For WaMu the Government bailout will be too little too late. Its possible that JP Morgan Chase, however will may get a healthy slice of the $700 billion pie.
The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then almost immediately sold off WaMu's banking assets to JPMorgan Chase & Co. for $1.9 billion. This is the second major purchase Chase has made this year; back in March Chase purchased Bear Sterens for nearly $1.5 billion.
WaMu, founded in 1889, now holds the dubious title of the largest bank to fail in US history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.
One positive is that the sale of WaMu's assets to JPMorgan Chase prevents the thrift's collapse from depleting the FDIC's insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation's most momentous financial crisis since the Great Depression.
WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.
"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."
The bank's failue means that shareholders' equity in WaMu will be completely wiped out. The deal leaves private equity investors including the firm TPG Capital, which gave WaMu a cash infusion totaling $7 billion this spring, with nothing and no recourse.
JPMorgan Chase is in this to acquire assets, not liabilities. Chase said it was not acquiring any senior unsecured debt, subordinated debt, preferred stock of WaMu's banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan also said it will not take on the lawsuits facing the holding company. Basically they are just covering deposits and loans.
JPMorgan Chase, the second largest bank in America will not have more than 5,400 branches in 23 states. Its possible that the company will take advantage of economies of scale and close some competing branches, but Chase hopes to to close less than 10 percent of the two companies' branches.
Friday, September 26, 2008
Tuesday, September 23, 2008
Dominoes
I once had a professor who would tell us that while free markets were fickle, things were [almost] never as bad as they seemed nor as good as they seemed to be. We are experiencing that rare case where things may actually be as bad as we think.
That said, lets look at the causes, and realize that socialism is NOT the answer. We should never privatize gains and socialize losses. How may of us made $70,000,000 last year? Lloyd C. Blankfein, the CEO of Goldman Sachs did.
How it all began
In the mid 1990s, when the US economy was booming, the idea of home ownership and small business start-ups became all the rage. At the same times banks were running out of qualified people to loan money to. Since banks make money by charging interest on loans (including mortgages) they began to ease credit restrictions.
By the late 1990s and early 2000s the increase in demand for homes drove up the price of homes.
From 2003-2005 the economy began to take a real turn for the worse, and unemployment began to rise. Since more homeowners had seen the value in their homes rise due to increase demand, many began to borrow against their homes; using the equity to help pay off other debt that has accrued.
Around the same times, there was still this massive push to get new homeowners into the market. Vultures began to come in and convince some that they were ready for home ownership, when in reality they were not. That caused subprime lending to soar. All bad loans were not subprime.
Some very smart investment bankers began to realize that these loans were going to be problems, however they had an out and it was CMOs. Banks began to sell loans to other banks. Then the loans would be packaged together with other loans and given an insurance wrap. These bundles now had mortgages as the underlying collateral. Once these loans began to default at a higher rate these CMOs became harder to sell.
In 2007 fear form the subprime market began to spread to the mortgage market in general. In turn banks, especially those who were exposed on the home lending side began to see their stock price drop; fewer home buyers meant that the price of homes was dropping fast as well.
In the fall and winter of 2007 were when things really hit the fan: executives at Citigroup and Merrill Lynch were forced from their post, as those firms began to realize steep losses in both asset base and profitability. This caused banks to sell off senior debt to raise money: Citigroup raised $7.5 billion from Abu Dhabi; National City picked up $7 billion; and Washington Mutual raised 5 billion.
Then came the New Year, and the nation's largest mortgage lender, Countrywide was on the verge of going belly up when Bank of America stepped in and bailed them out. The in March Bear Sterns ccrumble under its own weight of decreasing losses and write downs. Next in July the second largest home lender in CA IndyMac was taken over by federal regulators. The next two dominoes were Freddie and Fannie. Then came Lehamn Bros.
Now we have consolidation and Goldman will become a bank. What's next? Maybe things are as bad as they seem.
Wednesday, September 17, 2008
Another Government Bailout
Another day, another bailout. The U.S. government stepped in Tuesday to rescue American International Group Inc. aka AIG, one of the world's largest insurers, with an $85 billion injection of taxpayer money. What this proves is that the US governement has its priorities completely messed up.
