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http://www.cnbc.com/id/26709718

 

Bloody Sunday: Wall Street Is Hit by Financial Tsunami

LEHMAN AIG, MORGAN STANLEY, JPMORGAN, PAULSON

By CNBC.com With Wires

CNBC staff and wire reports

| 14 Sep 2008 | 10:32 PM ET

 

The U.S. financial system was badly shaken Sunday by the failure of Lehman Brothers , the surprise takeover of Merrill Lynch and big asset sales by major insurer American International Group.

 

The developments indicate that chief executives on Wall Street and regulators in Washington are accepting that massive triage is necessary in the face of the 13-month old credit crisis and destructive U.S. housing bust.

 

"The U.S. financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey."It's a new financial world on the verge of a complete reorganization."

 

On Sunday, growing expectations that Lehman will become Wall Street's most high profile bankruptcy since junk bond specialist Drexel Burnham Lambert collapsed in 1990 sparked a sell-off in U.S. asset prices. Lehman's announced it was filing for bankruptcy midnight Sunday.

 

Both US stock futures and the dollar plunged in reaction to the turmoil on Wall Street.

 

Sunday's events signalled a transformation in the power structure on Wall Street with major banking groups like Bank of America, which has agreed to buy Merrill for $50 billion, and JPMorgan Chase becoming more dominant.

 

Once Lehman and Merrill disappear, three of the top five U.S. investment banks would have dissolved or been bought inside six months. Bear Stearns was acquired in a fire sale by JPMorgan in March.

 

The focus early Sunday was on whether talks between regulators and Wall Street's top bankers would lead to the sale of Lehman, until recently the No. 4 U.S. investment bank.

 

Those talks faltered when Britain's Barclays, which had appeared to be front-runner to take over Lehman -- excluding its toxic mortgage-related assets -- said it had pulled out of the bidding.

 

That triggered expectations the investment bank was heading into bankruptcy and prompted a rare emergency trading session to allow Wall Street dealers in the $455 trillion derivatives market to reduce their exposure to the firm.

 

Within hours of Barclays withdrawal, Merrill agreed to be sold to Bank of America. And AIG , until recently the world's largest insurer by market value, was expected to sell off assets, including a profitable aircraft leasing arm.There were signs of attempts by banks and regulators to try to prop up market confidence.

 

To help provide liquidity, the Federal Reserve said it would accept a wider array of securities as collateral at its key borrowing windows.

 

"The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets," Fed Chairman Ben Bernanke said in a statement.

 

Banks Set up $70 Billion Borrowing Facility

 

Ten Wall Street banks have also agreed to set up a collateralized borrowing facility, and committed to fund for $7 billion each.

 

The banks are Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, and UBS. These banks have said they are committed to fund $7 billion each for a $70 billion collateralized borrowing facility.

 

The banks add that they are working together to assist in maximizing market liquidity through ongoing trading relationships, dealer credit terms and capital committed to markets. This will also facilitate the orderly resolution of OTC derivatives exposures between Lehman and its counterparties.

 

All ten banks say they all intend to use expanded federal reserve primary dealers credit facility this week. The banks say their actions reflect "extraordinary market environment".

 

Merrill, AIG and Washington Mutual , the biggest savings and loan institution -- which was the subject of conflicting reports Friday about whether it was in advanced talks for a sale to JPMorgan -- all face similar problems.

 

They have all held large amounts of real-estate related assets that have fallen sharply in value. Shares of all three lost more than one-third of their value last week. (Pimco's El-Erian discusses the financial fallout in the video).

 

The perception is that the losses they have disclosed are far from enough, and that they will have difficulty in raising new capital.

 

One of the catalysts for this weekend's events was the stance of U.S. Treasury Secretary Henry Paulson. He was strongly opposed to using government money in any deal aimed at resolving the Lehman crisis.

 

The lack of such government guarantees was the main reason Barclays decided to exit the negotiations to buy Lehman, according to a person familiar with the matter.

 

Emergency Sunday Trading Session

 

An emergency trading session was set between dealers with Lehman Brothers counterparty risk involved credit, equity, rates, foreign exchange and commodity derivatives, the International Swaps and Derivatives Association said.

