Re: Stock market giants Merrill Lynch and Lehman Bros go down, rest of the economy soon to follow

[hp...@lycos.com]

On Sep 15, 4:14 pm, Thaddeus Stevens <thaddeussteph...@gmail.com>
wrote:
>       ||| Ever read about those days in the 1930's when there was a 'bank holiday'? After the
> holiday, the banks opened and billions of dollars (trillions in today's money), had vanished
> down the rabbit hole. Get your stuff while the gettin's good. Now! |||
>
> While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed
> chairman, Ben S. Bernanke, and Mr. Paulson had warned that they would not put taxpayer money at
> risk simply to prevent a Lehman collapse.
>
> The message marked a major change in strategy but it remained unclear until at least Friday what
> would happen. “They were faced after Bear Stearns with the problem of where to draw the line,”
> said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic
> Advisors, a forecasting firm. “It became clear that this piecemeal, patchwork, case-by-case
> approach might not get the job done.”
>
> Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had
> ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger
> bailout of Fannie Mae and Freddie Mac.
>
> Outside the public eye, Fed officials had acquired much more information since March about the
> interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and
> traders in the vast market for credit-default swaps and other derivatives. In the end, both Wall
> Street and the Fed blinked.
>
> Lehman Files for Bankruptcy; Merrill Is Sold
> By ANDREW ROSS SORKIN
>
> This article was reported by Jenny Anderson, Eric Dash and Andrew Ross Sorkin and was written by
> Mr. Sorkin.
>
> In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself
> on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis,
> while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and
> hurtled toward liquidation after it failed to find a buyer.
>
> The humbling moves, which reshape the landscape of American finance, mark the latest chapter in
> a tumultuous year in which once-proud financial institutions have been brought to their knees as
> a result of hundreds of billions of dollars in losses because of bad mortgage finance and real
> estate investments.
>
> But even as the fates of Lehman and Merrill hung in the balance, another crisis loomed as the
> insurance giant American International Group appeared to teeter. Staggered by losses stemming
> from the credit crisis, A.I.G. sought a $40 billion lifeline from the Federal Reserve, without
> which the company may have only days to survive.
>
> The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as
> Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to
> avoid a downward spiral in the markets stemming from a crisis of confidence.
>
> “My goodness. I’ve been in the business 35 years, and these are the most extraordinary events
> I’ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone
> Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.
>
> It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during
> the last year, and the controlled demise of Lehman will be enough to finally turn the tide in
> the yearlong financial crisis that has crippled Wall Street and threatened the broader economy.
>
> Early Monday morning, Lehman said it would file for Chapter 11 bankruptcy protection in New York
> for its holding company in what would be the largest failure of an investment bank since the
> collapse of Drexel Burnham Lambert 18 years ago, the Associated Press reported.
>
> Questions remain about how the market will react Monday, particularly to Lehman’s plan to wind
> down its trading operations, and whether other companies, like A.I.G. and Washington Mutual, the
> nation’s largest savings and loan, might falter.
>
> Indeed, in a move that echoed Wall Street’s rescue of a big hedge fund a decade ago this week,
> 10 major banks agreed to create an emergency fund of $70 billion to $100 billion that financial
> institutions can use to protect themselves from the fallout of Lehman’s failure.
>
> The Fed, meantime, broadened the terms of its emergency loan program for Wall Street banks, a
> move that could ultimately put taxpayers’ money at risk.
>
> Though the government took control of the troubled mortgage finance companies Fannie Mae and
> Freddie Mac only a week ago, investors have become increasingly nervous about whether major
> financial institutions can recover from their losses.
>
> How things play out could affect the broader economy, which has been weakening steadily as the
> financial crisis has deepened over the last year, with unemployment increasing as the nation’s
> growth rate has slowed.
>
> What will happen to Merrill’s 60,000 employees or Lehman’s 25,000 employees remains unclear.
> Worried about the unfolding crisis and its potential impact on New York City’s economy, Mayor
> Michael R. Bloomberg canceled a trip to California to meet with Gov. Arnold Schwarzenegger.
> Instead, aides said, Mr. Bloomberg spent much of the weekend working the phones, talking to
> federal officials and bank executives in an effort to gauge the severity of the crisis.