Just a few weeks ago America sent $1 billion to Georgia to help rebuild damage caused by its war with Russia. And now the "loan" billions more to a private company. What about our schools and Americans unable to afford healthcare?
There is a problem when a society socalizes losses yet privatizes gains. While every American citizen is helping to foot the bill for AIG while they are in trouble, do we all receive dividend checks when AIG returns to profitability? If so then this is a good deal. Oh by the way where did the US govt get the money from, I thought we had a trillion dollar tab that.
AIG was the second time this month the feds put taxpayer money on the hook to rescue a private financial company. AIG says it plans to repay the money in full with proceeds from the sales of some of its assets.
When one bank loans another bank money, AIG insures those loans. Without AIG banks would have to find other ways to insure those loans.
Under the deal, the Federal Reserve will provide a two-year $85 billion loan to AIG, which many believe teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.
What is important to realize is that all investments have risk and unless your a Big Boy you won't get bailed out.
The Fed's move was part of a concerted push to help calm jittery markets and investors around the world.
On Tuesday, the Fed decided to keep its key interest rate steady at 2 percent, but acknowledged stresses in financial markets have grown and hinted it stood ready to lower rates if needed.
The central bank also pumped $70 billion into the nation's financial system to help ease credit stresses. In emergency sessions over the weekend, the Fed expanded its loan programs to Wall Street firms, part of an ongoing effort to get credit flowing more freely.
The stock market, which Monday posted its largest point loss session since the Sept. 11 attacks, recovered Tuesday after the Fed's decision on interest rates. The Dow Jones industrials rose 141 points after losing 500 points on Monday.
AIG's shares swung violently, though, as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent - and another 45 percent after hours.
Buy AIG, it will bounce back in the next few weeks, its dirt cheap right now.
Just a few weeks ago America sent $1 billion to Georgia to help rebuild damage caused by its war with Russia. And now the "loan" billions more to a private company. What about our schools and Americans unable to afford healthcare?
There is a problem when a society socalizes losses yet privatizes gains. While every American citizen is helping to foot the bill for AIG while they are in trouble, do we all receive dividend checks when AIG returns to profitability? If so then this is a good deal. Oh by the way where did the US govt get the money from, I thought we had a trillion dollar tab that.
AIG was the second time this month the feds put taxpayer money on the hook to rescue a private financial company. AIG says it plans to repay the money in full with proceeds from the sales of some of its assets.
When one bank loans another bank money, AIG insures those loans. Without AIG banks would have to find other ways to insure those loans.
Under the deal, the Federal Reserve will provide a two-year $85 billion loan to AIG, which many believe teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.
What is important to realize is that all investments have risk and unless your a Big Boy you won't get bailed out.
The Fed's move was part of a concerted push to help calm jittery markets and investors around the world.
On Tuesday, the Fed decided to keep its key interest rate steady at 2 percent, but acknowledged stresses in financial markets have grown and hinted it stood ready to lower rates if needed.
The central bank also pumped $70 billion into the nation's financial system to help ease credit stresses. In emergency sessions over the weekend, the Fed expanded its loan programs to Wall Street firms, part of an ongoing effort to get credit flowing more freely.
The stock market, which Monday posted its largest point loss session since the Sept. 11 attacks, recovered Tuesday after the Fed's decision on interest rates. The Dow Jones industrials rose 141 points after losing 500 points on Monday.
AIG's shares swung violently, though, as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent - and another 45 percent after hours.
Buy AIG, it will bounce back in the next few weeks, its dirt cheap right now.
Sunday, September 14, 2008
Lehman and the Fed
NEW YORK - The field of possible buyers for Lehman Brothers narrowed Saturday, but the parties involved in the discussions over the hemoraging investment bank's future were not able to nail down a solid plan over how to finance the rescue.
