Brace yourself!

In case you missed it, the financial system in the U.S. is near collapse. This weekend was unbelievable. Lehman Brothers filed for bankruptcy. The world’s largest insurer AIG is looking for the Fed to help it avoid collapse and Merrill Lynch was forced to close a deal with Bank of America to save it’s own hide.

Just another day at the office? Hardly. Dow Futures are down 350 points and the FTSE in London is already off nearly 5%. So get ready, this is going to be a very, very difficult day in the markets. Here’s the news of importance:

It all started on Monday last week. In the aftermath of the Fannie and Freddie bailout, market nerves were not calmed. Washington Mutual fired its CEO and announced it had an ominous agreement with the OTS (Office of Thrift Supervision).

Meanwhile Lehman Brothers released an early third quarter earnings report that was widely panned by analysts.

Then, it became obvious that some major losses in the Credit Default Swaps (CDS) market were in the offing due to the takeover of the GSE’s by the government. That was going to hit companies like AIG, which had a huge exposure to the CDS market.

The result was a meltdown in shares of WaMu, Lehman and AIG on Friday.

The Fed called an emergency meeting to deal with Lehman. No agreement was found and Lehman declared bankruptcy early this morning. They have assets of $500 billion

AIG dealt with three buyout shops to shore up its capital base but rejected an offer and went hat in hand to the Fed instead. They have assets of $1 trillion.

WaMu has not seemed to do anything. But rumors are swirling and they will come under great pressure this morning. Oh, and they have assets of $300 billion.

Merrill Lynch was the coup of the day. They struck a deal with Bank of America at a significant premium to both book value and the prevailing market price of their shares. Given what we are likely to see today, Merrill Lynch and its shareholders have to be very very happy. They can say, “thank you very much, John Thain.” Oh, and they have a assets of $1 trillion.

So, we’re talking about combined assets of $2.8 trillion here.

So, the day begins with one company gone (Lehman). Two companies under heavy selling pressure (AIG and WaMu) and one company loving life (Merrill Lynch). Who else should we watch?

All the regional financials, the home builders, and the Commercial Real Estate REITs are all going to be under heavy selling pressure.

Brace yourself!

  1. dearieme says

    A few bankruptcies here, a few bankruptcies there, and soon you’re talking real money.

  2. Edward Harrison says

    This will be the biggest day trading since after 9/11. This is a huge day for the market. We have oil down to $96, gold up 2%, treasuries up, stock futures down 360 points, the FTSE off 5%. I mean, the markets are going nuts.

    That means some heavy selling pressure for the regionals and WaMu and AIG. We could well se another bankruptcy this week.

    Yes, we are definitely talking real money now.

    The question is whether the government’s no-bailout of Lehman will be the thing that caused a fast liquidation and return to normal prices or a collapse and depression. I see the Treasury decision to NOT support Lehman as the pivotal event in the chain of events.

  3. Sobers says

    The Banks mentioned may have a lot of so called assets, but how much are they really worth, rather than the inflated valuations based on wishful thinking? And how many liabilities? It isn’t a positive number I suspect if you compare those two figures.

  4. Edward Harrison says

    At this point, it’s hard to say what those assets are worth because assets are deflating and may go below intrinsic value as the mood turns towards bearishness.

    As I have been saying, inflation is not the concern, it is deflation that should worry us:

    I do think that Lehman and AIG probably have the worst balance sheets of the lot because of the CDS and CRE exposure. Merrill is probably a decent buy, but not necessarily at $29 a share.

    I had thought WaMu would survive a while longer but they are now going to fail in all likelihood. Too many Alt-A assets to be marked down.

    The Fed needs to force consolidation so that we get as much from that as we do from bankruptcy and liquidation. The Merrill deal is the best case scenario. The Lehman situation is the worst from an industry-wide perspective.

    Thoughts, concerns, wishes?

  5. MAB says


    Bond holders are going to take haircuts here. No if ands or buts. That should stress test the derivatives market.

    I fully expect many swaps are not worth the paper they are printed on.

    De-leveraging is accelerating. I welcome the end of the foolishness. Watch the currency markets too. Global currency warfare will make re-flation much more difficult.

    On a brighter note, I’m bullish on “country club” prison space!

  6. dearieme says

    “country club” prison space; bah! Are you bullish on rope and lampposts?

  7. Edward Harrison says

    LEH’s top unsecured creditorsDrumroll, please.

    RTRS – Citigroup, Bank of New York Mellon, Azora Bank, Mizuho Financial Group, among Lehman’s top unsecured creditors.
    RTRS – Citigroup, Bank of New York Mellon hold about $138bln of Lehman’s bond debt as indenture trustees, under LBHI senior notes.

    This comes from FT Alphaville:

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