America over the weekend.

“Fuld could have gotten a deal done a month ago,” said one senior Wall Street executive involved in the weekend’s negotiations. “Merrill saw how quickly things turned on Fuld, and they made sure the same didn’t happen to them.”

Landon Thomas Jr. and Julia Werdigier contributed reporting from London and Jenny Anderson from New York.
More Articles in Business » A version of this article appeared in print on September 16, 2008, on page C1 of the New York edition.

Singha · Post by **Singha** » 16 Sep 2008 08:21

making a company that only last February had a market value of $46 billion now worth about $145 million.

just proves how little real assets these financial engineers have. imo good or bad, atleast
real estate has land banks to boast of. land costs real money even if times are bad

The bankers’ dress code was mostly out: while a few holdouts kept their ties knotted firmly, most of the traders moved around in jeans, casual shirts, even sneakers. One young employee showed up in a green Lehman T-shirt.

Bottles of alcohol popped up on the equity trading floor around noon. A dark, squat bottle of Don Julio tequila shared desk space with a keyboard; two rows over, a glass container of 80-proof Monte Alban Mezcal appeared only half full. Pizza arrived soon afterward, two dozen boxes of square-cut slices that were quickly devoured.

Amazing...this kind of thing would be a instant severance letter even in a less formal
IT co.

Nayak · Post by **Nayak** » 16 Sep 2008 08:29

More bad news -

http://money.cnn.com/2008/09/15/news/co ... 2008091522

AIG: Pressure mounts with downgrades
Nation's largest insurer hit by credit raters as it tries to raise cash. Fed asks Goldman and JPMorgan Chase to raise $70 billion for firm. Shares end down 61%.
EMAIL | PRINT | SHARE | RSS

By Tami Luhby, CNNMoney.com senior writer
Last Updated: September 15, 2008: 10:49 PM EDT

NEW YORK (CNNMoney.com) -- The pressure on American International Group reached fevered pitch on Monday night as the troubled insurer was hit by a series of credit rating downgrades.

The cuts could prove deadly to AIG, the nation's largest insurance company, which is scrambling to raise much-needed capital.

Late Monday night, Moody's Investors Service and Standard & Poor's Ratings Services each said they had lowered their ratings.

A few hours earlier, Fitch Rating had also downgraded AIG, saying the company's ability to raise cash is "extremely limited" because of its plummeting stock price, widening yields on its debt, and difficult capital market conditions.

The downgrades will make it more expensive for AIG to issue debt and harder for it to regain the confidence of investors.

Fitch said AIG could be required to post $10.5 billion of additional collateral if it was downgraded one notch by one of the other major rating agencies and $13.3 billion of collateral if downgraded by both, Fitch said in a statement, citing AIG's July 31 estimates.

The grim assessments came after a day in which state and federal officials raced to help the insurer gain access to much needed cash.

The company has lost more than $18 billion in the past nine months.

The credit downgrades could doom its business.

AIG did not immediately reply to a request for comment on the late-night downgrades.

New York State gave AIG, the nation's largest insurer, the power to transfer $20 billion in assets from its subsidiaries to use as collateral for daily operations, said Gov. David Paterson. In exchange, the parent company will give the subsidiaries less-liquid assets.

"It is simply giving AIG (AIG, Fortune 500) in effect the ability to provide a bridge loan to itself," said Paterson, stressing the company is financially sound and that no taxpayer dollars are involved.

Meanwhile, the Federal Reserve asked Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) to make $70 billion to $75 billion in loans available to AIG, the Wall Street Journal reported.

However, any discussions are very preliminary, a source close to the matter told CNNMoney.com.

Also, the Fed has hired Morgan Stanley (MS, Fortune 500) to examine alternatives for AIG and determine whether the government should help the insurer, a source said.

JPMorgan and the Fed declined to comment, while Goldman and Morgan Stanley did not immediately return requests for comment.
Shares plummet 61%

Wall Street had expected AIG to issue a restructuring plan that would address its capital crunch and boost investor confidence. But the company, a component of the benchmark Dow Jones industrial average, remained silent.

Investors punished the stock, sending it down 61% to close at $4.76 Monday. The company, which has been rocked by the subprime crisis, has seen its stock price fall more than 91% so far this year.

The New York Times reported late Sunday night that the company is seeking a $40 billion bridge loan from the Federal Reserve. A source close to the firm said that if AIG does not raise cash and is downgraded by ratings agencies, it may have only 48 to 72 hours to survive.