 

"This is an extremely, and I stress extremely, rare event. It also speaks to the more general notion that, in today's highly disrupted financial markets, the unthinkable is thinkable," said Mohamed El-Erian, CEO of Pimco, the world's biggest bond fund.

 

Market sources said the special session was initiated by the Federal Reserve, with the aim of reducing risk associated with a potential bankruptcy filing by Lehman Brothers.

 

"Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time Sunday," said the statement. "If there is no filing, the trades cease to exist."

 

The special session "is a way to offset the risk between the remaining large banks and insurance companies and fund managers prior to the markets opening in Asia," said Mark Grant, managing director of structured finance at Southwest Securities, based in Dallas.

 

Grant is expecting a turbulent session when the U.S. markets reopen for business on Monday.

 

"The market is going to be spooked. People will be fearful and no one outside a very small group of people knows what Lehman going into liquidation will mean."

 

Lehman's bankruptcy marks an ignominious end to a once-proud firm, founded by cotton-trading German immigrants 158 years ago. It would also badly tarnish the reputation of CEO Dick Fuld, who has insisted that his firm could work through its problems to survive as an independent entity.

 

Former Federal Reserve Chairman Alan Greenspan said Sunday he suspected "we will see other major financial firms fail," but added that this did not need to be a problem. "It depends on how it is handled and how the liquidations take place," Greenspan told the ABC program "This Week." "And indeed we shouldn't try to protect every single institution.

 

The ordinary course of financial change has winners and losers." Hundreds of Lehman employees went into the office on Sunday to clear desks and pack personal belongings, according to an employee.

 

Many even opted to say their farewells with one last office soiree. "We are having pizza and beer," said one Lehman employee, who declined to be identified.

 

The news on Sunday was a huge hit to an already wounded financial jobs market, and a dent to New York's claim to be the pre-eminent world financial center.

 

Headhunters and consultants said the talent-flush U.S. market -- which has shed more than 100,000 financial-sector jobs this year -- must now brace for up to 50,000 more.

 

? Reuters contributed to this story

? 2008 CNBC

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This is not the end.

 

I expect more bailouts in the near future.

 

Concur. The CEO of Bank of America said today that of the 9,000 banks out there, he expects half of them to fail; I think that is being optimistic.

 

Makes me thankful I have a bank account with PNC (which, from looking at its stock price, is pretty strong).

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"The fundamentals of the economy are strong."

-John Mccain, September 15, 2008

 

You cut-off his quote mid-sentence to make a point.

 

I think that's dishonest.

 

Is that what they teach in law school?

 

I don't think you could say that the fundamentals of the economy are strong at any point. We're in a serious financial meltdown. That's a fundamental part of the economy. This is not one of those "the fundamentals are strong, but we have some issues" type of economy, like he's been saying. This is a "this is a serious credit and liquidity crisis which could become global in scope and lead us into the biggest economic downturn since the Great Depression" economy. He's trying to have an optimistic outlook when it's clearly not so.

 

Just for the record: I am an attorney in the finance industry. I deal with all the players we've been talking about on a daily basis. I can confirm to you that sh*t is indeed hitting the fan, and this is beyond "serious".

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"The fundamentals of the economy are strong."

-John Mccain, September 15, 2008

 

You cut-off his quote mid-sentence to make a point.

 

I think that's dishonest.

 

Is that what they teach in law school?

 

I don't think you could say that the fundamentals of the economy are strong at any point. We're in a serious financial meltdown. That's a fundamental part of the economy. This is not one of those "the fundamentals are strong, but we have some issues" type of economy, like he's been saying. This is a "this is a serious credit and liquidity crisis which could become global in scope and lead us into the biggest economic downturn since the Great Depression" economy. He's trying to have an optimistic outlook when it's clearly not so.

 

Just for the record: I am an attorney in the finance industry. I deal with all the players we've been talking about on a daily basis. I can confirm to you that sh*t is indeed hitting the fan, and this is beyond "serious".

Although many economist believe the economy is fundamentally strong I wasn't arguing about that. The point of my post is that I found the way you cut McCain's quote mid-sentence to be dishonest.

