After a day or two of speculation we now know how US Treasury Secretary Hank Paulson will be spending this weekend — rescuing another failed American financial group.
That makes four weekend’s since March spent saving the American way of life as Wall Street knows it. From Bear Stearns ($US30 billion) in March, to the first step in saving Fannie Mae and Freddie Mac in July, and then last Sunday (total cost $US200 billion and counting) and now this weekend, Lehman Bros (cost unknown, but sure to be in the billions).
Lehman Bros has been a slow moving trainwreck whose management, led by chairman, Dick Fuld, failed to understand what the credit crunch meant, even after $US8 billion dollars in write-downs and the loss of $US2.8 billion in the first quarter.
This week’s loss of $US3.9 billion, and gross losses and write-downs of another $US7.8 billion, plus a dividend cut show that the planned asset sales and restructurings are little more than deck chair shuffling as the SS Lehman sailed into the rocks.
After the shares plunged again overnight by another 42%, and then another 6% in after hours trading, the market was happy as word spread of possible buyers, and later news that the US Treasury (Hank’s mob) and the Federal Reserve (Ben’s mob) were “facilitating” the rescue with a statement due Sunday afternoon in time for the Tokyo opening Monday.
To misquote a late US baseball great Yogi Berra, “De ja vu all over again”. Bloomberg reported this morning:
The U.S. Treasury and the Federal Reserve have been working with Lehman on a sale, and a deal may be announced before Asian markets open Sept. 15., a person with knowledge of the matter said. The government isn’t likely to contribute money, the person said. Bankers from other firms were reviewing Lehman’s books today, according to people with knowledge of the situation, who declined to identify potential acquirers.
A columnist in the Financial Times implored yesterday: “Hank, go away for the weekend, resist temptation, don’t bail anyone out, again.” But it obviously fell on deaf ears.
At the close of Wall Street main trading, Lehman was valued $US2.93 billion. At that value it can’t really issue equity, it can only be taken over for paper by a bigger bank. No one would waste the cash. At least Bear Stearns shareholders ended up getting $US10 a share in cash after they rebelled against the first offer of $US2.
Wall Street got a nice little kick in the final five minutes of trading this morning, our time, jumping by more than 60 points to finish up 165 points: all indexes firmed on rumours that a couple of buyers could be eyeing Lehman. They were named as Bank of America and British bank Barclays.
Barclays is a UK bank and a near basketcase that British investors still don’t believe is over the damage done by the credit crunch and the UK housing slump, while the Bank of America is fitter than Lehman but still has the subprime blackhole Countrywide Financial Services to contend with after bailing it out for a pittance earlier in the year (it started at $US4 billion in shares and ended up worth around $US2 billion).
The irony is that UK and US commercial banks of the ilk of Bank of America and Barclays are on the cash life support systems of their central banks and have been, off and on for months. More than $19 billion has been extended daily by the Fed to US commercial banks, of which Bank of America is one, while the Bank of England has advanced billions of pounds under a system that expires on October 31.
Morgan Stanley and Goldman both said they were not interested, while JPMorgan is still manfully keeping the remnants of Bear Stearns afloat, with that $US30 billion of help from the Fed.
There’s a deadline tonight our time for Lehman’s attempts to sell half of its investment management business to a group like private equity players KKR and Carlyle, while it is still talking to Blackrock about selling $US4 billion of UK mortgages assets. It’s plans to spin-off around $US30 billion of real estate assets of mixed quality won’t happen because the firm doesn’t have enough time left.
And all through this, Washington Mutual, America’s biggest savings and loan, saw its shares fall to an all time low of $US1.75 before the bounced right back over $US2 to end up on the day by 22% at $US2.83. In after hours trading, it fell back 13 cents to $2.70. It’s now valued at $4.8 billion.
Once Lehman Bros is sorted, the great blackhole that’s the currently the US stockmarket will focus on WaMu.
But WaMu reckons its right. in language similar to the assurances of Lehman Bros and Bear Stearns. WaMu directors issued a statement from far away Seattle. Despite losing one third of its value this week the company said it is “well capitalized” and, oh, forecast a third-quarter loan-loss provision of $4.5 billion.
So will that be enough to keep it out of the event horizon that is the credit crunch? It wasn’t for Lehman, it wasn’t for Bear Stearns, Fannie Mae and Freddie Mac.
All those people worried that the particle smasher in Switzerland, the Hadron Collider, might create a blackhole that could swallow the world, were wrong about the location. It’s on Wall Street rapidly devouring the weak and greedy.
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