An investment banking big wig said Bank of America Corp. and Barclays Plc have emerged as the two more realistic suitors for Lehman Brothers. The point of contestation is the possiblity of some sort of cash injection from Lehman's rival Wall Street banks and brokerages. This is counter-intuitive. The free market is a jungle, kill or be killed, and Lehman is dying. Why help your competetor?
Top officials from the Federal Reserve and the US Treasury Department and executives from Wall Street power banks met at the New York Fed's Manhattan headquarters Saturday, after a late night meeting on Friday. All in an attempt to hash out a deal to rescue Lehman Brothers.
The financial world was watching. Failure could prompt skittish investors to unload shares of financial companies, a contagion that might affect stock markets at home and abroad when they reopen Monday. If there is no sale announced by 8:30am Monday, you should think about shorting the stock - the price will continue to fall.
Discussions were expected to continue today, said Andrew Williams, a spokesman for the New York Federal Reserve.
The investment banking official, who asked not to be named because the talks were ongoing, said the investment houses were balking at paying to polish up Lehman's balance sheet so Bank of America or Barclays could buy a financially clean firm.
He said the investment banks were angling for the government to provide some money, as it did when it helped JPMorgan Chase & Co. buy Bear Stearns in March, because they would get little to nothing in return for their help.
The government has drawn a line in the sand over using taxpayer money to help rescue Lehman Brothers, however.
The official said the talks were tense and neither side appeared willing to back down.
Besides selling the company whole or piecemeal, Lehman could be liquidated, perhaps with financial firms agreeing to still do business with the company as it wound down.
Or, a financial company or companies could buy Lehman's "good" assets. Its shunned or devalued real-estate assets could be placed in a "bad bank" financed by other banks.
Saturday's participants included Treasury Secretary Henry Paulson, Timothy Geithner, president of the New York Fed, and Securities and Exchange Commission Chairman Christopher Cox. Citigroup Inc.'s Vikram Pandit, JPMorgan Chase & Co.'s Jamie Dimon, Morgan Stanley's John Mack, Goldman Sachs Group Inc.'s Lloyd Blankfein, and Merrill Lynch & Co.'s John Thain were among the chief executives at the meeting.
Representatives for Lehman Brothers were not present during the discussions.
Federal Reserve Chairman Ben Bernanke is actively engaged in the deliberations but wasn't in attendance.
Geithner convened the meeting Friday evening and told bankers gathered at the New York Fed to come up with a solution or risk being the next to go under, investment banking officials with direct knowledge of the talks said. They spoke on condition of anonymity because the talks were ongoing.
Other potential buyers could include Japan's Nomura Securities, France's BNP Paribas and Deutsche Bank AG. All have declined to comment.
Participants in Saturday's meeting were also trying to tackle a broader agenda that includes problems at American International Group Inc. and Washington Mutual Inc., said the investment bank officials, who were briefed on the talks.
Lehman's stock closed at $3.65 Friday - an all-time low and down nearly 95 percent from its 52-week high of $67.73.
Global fears intensified Saturday that Lehman's collapse would stagger markets and undercut confidence in the U.S. financial system.
Germany's Finance Minister Peer Steinbrueck urged that a resolution be found before Asian markets open, warning ominously, "the news that is coming out of the U.S. is bad."
Lehman Brothers Holdings Inc. put itself on the block earlier this week. Bad bets on real-estate holdings - which have factored into bank failures and taken out other financial companies - have thrust the 158-year-old firm in peril. It has been dogged by growing doubts about whether other financial institutions would continue to do business with it. This causes a self-fullfilling proficy.
Richard S. Fuld, Lehman's longtime CEO, pitched a plan to shareholders Wednesday that would spin off Lehman's soured real estate holdings into a separately traded company. He would then raise cash by selling a majority stake in the company's unit that manages money for people and institutions. That division includes asset manager Neuberger Berman.
Government officials want to avoid a Bear Stearns-like bailout; the Fed in March agreed to provide a loan of nearly $29 billion as part of JPMorgan Chase & Co.'s takeover of the firm. Unlike Bear, Lehman can go directly to the Fed to draw emergency loans if it needs a quick source of ready cash. In recent weeks, though, there's been no indication that Lehman has done so.
