News round-up: 20 Aug 2008 – financial institutions special edition

From where I sit, today was a complete disaster for U.S. finance. Fannie and Freddie imploded — their shares quickly approach zero. Lehman admitted it is scared witless and has tried to line up foreign governments to bail it out. States are still suing major investment banks for the Auction rate securities scandal. And Wachovia announced its dumping shed loads of residential construction loans for 50 cents on the dollar.

But the market was up 69 points. Whew, I’m glad everything is A-OK in American finance.

Look, there is definitely a major bankruptcy in the offing here, and you can take your guess as to who its going to be — there are many candidates.

Today’s rally notwithstanding, investors are panicked because of uncertainty. Will the U.S. government make GSE debt holders whole or not? Is the crisis near over or not? Who is going to hit the wall first? These are all legitimate questions. Moreover, the writedowns keep coming and the capital raising window has closed. Strangely, I see the Wachovia announcement as the most important one. Troubles at Lehman, Freddie and Fannie are a given, but Wachovia’s dealings in residential construction loans are a harbinger of an ill wind in that class of credit.

In any event, most financials actually closed up except the two GSEs. Go figure. As my 10th grade teacher Mr. Sorkin used to say: “May we continue to surf this rising wave of mediocrity.”

If you haven’t been keeping up with the news, here’s what you missed in American Finance.

Wachovia Unloads Troubled Loans – WSJ (keep your eye peeled on construction loans. Much pain is about to be felt).

Lehman’s secret talks to sell 50% stake stall – FT
Possible Lehman asset management sale portends pain – Reuters
Analysts expect further $3bn Lehman Brothers writedown – Times Online

The GSEs
Who’s Afraid of Fannie and Freddie? – Deal Book (Legg Mason is taking it on the chin)
Fannie, Freddie Hammered Again; Will it Matter? – Housing Wire

FDIC Releases Details on IndyMac Loan Mods; Questions Remain – Housing Wire
California mulls probing senator over IndyMac crash – Reuters

Other stories
New York AG intensifies auction-rate debt probe – Reuters
Merrill CEO may meet Korean sovereign fund chief; Lehman nearly got $5 bln in funds from Korea – MarketWatch

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