Lehman, AIG, MER, CDS etc etc etc Watch…Updates Throughout the Night

Posted on September 14th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Also numbers are changing.  Last night the numbers being reported by the press were that Lehman had $50bb in bad Real Estate assets. Now, suddenly a few are reporting $85bb. That makes all the difference in the world. No wonder they can’t get a deal through with their $30bb ‘bad bank’ idea.

This story is all about getting the assets off Lehman’s books so they don’t have devastating effects on everyone else’s books upon a 15 cent fire sale. But now the numbers have changed from 60 cents on the dollar ($50bb in assets @ $30bb purch price) to 35 cents on the dollar ($85bb @ $30bb purch price).

Why would these 10 banks spend $3bb that they don’t have when they still have a massive mark coming when the deal goes down at 35 cents? Why burn shareholder money in a barrel and allow a competitor to scoop up LEH and compete with you?  If I am GS I am thinking, lets let Lehman go BK.  Even if my (GS) stock falls 30% I am still alive and over next 10 years I have one less competitor.

On the .Gov side, the poker game continues and .Gov is playing hard ball. Gov can’t play ball with a massive backing, because they have to keep their powder dry for WM, MER and AIG.  Gov refunding time is upon us, which is why they are playing hard ball in the first place. If they back down, it could precipitate a Treasury run. They are screwed – we are all screwed. They are damned if they do, damned if they don’t here.

Oh ya, and I am not even factoring in Lehman owning 10% of all CDS counter party risk into the mix. This is going to be a fun next few hours.  I will keep you posted by adding to this post anything I hear. -Best Mr Mortgage

Follow-up News:

1pm PST – BofA and Merrill in merger talks. This is good news.

3:30pm PST – SPZ open down 42 handles.

5pm PST – CNBC is on right now talking about sweeping changes on Wall Street and updated events surrounding all the troubled companies.

Notes below (will keep updating as events unfold).  Hang on gang, this is getting interesting. AIG is the real threat here. Keep an eye out.

$50bb Collateralized Borrowing Pool of Funds: AP Report – Banks Will Pool Funds to Prop Troubled Companies.  A top banking official says US and foreign banks are planning major steps to inoculate the global financial system as a BK filing by Lehman appeared likely. The official said Sunday the banks would create a pool of $50bb to lend to troubled financial companies.

7pm PST Update on Collateralized Borrowing Pool – $70bb pool from 10 banks. No one bank can borrow more than a third. This is a ‘get ready for rally bad stuff to happen’ fund.

LEH: CNBC has a split screen up with with Lehman’s front door on half screen. Employees are streaming in empty handed and out with boxes in hand.

LEH: paper not good at TAF window any longer. I told you! CNBC has said for weeks that reduced borrowing at the Fed window by the investment banks is great because they don’t need the money. I have been screaming that ‘they don’t have the ‘investment grade’ assets to put up as collateral’ and its a bad thing.

MER:  CNBC says ‘Merrill likely to be purchased by BofA’.  They better be careful. Haven’t they learned their lesson yet.

5:30pm PST – Charley Gasparino is floating a rumor that Merrill is being bought by BofA for $29.  

5:40pm PST – Rumor is true. Merrill bought at $29 per share in stock.CNBS actually posed a great question – “if Merrill can command a premium then why sell?”.  Financials guru Michale C says “They can sell at a premium TO BAC …. they always pay too much (25% of CFC for $17 per share and $21bb for LaSalle just to name the most recent ones)”

David Faber on AIG: Trying to raise $40bb to avoid ratings downgrades.  If downgraded will have to put up a lot more collateral on CDS. They want to sell assets, raise new new capital and move capital from regulated insurance companies. AIG has liquidity. They need more liquidity or they will be downgraded. They are connected in deriv markets in all sorts of different ways and it would be a bad thing.

6:10pm PST WILD NEWS –AIG looking for a Fed bridge loan tonight for asset sales it will then undertake. They can move ahead to raise capital from private equity firms from KKR and TPG.  This is totally unprecedented.

Cramer comes on spewing: Said ‘when Bear fell it was a buying opportunity’. He said ‘if BAC buys MER’ he will buy the DOW down 250. If AIG raises $40bb, he will do the same. Bla bla bla. Cramer says ‘buy NASDAQ’ tomorrow. He said buy Pulte Homes. Oh my. Here is the latest Don Harrold video on Cramer. Watch them all. http://www.youtube.com/watch?v=aWFf0FBA6JE

Bill Gross: He said the CDS side of the equation is scary. Expect extreme volatility in the CDS as everyone tries to get right side up again. Fed may not lower rates on Tuesday.

Harvey Pitt – Kalorama Partners: Classic run on the bank but the bank happens to be brokerages, insurance companies etc. The firms have to restructure. LEH had a lot of notice after Bear but nobody listened. Now they have to pay a large price.

Carlos Mendez: Absolute counter party risk here.  Major calls on capital from anyone trading with Lehman.  In their CDS unwind test runs this weekend, all scenarios surrounding Lehman were a total mess.  BAC buying MER means nothing to the market.