Bear's sudden meltdown led the Fed to engage in its broadest use of lending powers since the 1930s. Fearful that other firms could be in jeopardy, the Fed temporarily opened its emergency lending program to investment firms, a privilege that for years was granted only to commercial banks, which are subject to tighter regulation.
An investment banking big wig said Bank of America Corp. and Barclays Plc have emerged as the two more realistic suitors for Lehman Brothers. The point of contestation is the possiblity of some sort of cash injection from Lehman's rival Wall Street banks and brokerages. This is counter-intuitive. The free market is a jungle, kill or be killed, and Lehman is dying. Why help your competetor?
Top officials from the Federal Reserve and the US Treasury Department and executives from Wall Street power banks met at the New York Fed's Manhattan headquarters Saturday, after a late night meeting on Friday. All in an attempt to hash out a deal to rescue Lehman Brothers.
The financial world was watching. Failure could prompt skittish investors to unload shares of financial companies, a contagion that might affect stock markets at home and abroad when they reopen Monday. If there is no sale announced by 8:30am Monday, you should think about shorting the stock - the price will continue to fall.
Discussions were expected to continue today, said Andrew Williams, a spokesman for the New York Federal Reserve.
The investment banking official, who asked not to be named because the talks were ongoing, said the investment houses were balking at paying to polish up Lehman's balance sheet so Bank of America or Barclays could buy a financially clean firm.
He said the investment banks were angling for the government to provide some money, as it did when it helped JPMorgan Chase & Co. buy Bear Stearns in March, because they would get little to nothing in return for their help.
The government has drawn a line in the sand over using taxpayer money to help rescue Lehman Brothers, however.
The official said the talks were tense and neither side appeared willing to back down.
Besides selling the company whole or piecemeal, Lehman could be liquidated, perhaps with financial firms agreeing to still do business with the company as it wound down.
Or, a financial company or companies could buy Lehman's "good" assets. Its shunned or devalued real-estate assets could be placed in a "bad bank" financed by other banks.
Saturday's participants included Treasury Secretary Henry Paulson, Timothy Geithner, president of the New York Fed, and Securities and Exchange Commission Chairman Christopher Cox. Citigroup Inc.'s Vikram Pandit, JPMorgan Chase & Co.'s Jamie Dimon, Morgan Stanley's John Mack, Goldman Sachs Group Inc.'s Lloyd Blankfein, and Merrill Lynch & Co.'s John Thain were among the chief executives at the meeting.
Representatives for Lehman Brothers were not present during the discussions.
Federal Reserve Chairman Ben Bernanke is actively engaged in the deliberations but wasn't in attendance.
Geithner convened the meeting Friday evening and told bankers gathered at the New York Fed to come up with a solution or risk being the next to go under, investment banking officials with direct knowledge of the talks said. They spoke on condition of anonymity because the talks were ongoing.
Other potential buyers could include Japan's Nomura Securities, France's BNP Paribas and Deutsche Bank AG. All have declined to comment.
Participants in Saturday's meeting were also trying to tackle a broader agenda that includes problems at American International Group Inc. and Washington Mutual Inc., said the investment bank officials, who were briefed on the talks.
Lehman's stock closed at $3.65 Friday - an all-time low and down nearly 95 percent from its 52-week high of $67.73.
Global fears intensified Saturday that Lehman's collapse would stagger markets and undercut confidence in the U.S. financial system.
Germany's Finance Minister Peer Steinbrueck urged that a resolution be found before Asian markets open, warning ominously, "the news that is coming out of the U.S. is bad."
Lehman Brothers Holdings Inc. put itself on the block earlier this week. Bad bets on real-estate holdings - which have factored into bank failures and taken out other financial companies - have thrust the 158-year-old firm in peril. It has been dogged by growing doubts about whether other financial institutions would continue to do business with it. This causes a self-fullfilling proficy.
Richard S. Fuld, Lehman's longtime CEO, pitched a plan to shareholders Wednesday that would spin off Lehman's soured real estate holdings into a separately traded company. He would then raise cash by selling a majority stake in the company's unit that manages money for people and institutions. That division includes asset manager Neuberger Berman.
