Michael Gracie

After a chaotic weekend, Lehman filed for bankruptcy and Merrill sold itself to Bank of America. The Dow Jones Industrial Average plunged 504 points on the news (and roughly 20% of that loss occurred in the last hour or so of trading). It will forever be referred to here as “Brown Monday”. And the news is still coming.

Today we find…

• Russia’s market sold off 17% overnight and trading had to be halted - BRICs are doing nothing but crumbling;
• The US Treasury seriously considering conservatorship for AIG - no doubt the idea of losing both the massive credit risk hedges AND a good portion of the P&C market is playing a role here;

and…

• Wilbur Ross says get ready for 1,000 banks to fail - kind of scary even if he is half right.

Adieu.

UPDATE: Almost forgot…folks are wondering whether Blackberry subscriptions will take a hit now that Wall Street has been bludgeoned. Maybe those Blackberry addicts will go back to loving their spouses?

No government assistance this weekend

As Lehman Brothers, one of oldest names on Wall Street, appeared to unravel on Sunday, anxiety over the bank’s fate — and over what might happen next — gripped the nation’s financial industry. By late afternoon, Merrill Lynch, under mounting pressure, entered into talks to sell itself to Bank of America.

While the New York Times waxed on about spoiled cocktail parties and canceled weekends in the Hamptons, Bloomberg noted that Lehman’s lawyers were prepping Chapter 7 paperwork and the Wall Street Journal said the Merrill Lynch board was nearing a vote on a $29/share sale to Bank of America.

After reviewing chatter around the web, I’ll say the consensus expectation is that Washington Mutual is a foregone conclusion, and that Wachovia and AIG are not far behind.

I guess the powers that be in the United Socialist State Republic of America figured they’ve already bitten off a century’s worth of meals with Fannie and Freddie.

UPDATE: The Fed has been clocking some overtime - according to their now regular Sunday press release, they are “broadening” the Primary Dealer Credit Facility and the Term Securities Lending Facility (i.e. the emergency conduits for the printing of money in return for collateral of declining value). In particular…

The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities.

Unless I am completely off base, this means that the PDCF will now accept equity securities in return for short-term loans. The tri-party repo system is run primarily by Bank of New York and JP Morgan Chase - this is the kind of move that would reflect either 1) declining confidence in their ability to continue clearing the transactions or 2) something done with their prodding in order to reduce their own counterparty risk.

Big stuff.

UPDATE 2: Lehman files Chapter 11.

Derivative headline for a derivative world.

Was discussing the same idea with a colleague just this morning…

And if another investment bank were to fall like Bear Stearns, there are no more J.P. Morgans to pick up the pieces. In addition, counting on foreign countries’ investment funds may be problematic, as many politicians balk at the fact that all but one sovereign wealth funds are from countries without a democratic system.

For the better part of a year there’s been play with banking shorts. Now there seems to be a lot of money sitting on the sidelines, persistent chatter that the bottom has been reached, and yet continued resistance towards the upside. Uncertainty is the prevailing wind.

The take over here is there are still a lot of writedowns left to go, and even more balance sheet games which will eventually exacerbate the situation. The Fed and the Treasury seem to have “blown their wads” too early. More obvious taxpayer funded/direct bailouts could create downright insurrection (or at least there are going to be a lot of pissed off renters rioting in the streets). The WSJ is correct in their assumption - there just aren’t many J.P. Morgans left to do the bailing. Then there is the offshore money. Politics aside, you have to wonder how much of it will be willing to chase financial assets of a dollar denominated nature - said assets may look cheap to them now, but may get a hell of a lot cheaper in the year to come too.

At the very least I suspect it is going to be an interesting summer.