Deal or No Deal has gone global, folks!
Yesterday AIG got the mother of all deals, an $85 billion dollar loan to buy the company enough time to sell off assets. The government now has an 79.9% stake in the world’s largest insurance company, and it’s going to be selling chunks of AIG to try to make that money back.
Fearing a financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group.
The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.
With time running out after A.I.G. failed to get a bank loan to avoid bankruptcy, Treasury Secretary Henry M. Paulson Jr. and the Fed chairman, Ben S. Bernanke, convened a meeting with House and Senate leaders on Capitol Hill about 6:30 p.m. Tuesday to explain the rescue plan. They emerged just after 7:30 p.m. with Mr. Paulson and Mr. Bernanke looking grim, but with top lawmakers initially expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with.
What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but A.I.G.’s role as an enormous provider of esoteric financial insurance contracts to investors who bought complex debt securities. They effectively required A.I.G. to cover losses suffered by the buyers in the event the securities defaulted. It meant A.I.G. was potentially on the hook for billions of dollars’ worth of risky securities that were once considered safe.
If A.I.G. had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of those securities, and that in turn would have reduced their own capital and the value of their own debt. Small investors, including anyone who owned money market funds with A.I.G. securities, could have been hurt, too. And some insurance policy holders were worried, even though they have some protections.
“It would have been a chain reaction,” said Uwe Reinhardt, a professor of economics at Princeton University. “The spillover effects could have been incredible.”
Ahh, but the game isn’t over yet. Not by a long, long way. For you see, today is a new day…and we have a new contestant on the other side of the pond, UK megabank HBOS is about to be bought out by Lloyd’s of London.
Embattled mortgage lender HBOS PLC confirmed Wednesday that it is in advanced talks about being taken over by Lloyds TSB PLC in what would be a further reshaping of the financial industry amid the credit crisis.
The brief announcement to the London Stock Exchange gave no details, adding that the talks may not lead to an agreement.
Lloyds is the fifth-largest U.K. bank by market capitalization and the U.K.’s third-biggest home mortgage lender. HBOS, parent company of Halifax and the Bank of Scotland, writes about a fifth of the home mortgages in the U.K.
Here on this side of the pond, the bailout of AIG has failed to stop the bloodbath. The Dow is down 350+ at noon and speculation is swirling around who is next. Odds are it’s WaMu, but the bloodbath is rolling across the board.
U.S. stocks tumbled as bank lending seized up in the wake of the government’s takeover of American International Group Inc. and investors fled to the relative safety of Treasuries.
Goldman Sachs Group Inc. and Morgan Stanley, the two largest U.S. securities firms, plunged more than 14 percent after Oppenheimer & Co. analyst Meredith Whitney cut profit estimates. General Electric Co., the world’s third-biggest company, fell 7.7 percent and U.S. Steel Corp. slid 11 percent. Yields on three-month bills sank to a 54-year low and a measure of corporate borrowing costs surged to the highest since the crash of 1987.
“It’s ugly,” said Michael Mullaney, a Boston-based money manager for Fiduciary Trust Co., which oversees $10 billion in stocks and bonds. “It’s about the worst I’ve seen it in 25 years. You have to have free-flowing credit to lubricate the system. That’s not happening right now.”
The S&P 500 lost 36.6, or 3 percent, to 1,176.99 at 11:24 a.m. in New York, its lowest in almost three years. The Dow Jones Industrial Average decreased 275.36, or 2.5 percent, to 10,783.66. The Nasdaq Composite Index sank 69.71, or 3.2 percent, to 2,138.19. More than 10 stocks retreated for each that rose on the New York Stock Exchange.
About $2.8 trillion of market value was erased from global stocks this week, triggered by Lehman Brothers Holdings Inc.’s bankruptcy. Russia halted stock trading for a second day and poured $44 billion into its three biggest banks in a bid to halt the worst financial crisis in a decade.
The global credit crunch is in overdrive. The AIG bailout has locked up the credit markets across the globe, and the markets are in freefall in Asia, Europe, and America.
We’re watching Deal Or No Deal come up No Deal all over the world. Credit swaps are locking up. Trillions of credit has evaporated across the globe and will continue to evaporate at a time where credit liquidity is the only thing keeping the markets going, being able to trade phantom fiat cash for other phantom fiat cash…the world’s biggest IOU swap meet just ground to a screaming halt.
The Fed is scrambling to raise cash itself. It’s in real trouble, having to resort to a special auction of T-Bills in order to save its bacon.
