Wall Street's Bloody Sunday
Posted Monday, Sept. 15, 2008, at 6:29 AM
"Crisis on Wall Street," blares the Wall Street Journal, neatly summing up the fall of the Houses of Lehman and Merrill in the past 24 hours. Lehman Brothers, the newspaper reports, acknowledged its only option is bankruptcy protection, Merrill Lynch found a rescue buyer, and the world's largest insurer, American International Group, is scrambling to raise cash to bolster its shaky finances—or go belly up. This whirlwind of events all occurred in "one of the most dramatic days in Wall Street history," the New York Times points out on Page A1, a day that will do no less than "reshape the landscape of American finance". The Financial Times puts it more bluntly: Wall Street is "in turmoil," the newspaper says.
Here's how it played out. For Lehman, the game of beat-the-clock began Friday night, when the heads of the Treasury and Federal Reserve convened a historic meeting of Wall Street brass to say there would be no help from Uncle Sam this time round, the WSJ reports. After potential suitors Barclays and Bank of America passed on buying Lehman over the weekend (Barclays said a deal would not have been in the best interest of shareholders, Dow Jones reports), the battered investment bank, the WSJ wrote, late on Sunday night started "working on a possible bankruptcy filing that would allow most of its subsidiaries to continue operating as the firm is wound down." Fortune Managing Editor Andy Serwer camped outside the Lehman headquarters on Sunday to observe the final hours of one of Wall Street's fallen Goliaths. "Employees, some in suits, others in casual clothes, are filing out with all they can carry as time runs out," he wrote.
Bank of America may have passed on Lehman, but it liked what it saw in Merrill Lynch, snapping up the 94-year-old Wall Street firm for $50 billion in an all-stock deal, also late on Sunday night, the WSJ writes. "The deal, worked out in 48 hours of frenetic negotiating, could instantly reshape the U.S. banking landscape, making the nation's prime behemoth even bigger," the newspaper says. Things aren't nearly so rosy for AIG. In its online edition, the NYT has the scoop that the insurance powerhouse is seeking a $40 billion bridge loan from the Federal Reserve "as it faces a potential downgrade from credit-ratings agencies that could spell its doom." The loan has to come fast. The newspaper, citing a "person close to the firm," said that if the credit ratings agencies slap a bad rating on AIG this morning, it could trigger a run on its capital. If that happens, AIG may only have 48 to 72 hours before it fails, the newspaper ominously reports. With so much doom in the air, it's not surprising then that 10 of Wall Street's biggest (surviving) banks have established a $70 billion emergency bailout fund "intended to avert further failures," the Guardian writes.
What's already being called "black Sunday" is expected to have a heavy toll on shares today. Reuters reports this morning that S&P500 futures fell 3.6 percent, taking the dollar down with it. BBC reports shares were down sharply in Asia and across Europe in early trading Monday. And in a further sign of trouble at the big investment banks, Swiss banking giant UBS is expected to write down a further $5 billion in dodgy investments, Marketwatch reports.
Officials are still picking up the pieces and counting the cost of Hurricane Ike down in Texas, but the rest of America also is feeling its force in the form of higher gasoline prices, the Los Angeles Times reports. With Houston's crucial refining hub shut down, some motorists across the Midwest can expect the price per gallon to top $5 in the coming days. It's probably no comfort, then, to hear that crude oil prices finally dropped below $100 a barrel this weekend despite a move by OPEC to curtail production in order to preserve a "basket" of crude prices above the century mark. GM is betting that the dip is only temporary as it announces the launch of a new battery-powered car, writes the WSJ. "GM looks for buzz with its electric volt," waxes the headline writer for a piece that explains how GM hopes the new Chevy Volt won't just be seen as fuel-efficient. Rather it will be "such a technological leap forward that the many consumers who have turned their backs on Detroit will give the company and its cars a fresh look."
Electronic Arts took a seven-month-long look at rival video game maker Take-Two Interactive Software before balking on a $2 billion hostile takeover bid. The move to combine a stable of hit games such as EA's Madden football and Take-Two's Grand Theft Auto series (talk about spicing up the NFL commentator's weekly cross-country commute) would have "united two of the largest publishers of videogames," the WSJ writes. EA suggests it walked away because it wasn't confident about doing a deal in time to incorporate Take-Two's products into portfolio in for the busy holiday season.
At least one Wall Street veteran is smiling this morning. Charles Prince, Citigroup's former chairman and CEO, has a new job at Washington-based consulting firm Stonebridge International LLC. He left Citigroup in a precarious state; shares are down 60 percent in the past year, thanks in part to some of Prince's aggressive bets. Prince's objective at the new job? "I'm going to have fun," he tells the WSJ. "It's been a long time since I've had fun."