Maria Bartoromo – The US is keeping out Private Equity firms due to tighter regulations and she is speculating they will ease restrictions on private equity so they can jump in. Focus on the crisis at hand damnit Maria. Take off the pump hat for an hour.

Vince Farrell is on now: It’s PUMP TIME.  Merrill and BofA is a great deal and positive for the market. Every time you have had a run on the bank it is a buying opportunity. Screw him.

5:45pm PST MAJOR NEWS OUT – Fed will accept stocks, short-term notes and legal-sized copy paper at Discount Window. 

How is putting the entire Fed’s remaining balance sheet at risk going to be viewed? Is it going to be a positive or a panic move? Why would they do this though?  Stocks and short-term notes are not the problem. They are more liquid than anything else. But overall, it is not about a liquidity issue it is about a capital issue. This makes no sense other than for a feel good move.

6:40pm PST  – BAC and MER deal FOUR MONTHS OUT! This is by no means a ‘done deal’ yet. Just like with CFC, the all-stock deal looked much different than at the beginning. Plus, BAC said ‘we have no intention of honoring all CFC debt’.  This was a Merrill bailout and nothing more.

7:20pm PST – Former Treasury Secretary Roger Altman was on and said ‘this is clearly a negative for the financial markets and not a positive or a neutral’.  He said more but he talks really choppy and slow. But in a nutshell, the previous statement sums it up.

29 Responses to “Lehman, AIG, MER, CDS etc etc etc Watch…Updates Throughout the Night”

  1. This might be an “IT” moment..stay tuned

  2. It signals to all other troubled banks, the auto industry and the insurance industry that there are no more bailouts. DOOM

  3. There seems too many Bush buddies in LEH. But that aint gonna help all the other ones coming down the road.

  4. Wow! We can now rally up 400 points. LEH’s problems are behind us. Woo hoo! Recovery is in. Buy buy buy!

  5. BAC will take MER.

    Bank of Zimbabwe will take AIG
    Bank of North Korea will take WM.

    Don’t you just love what 100 bankers can do in a room on a weekend! eHarmony gone wild. Woo hoo! Bottom is in. Buy buy buy!

  6. From Roubini’s blog earlier in the day,

    “I also argued in follow-up pieces that, in a matter of two years, no one of the remaining independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs) would survive as:

    1. their business model is now impaired (securitization is semi-dead);

    2. they will need to be regulated like banks given the PDCF support and thus have lower leverage, higher liquidity and more capital that will erode their profitability;

    3. Their severe maturity mismatch – borrowing very short term and liquid, leveraging a lot and lending and investing in more long term and illiquid ways – makes them very fragile – in the absence of deposit insurance and in the presence of only limited LOLR support by a central bank – to bank like run that are destructive even of illiquid but otherwise solvent institutions.

    Thus all such broker dealers need to merge with larger financial institutions that have a commercial banking arm and thus access to stable and insured deposits and to true LOLR Fed support. That process of unraveling of independent broker dealers started with Bear Stearns; now it is moved to Lehman; tomorrow Merrill Lynch will be on line; and Morgan Stanley and Goldman Sachs will be next.

    No one of them can and will survive as independent entities. So, the Fed and Treasury should advise them all to start finding a large international partner (international as almost no domestic partner is now sound to take them over) and merge with such partner before we get another Bear or Lehman disaster.”

  7. Looks to be a love fest. Let the mergers begin.

  8. Headed out to Costco/Walmart to pick up a few canned goods and ammo. : )

    Pretty ridiculous how most of America is still worried about “terrorists” when the collapse of financial markets is much more devastating than that of the twin towers.

  9. LEH needs to go, it’s sad to see a 160 year old company, one of the respected firms of this country, go bankrupt, very sad…but over the last few years they were way too greedy just like the others and made horribly stupid bets. They should not be bailed out.

  10. Seeing the bearishness on this blog with regard to the stock market, just makes me think we are so much closer to the bottom. Great contrary indicators.

  11. NYT is saying BAC/Countrywide is in “advanced talks to buy Merrill Lynch for at least $38.25 billion in stock… A deal valued at between $25 and $30 a share.” MER closed at $17.05 on Friday.

    Wow, WTF is going on?

  12. Nate,

    This is to cushion the fall. Ouch!

  13. Ah yes, the bottom. That elusive, often-mentioned quarry. Much like a snipe, the Holy Grail, or true love. Much sought after, but seldom found.

    I’m a fan of contrary indicators too, but there’s also the saying: the public is right about the trends, but wrong at both ends.

    I think the current trend is still intact, and will be until at least that magical point called “housing affordability” is reached. Housing prices drive the valuation of all these “toxic” assets, and even with the recent dramatic current price declines, the median house still cannot be purchased with the median income.

    But I encourage you to place your money where your beliefs are. We can compare notes in a year and see who had the more accurate market insight.

  14. I’m thinking this is actually pretty simple. Mark all mortgages of the last 3 years at 50% value and all preceding years at 85% value. Apply that formula across Fanny and Freddie, all banks and investment banks and you have your answer of where we are and where we need to go. Just a rough guess but probably not too far off….and better than the “experts” are saying on any given day. Of course I could be wrong…..