The Treasury will sell more debt to enable the Federal Reserve to expand its balance sheet, a sign of the strains created by the biggest extension of central-bank credit to financial companies since the Great Depression.
The program starts today with a $40 billion auction of 35- day bills, a day after the government agreed to take over American International Group Inc., the Treasury said in a statement in Washington.
The proceeds will “provide cash for use” by the Fed as it seeks to boost liquidity in credit markets struggling from $515 billion in writedowns and losses since the start of last year. The announcement illustrates the potential drain on the government’s finances in taking over AIG, Fannie Mae and Freddie Mac, and taking on $29 billion in Bear Stearns Cos. assets.
“It is becoming imperative for the Fed to take actions to enlarge its balance sheet,” said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.
Yesterday the Fed announced an $85 billion loan to AIG, in exchange for a 79.9 percent government stake in the largest U.S. insurer. The Fed also has set up several other emergency lending programs to provide Wall Street firms with ready access to funding.
“The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program” and “will provide cash for use in the Fed initiatives,” the department’s statement said.
Fed T-Bill rates have dropped to their lowest level in over 50 years because of this. The Fed is falling apart, its balance sheet is in real trouble now.
Deal Or No Deal is hitting Moscow too.
Russia poured $44 billion into its three largest banks and halted stock trading for a second day in a bid to stem the worst financial crisis since the devaluation and default a decade ago.
The Finance Ministry extended the repayment period on loans available to OAO Sberbank, VTB Group and OAO Gazprombank to three months from one week. The benchmark Micex stock index plunged as much as 10 percent, bringing its three-day decline to 25 percent. The KIT Finance brokerage said it’s in talks with investors to sell a stake after failing to meet obligations.
Russia’s markets are facing the biggest test since the government defaulted in 1998. The decade-long economic boom is fading, foreign investors have pulled at least $35 billion from the nation’s stocks and bonds since the five-day war in Georgia last month, and the collapse this week of Lehman Brothers Holdings Inc. and American International Group Inc. prompted a flight from emerging markets.
“I will tell my clients today to continue to abstain from buying Russian assets” until economic problems are solved, said Zina Psiola, who manages a $1 billion Russian equities fund at Clariden Leu AG in Zurich.
The cost of lending has soared to a record, with the MosPrime overnight rate reaching 11.1 percent today, deterring speculative bets in equities. Russian stocks have lost more than $425 billion in value since reaching an all-time high May 17.
Since Friday the global financial system has gone into crisis mode. The system is beginning to show huge cracks. Everyone is scrambling to try to save their markets. Deal Or No Deal is being repeated in every corner of the markets on Earth today.
The system is crashing before our eyes. New York. London. Moscow. Hong Kong. Tokyo. All over.
Deal Or No Deal has gone berserk. The game is grinding to a halt because nobody knows what deals are worth anymore…and nobody can make any more deals.
You are witnessing the death throes of the system. Today. Right now. In real time. We’re watching the global economic engine seize up because like a car with no oil, the parts are locking up. That oil — global credit liquidity — has dried up and turned to toxic sludge. Deal or No Deal has become just No Deal…because deals cannot be made. History books will look back on this week and we’ll wonder.
Because we’re about to get crushed by the flailing corpse of the global economy. The big one is upon us as we speak.
The final verdict is No Deal.
More than ever folks…
Be prepared.
Cross-posted at ZVTS
The markets have ceased to be rational. We’re in panic mode. And when people trade on fear and mob mentality and not logic, they make mistakes.
Oil is up $7 a barrel.
3 month T-Bills are at their lowest level in 54 years.
Gold? Gold is up a staggering $80 an ounce.
Rationality is dead. People are now panicking. The Fed bailout did nothing to calm the markets, in fact it has backfired across the board. We’re trapped in a death spiral where Asia’s numbers are dropping European numbers which are dropping US numbers which are dropping Asian numbers the next day.
We are watching the market disintegrate in real time, 24 hour cable news style. All over the globe people are asking “Is my money safe? Is my bank next?”
The answer for more and more Americans is No and Yes in that order. The more fail, the more will fail in turn. Short term debt markets are locked up and will remain locked up until further notice. Liquidity injections will not work anymore. Bailouts will not work anymore.
The Fed has one last card to play.
Hyper-inflation. We’re already seeing it in action. The dollar has plunged. The Fed has thrown $150 billion plus into the markets in the last 5 days to no benefit whatsoever. It will continue to throw money in until that game ends too.
