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`Tectonic' Shift on Wall Street as Lehman Fails, Merrill Sold

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Time Zone: EST (New York, Toronto)
Messenger: Eleazar1234 Sent: 9/15/2008 7:14:59 PM

`Tectonic' Shift on Wall Street as Lehman Fails, Merrill Sold

By Christine Harper

Sept. 15 (Bloomberg) -- In the biggest reshaping of the financial industry since the Great Depression, two of Wall Street's most storied firms, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., headed toward extinction.

New York-based Lehman, founded 158 years ago, said early today that it filed for Chapter 11 bankruptcy protection after failing to find a buyer. Merrill Lynch, 94 years old and also based in New York, agreed to sell itself to Bank of America Corp. for $50 billion in an emergency deal hashed out yesterday.

``The tectonic plates beneath the world financial system are shifting, and there is going to be a new financial world order that will be born of this,'' said Peter Kenny, managing director at Knight Capital Group Inc., the Jersey City, New Jersey-based brokerage that handles about $1 trillion worth of stock transactions a quarter. ``It's an ugly and painful process.''

The engines that powered record growth in the financial industry over the last decade -- cheap credit and surging property values -- have been thrust into reverse. Companies that once thrived on making real estate loans and holding assets bought with borrowed money are now under siege, giving the upper hand to those less reliant on leverage and holding the fewest assets tied to property.

The industry convulsions that started last year have already eliminated Bear Stearns Cos., forced into a cut-price sale to JPMorgan Chase & Co. with government support in March. A week ago, the U.S. Treasury placed mortgage companies Fannie Mae and Freddie Mac into conservatorship, guaranteeing their widely held debt securities while all but erasing their equity value.

American International Group Inc., once the world's largest insurer, is struggling to raise cash to avoid a credit-rating downgrade that could cripple its business.

From Five to Two

The five New York-based securities firms that dominated Wall Street have been reduced to two: Goldman Sachs Group Inc. and Morgan Stanley. While both firms are scheduled to report a drop in third-quarter earnings this year, their business has remained profitable throughout 2008 -- unlike Lehman and Merrill.

``I think highly of Morgan Stanley and Goldman Sachs, so I expect them to ride this out,'' Evercore Partners Inc. Chief Executive Officer and Former Deputy Treasury Secretary Roger Altman said in an interview on CNBC. ``But as to whether we've seen the last of this crisis, I think the answer to that is clearly no. And exactly where it goes from here and how it unfolds, I'm unsure.''

Lehman, which employed 25,935 people at the end of August in 61 offices around the world, had a balance sheet totaling $786 billion as recently as February. Merrill Lynch, with 60,000 employees, is known for its ``thundering herd'' of financial advisers that brought Wall Street financial products to Main Street investors.


``I've been on Wall Street for many years, and I've never seen a weekend like this one,'' said Michael Holland, 64, chairman and founder of New York-based Holland & Co. ``We are unwinding what has been years of silliness in the financial markets, and the silliness is being vaporized as we speak, unfortunately with the stock price of a number of companies involved in it.''

To help cushion the fallout, 10 banks created a $70 billion fund to lend to firms that are having trouble financing their assets in the markets. The Federal Reserve also said it will be willing to lend money in return for a wider array of collateral including stocks.

Still, the repercussions may be widespread.

Meredith Whitney, an analyst at Oppenheimer & Co., wrote in a note to investors that sales of Lehman's assets will push down the value of securities, forcing other firms to write down their own holdings.

`Fundamentally Flawed'

Nouriel Roubini, an economics professor at New York University, said the independent securities firm model is ``fundamentally flawed'' and that every securities firm will need to combine with a bank to gain a deposit base and greater access to loans from the Federal Reserve.

Just five months ago, Lehman Brothers Chief Executive Officer Richard Fuld, 62, was telling shareholders that ``the worst is behind us'' in the credit contraction. As concerns escalated about the value of Lehman's assets tied to residential and commercial real estate, Fuld replaced Chief Financial Officer Erin Callan and President Joseph Gregory in June.

Deteriorating markets put more pressure on the value of Lehman's assets and the firm, unable to negotiate an investment from the Korea Development Bank, instead tried to reassure investors last week by revealing third-quarter results early and unveiling a plan to sell part of its fund management unit and create a separate unit for its real estate holdings.

