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Banking Is Tanking

By Matthew Yeomans and Bernhard WarnerPosted Friday, Sept. 12, 2008, at 6:16 AM ET

The New York Times, Wall Street Journal, and Fortune all lead with Lehman Brothers' plight this morning. "Lehman races to find a buyer," screams the WSJ headline after a disastrous day during which the once high-flying investment bank's "self-made survival strategy—ranging from spinning off commercial real-estate to selling a stake in Lehman's lucrative investment-management division—failed to halt a slide in Lehman's stock price." By the end of yesterday, Lehman's shares had slid 41 percent as investors voted with their feet. Lehman's best hope now is an outside buyer: Bank of America and Barclays are interested but only if the U.S. government offers assurances to help shield them from further losses. The Washington Post says that the Federal Reserve and Treasury Department are "actively helping" Lehman put itself up for sale, but time is running out; long-time Lehman customers tell Fortune that "they have sharply curtailed their trading with the firm." It all seemed so different just one year ago. Back then CEO Dick Fuld (who recently received a $40 million compensation package) said, "Do we have some stuff on the books that would be tough to get rid of? Yes. Is it going to kill us? Of course not." Those words could yet come back to haunt him.

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Other banks are scrambling to reassure investors, none more so than Washington Mutual, which, coming off the back of its own 40-plus percent share drop this week, issued a statement assuring all and sundry that it "continues to be confident that it has sufficient liquidity and capital to support its operations while it returns to profitability," CNN Money reports. WaMu says it has $50 billion in liquidity, but that didn't stop both Fitch Ratings and Moody's Investors Service from downgrading their assessments of the company.

Next into the lion's den are Goldman Sachs and Morgan Stanley, which report their third-quarter earnings next week. While no one on Wall Street is expecting a shock to rival Lehman Brothers (both Goldman and MS are expected to turn a profit, says CNN Money), the expected tepid performance of both institutions further reinforces the fragility of the U.S. banking sector. "The [question] will be, 'Can they muddle through?' rather than, 'Can they surprise with robust business?' " one analyst tells CNN Money. Life could be much tougher for insurance giant AIG. Investors are skittish that the company that has already lost $13.1 billion this financial year "will face billions in additional losses because it has effectively guaranteed complex financial instruments tied to home loans whose values have plummeted," writes the NYT.

There's no joy on the other side of the world either. Japan's economy recorded its "sharpest quarterly fall in almost seven years as the country appears to be falling into recession," the BBC reports. The world's second-largest economy shrank at an annualized rate of 3 percent from April to June. Meanwhile China's economy is feeling the pinch from the all-out Olympic push that brought about the temporary closure of hundreds of factories. Industrial output growth slowed to 12.8 percent last month compared with August 2007—a six-month low. New Zealand's Labour government can't blame the Olympics for its country's recession; what's worse, it has to fight a general election two months from now. Prime Minister Helen Clark hopes the recession-hit country will be enjoying a "much needed boost from recently granted tax cuts and lower interest rates," writes the Financial Times.

The imminent arrival of Hurricane Ike on Texas shores has shored up crude prices even as they flirted with dropping into double digits for the first time since March. U.S. gasoline prices are expected to rise after the Gulf of Mexico's refining hub shut down to brace for yet another major storm, reports the NYT. And biofuels, too, are taking a hit. Yesterday the European Union announced that its "ambitious targets for using crop-based biofuels should be pared back dramatically" over fears that corn-based ethanol is driving up food prices and that grain-based biofuels could create more CO2 pollution than they curtail.

At least some sectors are smiling, however. With the pro football season just one week old, NBC reports that it has already sold about 85 percent of the available Superbowl TV ads, and that's after it hiked its rate by 10 percent, the WSJ reports. Budweiser and Pepsi will be looking for a big game, but GM is sitting it out this year.

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Matthew Yeomans has covered everything from the dot-com bust to the global oil boom. Today, he is founder of Custom Communication, providing social media strategy and branded content for companies. Bernhard Warner has covered the ups and downs of the biggest companies, industries, and economies of North America and Europe. Today, he is a director of Custom Communication.
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