Government officials want to avoid a Bear Stearns-like bailout; the Fed in March agreed to provide a loan of nearly $29 billion as part of JPMorgan Chase & Co.'s takeover of the firm. Unlike Bear, Lehman can go directly to the Fed to draw emergency loans if it needs a quick source of ready cash. In recent weeks, though, there's been no indication that Lehman has done so.
Bear's sudden meltdown led the Fed to engage in its broadest use of lending powers since the 1930s. Fearful that other firms could be in jeopardy, the Fed temporarily opened its emergency lending program to investment firms, a privilege that for years was granted only to commercial banks, which are subject to tighter regulation.
Friday, September 12, 2008
Producers take a hit
- The Producer Price Index for August fell -.9% versus estimates of a -.5% decline and a 1.2% increase in July.
- The PPI Ex Food & Energy for August rose .2% versus estimates of a .2% gain and a .7% increase in July.
- Advance Retail Sales for August fell -.3% versus estimates of a .2% gain and a downwardly revised -.5% decline in July.
- Retail Sales Less Autos for August fell -.7% versus estimates of a -.2% decline and a .3% increase in July.
- Preliminary Univ. of Mich. Consumer Confidence for September jumped to 73.1 versus estimates of 64.0 and a reading of 63.0 in August.
- The PPI Ex Food & Energy for August rose .2% versus estimates of a .2% gain and a .7% increase in July.
- Advance Retail Sales for August fell -.3% versus estimates of a .2% gain and a downwardly revised -.5% decline in July.
- Retail Sales Less Autos for August fell -.7% versus estimates of a -.2% decline and a .3% increase in July.
- Preliminary Univ. of Mich. Consumer Confidence for September jumped to 73.1 versus estimates of 64.0 and a reading of 63.0 in August.
Tuesday, September 9, 2008
OPEC
The oil market is balanced, said Ali Naimi, Saudi Arabia’s powerful oil minister, making it less likely the Opec oil cartel will formally decide to cut its output at a meeting later on Tuesday.
Mr Naimi said as he arrived in Vienna in the early hours of Tuesday: “The market is fairly well balanced and we have worked very hard since June’s meeting to bring prices to where they are now.”
e added: “Whatever the customers want, we will satisfy.”
Mr Naimi’s keenly-awaited words mark the first time he has spoken publicly about Saudi Arabia’s oil policy in several weeks. Oil prices fell by more than $1 with Nymex October West Texas Intermediate down $1.42 to $106.47 while ICE October Brent lost 74 cents at $102.70 a barrel.
Most analysts and traders this week predicted Opec would have to discuss reducing its output to shore up oil prices that have fallen more than 25 per cent since July. But they forecast that ultimately the group would maintain the status quo, at least formally, when they met in Vienna later on Tuesday.
Ed Morse, chief energy economist at Lehman Brothers, argued that Saudi Arabia, Opec’s de facto leader, had an interest in even lower prices to reignite demand. ”Opec output is likely to remain unchanged at the upcoming meeting,” he said in a note to clients.
Those predictions were mirrored by comments from other ministers, such as Galo Chiriboga, Ecuador’s energy minister, who forecast on Monday morning that Opec would change nothing.
Mohammed Abdullah Al-Aleem, Kuwait’s energy minister who sits on the committee that helps steer Opec’s decisions through economic analysis warned that supply was outpacing demand. But, he said: “For the time being ... there is no need to cut production.”
Mr Naimi’s comments a few hours later were widely interpreted as making this outcome even more likely. However, nothing is final until ministers meet after sundown on Tuesday and many analysts suspect Saudi Arabia will continue quietly to cut its own production if it feels the market is oversupplied.
Iran and Venezuela, Opec’s most hawkish members, had called for the 13-country group to reduce production, but even their message was less ardent than at past meetings. Opec members with better ties to Washington were also keen not to anger their biggest customer ahead of the presidential elections in November.
