Reuters
Banks rush to do deals as Wall St crisis deepens
Wednesday September 17, 6:48 pm ET
By Jack Reerink
NEW YORK (Reuters) - Wall Street's manic dealmaking reached a new pitch on Wednesday as U.S. share prices plummeted to three-year lows and forced increasingly desperate major banks to scramble for merger partners.
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With the financial landscape undergoing its most dramatic transformation since the Great Depression, reports emerged of takeovers involving No. 2 U.S. investment bank Morgan Stanley (NYSE:MS - News), weakened top U.S. savings bank Washington Mutual (NYSE:WM - News) and major UK mortgage lender HBOS (LSE:HBOS.L - News).
"This is indicative of the changes that are shaking the foundation of the financial system in today's world," said Frank Husic, Managing Partner of Husic Capital Management in San Francisco.
The flurry of potential deals followed the surprise $85 billion rescue of insurer American International Group (NYSE:AIG - News) by the U.S. Federal Reserve on Tuesday that did little to calm investors' nerves.
"Stop The Insanity," pleaded a research note from Swiss bank UBS as U.S. financial shares appeared to be in free-fall. The U.S. stock market plunged 4.7 percent to a three-year low, the dollar slumped, while safe-haven U.S. Treasury bonds and gold soared.
The AIG rescue capped a week of bailouts, a bankruptcy on Wall Street and moves by central banks around the world to flood the financial system with funds to prevent it from seizing up.
The result: a seismic shift in the financial industry, with some of Wall Street's biggest names disappearing.
"The fear is who is next," said John O'Brien, senior vice president at MKM Partners in Cleveland. "It almost feels like people scour the books and say who is the next likely target that we can put a short on. And that spreads continuous fear."
DANCING PARTNERS
Shares of Morgan Stanley and larger rival Goldman (NYSE:GS - News) fell as much as 43 percent and 27 percent respectively, even after both reported better-than-expected quarterly earnings on Tuesday.
That stoked talk Wall Street's two surviving investment banks may have to join up with a commercial bank to survive.
"I'm assuming that Goldman Sachs and Morgan Stanley are lining up dancing partners. They don't want to be ... this week's victim," said William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts.
The dance music picked up pace after the close of trading.
Morgan Stanley was discussing a merger with regional banking powerhouse Wachovia (NYSE:WB - News), the New York Times reported. CEO John Mack got a phone call from Wachovia on Wednesday but is also pursuing other options, the paper said.
"In this market, anything's possible. It seems like the market wants the investment banking model to disappear," said Danielle Schembri, a bond analyst covering brokers at BNP Paribas in New York.
Washington Mutual, beleaguered by mortgage losses, put itself up for sale, sources said. Potential suitors include Citigroup (NYSE:C - News), JPMorgan (NYSE:JPM - News), Wells Fargo (NYSE:WFC - News) and HSBC (LSE:HSBA.L - News), they added.
"Everything is for sale in the banking world these days," said Ralph Cole, a portfolio manager at Ferguson, Wellman Capital Management in Portland, Oregon. "Washington Mutual should be shopping itself."
In Britain, top mortgage lender HBOS Plc struck an all-stock deal with Lloyds TSB (LSE:LLOY.L - News) to create a 28 billion pound ($50 billion) mortgage giant.
EMPTY SEATS
The White House said it was "concerned about other companies" while the U.S. presidential candidates struck populist tones, with John McCain blasting Wall Street's "casino culture" and Barack Obama stressing protection for mom-and-pop investors. (ID:nN17526790)
The objects of their ire were glued to their trading screens. In the capital of the hedge fund industry, Greenwich, Connecticut, an industry conference for 500 people had 200 empty seats.
"A lot of people who are seeing massive red ink and are suffering the most are not here," said Jean de Bolle, the chief investment officer at Byron Advisors.
The cost of protecting Morgan Stanley's and Goldman's debt spiked, reflecting investor fears their debt issues are no safer than junk bonds.