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Obama needs to do a better job of tying McCain to this administration's reckless economic plans that have caused these problems. Or have the 527s do it.

 

I think it's funny that all of a sudden, the White House decided that they won't bailout any more companies. Even though I agree with that, it's inconsistent with the massive federal bailout of Fannie and Freddie just a couple of weeks ago (which still goes against the beliefs of the GOP's voting bloc of extreme free-marketers).

 

I doubt that we have seen a banking crisis this bad since 1929. Certainly not in a long, long time.

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I've heard some analysts on CNBC calling for a depression in about a year's time from now. Sometime before 2010.

 

 

All I think these falls show is the fallacy of america. We try to make eveyrone the middle class ie socialism in a way. We had two major bubbles burst. The internet boom and the mortgage boom.

 

Both result in massive falls in the markets, people losing a lot, and people blaming the government. How about blaming the people. All of these happen in the get rich quick scheme of things.

 

The true upper, middle, and lower classes are not really effected by these things. While banks are closing etc.. if you did nto double/triple refinance your home you are not really seeing a lot of this burden. If you work a middle class job and did jump on becoming a relator you can go to work almost every day and not worry.

 

Most job lose is in these fields and has created this ridiculous scare in everyone. I earned my way to where I am and many other americans have and they are not struggling.

 

And if you refinanced to buy a boat or pay other things off I do not sympathize with you. Get a secure loan and hold onto your equity. Do not play games with things you can not control.

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Obama needs to do a better job of tying McCain to this administration's reckless economic plans that have caused these problems. Or have the 527s do it.

 

I think it's funny that all of a sudden, the White House decided that they won't bailout any more companies. Even though I agree with that, it's inconsistent with the massive federal bailout of Fannie and Freddie just a couple of weeks ago (which still goes against the beliefs of the GOP's voting bloc of extreme free-marketers).

 

I doubt that we have seen a banking crisis this bad since 1929. Certainly not in a long, long time.

 

Frannie and Freddi are not truly companies, we were already on the hook for that crap thanks to FDR.

 

And this is a replay of the SNL crap that we dealt with from the 70s through the 90s.

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I've heard some analysts on CNBC calling for a depression in about a year's time from now. Sometime before 2010.

 

 

All I think these falls show is the fallacy of america. We try to make eveyrone the middle class ie socialism in a way. We had two major bubbles burst. The internet boom and the mortgage boom.

 

Both result in massive falls in the markets, people losing a lot, and people blaming the government. How about blaming the people. All of these happen in the get rich quick scheme of things.

 

The true upper, middle, and lower classes are not really effected by these things. While banks are closing etc.. if you did nto double/triple refinance your home you are not really seeing a lot of this burden. If you work a middle class job and did jump on becoming a relator you can go to work almost every day and not worry.

 

Most job lose is in these fields and has created this ridiculous scare in everyone. I earned my way to where I am and many other americans have and they are not struggling.

 

And if you refinanced to buy a boat or pay other things off I do not sympathize with you. Get a secure loan and hold onto your equity. Do not play games with things you can not control.

 

god, that is such a narrow view

 

In many regions homes are pricing lower than they were 4-5 years ago. So even if you didn't get a "liars loan" or refinance, you could still be in trouble if circumstances arose that would require you to either have a change in income or a need to sell your home. The foreclosures cut the market value for everyone.

 

Second, how about all those true middle class people who made their way and invested in savings instead of blind consumerism. I'm sure the bloodbath the markets have been taking haven't hurt them one bit, right? Or maybe they can just move their cash to a failing bank. Or invest in some annuities from another failing financial institution.

 

What salary range do you think the employees of Lehman were in? Poor management and overall circumstance has hurt them and all those that rely on them.

 

If AIG fails the ripples will be severe across all segments and will impact those in the middle class. Not only because of how large of an employer they are, but also how large of a market they are to risk management for other businesses.

 

There is so much out there that is beyond the control of any one individual, that even if you do everything the right way it's very plausible to get bit in the butt.

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I hope my mortgage company goes belly up.

 

 

Then hopefully I can find a way to payoff my note on pennines on the dollar.

 

:lol

 

Not so fast. They'll just sell those mortgages to another company and you'll have to pay them instead. You're not getting a free ride on someone else's failure.

