Wall Street Journal: The Mother of All Mondays

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Wall Street Journal: The Mother of All Mondays

September 14, 2008, 5:53 pm
The Mother of All Mondays
Posted by Tim Annett

Investors world-wide have rarely rolled out of bed to face a Monday morning quite like the one they’ll contend with this Monday.

Sundays have long been host to important corporate news, from big mergers to bankruptcies. But this weekend, in an extraordinary meeting that recalled the summit called ten years ago amid the meltdown of hedge fund Long-Term Capital Management and J. Pierpont Morgan’s efforts more than 100 years ago to rescue a series of ailing banks, Wall Street’s most senior deal makers and regulators raced to find a deal that would keep storied Lehman Brothers Holdings from collapse. At this hour, their efforts have yet to yield any fruit. Barclays, which had come to be viewed over the weekend as the most likely bidder for the badly ailing Lehman, pushed away from the bargaining table on Sunday. The main impediment appeared to be that the U.S. government is reluctant to backstop a deal, as it had amid the Bear Stearns meltdown in March.

If Lehman can’t find a life raft, it could lead to turmoil in the credit markets as traders rework credit-default swaps and other trades with Lehman at their center. Credit-default swaps traders were called to work Sunday, the Wall Street Journal reported, for a special trading session that would let Lehman counterparties offset their positions against each other. Equity markets could also be roiled Monday. The crumbling of a major Wall Street institution is likely to shake badly the confidence of investors who had hoped the Street would make it through the credit crisis without yet another large firm being swallowed up. What’s more, the economic backdrop looks dimmer than it did in March when Bear Stearns was pushed into the arms of Jamie Dimon.

Any forced selling of stocks or other securities by hedge funds and other big investors linked to Lehman could further destabilize the markets. Market sentiment has been fragile for months, causing wild gyrations that have given equities little chance to establish momentum in one direction or the other. Investors have skipped in and out of Treasurys and other safe-haven bets and money that was pushed into commodities bets has suffered amid the jarring drop in the price of oil and other raw materials since July.

One possible Lehman suitor, Bank of America, has reportedly meanwhile taken up merger talks with another brokerage giant that has been battered by the credit crisis – Merrill Lynch. Strategically, a union of Bank of America and Merrill Lynch would merge BofA’s sprawling retail banking business with Merrill’s vast brokerage network. Bank of America has a deep well of capital due to its massive deposit base. A deal could chase at least some of the gloom swirling around the financial sector because of Lehman. Merrill shares were slammed last week alongside Lehman.

Adding to the whorl, American International Group (whose shares were also clobbered last week amid growing concern about the extent of its losses on CDS and other derivatives) plans to disclose a restructuring on that Monday that is likely to include the sale of major assets, including its aircraft-leasing business, International Lease Finance Corp., the Journal reported today. The insurance giant, a component of the Dow Jones Industrial Average, is hoping to raise more than $10 billion. The company has already raised $20 billion in fresh capital this year.

UPDATE at 6:39 PM EDT: Dow Jones Industrial Average futures were down roughly 300 points in recent trading.

UPDATE at 6:48 PM EDT: The Journal is reporting that a Bank of America-Merrill deal is closer, with an all-stock deal expected at $26 a share or greater. However, the situation remained fluid and any deal could still falter. Meanwhile AIG plans to shift capital from its regulated insurance business to its holding company, a source has told the Journal. The move is intended to improve AIG’s liquidity position. The measures involve $40 to $50 billion in capital allocation and new capital, the source says.

UPDATE at 7:04 PM EDT: The Journal reports the Merrill board is meeting now to consider a deal. Merrill shares ended trading on Friday at $17.05, down 12% from where they began the day. The shares had fallen 68% for the year to date and 77% over the last 12 months.

http://blogs.wsj.com/marketbeat/2008/09/14/the-mother-of-all-mondays/