"The credit crunch and credit contraction is intensifying," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. "The action in Morgan Stanley in light of what was better-than-expected numbers last night is disconcerting."
Goldman spokesman Lucas van Praag said the drop in his company's share price was "the result of completely irrational fear and is not based on any fundamentals."
Morgan Stanley's Mack blamed short sellers, or investors who bet on falling stock prices, saying in an internal memo: "We're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down."
PROPPING UP THE SYSTEM
In the latest example of regulatory action with little apparent effect, the U.S. Securities and Exchange Commission curbed short-selling.
"Seems like the SEC is a day late on the rule ... Morgan Stanley is clearly in the short-sellers' sights," said Andrew Brenner, senior vice president at MF Global in New York.
New distress signals had popped up earlier. The cost of borrowing overnight dollars spiked above 10 percent, indicating a deep lack of trust in the interbank lending market.
The HBOS merger talks underscored how quickly authorities around the world are ditching long-held beliefs about free markets as they struggle to counter the credit crunch.
Lloyds was previously blocked from buying a smaller mortgage bank, and the British government shocked investors by taking over troubled bank Northern Rock in February -- the country's first major nationalization since the 1970s.
U.S. authorities already have spent $900 billion to prop up the financial system and housing market. Authorities may get much of that money back -- if asset prices do not slide further.
The AIG rescue came just over a week after the bailout of mortgage finance companies Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News), and six months after the Fed brokered the sale of failed investment bank Bear Stearns to JPMorgan Chase (NYSE:JPM - News).
Two legendary firms bit the dust over the weekend. Lehman Brothers Holdings Inc (NYSE:LEH - News) filed for bankruptcy and Merrill Lynch & Co (NYSE:MER - News) CEO John Thain struck a deal to sell out to Bank of America Corp (NYSE:BAC - News).
"Thain at Merrill Lynch did a very smart thing ... in keeping shareholders from being swallowed up by this vortex," said Jeffrey Gundlach, chief investment officer at bond manager Trust Company of the West in Los Angeles.
(Additional reporting by Svea Herbst-Bayliss, Jon Stempel, Jennifer Ablan, Joseph Giannone, Jeffrey Hodgson and Kevin Plumberg; Editing by Maureen Bavdek and Ted Kerr)
Wednesday, September 17, 2008
Bombe ad orologeria finanziarie
E il dollaro è ai massimi dell'anno e così i titoli di stato USA.
Sono saliti perchè i capitali americani sono stati rimpatriati per ripagare i debiti e le perdite e si sono rifugiati per paura nei titoli di stato, però poi c'è questo fatto da considerare ora.
Quest'anno lo stato americano si è impegnato per:
500 miliardi
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circa di "scambio" tra la FED e le banche per cui la FED cede i propri Treasury bond e le banche le danno in cambio derivati e bonds cartolarizzati su crediti dubbi sperando che l'anno prossimo si possano rimettere sul mercato
30 miliardi
------------
per garantire a JP Morgan i derivati tossici di Bear Sterns altrimenti non la comprava
30 miliardi
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per le banche fallite finora come Indymac
200 miliardi
------------
per garantire Fannie Mae e Freddie Mac che altrimenti fallivano e i cui 5.400 miliardi di mutui ora sono sotto lo stato
85 miliardi
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ieri per per garantire AIG che altrimenti falliva e i cui 1.060 miliardi di bilancio ora sono in pratica sotto lo stato che al momento diventa proprietario dell'85% di AIG
Non so quanto tempo ci voglia, ma è ovvio che avendo tra l'altro un deficit pubblico ora sui 600 miliardi l'anno destinato ad aumentare perchè con la recessione gli introiti delle tasse calano, è solo questione di tempo prima che queste bombe ad orologeria che vengono innescate esplodano contro il dollaro e i treasury (i quali ora rendono, come bond A 10 ANNI!, il 3.49% con inflazione ufficiale al 5.4%)
Up Moves May Be Short-Lived
It was my view a few weeks ago that a rally in oil that catalyst that would take the stock market down. I was clearly only half right in that assessment. Oil has kept sliding, and the market has slid right along with it. It appears that the market no longer cares about how much oil prices come down.
