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>Lehman Brothers Is Gone

The Financial Fish Weren’t Biting Sunday
September 15, 2008
New York–We said it yesterday–no one should chase bad money with good.
That seemed to be the consensus of the financial markets over the weekend, as all the possible suitors for Lehman Brothers’ $60 billion in tangled and messy real estate holdings dropped by the wayside, leaving the large 158-year-old international investment bank filing for a Chpater 11 bankruptcy.

Two thousand New York employees cleaned out their desks and were gone. How do I interpret it? For America as a whole it’s a good and logical end to only part of a very sad story, but it had to happen. Observers believe there will be 110 banks fail during the next nine months. Will yours be one of them?

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. There is talk on the street that Wachovia and Washington Mutual are in deep trouble and now, understandably, they can’t attract new accounts from a very worried public.

The problem with these firms isn’t necessarily the firms themselves, but the loose supervision of banks by the Fed and other regulators. Some of them got into the practice of running what resemble kiting operations and the regulators looked the other way. Kiting is where you take from Peter to pay Paul and that’s illegal.

Reserves are the problem. How much money should a bank have on hand to make a loan? That’s decided by the regulators, so if you want to lay some blame on someone look at the regulators and Congress for failing to insist on tighter regs.

Maybe we, the people, should shake up Congress. Fire all the old ones and insist on new blood in Washington.That’s basically what I’m going to do this fall–vote out the incumbents who have been there way too long. Look at Joe Biden with his 36 years, Ted Kennedy and Orin Hatch with a like number of years. Even John McCain has been there 24 years and now he wants to be president.

From my vantage point, there is only one candidate who fits the “new” description and her name is Sarah Palin who is the vice presidential candidate on the John McCain ticket. She is currently attracting a lot of American attention and as a result has supercharged McCain’s chances.

Back to the banks: Because they could, banks got into the habit of using money from current accounts, especially new ones, to fund questionable loans. Using this method of banking, someday when these banks couldn’t get new business the domino effect took place. That “someday” is now.

The only advice I could offer the average American is to make sure your bank is Federally insured, and that you have no more than $100,000 in each account–the amount the FDIC promises to repay if the bank goes under.

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.

Bank of America Corp. is buying Merrill Lynch & Co. Inc. in an $50 billion all-stock transaction.

The world’s biggest insurer, American International Group, is also in trouble. It is restructuring, meaning it basically can’t operate as it has in the past and must lay down greater reserves for a rainy day. 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. It 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.

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.” This consortium has put together $70 billion to lend to troubled banks and to help prop up the system.

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. Somehow, folks, this action by the Fed doesn’t resemble tightening at all. It’s more of the same, a give-away program right out of the taxpayers’ pockets.

Perhaps they feel we need to smooze and massage these banks so they don’t fail, but to me this is merely extending their day of reckoning and has nothing to do with solving anything. Congress’ oversight committee should immediately call for an investigation and get highly involved. Ben Bernanke is no Alan Greenspan and neither of them knows what they are doing.

Federal Reserve Chairman 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.” This is his way of saying he doesn’t have the answers.

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. But this liberal Democrat forgets that it’s Congress that oversees financial institutions as well, not just the president. Democrats should get a lot of negative press over this one as well.

“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.” He’s right and the Democrat-controlled Congress that likes to declare vacations mid-term had better start locking the doors and burning the midnight oil on this one.

Hurrah for the U.S. Treasury!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.

A news report said 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.

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.

Though even Bank of America isn’t well, 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.

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.

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 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 and could 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.