>
> The weekend that humbled Lehman and Merrill Lynch and rewarded Bank of America, based in
> Charlotte, N.C., began at 6 p.m. Friday in the first of a series of emergency meetings at the
> Federal Reserve building in Lower Manhattan.
>
> The meeting was called by Fed officials, with Treasury Secretary Henry M. Paulson Jr. in
> attendance, and it included top bankers. The Treasury and Federal Reserve had already stepped in
> on several occasions to rescue the financial system, forcing a shotgun marriage between Bear
> Stearns and JPMorgan Chase this year and backstopping $29 billion worth of troubled assets — and
> then agreeing to bail out Fannie Mae and Freddie Mac.
>
> The bankers were told that the government would not bail out Lehman and that it was up to Wall
> Street to solve its problems. Lehman’s stock tumbled sharply last week as concerns about its
> financial condition grew and other firms started to pull back from doing business with it,
> threatening its viability.
>
> Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big
> British bank, and Bank of America. At the same time, other Wall Street executives grew more
> concerned about their own precarious situation.
>
> The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the
> nation’s largest brokerage force and its name is known in towns across America, while Lehman’s
> main customers are big institutions. But during the credit boom both firms piled into risky real
> estate and ended up severely weakened, with inadequate capital and toxic assets.
>
> Knowing that investors were worried about Merrill, John A. Thain, its chief executive and an
> alumnus of Goldman Sachs and the New York Stock Exchange, and Kenneth D. Lewis, Bank of
> America’s chief executive, began negotiations. One person briefed on the negotiations said Bank
> of America had approached Merrill earlier in the summer but Mr. Thain had rebuffed the offer.
> Now, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and
> further cripple Merrill Lynch, the two parties proceeded with discussions.
>
> On Sunday morning, Mr. Thain and Mr. Lewis cemented the deal. It could not be determined if Mr.
> Thain would play a role in the new company, but two people briefed on the negotiations said they
> did not expect him to stay. Merrill’s “thundering herd” of 17,000 brokers will be combined with
> Bank of America’s smaller group of wealth advisers and called Merrill Lynch Wealth Management.
>
> For Bank of America, which this year bought Countrywide Financial, the troubled mortgage lender,
> the purchase of Merrill puts it at the pinnacle of American finance, making it the biggest
> brokerage house and consumer banking franchise.
>
> Bank of America eventually pulled out of its talks with Lehman after the government refused to
> take responsibility for losses on some of Lehman’s most troubled real-estate assets, something
> it agreed to do when JP Morgan Chase bought Bear Stearns to save it from a bankruptcy filing in
> March.
>
> A leading proposal to rescue Lehman would have divided the bank into two entities, a “good bank”
> and a “bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have
> been performing well, while a group of 10 to 15 Wall Street companies would have agreed to
> absorb losses from the bank’s troubled assets, to two people briefed on the proposal said.
> Taxpayer money would not have been included in such a deal, they said.
>
> Other Wall Street banks also balked at the deal, unhappy at facing potential losses while Bank
> of America or Barclays walked away with the potentially profitable part of Lehman at a cheap price.
>
> For Lehman, the end essentially came Sunday morning when its last potential suitor, Barclays,
> pulled out from a deal, saying it could not obtain a shareholder vote to approve a transaction
> before Monday morning, something required under London Stock Exchange listing rules, one person
> close to the matter said. Other people involved in the talks said the Financial Services
> Authority, the British securities regulator, had discouraged Barclays from pursuing a deal.
> Peter Truell, a spokesman for Barclays, declined to comment. Lehman’s subsidiaries were expected
> to remain solvent while the firm liquidates its holdings, these people said. Herbert H. McDade
> III, Lehman’s president, was at the Federal Reserve Bank in New York late Sunday, discussing
> terms of Lehman’s fate with government officials.
>
> Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy
> protection. Because of the harsher treatment that federal bankruptcy law applies to
> financial-services firms, Lehman cannot hope to reorganize and survive. It was not clear whether
> the government would appoint a trustee to supervise Lehman’s liquidation or how big the
> financial backstop would be.
>
> Lehman has retained the law firm Weil, Gotshal & Manges as its bankruptcy counsel.