In the near term, the market appears to be oversold. We saw some minor fear and panic out there when, during Tuesday's decline, the CBOE's Equity put/call ratio surged to 99%. That means there was almost one put being bought for every call. We did not see the Equity put/call ratio get this high in this past July's decline, but we did see it get there a few months before in the March decline.
In the following chart, you can see that Point A was the August 2007 low. Point B shows the November 2007 low (not a good low at all). Point C is the January 2008 low, and Point D is the March 2008 low. Point E is where we stand as of September 9, 2008.
Now when we look at the Equity put/call ratio on a more intermediate-term basis at those same dates, we see a different picture. Below you can see a chart of the same indicator (equity put/call ratio) plotted on a 30-day moving average. When it peaks, I think we tend to get a market low. (In other words, too many high readings may lead to a high moving average, which may mean too much fear in the market. A contrarian view says too much fear leads to a rally.)
In the following chart, Point A is the August 2007 low. Point B is the November 2007 low. Point C is the January 2008 low (notice how on the chart it is not a peak in the indicator). Point D is the March 2008 low. Point E is the July low. And then see where we are now: more like where we were at the January low, which was a low that lasted about a week.
In late August 2008, I showed the 30-day moving average of the advance-decline line, which is an indicator I use to determine when the market is overbought or oversold on an intermediate-term basis. At the time, I noted that it had reached an overbought reading during the final week of August. In my review of the more current chart, I currently do not have a good sense of when the market might be oversold, except to say I believe sometime in October. Therefore, I expect we will get rallies that are short-term in nature, but I do not yet see a low in the market that is going to give us a lift that lasts at least a few weeks or more.
What I think has been going on, and probably will continue to occur in the market, is that we will get group rotation. The past few weeks have been about selling technology and commodity stocks and buying financial stocks. I expect financial stocks to take a back seat shortly while we get an oversold rally in technology stocks and commodity names.
Rather than giving us a lift that is all-encompassing, this sector rotation could mean that there is only so much money to go around, so it jumps from group to group. I believe that this phase will pass eventually. And when it does, I expect we'll see it in the indicators I follow. Until then, trade carefully.
Cramer: We're in 1987 Mode
It's time to talk turkey about the prices on your screen and recall another time when things felt like this -- the crash of 1987. In 1987, we believed that all the major firms in the brokerage industry were going to go belly-up. Many of them were not in compliance with paperwork, others were simply not even picking up the phone. It felt like the end of the world. It wasn't. But it was eerie.
We are in that mode again. I don't think anyone looking at Morgan Stanley (MS Quote - Cramer on MS - Stock Picks) or Goldman Sachs (GS Quote - Cramer on GS -Stock Picks) today would dispute that. These companies are clearly reflecting that they are in severe straits, much worse than I think they are. In many ways, this time it isworse than 1987 because AIG (AIG Quote - Cramer on AIG - Stock Picks) and Fannie (FNM Quote - Cramer on FNM - Stock Picks) and Freddie (FRE Quote - Cramer on FRE - Stock Picks) and Lehman (LEH Quote - Cramer on LEH - Stock Picks) still haven't been sorted through. We have too many aftershocks that we must worry about, and there is too much damage in the system. Plus, there is now a sense that the U.S. government has become a cartoon government with a cartoon currency and a cartoon Fed. No rate cut? Oh my! How wrong!!
I think the Fed is in shock that we are not doing better today, but what they failed to recognize is that the erosion in confidence from their worrying about inflation is staggering. I think also, right now, they should be on the phone to the big repositories of capital in the Middle East and Asia and urge them to take advantage of these prices.
I want to make it clear: In many ways this period right now is worse than 1987. AIG, Lehman, FNM, FRE, Bear, and who the heck knows what else? Right now we are experiencing a true meltdown in financials. There is very little hope at this moment that we can turn it around ourselves.