  15. I’m Lovin It!

    These Wall Street Shills Love to Speak of Risk Taking!

    But they never take any risk they just love to steal.

    They Suck!

    I hope the Dow opens at 8000 and then goes down from there.

  16. MelB – you just about nailed it. But you have to go back to 2003. The problem is probably $6tt of the $10.5tt in mortgages in existence were originated during those years. But this formula only works across ALL mortgages but just those of the exotic nature. Because exotics will have a much greater loss severity when all is said and done.

  17. Where are The Wall Street Shills Now?

    We have heard the MYTH of the Wall Street Shill as the BIG RISK TAKER – with other people’s money.

    That’s why they get to get to Steal – oh, I mean earn so much money, right?

    Well these SHILLS had four deals they could have taken some risk on; Bear, Freddie, Fannie & Lehman.

    Where are the risk takers?

    Wall Street Shills DO NOT MAKE MONEY they transfer wealth from REAL PRODUCERS to their accounts.

    Start The Trails, IMMEDIATELY.

    Wake Up America and stop the Cheerleading for these useless Shills.

    The only things these SHILLS produce are Losses for their SUCKERS, oh I mean Clients.

  18. Important new Lehman facts from the best Federal Reserve beat reporter in the world by far, Krishna Guha of the Financial Times.


    Tony Buzan

  19. Great report but I think a number of these readers are looking at real estate and banking with a narrow mind. Mr. Mortgage, you’re much more intelligent than I am. However, there’s still the matter of the dollar’s mystical worth when it comes to our gov (e.g. taxpayers) owing trillions to the Fed (another scam topic entirely) and no longer reporting to the M3 index. Hmmm…this country is operating on an illusion of being credit worthy to those who buy bonds and still believe in the dollar or have to in order to sustain their own economies because we buy from them, namely China and Saudi’s. Eventually that illusion (or obligation) disappears or is exhausted and leaves those who once saw a fountain in the middle of desert realizing that they’re drinking sand. Can you say Amero? These guys are not stupid people. That’s what they (Bush, Bilderberg, Rothschild) have planned. And guess how many Amero’s you’ll be getting with that dollar once it happens? Oh and btw, you’ll have to pay those taxes for the country’s debt as well as the evil carbon tax that will be leveraged in anything you can think of simply because Al Gore says it true. Another scam so they can tax. This whole world we’re living in reads like a fiction novel. Crazy!

  20. Let the games begin:
    Horray!! Another weekend rescue..this only shows how bad things really are.. but wait…there is much more of this kind of crap coming down the pipe. Unfortunately it only gets much worse. Watch the regional banks in the coming months.

  21. CNBC: BAC takes MER for 44 bil in stock.

  22. DOW future only down 284. Guess it’s the bottom Cramer’s been calling for…..hahahha

  23. HEY – I am keeping a running tally on everything on the main post above. Refresh.

  24. Congress needs to incentivize would be real estate investors through tax credits through the end of 2009 to invest in housing. Tax credit on the purchase, and then accelerated depreciation on the next 5 years. Both of these itmes would give a higher implied return on the investment, and put a floor under housing.

  25. Boy, these days everyone wants a bailout. “Housing prices are too high for me to get a real return on my investment – USG should sweeten the pot for me.” So why should they do that?

    Congress “needs” to do nothing at all. Housing prices need to fall to a level where normal people can afford to buy normal houses using a 30 year fixed mortgage. Then, as if by magic, real estate prices will find their floor.

    Really its not very complicated. Scary, for those in the housing industry. But not complicated.

  26. Why is everyone LOOKING for a solution.

    I thought the FREE MARKET was the Solution!

    Just like an atheist praying when their on their death bed.

    You Shills wear the FREE MARKET lapel pin for show only.

  27. The fact that the Fed is taking equities shows massive desperation in my opinion. Since equities are totally liquid (they can be sold on the exchanges where there is plenty of liquidity) I see this move as a desperate attempt to keep the stock market from crashing. Instead of having the IBs, banks, and whoever else has access to the Fed Discount Window selling their stocks on the open market, the Fed will loan against them at the “prevailing” market price. Of course, the “prevailing” market price would go down if the Fed beneficiaries were to sell their stocks on the open market.

    It’s also possible that some ailing Fed Discount Window Teetsucker is holding a brickton of MER stock, so the Fed conspired with BofA to have BofA “bid” $29 for MER. Now, instead of the ailing teetsucker dumping all thier MER on the open market and driving the price down from $17, the Teetsucker can get $29/share straight from the Fed Discount Window. Man. I wish I could get that kind of deal.

  28. As a small business owner it has been clear for years that all people seeking “BIG RETURNS”, hedge funds, retirement funds, banks, etc. were really bleeding the productive sector of our economy. They have finally bled the goose totally and the parasites are dying, its a natural process that will run its course. Those of us that have always believed we should produce a product people want in exchange for their money will hopefully still find buyers and the economy will recover.

  29. Tim,

    Thou hast said it.
    An astute examination of the situation.
    Oh uhm, you don’t suppose it’s BOA that
    owns a buttload of MER stock ?

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