Lehman Goes Broke, Merrill Sold, AIG Floundering

It’s a tough day to be in the stock market. Lehman Brothers went out of business when no one wanted to buy it yesterday. Meanwhile, Merrill Lynch is now part of Bank of America after a $50 billion purchase was agreed. And insurance giant AIG may need a $40 billion loan from the Federal Reserve to stay afloat.

After 158 years in business, Lehman Brothers went belly up because of $70 billion in bad mortgage-backed securities. CEO Richard Fuld had a chance to save his company earlier this year by selling Neuberger Berman, but he overplayed his hand and demanded too much for those assets. Now, he’s got nothing.

Merrill Lynch found a good fit with Bank of America, an institution that could actually afford to buy the brokerage and that finds the brokerage business complementary to its banking operation. James Ellman, portfolio manager at hedge fund Seacliff Capital., summed it up when he said to Reuters, “Now Bank of America has one of the best and largest retail brokerages in the country, one of the top investment banks in the world, and a large stake in one of the best investment managers in the world.”

AIG, meanwhile, is facing rating agency downgrades that would require it to post as much as $14.5 billion in collateral. Reuters reported, “Over the weekend, the insurer has been working on a three-part plan involving asset sales, shifting regulated capital from the insurance operations to the holding company, and working with private equity investors, said a person familiar with the negotiations.”

CNN is reporting, ‘The Fed said it would expand its short-term lending to banks by starting to take all investment-grade debt as collateral - instead of just Treasurys and other high-grade securities. ‘The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets,’ said Fed Chairman Ben Bernanke. Similarly, a consortium of 10 leading domestic and foreign banks had agreed to create a $70 billion fund to lend to troubled financial firms. The group of 10 commercial and investment banks which included, among others, Goldman Sachs (GS, Fortune 500), Citigroup, Barclays and Morgan Stanley, agreed to pony up $7 billion each to create a $70 billion lending pool to help troubled institutions. Similarly, The measure would also help resolve exposure between Lehman Brothers and its counterparties, the companies said.”

It looks like they are trying to set up a firewall to prevent anyone else from going under – which raises the concern that this isn’t over yet.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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