Wall Street Blues

Yesterday was Black Monday on Wall Street with Bank of America buying Merrill Lynch and Lehman Brothers filing for bankruptcy.

Massive Shifts on Wall St.
Troubled Investment Bank To File for Bankruptcy

By Heather Landy and Neil Irwin
Washington Post Staff Writers
Monday, September 15, 2008

NEW YORK, Sept. 15 — Lehman Brothers announced early Monday morning that it will file for bankruptcy, becoming the largest financial firm to fail in the global credit crisis, after federal officials refused to help other companies buy the venerable investment bank by putting up taxpayer money as a guarantee.

The failure of the nation’s fourth-largest investment firm offers a profound test of the global financial system, and government and private officials had been bracing Sunday night for an upheaval in a range of financial markets that have never before experienced the bankruptcy of such a large player. To keep cash flowing normally through these markets, the Federal Reserve announced new lending procedures, while 10 major banks combined to create a new $70 billion fund.

After a marathon series of negotiations over the weekend, Federal Reserve and the Treasury stepped aside to allow a wrenching transformation of Wall Street to proceed. After galloping to the rescue of other major financial institutions in recent months, the federal government drew the line with Lehman Brothers, ignoring pleas from would-be buyers of the company who insisted on receiving federal backing for its troubled assets.

Leaders of the Federal Reserve and Treasury Department decided that Lehman was unlike the investment bank Bear Stearns, whose sudden collapse in March threatened the world financial system, or Fannie Mae and Freddie Mac, whose potential insolvency did the same.

In betting that Lehman could be allowed to fail without catastrophic consequences, New York Federal Reserve President Timothy F. Geithner, Fed Chairman Ben S. Bernanke, and Treasury Secretary Henry M. Paulson Jr. were making it clear that struggling financial firms cannot count on a bailout.

These actions caused the market to plummet in the U.S. and overseas.  And today I read that AIG (American International Group) may be getting help from the Federal Reserve with an $80 billion dollar loan.

Fed Tentatively Agrees to Provide $85B to AIG
Move Aimed to Avert Insurance Giant’s Collapse

By David S. Hilzenrath and Zachary A. Goldfarb
Washington Post Staff Writers
Tuesday, September 16, 2008

The Federal Reserve has tentatively agreed to provide $85 billion in emergency loans to insurance giant AIG in hope of preventing a bankruptcy that could send tremors through the U.S. and global financial markets, according to a source familiar with the plan.

In exchange, the Fed would get rights to 79.9 percent of AIG’s stock and replace the company’s management, the source said. The company would be put up as collateral. The insurance subsidiaries of AIG, which are regulated by state authorities, would be excluded from the arrangement, the source said.

The proceeds of an asset sales would be used to pay down the federal loan.

The plan must still be approved by the governors of the Federal Reserve.

To add to the misery in the business world Seattle based savings and loan Washington Mutual had it’s credit rating downgraded to junk status.

Washington Mutual’s Rating Cut to Junk
Failure Could Cost FDIC Insurance Fund $24 Billion to Cover Depositors, Estimates Say

By Thomas Heath and Binyamin Appelbaum
Washington Post Staff Writers
Tuesday, September 16, 2008

The credit crisis that yesterday pushed Lehman Brothers to file for bankruptcy and drove Merrill Lynch into the arms of Bank of America has many on Wall Street looking at other troubled financials.

Washington Mutual, the Seattle-based savings and loan giant whose stock has been hammered the past week, has raised concern because its demise would be the largest bank failure in U.S. history, putting stress on the Federal Deposit Insurance Corp. to cover depositors.

Washington Mutual yesterday closed at $2 per share, down 27 percent on the day. The stock is 95 percent off its 52-week high. Standard & Poor’s downgraded the company’s credit rating to junk status, citing the deteriorating housing market.

“The cost to the FDIC if this company fails is likely to be quite high,” analyst Rich X. Bove of Ladenburg Thalmann wrote. He estimates the net cost to the FDIC at $24 billion, which is about half of the assets in the FDIC’s insurance fund.

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