>
> The collapse of Lehman is a devastating end for Richard S. Fuld Jr., the chief executive, who
> has led the bank since it emerged from American Express as a public company in 1994. Mr. Fuld,
> who steered Lehman through near-death experiences in the past, spent the last several days in
> his 31st floor office in Lehman’s midtown headquarters on the phone from 6 a.m. until well past
> midnight trying to save the firm, a person close to the matter said.
>
> A.I.G. will be the next test. Ratings agencies threatened to downgrade A.I.G.’s credit rating if
> it does not raise $40 billion by Monday morning, a step that would cripple the company. A.I.G.
> had hoped to shore itself up, in party by selling certain businesses, but potential bidders,
> including the private investment firms Kohlberg Kravis Roberts and TPG, withdrew at the last
> minute because the government refused to provide a financial guarantee for the purchase. A.I.G.
> rejected an offer by another investor, J. C. Flowers & Company.
>
> The weekend’s events indicate that top officials at the Federal Reserve and the Treasury are
> taking a harder line on providing government support of troubled financial institutions.
>
> While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed
> chairman, Ben S. Bernanke, and Mr. Paulson had warned that they would not put taxpayer money at
> risk simply to prevent a Lehman collapse.
>
> The message marked a major change in strategy but it remained unclear until at least Friday what
> would happen. “They were faced after Bear Stearns with the problem of where to draw the line,”
> said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic
> Advisors, a forecasting firm. “It became clear that this piecemeal, patchwork, case-by-case
> approach might not get the job done.”
>
> Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had
> ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger
> bailout of Fannie Mae and Freddie Mac.
>
> Outside the public eye, Fed officials had acquired much more information since March about the
> interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and
> traders in the vast market for credit-default swaps and other derivatives. In the end, both Wall
> Street and the Fed blinked.
>
> Reporting was contributed by Edmund L. Andrews, Eric Dash, Michael Barbaro, Michael J. de la
> Merced, Louise Story and Ben White.    http://www.nytimes.com/2008/09/15/business/15lehman.html?em=&pagewant...
>
>         *******************************************************************
> The Fundamentals Are Not Sound ...
> A Temporary Respite from Permanent Decline
>
> By PAUL CRAIG ROBERTShttp://www.counterpunch.org/
>
> Americans were alarmed last June as the price of oil raced toward $150 per barrel. Today, as the
> price falls toward $100, Americans feel relieved. They have forgotten that prior to the Bush
> regime’s wars, the price of oil was $30 per barrel.
>
> Similarly with the dollar. Despair ruled as the dollar fell to 1.6 to 1 euro. Now with the
> dollar’s rise to 1.4 to 1 euro, relief bathes the markets. The fact that the dollar will never
> return to parity with the euro is out of sight and out of mind.
>
> In declines, as in rises, speculation can run ahead of fundamentals. Just as speculators in oil
> futures markets can drive the price too high, currency speculators can drive a currency too low.
>
> The dollar’s problems are the enormous US trade and budget deficits and the fact that there
> appears to be no way to close either. Offshoring of US manufacturing and service jobs has
> enlarged the trade deficit while shrinking the domestic income tax base. In addition to its
> energy imports, the US has large trade deficits in manufactures.
>
> When inflation is properly measured, the US economy has experienced little, if any, real
> economic growth in the 21st century. Yet, according to economist Joseph Stiglitz, the total cost
> of the Bush regime’s wars in behalf of US and Israeli hegemony is $3 trillion. Without a rapidly
> expanding economy, there are insufficient tax revenues to cover these costs.
>
> The US is dependent on foreigners to finance its $600 billion annual government budget deficit
> and its $800 billion annual trade deficit. The US government relies on foreigners to recycle
> their $800 billion trade surplus dollars to buy US Treasury bonds and mortgage debt.
>
> Foreigners were becoming reluctant to continue the same rate of recycling. This reluctance
> contributed to the dollar’s slide and to the worsening situation of Fannie Mae and Freddie Mac,
> which need to issue their own bonds in order to support their mortgage holdings.
>
> The US Treasury took steps to avert, or perhaps more accurately to push off into the future, a
> crisis. Foreign central banks agreed to purchase dollars so that low US interest rates could
> persist through the November election. HIgh interest rates now would make the mortgage crisis
> unmanageable.