The restructuring plan was expected to include the sale of assets, including its annuities unit and its domestic auto insurance business, the Journal reported Sunday. It may also look to dispose of its aircraft-leasing arm, International Lease Finance Corp., which has a fleet of more than 900 airplanes valued at more than $50 billion.

AIG spokesman Nicholas Ashooh told CNNMoney.com on Monday that the company is "still evaluating alternatives."

The ailing company, which had planned to announce a turnaround strategy on Sept. 25, is being forced to accelerate the announcement after investors fled the stock last week.

The company is likely to sell its personal insurance and annuities businesses and the aircraft leasing unit, wrote Joshua Shanker, a Citigroup analyst, who believes the company might have to mark down another $30 billion in assets.

"We believe AIG will survive, but we have little indication of how many business lines will ultimately need to be sold and how dilutive to shareholders future capital raising efforts will be," Shanker wrote.

AIG, which already raised $20 billion in fresh capital earlier this year, has been pummeled by three quarters of huge losses and writedowns.

Its troubles stem from its sales of credit default swaps - insurance-like contracts that guarantee against a company defaulting on its debt - and from its subprime mortgage-backed securities holdings.

AIG has written down the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year, and has had to write down the value of its mortgage-backed securities as the housing market soured.

The insurer could be forced to immediately come up with $18 billion to support its credit swap business if its ratings fall by as little as one notch, wrote John Hall, an analyst at Wachovia.

But the company has many attractive businesses it could sell to raise capital, he said.

"We think investors need to divorce themselves of the notion that the AIG which emerges from these problems will resemble the insurance titan of the past," Hall wrote.

This year's results have also included $12.2 billion in pretax writedowns, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.

What happens to AIG now depends on its ability to sell assets and to unleash the assets in its subsidiaries, Fitch said.

AIG has struggled all year as the Wall Street credit crunch took its toll.

In June, the company tossed out its chief executive, Martin Sullivan, who had been charged with turning the company around after directors removed longtime CEO Hank Greenberg in 2005. Greenberg was the target of one of then-Attorney General Eliot Spitzer's investigations.

The board named AIG chairman Robert Willumstad, who joined AIG in 2006 after serving as president and chief operating officer of Citigroup (C, Fortune 500), to replace Sullivan as chief executive officer.

Though AIG's problems have been apparent for months, it is coming under fire now because of Wall Street's increasing skittishness over Lehman Brothers, also a big player in credit default swaps, said Chip MacDonald, partner in the capital markets group at Jones Day, a law firm.

"It's the lack of transparency and clarity about their business," MacDonald said. "In today's environment, everyone is assuming the worst so they are forcing AIG to come out with a plan sooner rather than later."

However, MacDonald noted, AIG is not in as vulnerable a position as other financial institutions because of its core insurance business. Customers cannot simply withdraw their deposits, as they can at a bank.

"It's a little harder to make a run on an insurance company," MacDonald said. To top of page
First Published: September 15, 2008: 9:48 AM EDT

Singha · Post by **Singha** » 16 Sep 2008 08:44

wouldnt hedge funds who took short positions on these 'giants' (now dwarfs) be making
a small fortune on these steep declines in stock prices?

SwamyG · Post by **SwamyG** » 16 Sep 2008 09:35

archan wrote:Guru log,
I do not understand this finance and bijnis stuff...being a bone headed science wallah. Can someone explain in aam abdul's terms what it means to me? all of my tiny savings of my stay in unkil's land is in an ING savings a/c. Koi khatra hai? should i look into moving part of it elsewhere?

If you are planning to return to desh, then consider taking a small portion of money from savings and start your investments in India; based on your priorities and schedule. It is not bad to keep money in both the currencies. If you have more than 100K sitting in ING Savings, then split the amount and ensure you have less 100K in a savings account. FDIC insurance is for 100K onlee.

Singha ji: I heard that the uptick rules are going to be reinstated as early as this week.

archan · Post by **archan** » 16 Sep 2008 09:42

Shukriya SwamyG.
Option of returning to desh is open as of now...but they don't hire too many fresh phds or blokes with 2-3 yr of post doctoral (academic) experience. Its tough, especially if the spouse also has similar qualification and the intention is to live together and not travel 2 hrs to work every day, that too in desh.
100K?

So I see the problem so far is only for the rich folks.

shaardula · Post by **shaardula** » 16 Sep 2008 10:40

swami
but does the FDIC thingie cover these type of meltdowns too?

similar state as the archans in more ways than one. sleepless about the 3+1 cents that we have managed to save. i was wondering if we have to withdraw all our savings and stuff it under the pillow.

how about india? banks there safe?