Pan-African News Wire editor, Abayomi Azikiwe, with Sandra Hines of the Moratorium Now Coalition to Stop Foreclosures and Evictions, outside Bank of America on July 22, 2008 in downtown Detroit. (Photo: Alan Pollock).
Originally uploaded by Pan-African News Wire File Photos
By Francesco Guerrera in London, Krishna Guha in Washington and Greg Farrell in New York
September 15 2008 11:46
Wall Street was in turmoil on Monday after Lehman Brothers filed for bankruptcy protection and Merrill Lynch agreed a $50bn takeover by Bank of America.
Confidence in financial institutions around the world was shaken as central banks introduced a series of emergency measures to ease the crisis in the global financial system.
Equity markets fell heavily in Europe and debt spreads widened as banks, investment managers and insurance companies came under heavy selling pressure.
BofA’s bold bid for Merrill came as the world’s top banks abandoned efforts to save Lehman and set out to build a firewall against further financial chaos with a $70bn liquidity pool to support other vulnerable institutions.
The moves capped a weekend of high drama that could lead to one of the most radical reshapings in Wall Street history and set the scene for a volatile day on global capital markets.
The Federal Reserve said it was making it easier for financial institutions to access Fed liquidity by easing terms on its borrowing facilities and accepting a much wider range of assets as collateral. The Fed meets to decide on interest rates on Tuesday.
It widened the set of assets eligible as collateral for loans of Treasuries to include all investment grade paper, and raised the size of these Treasury loans to $200bn.
The Fed also suspended rules that prohibit banks from using deposits to fund their investment banking subsidiaries.
The Fed’s intervention was followed on Monday by the European Central Bank and the Bank of England.
The ECB allotted €30bn ($42.04bn) in one-day liquidity at a marginal rate of 4.30 per cent and an average rate of 4.39 per cent. Altogether 51 banks bid €90.27bn.
Meanwhile, the Bank of England said it would offer extra reserves to help stabilise conditions in sterling money markets. The Bank said it would auction £5bn through an exceptional fine tuning open market operation.
The weekend’s dramatic events undermined confidence in financial stocks across Europe. Banks and insurance companies were the heaviest fallers on Monday while gold prices jumped higher as investors sought the safety of the precious metal.
The Markit iTraxx Crossover index, which measures the cost of insuring European junk-rated credit derivatives, widened 17 per cent on Monday to 640 basis points as the likelihood of defaults was perceived to be higher.
Monday’s market reaction will be closely watched by regulators and banking executives to gauge investor sentiment towards the credit crunch that has wreaked havoc on the financial sector for more than a year.
BofA’s rapid U-turn, which saw it abandon talks to buy Lehman and move to Merrill in the space of a few hours, will throw the spotlight on Morgan Stanley and Goldman Sachs. The two could soon become the only independent investment banks in the US.
Merrill’s board voted on Sunday night to approve BofA’s takeover all-stock bid, which was pitched at $29 a share. That is a premium of 70 per cent on Friday’s closing price of $17.05. Merrill’s shares have fallen nearly 70 per cent this year.
The sudden and dramatic turn of events came at the end of a weekend which saw top Wall Street executives locked in increasingly desperate talks over the future of Lehman and the state of the financial sector with Hank Paulson, US Treasury secretary, and Tim Geithner, president of the New York Federal Reserve.
However, bankers familiar with the talks said a rescue plan for Lehman had been seriously undermined after suitors Barclays of the UK and BofA, had walked away. Barclays pulled out in the afternoon after the US government refused to provide a guarantee to enable Lehman to continue trading until a deal had been completed.
Lehman, a 158-year-old firm that is one of the biggest names on Wall Street, said during the New York night that it would file for bankruptcy.
The filing is likely to cause thousands of job losses among Lehman’s 25,000-strong staff. On Sunday night a number of employees were seen leaving Lehman’s Manhattan headquarters with boxes stacked with their possessions, stationery and even some paintings.
In a separate move, regulators had prepared the ground for a Lehman bankruptcy by asking its derivatives counterparties to settle trades between themselves in a special trading session in the afternoon.
Merrill’s decision to enter talks with BofA, which has long coveted its rival’s large retail brokerage business, came after it became apparent that Lehman’s woes could spread to the rest of the investment banking sector in the coming weeks.