Fuld's Efforts Undermined

Fuld's efforts were undermined on Sept. 10, when Moody's Investors Service put Lehman's credit rating on review for downgrade, noting that the firm needed a ``strategic transaction with a stronger financial partner'' to help support its rating.

Lehman's stock fell 50 percent on Thursday, Sept. 11 and Friday, Sept. 12 and the collapse spread to Merrill, which has reported four consecutive quarters of losses and was expected to lose money again this quarter.

New York Federal Reserve President Timothy Geithner called a meeting of Wall Street's top firms starting at the Fed's downtown headquarters that began at 6 p.m. on Friday, with a goal of helping ease a sale of Lehman, according to people familiar with the situation.

Suitors Walk Away

The two banks most interested in Lehman, London-based Barclays Plc and Charlotte, North Carolina-based Bank of America, balked at a deal unless the government would protect it from any losses on some of the hardest-to-value assets. The government, already shaken by criticism of its actions to support Bear Stearns, Fannie Mae and Freddie Mac, refused to budge and tried to persuade the CEOs of the biggest Wall Street firms to pitch in instead.

The talks lasted through the weekend, with groups of executives breaking off into smaller groups to discuss options and teams of traders examining positions at every major firm. Yesterday, Barclays, the U.K.'s third-biggest bank, dropped out, deciding it couldn't agree on a deal so quickly without some type of protection from losses.

As hopes dimmed for salvaging Lehman, attention turned to the future of Merrill, Lehman's bigger rival. That business, with its 16,690 financial advisers and nearly half of fund manager BlackRock Inc., was more attractive to Bank of America than Lehman could be. Merrill CEO John Thain, persuaded by the weekend's events that a deal was necessary to avoid a loss of confidence and a fate similar to Lehman's, entered into negotiations with Bank of America's Ken Lewis.

The liquidation of Lehman, last year's top underwriter of bonds backed by mortgages, is an amplified version of investment bank Drexel Burnham Lambert Inc., which filed for bankruptcy in 1990. Drexel made its name financing corporate takeovers in the 1980s using junk bonds pushed by Michael Milken.

Keeping the Talent

Maintaining the confidence of the markets is only one of the challenges for an investment bank -- the other is retaining employees, recalled Fred Joseph, Drexel's CEO from 1985 to 1990.

``It's an awfully good business, but the assets go down in the elevator every night,'' said Joseph, 71. ``Despite the tough times, the Street's so small, everybody wants the really good guys.''

A key difference with Drexel is Lehman's central role in the over-the-counter derivatives markets, which have ballooned to $454 trillion since Drexel was in business. A default by Lehman on its obligations in that market could cause chain reactions throughout the markets that have never before seen a major financial counterparty fail to honor its obligations.

``The implications of one of the `too big to fail' institutions being allowed to fail is incredibly difficult to grasp, but suffice to say that a huge number of firms and securities are going to get affected,'' said Michael Auyeung, who manages about $500 million as chief executive officer at Pacific Mutual Fund Bhd. in Petaling Jaya, Malaysia. ``The reach of the carnage will be global and system-wide.''

Lehman's collapse wipes out a company that had a market value of $45.5 billion in February 2007. Merrill's sale to Bank of America for $29 a share, while about a 70 percent premium to Merrill's value on Friday, compares with the company's $86 billion market capitalization in January 2007.

``It's breathtaking that we've gone from five standalone firms to two very quickly,'' said Roy Smith, a finance professor at New York University's Stern School of Business and a former partner at Goldman Sachs. ``It's certainly going to cause Wall Street to rethink the strategy.''

Messenger: Eleazar1234 Sent: 9/16/2008 7:53:29 AM

* Business
* Lehman Brothers

Banking crisis: Lehman Brothers files for bankruptcy protection

In a separate development that underlines the tumultuous state of the financial world, Merrill Lynch was taken over by Bank of America for $50bn
All comments (16)

* Graeme Wearden, David Teather, and Jill Treanor
* Monday September 15 2008 12:45 BST
* Article history

Lehman Brothers, one of the most prestigious players on Wall Street, filed for bankruptcy protection this morning after a frenzied weekend of negotiations failed to find a way of saving the company.