It is possible Opec in Tuesday’s communiqué will remind members of their quota obligations, which many brushed aside when oil prices rose to records of more than $147. This would signal to the market the group was prepared to act if prices fell further and give Saudi Arabia some cover to quietly cut back the extra barrels it pumped on the market this summer.
Opec members are likely continue to watch prices closely in the runup to their next meeting, which is to be held in Algeria in December.
They face a delicate balancing act, having to weigh the benefit lower oil prices have in stimulating demand for their most precious resource with the drawback of reduced revenue if prices continue to fall significantly.
In volatile trading on Monday, Nymex October West Texas Intermediate fell to an intraday low of $104.70 a barrel, the lowest level since April. It had risen as high as $109.89 on concerns about hurricane Ike keeping oil and gas production in the Gulf of Mexico shut.
The drop came as the US dollar surged to its highest level against the euro since October 2007 at $1.4095, an issue seized on by ministers on Monday.
Chakib Khelil, Algeria’s energy minister and Opec’s president said on Monday: ”What we are seeing now is that the inverse relation between the U.S. dollar and the oil price is verified.”
Copyright The Financial Times Limited 2008
Mr Naimi said as he arrived in Vienna in the early hours of Tuesday: “The market is fairly well balanced and we have worked very hard since June’s meeting to bring prices to where they are now.”
e added: “Whatever the customers want, we will satisfy.”
Mr Naimi’s keenly-awaited words mark the first time he has spoken publicly about Saudi Arabia’s oil policy in several weeks. Oil prices fell by more than $1 with Nymex October West Texas Intermediate down $1.42 to $106.47 while ICE October Brent lost 74 cents at $102.70 a barrel.
Most analysts and traders this week predicted Opec would have to discuss reducing its output to shore up oil prices that have fallen more than 25 per cent since July. But they forecast that ultimately the group would maintain the status quo, at least formally, when they met in Vienna later on Tuesday.
Ed Morse, chief energy economist at Lehman Brothers, argued that Saudi Arabia, Opec’s de facto leader, had an interest in even lower prices to reignite demand. ”Opec output is likely to remain unchanged at the upcoming meeting,” he said in a note to clients.
Those predictions were mirrored by comments from other ministers, such as Galo Chiriboga, Ecuador’s energy minister, who forecast on Monday morning that Opec would change nothing.
Mohammed Abdullah Al-Aleem, Kuwait’s energy minister who sits on the committee that helps steer Opec’s decisions through economic analysis warned that supply was outpacing demand. But, he said: “For the time being ... there is no need to cut production.”
Mr Naimi’s comments a few hours later were widely interpreted as making this outcome even more likely. However, nothing is final until ministers meet after sundown on Tuesday and many analysts suspect Saudi Arabia will continue quietly to cut its own production if it feels the market is oversupplied.
Iran and Venezuela, Opec’s most hawkish members, had called for the 13-country group to reduce production, but even their message was less ardent than at past meetings. Opec members with better ties to Washington were also keen not to anger their biggest customer ahead of the presidential elections in November.
It is possible Opec in Tuesday’s communiqué will remind members of their quota obligations, which many brushed aside when oil prices rose to records of more than $147. This would signal to the market the group was prepared to act if prices fell further and give Saudi Arabia some cover to quietly cut back the extra barrels it pumped on the market this summer.
Opec members are likely continue to watch prices closely in the runup to their next meeting, which is to be held in Algeria in December.
They face a delicate balancing act, having to weigh the benefit lower oil prices have in stimulating demand for their most precious resource with the drawback of reduced revenue if prices continue to fall significantly.
In volatile trading on Monday, Nymex October West Texas Intermediate fell to an intraday low of $104.70 a barrel, the lowest level since April. It had risen as high as $109.89 on concerns about hurricane Ike keeping oil and gas production in the Gulf of Mexico shut.
The drop came as the US dollar surged to its highest level against the euro since October 2007 at $1.4095, an issue seized on by ministers on Monday.
Chakib Khelil, Algeria’s energy minister and Opec’s president said on Monday: ”What we are seeing now is that the inverse relation between the U.S. dollar and the oil price is verified.”
Copyright The Financial Times Limited 2008
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