John Thain, Merrill's chief executive, who was attending the Lehman crisis talks, approached some rivals asking them whether they would be interested in bidding for his firm, according to people close to the situation.
Morgan Stanley, BofA and some foreign banks were contacted but many of them declined to pursue the talks because they had insufficient time to pore over Merrill’s complex trading books, they added. Merrill, Morgan Stanley and BofA declined to comment.
A takeover of Merrill would be a victory for Ken Lewis, BofA’s chief executive, who has long wanted to combine the lender’s commercial banking operations with Merrill’s army of retail brokers.
However, a deal could saddle BofA with more troubled assets. The bank bought the stricken mortgage-lender Countrywide and a purchase of Merrill would force it to clean up the bank’s trading books, which have already cost Merrill some $52bn in writedowns and credit losses.
Mr Thain, the former Goldman Sachs executive and former head of the New York Stock Exchange who joined Merrill last year after the departure of Stan O’Neal, is almost certain to leave the firm if the BofA takeover goes through.
He is a fervent supporter of John McCain, the Republican presidential candidate, and some experts expect him to seek a political career.
Copyright The Financial Times Limited 2008
Lehman’s outstanding debts total $600bn
By Stacy-Marie Ishmael and agencies
September 15 2008 12:26
Lehman Brothers Holdings owes more than $600bn to creditors scattered across the US, Europe and Asia, according to the investment bank’s Chapter 11 petition.
The largest unsecured creditors include Citigroup and Bank of New York Mellon, who have around $138bn of exposure to Lehman’s bond debt as indenture trustees.
Indenture trustees act as agents on behalf of bondholders, and while they help enforce the rights of creditors, they are not necessarily creditors themselves.
Bank of New York Mellon has an additional $17bn in exposure to both subordinated and junior subordinated debt, again as an indenture trustee.
Apart from the trustees, Japan’s Aozora Bank, which is part owned by Cerberus, is owed $463m.
But Aozora said its actual exposure to Lehman would be ”significantly lower” due to collateral and hedging, Reuters reported.
”Whatever may appear in a filing by Lehman in terms of gross exposure will be very different from what we have net of our hedges and net of our collateral,” Richard Layton, Aozora’s chief financial officer, told Reuters in a telephone interview on Monday.
Other Japanese banks cited in the filing include Mizuho Corporate Bank, with a $382m exposure in the form of a bank loan, Shinsei Bank with $231m and UFJ Bank with $185m. Japanese markets were closed on Monday for a holiday.
The top European creditor is BNP Paribas, which according to the filing extended a $250m bank loan to the investment bank. Shares in the French bank fell 7.2 per cent to €59.88 in midday trade in Paris.
Other European banks named in the filing include Svenska Handelsbanken, KBC, Lloyds TSB, Standard Chartered and DnB.
Copyright The Financial Times Limited 2008
BofA to buy Merrill Lynch for $50bn
By Francesco Guerrera in London
September 15 2008 08:15
Merrill Lynch on Monday rushed into an agreement to be acquired by Bank of America for $50bn in a sign that the crisis gripping Lehman Brothers is forcing rival investment banks to seek partners to avoid suffering the same fate.
In a dramatic U-turn on Sunday, BofA entered discussions with Merrill after pulling out of the bidding for Lehman, partly prompted by the US government’s refusal to supply financial help for a Lehman takeover.
BofA said in a statement it would exchange 0.8595 shares of its common stock for each Merrill common share in a $50bn all-stock transaction. Based on Friday’s closing prices, the offer is the equivalent of $29 per share and 1.8 times Merrill’s stated tangible book value.
BofA’s chief executive Ken Lewis has long coveted Merrill in the belief that a merger the lender’s commercial banking operations and Merrill’s retail brokerage arm would be a formidable combination in the US financial services industry.
However, a deal could saddle BofA with more troubled assets. The bank bought the stricken mortgage-lender Countrywide and a purchase of Merrill would force it to clean up the bank’s trading books, which have already cost Merrill some $52bn in writedowns and credit losses.
Bankers said that BofA’s move could flush out other bidders for Merrill and added that the decision by John Thain, Merrill’s chief executive, to put the firm up for sale could put pressure on other investment banks such as Morgan Stanley and Goldman Sachs to also hit the takeover trail.