I think that unless we get some outside help from the Middle East or China, it won't end. Our government has made so many mistakes, our Fed has made so many mistakes, that I can understand why people would panic.
I simply have to believe, though, that there is outside capital that wants in. I believe that money does exist that can come in and stabilize things. But I also want to point out that without it, we are most likely not done going down.
Again, without it, we were down 508 points from the 2300 level in 1987, and we had a much more capable Fed and government. So I can't rule out a big percentage decline from here. It could happen again unless we get some grownups from outside our own universe to come and put money here right here.
Without it, we cannot take 1987 off the table, even though I think the situation is not as perilous given the incredible liquidity of so many companies and the moves that have been made to preserve the system already.
What happened in 1987 that turned things around? The major Wall Street firms with capital came in and bought the market at about 1400 on Terrible Tuesday. They had the capital to do so. We don't anymore. The foreigners do, I do hope that we are making calls to the major sovereign funds from companies more flush than ours.
Without it, you can figure that history can always repeat itself even though the pain is in one sector only -- finance -- and the rest can be handled given the cash in the corporate coffers and the sidelines. To save finance, we need more than just our own help -- we need major intervention from the incredibly tight EU. We also need major infusions of cash into financials from the likes of the big Middle East sovereign funds.
Logically, we should bottom at some point, just like we bottomed in 1987. That bottom did not occur until we declined more than 50% from our highs. But then we caught bargains of a lifetime. I think some capital should be kept for that moment.
I also think that we need to be on the lookout for major buys caused by panic, too. Not a sop to the bulls, just a statement that fear is so prevalent that there have to be some opportunities in rock-solid companies with no debt that are down way too much at this very moment. Some stuff isn't down enough, some stuff has much further to fall, but some stuff can be bought right around here if the companies do not need cash and can withstand this assault.
At the time of publication, Cramer was long Morgan Stanley and Goldman Sachs.
SEC Bans Naked Short-Selling
The Securities and Exchange Commission on Wednesday outlined sweeping restrictions on "naked" short-selling in an effort to prevent pessimistic investors from driving down stock prices too far, too fast.
The new rules force short-sellers and their broker-dealers to deliver their borrowed securities within three days of the transaction date. Market makers are no longer immune from the naked short rules.
Another new regulation also makes short sellers liable for fraud to lie about their intention or ability to deliver securities in time for settlement.
"These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short selling," SEC Chairman Christopher Cox said in a statement. Regulators "will now have these weapons in their arsenal in their continuing battle to stop unlawful manipulation," he added.
In an ordinary short sale, an investor borrows a stock for a fee, and sells it betting that the price will go down. He then buys back the stock at a later time to return it to the owner. In "naked" short sales, the investor must locate shares to borrow, but does not actually borrow or deliver them.
The SEC had put in place temporary restrictions on naked short selling of certain financial stocks over the summer as several firms were suffering from precipitous declines in market value. When those temporary rules expired in August, the stocks continued falling hard and fast, culminating in federal takeovers of Fannie Mae (FNM Quote - Cramer on FNM - Stock Picks), Freddie Mac(FRE Quote - Cramer on FRE - Stock Picks) andAmerican International Group (AIG Quote - Cramer on AIG - Stock Picks) and a bankruptcy filing by Lehman Brothers (LEH Quote - Cramer on LEH - Stock Picks).
The new rules will apply to all securities and are effective as of 12:01 a.m. on Thursday.
Money market giant freezes redemptions
NEW YORK (MarketWatch) -- One of the first and largest money market funds has put a seven-day freeze on redemptions after the net asset value of its shares fell below $1. Primary Fund (RFIXX:, , ) , a $62 billion fund managed by money market fund inventor The Reserve, said Tuesday afternoon that its $785 million holding of Lehman Brothers Holdings debt has been valued at zero. As of 4 p.m., the value of the fund's share is 97 cents. The Reserve said that redemption requests received before 3 p.m. Tuesday will be paid out at $1 a share. 
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