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The Financial Market – The Morning After

We awoke Monday morning to 3 very serious announcements…

  1. Lehman Brothers, burdened by $60 billion in soured real-estate holdings, filed a Chapter 11 bankruptcy petition in U.S. Bankruptcy Court after attempts to rescue the 158-year-old firm failed.
  2. Bank of America Corp. said it is snapping up Merrill Lynch & Co. Inc. in a $50 billion all-stock transaction.
  3. The world’s largest insurance company, American International Group Inc. (AIG), also was forced into a restructuring.

This news sent the financial markets sharply downward and eyes fell on the Fed to see what they would do with interest rates.

Here is the latest update for each of those headlines…

  1. This morning, the situation for Lehman Brothers looked a shade less bleak than it did yesterday — though only a shade — as the investment house continues discussions to sell its broker-dealer operations to Barclays, as The Wall Street Journal reports. The paper says Lehman executives and Barclays Americas Chairman Archibald Cox Jr. were hoping to reach a deal by today that would save at least 10,000 jobs, though many questions remain, not least the price that the U.K.’s third-largest bank would pay. Barclays is eager to expand in the U.S., "even at the risk of exposing the bank to integration challenges and risk at a highly tenuous time in banking," the Journal writes. The paper notes that the talks must be concluded urgently as Lehman’s biggest assets — its employees — are literally walking out the door.
  2. In a rushed bid to ride out the storm sweeping American finance, 94-year-old Merrill Lynch & Co. agreed late Sunday to sell itself to Bank of America Corp. for $50 billion. The deal, worked out in 48 hours of frenetic negotiating, could instantly reshape the U.S. banking landscape, making the nation’s prime behemoth even bigger. Early Monday, the two firms said the directors of both companies had agreed to the deal, which will be subject to shareholder and regulatory approvals.
  3. Also in the Implications-Too-Numerous-To-Grasp Department, the insurance behemoth American International Group today is desperately trying to scrape together enough money to stave off a failure of its own. "AIG — a company with $110 billion in revenues last year and $1 trillion in assets — has suddenly gone from being the gold standard in its industry to fighting for survival," BusinessWeek writes, noting that the company has seen $176 billion in market capitalization wiped out in less than a year. AIG needs to garner as much as $75 billion to avoid a bankruptcy filing, The Wall Street Journal reports, adding that Goldman Sachs Group and J.P. Morgan Chase — with encouragement by the Federal Reserve — are seeking to raise between $70 billion and $75 billion in loans to help prop up the insurer. Meanwhile, New York Gov. David Paterson said state officials are working on a plan that would allow AIG to, in effect, loan itself $20 billion, by borrowing against its assets, sidestepping some of the tight regulatory measures to which insurers are usually subject.

    The Journal says AIG’s huge assets mean that its traditional insurance customers would likely get claims paid even in the event of bankruptcy. "But AIG’s shares and debt are widely held, and the firm is used by many companies world-wide to manage a range of risks, including exposure to investments in subprime mortgages," the Journal writes. "Its demise would potentially make it harder or more expensive for businesses to control their risks."

(sources: Rocky Mountain News, Wall St Journal)