>
> To keep the recycling going, the US Treasury took the mortgage giants under its wing in order to
> reassure foreign investors. According to a September 8 Reuters report from Beijing, “China owned
> $376 billion of debt issued by US government agencies, principally Fannie and Freddie, as of
> mid-2007.”
>
> If the Treasury’s new relationship with Fannie and Freddie implies a guarantee of the bad
> mortgages as well as the bonds issued by the two companies, it is possible that the Treasury has
> put at risk its own ability to borrow.
>
> The Treasury already has to borrow $600 billion a year to finance the operations of the US
> government. How much in addition will the Treasury need to borrow, or co-sign, in order to keep
> the two companies afloat and to keep mortgages from defaulting?
>
> The total could be greater than the US Treasury’s credibility.
>
> It remains to be seen whether the Treasury has put troubled debt on the same footing as its own
> or brought trouble to Treasury bonds.
>
> If the latter, America’s superpower days are over, and the world will be spared the neocons’
> hegemonic wars.
>
> Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was
> Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National
> Review. He is coauthor of The Tyranny of Good Intentions. He can be reached at:
> PaulCraigRobe...@yahoo.com
>          __________________________________________________________________
>          - - - -> More political discussion continues athttp://www.usaliberalism.com/
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>         __________________________________________________________________
>
> A reasonably just and well-ordered democratic society might be possible, and . . . justice as
> fairness should have a special place among the political conceptions in its political and social
> world. . . [M]any are prepared to accept the conclusion that a just and well-ordered democratic
> society is not possible, and even regard it as obvious. Isn't admitting it part of growing up,
> part of the inevitable loss of innocence? But is this conclusion one we can so easily accept?
>         The answer we give to the question of whether a just democratic society is possible and
> can be stable for the right reasons affects our background thoughts and attitudes about the
> world as a whole. And it affects these thoughts and attitudes before we come to actual politics,
> and limits or inspires how we take part in it. . .
>     If we take for granted as common knowledge that a just and well-ordered democratic society
> is impossible, then the quality and tone of those attitudes will reflect that knowledge. A cause
> of the fall of Wiemar's constitutional regime was that none of the traditional elites of Germany
> supported its constitution or were willing to cooperate to make it work.  They no longer
> believed a decent liberal parliamentary regime was possible. Its time had past.
>
> The regime fell first to a series of authoritarian cabinet governments from 1930 to 1932. When
> these were increasingly weakened by their lack of popular support, President Hindenburg was
> finally persuaded to turn to Hitler, who had such support and whom conservatives thought they
> could control.
> ~ John Rawls "Political Liberalism" pg. lx
>
>          __________________________________________________________________
>
> "Let me give you a word of the philosophy of reform. The whole history of the progress of human
> liberty shows that all concessions yet made to her august claims, have been born of earnest
> struggle. The conflict has been exciting, agitating, all-absorbing, and for the time being,
> putting all other tumults to silence. It must do this or it does nothing. If there is no
> struggle there is no progress. Those who profess to favor freedom and yet depreciate agitation,
> are men who want crops without plowing up the ground, they want rain without thunder and
> lightening. They want the ocean without the awful roar of its many waters."
>
> "This struggle may be a moral one, or it may be a physical one, and it may be both moral and
> physical, but it must be a struggle. Power concedes nothing without a demand. It never did and
> it never will. Find out just what any people will quietly submit to and you have found out the
> exact measure of injustice and wrong which will be imposed upon them, and these will continue
> till they are resisted with either words or blows, or with both. The limits of tyrants are
> prescribed by the endurance of those whom they oppress. In the light of these ideas, Negroes
> will be hunted at the North, and held and flogged at the South so long as they submit to those
> devilish outrages, and make no resistance, either moral or physical.   Men may not get all they
> pay for in this world; but they must certainly pay for all they get. If we ever get free from
> the oppressions and wrongs heaped upon us, we must pay for their removal. We must do this by
> labor, by suffering, by sacrifice, and if needs be, by our lives and the lives of others."http://www.buildingequality.us/Quotes/Frederick_Douglass.htm
> Frederick Douglass, 1857
>
>         ----------------------------------------------------------------------
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