Heralding a tumultuous day in the financial markets, Lehman announced at around 5.30am BST that it will file for Chapter 11 bankruptcy protection, making it the biggest victim so far of the credit crunch and sub-prime crisis. It said it is making the move to "protect its assets and maximise value".

The collapse of Lehman – one of the biggest financial shocks in years - puts tens of thousands of jobs around the world at risk, including over 4,000 in the City and another 1,000 in High Wycombe.

It also sent shockwaves around the banking world, with commentators predicting that the damage could be felt across the industry and could help to push the UK into recession. The FTSE 100 plunged by almost 400 points this morning, and the Dow Jones industrial average is tipped to tumble by as much as 4%.

Until late last night, Lehman was locked in talks with potential buyers after the last-ditch restructuring plan it announced last week failed to deter investors and trading partners from fleeing.

Barclays pulled out of talks on Sunday evening, because it could not win the government guarantees it wanted to protect itself against future losses on Lehman's trading positions - thought to be as large as $300bn (£167bn). It said this morning that a deal would not have been in the best interests of its shareholders.

In a separate development that underlines the tumultuous state of the financial world, Merrill Lynch was taken over by Bank of America for $50bn - a move that will spare it Lehman's fate.

Most of Lehman's UK staff are based at its headquarters at Canary Wharf, where the mood was sombre this morning. Employees arriving for work this morning said they did not know anything about what was likely to happen.

One worker told the assembled journalists, who were kept away from the building by security staff, that "I'm as much in the dark as you but I can't talk to you. We've been told not to talk."

Speaking on BBC Radio 4 this morning, Liberal Democrat Treasury spokesman Vince Cable described the situation as "very grave".

"I think the least we are going to have to learn from this is that the whole of the financial sector simply cannot return to where it was before," Cable said. "It is going to have to be much more tightly regulated in the public interest."

Howard Archer, chief UK and European economist at Global Insight, warned that Lehman's fate will make the surviving banks even more reluctant to lend to each other.

"This increased the risk that the credit crunch will deepen and last for some considerable time to come, which in turn increases the already serious downside risks to growth in the UK and the Eurozone, and heightens the danger of recession," Archer warned.

Sub-prime woes

Merrill Lynch and Lehman both expanded aggressively into property-related investments, including so called sub-prime mortgages - loans to people on low incomes or with poor credit histories. The bank has lost $14bn in the past 18 months after being forced to take huge write-downs on the value of those investments.

The breakdown in talks between Barclays and Lehman came after government officials and senior Wall Street executives gathered for a third day at the US central bank, the Federal Reserve, in lower Manhattan, arriving in a funereal procession of black limos.

The Fed, and the US Treasury, had been hoping to secure a saviour for Lehman ahead of the Asian markets opening on Monday.

The collapse of Lehman sent traders rushing into government treasury bonds – seen as a safe haven in troubled times. The dollar fell against both the euro and the yen.

Peter Kenny, managing director at Knight Equity Markets in New Jersey, said the financial world is on the verge of a complete reorganisation. "The US financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before," he told Reuters. And Bill Gross, chief investment officer at Pacific Investment Management, warned of an "imminent tsunami" as dealers are forced to unwind complicated derivative and swap-related positions.

Alan Greenspan, the respected former chairman of the Fed, warned yesterday that other big institutions could yet be vulnerable; a shocking situation for Wall Street where the big investment banks had for so long enjoyed an air of invincibility.

Greenspan described the credit crisis as a "once-in-a-century" type of event. "There's no question that this is in the process of outstripping anything I've seen and it still is not resolved and it still has a way to go," he told ABC News.