If he wants he could just walk away from the mortgage and rather than being called a deadbeat he would be called a victim.

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I hope my mortgage company goes belly up.

 

 

Then hopefully I can find a way to payoff my note on pennines on the dollar.

 

:lol

 

Not so fast. They'll just sell those mortgages to another company and you'll have to pay them instead. You're not getting a free ride on someone else's failure.

If he wants he could just walk away from the mortgage and rather than being called a deadbeat he would be called a victim.

 

No, he would be a deadbeat. You have the mistaken belief that Democrats/liberals are okay with personal irresponsibility. That couldn't be the furthest thing from the truth.

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I hope my mortgage company goes belly up.

 

 

Then hopefully I can find a way to payoff my note on pennines on the dollar.

 

:lol

If they haven't already sold off your mortgage to someone else, which has happened to many people...

its probably sold 3 or 4 times already.

 

 

Some positive news. We think its bad lets look globally. Oil is down to 92 dollars a barrel.

 

The market rebounded a 150 points. While both the Asian and European markets fell another 150 points today. 3 Consecutive days of huge falls for the other two markets.

 

And lastly the us dollar is now up to 71 cents on the euro. Only 2 1/2 months ago the us dollar was about 50 cents on the euro.

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I hope my mortgage company goes belly up.

 

 

Then hopefully I can find a way to payoff my note on pennines on the dollar.

 

:lol

If they haven't already sold off your mortgage to someone else, which has happened to many people...

its probably sold 3 or 4 times already.

 

 

Some positive news. We think its bad lets look globally. Oil is down to 92 dollars a barrel.

 

The market rebounded a 150 points. While both the Asian and European markets fell another 150 points today. 3 Consecutive days of huge falls for the other two markets.

 

And lastly the us dollar is now up to 71 cents on the euro. Only 2 1/2 months ago the us dollar was about 50 cents on the euro.

 

It's a bear-market rally. Watch the gains be erased within 2 trading days as traders short their stocks. Not to mention the bear-market rally was caused by the government giving an emergency loan to AIG, because it looked like it was going to crash again today after the Fed held pat on the prime rate.

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Obama needs to do a better job of tying McCain to this administration's reckless economic plans that have caused these problems. Or have the 527s do it.

I think it's funny that all of a sudden, the White House decided that they won't bailout any more companies. Even though I agree with that, it's inconsistent with the massive federal bailout of Fannie and Freddie just a couple of weeks ago (which still goes against the beliefs of the GOP's voting bloc of extreme free-marketers).

 

I doubt that we have seen a banking crisis this bad since 1929. Certainly not in a long, long time.

 

While I am probably not going to vote for Obama, I have been fairly critical of the Bush regime and their liberal economic policy. The issue your candidate might have is his several of his top economic advisers in his campaign Franklin Raines and Jim Johnson were both CEO's of Fannie Mae. This mortgage mess is owned by both parties .

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I hope my mortgage company goes belly up.

 

 

Then hopefully I can find a way to payoff my note on pennines on the dollar.

 

:lol

If they haven't already sold off your mortgage to someone else, which has happened to many people...

its probably sold 3 or 4 times already.

 

 

Some positive news. We think its bad lets look globally. Oil is down to 92 dollars a barrel.

 

The market rebounded a 150 points. While both the Asian and European markets fell another 150 points today. 3 Consecutive days of huge falls for the other two markets.

 

And lastly the us dollar is now up to 71 cents on the euro. Only 2 1/2 months ago the us dollar was about 50 cents on the euro.

 

It's a bear-market rally. Watch the gains be erased within 2 trading days as traders short their stocks. Not to mention the bear-market rally was caused by the government giving an emergency loan to AIG, because it looked like it was going to crash again today after the Fed held pat on the prime rate.

 

 

Government is prolonging the problem. This is a mess of their creation and they are delaying the inevitable . I think global capital will temporarily prop up the domestic economy but it will be short lived . We are going to revisit the 1970's economy and our government is not properly positioned to deal this situation . We have expanded the size of government so much in the short term I wonder if it is sustainable if it is not massive cuts and huge tax increases will be coming soon.

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