US Financial Sector Bailing Without Big Pail (UPDATED)

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.

Comments

Rex says:

Holy Cow!!!
I’m all in money market funds now!

Ironically, is now a good time to start our own bank?

I think we’ll have to wait until the Fed starts taking equity short positions as collateral, which shouldn’t be too far off.

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