Wall Street Dominoes Falling
With Lehman headed for bankruptcy filing Sunday night, the next three dominoes in line for the fall are Merrill Lynch, WAMU and AIG. Bank of America took advantage of Merrill Lynch's desperation to avoid Lehman's fate by buying it... negotiations were reported to be in the $35 per share range and eventually settled on $29, still a good premium over ML's Friday closing price of $17. But BofA didn't want Lehman, they wanted Merrill Lynch, a well established retail brokerage brand name that is more synergetic to the BofA consumer brand. BoA makes out.
The Lehman bankruptcy filing is a natural outcome consistent with Wall Street's nickel and diming culture. Instead of a bank or concern purchasing Lehman lock, stock and barrel, the bankruptcy will allow buyers to return to feast on Lehman's parts and ignore the rotten organs.
The Fed decided the buck stops here and now with bailout guarantees, so expect a variety of Fed prompted actions - a $70 billion bank consortium loan program to provide liquidity for the Lehman trade unwind, perhaps even a rate cut, to quell damage.
Three of the five top investment banks - Bear Stearns, Lehman and Merrill Lynch - have disappeared in the past half year. The industry is headed into a new era where global superbanks like BofA (include overseas banks who remained unscathed by mortgage bonds) can wield their capital like the rich poker player taking out their "all-in" brethren.
The falling dominoes will continue to force any financial institution with mortgage bond exposure to run for cover, either by selling assets or consolidating to improve their balance sheet, because the Fed and Treasury have pulled their financial backstopping after Freddie and Fannie. On the bright side, such consolidation will eventually clear the air on just where these toxic mortgage bonds reside. By isolating the problems, the financial industry can rebuild itself on a clean slate platform.
Sometimes the treatment hurts for awhile. Is this a perfect solution? Not sure anybody would argue that. Still, Uncle Ben saying the Fed sponsored lunch is over is a good thing.
You've been on top of this at every stop, Thanks for that.
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I'm up early tomorrow to watch the show... expect a meltdown and a recovery within 48 hours. maybe a rate cut... and if we're lucky a few more deals cobbled together in the span of all-nighters on Park Avenue.
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