Messenger: Eleazar1234 Sent: 9/16/2008 7:55:47 AM

Peter Tosh
Day the Dollar Died

I see Johnny with his head hanging down
Wondering how many schillings left in that pound
Cost of living it is rising so high
Dollar see that have heart attack and die

Bills and budgets are waiting
Finance ministers anticipating
Unemployment is rising
And I hear my people, they're crying

The day the dollar die
Things are gonna be better
The day the dollar die
No more corruption
The day the dollar die
People will respect eachother
The day the dollar die

Tell me brother
Is there something I can do
Don't you let frustrations make you blue

Time is hard
And I know that is true
But if you pick yourself up
That's all you've got to do

Things can be much better
If we can come together
Long time we been divided
And it's time we be inited

The day the dollar die
Gonna be better
The day the dollar die
I won't need no pockets
The day the dollar die
Don't have to be frettin'
The day the dollar die

Now I see you standing on your feet
And you can also make two ends meet
Never you let life problems get you down
There is always a solution to be found

Bills and budgets are mourning
Finance ministers groaning
Peter Tosh
Day the Dollar Died

Unemployment is rising
And I hear my people crying from the ghetto

The day the dollar die
It's gonna be nice
The day the dollar die
Just you wait and see
The day this here dollar die
There be no more inflation
The day the dollar die

I say the day Danny dollar die
The day Sammy dollar die
We will love eachother
I said the day this a dollar die
Fight some inflation

Messenger: Eleazar1234 Sent: 9/16/2008 10:11:01 AM

Markets devastated in Lehman's wake

Grim faces from Hong Kong traders as shares slide following Lehman's collapse [AFP]

Asian stocks have taken a severe beating as the global fallout from the collapse of US investment bank Lehman Brothers deepened.

Share indexes in Japan, Hong Kong, China, Australia, Singapore, Taiwan, India and South Korea fell by between 2 and 7 per cent in early trading on Tuesday, the first day back for many of the markets after a holiday on Monday.

Many banks suffered even bigger stock losses as the shockwaves were exacerbated by the sale of another investment bank, Merrill Lynch, and signs that insurer American International Group (AIG) was struggling for survival.

The early carnage in Asia followed a devastating Monday for global stock markets which dropped sharply after a triple blow from Wall Street.

Lehman, the fourth-largest investment bank in the US, declared bankruptcy on Monday while Merrill Lynch, another major player, was reportedly being sold off to Bank of America.

AIG, one of the world's biggest insurance companies, lost half of its value on the stock markets following reports it had asked the US Federal Reserve for a $40bn bridging loan.

The crisis touted as a re-shaping of the US financial landscape knocked down markets across Asia in one of the most explosive 48-hour period in the financial world.

Plunging shares

Tokyo's benchmark Nikkei plunged 5 per cent to a three-year low as investors dumped financial shares, prompting Japan's central bank to quickly issue a statement saying it would carefully watch the development and take appropriate measures to stabilise the market.

China's main stock index tumbled more than 3 per cent in the opening minutes of trading but analysts said a surprise monetary easing announced a day earlier by China's central bank was likely to limit falls, and could help the index close above 2,000 points.

The Shanghai Composite Index was down 3.16 per cent at midday, recording a new 21-month low as it dipped below the 2,000-point level many analysts and investors consider as important support.

Hong Kong's Hang Seng index fell 5.9 per cent at noon, recovering slightly from the 6.5 per cent when markets opened earlier in the day.

South Korea's Kospi ended 6 per cent lower at its lowest in 18 months.

Indian shares were down 2.8 per cent after losing 3.35 per cent on Monday.

Australia's benchmark index fell 1.4 per cent to a two-and-a-half year low, after falling as much as 2.7 per cent earlier on Tuesday.

The Dow Jones industrial average fell more than 500 points on Monday in its worst point drop since after the September 11, 2001 attacks in the US.

London's FTSE share index closed down 3.9 per cent, the CAC-40 was off 3.7 per cent in Paris while Frankfurt's DAX index of blue chips sagged 2.7 per cent.

Bush 'confident'

In Washington, George Bush, the US president, said the country's economy would bounce back soon, and that he was working to "minimise the impact" of "painful" economic turmoil.

The US financial crisis has rocked stock markets across the globe [AFP]
"In the short run, adjustments in the financial markets can be painful," he said at the White House.

"In the long run, I'm confident that our capital markets are flexible and resilient and can deal with these adjustments."

But Israel Adelman, a Fordham Financials trader on Wall Street, told Al Jazeera that "people in upper government don’t understand what the average American is going through".

