15 September 2008

Financial Institutions Dropping Like Flies

Lehman Brothers, burdened by $60 billion in soured real-estate holdings, said it is filing for Chapter 11 bankruptcy after attempts to rescue the 158-year-old firm failed.

Bank of America Corp. said it is snapping up Merrill Lynch & Co. Inc. in a $50 billion all-stock transaction.

The demise of the independent Wall Street institutions came as shock waves from the 14-month-old credit crisis roiled the U.S. financial system six months after the collapse of Bear Stearns. . . .

Insurer AIG, hit hard by deterioration in the credit markets, said Sunday it is reviewing its operations and discussing possible options with outside parties to improve its business after a week when its stock dropped 45 percent amid concerns about the company's financial underpinnings.

The Wall Street Journal and The New York Times both reported early Monday on their Web sites that the American International Group is seeking an additional $40 billion in emergency funds - possibly from the Federal Reserve - to help it avoid a credit rating downgrade, which would make it more expensive for AIG to raise money.

From here.

I discussed some underlying causes of these developments last week.

Lehman dealt a blow to the largest of Janus Funds mutual funds, based in Denver, Colorado's Cherry Creek North business district (walking distance from Wash Park). While this doesn't directly hurt Janus, because mutual funds are fundamentally investments made with someone else's money, it hurts their carefully cultivated reputation for careful research and prescience. This could discourage others from investing with Janus in the future, and in particular hurts the reputations and job security of the fund managers at the fund that made the bad bet.

Denver itself, however, has one of the best credit ratings in the nation due, according to the S&P which made the rating, to:

the fundamental strength of Denver’s deep and diverse economy and high per capita market values, combined with the city’s proactive budget-cutting efforts in periods of revenue softness to maintain, in our opinion, very strong fund balance.

Commercial bank Washington Mutual is also in dire straights and has ousted its CEO.


Michael Malak said...

Lehman was a predatory lender. We could say they got what they deserved, except we're talking about a company rather than individuals. No doubt the executives will float down with their golden parachutes while the rank and file hit the soup kitchen.


"Of the businesses fueling this search for responsibility [for predatory lending], perhaps no secondary market participant has drawn more criticism than the investment banking firm of Lehman Brothers. For over a hundred years, Lehman has been recognized as one of the nation’s leading firms in providing financial services to corporations, governments, and individuals with large financial holdings. But in the past decade Lehman’s reputation has suffered from its business dealings with mortgage originators and servicers. In at least five separate episodes Lehman Brothers has been involved in predatory lending scandals—albeit in each instance through indirect involvement."

Andrew Oh-Willeke said...

The rank and file there have a pretty sweet deal themselves (even secretarial staffs are top of their market performers and paid accordingly), so I don't think that many will be heading for soup kitchens, but hundreds of thousands of members of Wall Street's financial elite from a variety of firms will have to adapt to reduced prosperity and find a way to land on their feet.

The real question is who will be displaced as these fortunate ones start to compete in the rest of the market.

Michael Malak said...

Perhaps they will cash out of the expensive New York real estate market and move to Denver, like I did (moved from Washington, DC area in 2006 as I observed real estate was just starting to decline, and I was doing software consulting for Fannie Mae).

Anonymous said...

Yikes. I have quite a lot in Janus Twenty... Thats not good. Suggestions?