Mr Thain, who was attending the Lehman crisis talks, approached some rivals asking them whether they would be interested in bidding for his firm, according to people close to the situation.
Morgan Stanley, BofA and some foreign banks were contacted but many of them declined to pursue the talks because they had insufficient time to pore over Merrill’s complex trading books, they added.
Mr Thain, the former Goldman Sachs executive and former head of the New York Stock Exchange who joined Merrill last year after the departure of Stan O’Neal, is almost certain to leave the firm if the BofA takeover goes through.
He is a fervent supporter of John McCain, the Republican presidential candidate, and some experts expect him to seek a political career.
“Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders,” Mr Lewis said. “Together, our companies are more valuable because of the synergies in our businesses.”
Mr Thain said: “Merrill is a great global franchise and I look forward to working with Ken Lewis and our senior management teams to create what will be the leading financial institution in the world with the combination of these two firms.”
BofA expected to achieve $7bn in pre-tax savings by 2012 and for the acquisition to be earnings accretive by 2010.
Copyright The Financial Times Limited 2008
World’s biggest banks join forces
By Krishna Guha in Washington
September 15 2008 04:43
Ten of the world’s biggest banks have agreed to pool $70bn in a giant liquidity fund as part of a dramatic series of private and public sector initiatives intended to mitigate the impact of the expected failure of Lehman Brothers, the investment bank.
The moves came as Merrill Lynch, another investment bank, prepared to announce that it was being taken over by Bank of America.
The Federal Reserve said it was dramatically easing its lending terms and would allow investment banks to pledge equities and loans in return for cash.
Both the Fed move and the new private sector liquidity fund are specifically aimed at countering a feared disruption in the triparty repo market, a market in which investment banks secure short-term funding, much of it from money market mutual funds.
The Securities and Exchange Commission issued a statement saying that it would ensure an orderly winding down of Lehman in conjunction with its international counterparts.
Treasury Secretary Hank Paulson said the co-ordinated moves, announced late on Sunday night, would “be critical to facilitating liquid, smooth functioning markets and addressing potential concerns in the credit markets” and praised the financial sector for joining forces with the US authorities to contain market risks.
However, the US authorities believe that even these aggressive moves will only mitigate and not prevent a period of turbulence in the markets that could last for a number of days.
The 10 banks – Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase, Merrilly Lynch, Morgan Stanley and UBS – all pledged $70bn towards the liquidity fund, which is in effect a self-insurance scheme.
Each of them will be able to borrow up to one third of the total fund – about $23bn – as needed against a very wide range of collateral, including assets such as real estate that still cannot be pledged in return for loans from the Fed.
In a joint statement, the banks said the fund was intended to support liquidity and reduce volatility in an “extraordinary market environment.” They said they would also work towards an “orderly resolution” of Lehman derivatives exposure.
Ben Bernanke, the Fed chairman, said the Fed was taking a series of steps to “mitigate the potential risks and disruptions to markets” arising from the crisis at Lehman.
The Federal Reserve announced a dramatic easing of the terms under which it lends to primary dealers – most of whom are investment banks – under the Primary Dealer Credit Facility. Dealers will now be able to pledge a wide range of assets including equities, whole loans and sub-investment grade debt.
The Fed – which meets on Tuesday to set interest rates – also announced that it was broadening the range of assets that can be pledged in exchange for loans of government bonds under its Treasury Securities Lending Facility to include all investment-grade debt, increasing the size of this scheme from $175bn to $200bn and increasing the frequency of its auctions.
The Fed added that it was suspending a rule that normally prohibits deposit-taking banks from using deposits to help finance their investment banking subsidiaries to allow them to fund activities normally funded in the repo market on a temporary basis until January 30 2009.
The Federal Reserve declined to comment on reports that AIG, the troubled insurance company, was seeking the ability to borrow from it as well.
The Fed has not at this point acceded to any request from AIG. If there was to be funding for AIG it would probably take the form of an emergency loan rather than a new facility for all insurance companies.
The new Fed terms are much easier than existing ones. The PDCF is now an almost perfect substitute for the triparty repo market – the market in which investment banks traditionally meet much of their short-term funding needs.
Until now an investment bank that faced a sudden cut-off in funding in the repo market would have found it difficult to replace this with Fed cash using the same assets as collateral.