"The customer is very squeezed right now, houses are worth nothing, people are up to their ears with credit cards debt," he said, describing the situation as a "confidence crisis".

"We've been making a lot of money from cheap money … we are the pinnacle of greed … we’re going to pay for it all the way through next year. The bleeding is going to haemorrhage."

No bail-out

Henry Paulson, the US treasury secretary, said he would work with US legislators and financial authorities abroad to ensure "the stability and orderliness" of crisis-hit US capital markets.

He called for "streamlined and more effective regulation" coupled with "market discipline" to let failing institutions fail, indicating he was wary of more taxpayer-funded bailouts of major financial institutions.

Philip Tagher, a New York real estate investor, agreed with Paulson, telling Al Jazeera that the government was correct not to bail Lehman Brothers out.

"If the government steps in to rescue a private company, at best it encourages others to delay facing the reality of their situation, and at worse it encourages them to engage in risky behaviour," he said.

Messenger: Eleazar1234 Sent: 9/16/2008 10:12:47 AM

Israel Adelman, a Fordham Financials trader on Wall Street


Messenger: Eleazar1234 Sent: 9/16/2008 10:13:51 AM



Messenger: Eleazar1234 Sent: 9/16/2008 10:16:22 AM

Max Keiser, prediction markets analyst in Paris

"There's a decoupling in the wind, America is essentially finished as a global economic power.

"The US dollar is now finished as the world's reserve currency and we are going to see now some other country rise up and take its place, most probably China."

"This is entirely predictable … [in] the neo-liberal model, which means that credit is available for almost free.

"Suddenly last summer, credit was unavailable, and then banks who need credit to live start to tumble.

"So this is gaining pace [and] there's going to be no credit for banks because you're talking about $700 trillion worth of debt in the global economy.

"The entire GDP [Gross Domestic Product] of the world is something like $60 trillion, so this has a long way to go as you deflate all of this debt back to something more sustainable.

"It's not a doomsday scenario if you're in a developing country and you've got stuff like oil in the Middle East or you've got huge savings, like they do in China.

"It is only a doomsday scenario for America and Britain that have been living on borrowed money for generations.

"It's a happy day for people who have savings, who have money, who have cash, who have stuff, who have oil, who have resources.

Messenger: Eleazar1234 Sent: 9/16/2008 10:18:44 AM

Allister Heath, editor of London's City A.M. financial newspaper

"Everybody in the West, [or] at least a lot of people, have pensions and these pensions invest in the stock market, and a lot of the shares are actually the shares of banks.

"And when bank shares get hammered, people's pensions get hammered, so everybody loses.

"When big banks like Lehman go under, you know the housing market is going to suffer again, house prices are going to fall in American and Britain, in Europe and so on.

"That's going to again hit millions of ordinary people, and of course you have got thousands of job losses."

Messenger: Eleazar1234 Sent: 9/16/2008 10:19:18 AM

Andrew Critchlow, managing editor for Dow Jones Middle East in Dubai

"I think the impact is going to be quite profound.

"I think this is a defining moment for world economies, it's a defining moment for the United States, it's a defining moment for all of us that will remember [this] for the rest of our lives.

"People who were around in the 1920s, at the time of the Great Depression - that experience stuck with them for an awful long time.

"And I think that the economic events that we're currently seeing in the world at the moment - they can only be described in similar terms.

"Certainly in my career, I've seen nothing that compares to this and it's difficult to quantify at this stage where all of this is going to lead.

"A lot of the bad news we've seen is just really referring to banks - a lot of these household names in US banking that are now technically going out of business.

"I think the worrying thing is when this hits the real economy, when this hits people on the streets who are going to have less money in their pockets, who are going to be put out of work, who potentially are going to be put out of their homes.

A 'falling knife'

"It's difficult to see how financial markets can stabilise at this point. I think that from an investor's view, you don't want to be caught catching a falling knife.

"Certainly talking to trader in the Gulf, Gulf markets have been very badly affected today.

"The sentiment is, we're not at the bottom of the market here, and as they say, this hasn't hit real economies yet - it hasn't hit the retail sector fully yet, it hasn't hit the spending power of the man on the street yet.

"There are lots of scary potential problems that could come out of the woodwork yet to haunt us here."

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