And with it our standard of living.
Welcome to The Glorious Democratic Socialist Republic of Americastan. Population: Us.
the markets haven’t even come close to reaching equilibrium. the price of oil’s moving back towards the $100 mark, and energy stocks are the only sector showing positive movement today.
gold, btw, went up $60oz asinvestors seek safe haven amid financial market freefall.
bloomberg.com breaking news headlines at 12:45pmdt:
this noaa sign pretty well sums up the week so far:
Yep. Tsunami Zone is right.
WaMu is going under. The FDIC is almost out of money, WaMu would be the straw that breaks its back.
If it goes under, the bank runs begin in earnest.
Tsunami.
one quadrillion, one thousand trillion, one hundred and four trillion — so there’s a hand out of a $85 billion bridge loan for a bridge to nowhere.
Waiter, there’s a banker in my soup..And a broker. And an insurer
AIG will be sured by pension funds.
Money Market funds no longer dollar for dollar. You may end up getting 60 cents for each dollar you thought you had.
Final score on the day, Dow off 450 points, down 800 points since Friday. Morgan Stanley off 30% and down even further in after hours trading, approaching the sub $20 mark.
The panic is spiraling. Next comes Asia’s markets tonight. Then Europe. Then America again. And so on, and so on, and so on.
Who will step in to stop the carnage? The Fed’s efforts have failed. They have only prolonged the fall, not stopped it.
At this rate the Dow will be under 10k by Friday at 4. Roubini was talking a 20% crash, under 9k.
How bad will it get? Who can stop this madness? The system is coming apart.
What will replace it?
Reuters BREAKING NEWS at this minute:
Washington Mutual begins auction to sell itself: New York Times
Lloyds reaches agreement to take over HBOS in all-share deal: UK media
and Morgan Stanley looking to merge with Wachovia and other options.
Wells Fargo looking at WaMu
Roubini is dead on. Morgan and Goldman can’t survive in present form.
Goldman is the cherry on the ice cream…and we’ll be surprised.
.
LONDON (AFP) – British bank Lloyds TSB on Thursday agreed to buy rival HBOS for 12.2 billion pounds (15.4 billion euros, 21.8 billion dollars) as the raging global financial storm claimed another victim.
Analysts estimate that up to 40,000 jobs could be lost from the banks’ combined 145,000 staff following the deal and that hundreds of branches could close. HBOS has 1,100 on Britain’s high streets and Lloyds TSB 1,900.
Business Secretary John Hutton is effectively extending Britain’s Enterprise Act to ensure that the deal goes through “on public interest grounds,” his department said in a statement shortly after the deal.
The landmark all-share merger, effectively a rescue plan for Britain’s biggest mortgage lender, comes after HBOS shares plummeted in recent trading following days of global stock market chaos and economic gloom.
Lloyds TSB shareholders would own 56 percent of the issued share capital under the acquisition and existing HBOS shareholders 44 percent.
HBOS, or Halifax Bank of Scotland, is the latest global bank to fall foul of the ongoing credit crunch following the collapse of US group Lehman Brothers, the sale of Merill Lynch and the rescue of insurer AIG earlier this week.
Gordon Brown’s big gamble to save HBOS – and himself
"But I will not let myself be reduced to silence.".
The Bank of England today joined forces with five of the world’s most powerful central banks to inject up to $180 billion (£100 billion) into the world’s financial system in a concerted bid to ease the funding pressure on international markets.
The US Federal Reserve is lending the Bank of England, the European Central Bank (ECB), the Swiss National Bank and the central banks of Canada and Japan billions of dollars to pump into their financial systems.
Today’s emergency funding has calmed overnight funding rates, with dollar borrowing falling from 5.03 per cent to 3.84 per cent.
Instead of lending each other money in the wholesale market, banks have hoarded cash, pushing up the price of borrowing and putting more pressure on already stretched financial institutions.
"But I will not let myself be reduced to silence."Keep in mind that the Fed did the same thing six months ago after Bear Stearns, a global, coordinated cash injection from central banks around the world.
That worked out well in hindsight, eh?
There’s only one thing you need to know about the Fed and their global buddies right now: Every single action the world’s central bankers have taken in order to try to halt the financial crisis for the last two years HAS FAILED.
It has only made it worse when the financials breached the next breaking point, prolonging the pain.
And now the real meat of the crisis is just getting started.