The world of financial services in not looking terribly stable in the wake of the Frannie nationalization. In fact, things are as jumbled as they have ever been. The latest news has AIG down 30% and both WaMu and Lehman brothers on the auction block.
Given the pace of the news cycle these past few days, I would expect to see some big news on the merger front over the weekend. And now that markets have closed, we can look to see if the FDIC is going to pull another Friday Night Special.
Welcome to the wonderful world of American Finance.
Let’s start with AIG. It closed down 30% at a 13-year low in heavy trading. AIG executive just recently paid an enormous $115 million fine for prior improprieties. The word now is that AIG had heavy exposure to Frannie and other mortgage-related instruments and will have billions in writedowns, putting their credit rating and capital adequacy at risk.
The stock has fallen more than 70 percent since it earlier this year warned investors that it could be hit by large, unrealized losses on credit default swaps it wrote to guarantee securities linked to subprime mortgages.
Since, the insurer has taken writedowns on these investments totaling about $25 billion, leaving it in the red by a cumulative $18 billion over the past three quarters.
“We attribute this (the share fall) to concerns about AIG’s ability to shed its troubled mortgage-related assets and we expect the shares to remain volatile as investors await news from the company,” said Standard & Poor’s analyst Catherine Seifert, in a research note on Friday.
Washington Mutual’s stock is selling for a song at under $3 a share after a Moody’s downgrade and as worries mount about the companies ability to remain solvent. The latest in WaMu is that JP Morgan is interested in taking over the company.
JPMorgan Chase & Co is in advanced discussions to acquire Washington Mutual Inc, a source familiar with the discussions said on Friday.
“They are in advanced talks,” the source told Reuters.
The source said the sensitive talks had been going on for some time and JPMorgan had conducted a lot of due diligence into Washington Mutual.
Thursday’s downgrade of Washington Mutual by Moody’s Investors Service helped advance the discussions between the two companies, the source said.
Given the advanced nature of the talks and the heavy due diligence already done, I imagine this is a deal that can get done.
And then there’s Lehman Brothers — now trading below $4 a share. Lehman is the financial services company subject to the most rumors over the past week. Goldman, Deutsche Bank, Barclays, HSBC and a bunch of other companies have all been bandied about as potential suitors. Now, it seems that a consortium that includes JC Flowers,the China Investment Company and Bank of America is going to be the main suitor (see article from the FT).
All in all, it was a pretty crazy week in finance. And we should expect more of the same craziness over the weekend and into next week. It was often said during the tech crash in 2001 and 2002 that stocks that drop into the single digits never recover. I reckon the same is true here for Lehman and WaMu. These two firms would be well advised to close a deal sooner rather than later. As for AIG, the carnage will continue for some time. It too may fall into the single digits, destined never to recover.