This should allow Lehman to migrate from funding its operations in the repo market to funding its remaining activities with the Fed in a gradual and orderly fashion as its activities are unwound.
However, other investment banks remain extremely reluctant to borrow from this facility, fearing it would be seen as a sign of desperation.
This “stigma” problem with the PDCF explains why the Fed had to expand and ease the terms on its Treasuries lending facility as well – as the latter is widely used by all investment banks.
The US authorities have put intense pressure on a number of weak financial institutions to strengthen their financial positions, if necessary by takeover by stronger entities.
Copyright The Financial Times Limited 2008
AIG seeks to shore up balance sheet
By Julie MacIntosh and Greg Farrell in New York and Francesco Guerrera and Gillian Tett in London
September 15 2008 04:18
American International Group, the US insurer, is seeking to raise $10bn-$20bn (£5.6bn-£11.1bn) in equity from buy-out investors that could include Kohlberg Kravis Roberts, Texas Pacific Group and JC Flowers, as part of an emergency plan to shore up its balance sheet.
AIG has also petitioned to be allowed to borrow from the Federal Reserve’s discount window, which it argues will help stabilise its business and the fragile financial markets, sources close to the company said. Such access would be unprecedented for an insurer.
The insurance giant is working to restructure its debt and sell up to $20bn in assets, according to people close to the company. Any funds it is able to raise, either through private equity investments or asset sales, would come on top of $20bn-plus it has raised this year.
Talks between AIG, the private equity investors, and New York state insurance regulators stretched late into the night on Sunday and were expected to continue, as the company works to secure a plan within days.
AIG, which has suffered $18.5bn in losses in the past three quarters, is considering selling businesses including its Transatlantic Holdings reinsurance group, its consumer finance group, its financial products division and a leasing unit.
The company’s significant exposure to the real estate and credit default swaps market has prompted ratings agencies to threaten to cut its credit ratings, a move that could require it to amass billions of dollars in extra collateral.
The three buy-out firms had been asked to work together on an investment, but JC Flowers, led by financial services investor Chris Flowers, broke away on its own on Sunday to consider investing alone or with a new partner. The firms have been combing over AIG’s books since Saturday morning, and advisers cautioned that talks with the private equity firms, which have been touch-and-go, could fall apart.
If AIG is not able to secure private equity capital, it may attempt to round up a consortium of banks to provide it with debt, which it would back with its own collateral. The company has a range of valuable insurance assets and other operations, but people involved in the talks still felt any agreement by Wall Street banks to aid AIG could require prodding by government officials.
AIG’s share price dropped more than 30 per cent on Friday amid concerns over its involvement in the business of writing insurance against defaults on mortgage bonds.
The cost of buying protection against a default on AIG’s debt, using credit default swaps, leapt to record levels that day and its bonds traded at distressed levels. To protect $10m of AIG bonds for five years, an investor would have had to pay $1.25m upfront plus $500,000 per year, according to Phoenix, a US broker.
The insurer, which is being advised by Citigroup, JPMorgan Chase and Blackstone, would prefer to secure nearly $20bn in capital from private equity investors to provide itself with a thicker cushion. It was unclear as to whether Blackstone, in addition to advising, might also invest money, according to a person involved in the talks.
The erosion of AIG’s balance sheet and growing concern among its investors shows that problems associated with mortgage securities backed by subprime debt are not confined to the investment banks that manufactured and sold these products.
AIG plays a central role in the credit default swaps market and in structured finance. It has not been linked as publicly to the credit default swaps market in recent years as investment banks have been, however, because many of the insurer’s activities have been concentrated in more opaque and complex areas.
The insurer was one of the first institutions to start buying tranches of so-called “supersenior” collateralised debt obligations (CDOs) from banks almost a decade ago.
It struck some of its first deals with banks such as JPMorgan, and has since positioned itself as a key source of demand for the instruments.
Supersenior components of CDOs are the pieces of debt packages that carry the highest credit ratings, and are supposed to be the least exposed to potential default.
The value of those chunks of debt has dropped dramatically in the past few months, however, due to rising defaults on mortgages, to ratings downgrades and a severe shortage of buyers of supersenior debt. Merrill Lynch, for example, sold a package of super-senior assets at just 23 per cent of face value in July.
Copyright The Financial Times Limited 2008
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