Bank of America's deal to buy Merrill Lynch and the collapse of Lehman Brothers spark even more worry in the blogosphere
For investors watching the disaster on Wall Street unfold, Peter Cohan at BloggingStocks has a piece of advice: "If you need your money in the next 10 years, take it out of everything else and deposit it in sub-$100,000 accounts with profitable banks."
That might not be such a bad idea, especially if you believe doomsayers like Nouriel Roubini, the New York University professor of economics who predicted back in February that one or two major broker dealers would go bankrupt and now believes all of them will eventually disappear. "If Lehman (LEH) does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Sept. 15 (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch (MER) first but also in sequence Goldman Sachs (GS) and Morgan Stanley (MS) and possibly even those broker dealers that are part of a larger commercial bank, i.e. JPMorgan (JPM) and Citigroup (C))," Roubini wrote on Sept. 13 in his blog, Nouriel Roubini's Global EconoMonitor. "Then this run would lead to a massive systemic meltdown of the financial system."
"What we are facing now [is] the beginning of the unraveling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank like runs," Roubini explains. "But unlike banks they are not properly regulated and supervised, they don't have access to deposit insurance and don't have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed)."
Roubini, who has been called "Dr. Doom," also states: "This is indeed the most severe financial crisis since the Great Depression and occurring at a time when the U.S. is falling in a now severe consumer led recession."
Unlike with Bear Stearns, the Fed and government decided to let Lehman fail on Sept. 14 after deal talks collapsed. "In a strange way, Lehman Brothers is being punished for not being more reckless," wrote Barry Ritholtz at The Big Picture on Sept. 14.
Focus also turned to insurance giant American International Group (AIG), which reportedly asked the Fed for a $40 billion bridge loan amid the threat that credit agencies would downgrade its debt, which would trigger more than $13 billion in collateral calls from investors who bought protection from AIG through credit default swaps, according to Bloomberg. Mike Shedlock at Mish's Global Economic Trend Analysis wrote: "I suspect the ratings agencies will be asked to not downgrade AIG. I also suspect the rating agencies will honor the request citing unfair stress or some other nonsense. The hope will be what it always is: to buy time."
More Banks on the Brink
Noting that currency traders are worried about AIG, Joseph Lazzaro at BloggingStocks wrote: "U.S. officials will be monitoring AIG, given the large role it plays in credit default swaps: the goal most likely will be to stabilize AIG to prevent CDS-related panic selling."
Peter Cohan at BloggingStocks takes a jab at John McCain's chief economic adviser Phil Gramm for the bill amendment that sparked the huge growth in the CDS market, which is 48 times bigger than the $1.3 trillion worth of subprime mortgages and a key reason for Lehman's demise. "Since nobody has ever had to deal with this volume of CDS unwindings, it is impossible to calculate how much they will cost," Cohan wrote.
Another bank that seems headed for demise is Washington Mutual (WM), with the shares now trading at a measly 2.22. "The alert have taken note that the failure of Washington Mutual, which looks increasingly likely, would consume the FDIC's reserves and, as in the savings and loan crisis, force the agency to go hat in hand to Congress for more money," wrote Yves Smith at Naked Capitalism on Sept. 15. "The concern is that uninsured depositors will flee weak banks, and in process, push more over the edge."
The CEO Pay Angle
In the chaos, with thousands of Lehman and Merrill employees at risk of losing their jobs, some CEOs will probably come out with hefty pay packages. Paul Kedrosky at Infectious Greed points to a New York Times story saying that with the Bank of America (BAC) deal, Merrill CEO John Thain's employment contract change of control clause will be triggered, giving him $25 million in total compensation when he leaves Merrill after 10 months on the job. "That's impressive enough, but it's doubly so when you consider he got packaged out of the NYSE with just shy of $20-million not quite a year ago," Kedrosky quips. "Apparently Thain has turned executive exits into a business model."
On the morning of Sept. 15, Ritholtz at The Big Picture reflected about the "terrible lessons" learned from the interventions of the Fed and Treasury Dept. in the bailout of Bear Stearns. He starts with, "You have to threaten to bring down the entire global financial system" and concludes that "The only thing that matters is the firm's balance sheet."
Taking a somewhat calmer approach, Kedrosky at Infectious Greed thinks the initial reaction to this major financial event is "more emotional than substantive." He writes: "Untangling the consequences of today's once-in-a-lifetime unraveling will only be seen over the coming weeks and months. We have insidiously complex and interconnected markets, and the old days of being able to readily detect all the co-moving parts are long gone."