Crazy news this Monday morning! So here’s the scorecard:
Merrill Lynch will be bought by Bank of America. According to Bloomberg.com, BofA will buy Merrill for $29 a share a 70% premium on it’s 9/12 price but considerably lower than it’s 2007 high of $97.53. What caused this buyout to happen? Bad mortgages! According to the NY Times Merrill Lynch has lost over $45 Billion in mortgage investments. The iconic bull from their logo will now be running through the halls of Bank of America! Is Bank of America slowly becoming the Google of banking?
Not so good news for Lehman Brothers which is filing for chapter 11 bankruptcy protection. The firm was unable to find a buyer and as a result needs to protect itself until a sale can happen. Lehman almost worked out a deal with Bank of America but BofA bailed someone else out instead. Lehman Brothers’ problems stem from $60 Billion in “soured real estate holdings” according to the Associated Press.
And since two isn’t enough, AIG is seeking a $40 Billion loan from the Fed in hopes to prevent a downgrade of it’s credit rating. AIG recently reported a quarterly loss of $5 Billion as a result of mortgage-related investments (see a pattern here?). According to MarketWatch if AIG’s credit rating goes down it will be difficult for them to sell new products which would prevent them from raising new capital.
What does all of this mean?
Well it’s going to be an interesting day in the stock market. And by interesting I’m thinking not so good. The International Herald Tribune is already reporting drops in the World markets.
As more financial firms reach critical mass it will become more difficult for other firms to get loans. This could potentially be the straw that breaks the camel’s back on the whole recession question. When firms can’t get more capital they can’t invest more in their businesses which slows their production. If productions slows enough to become negative then we’re in a recession.
For us, the little people, I think it’s going to become more difficult to get a mortgage, at least in the short run. Banks are going to be more skittish about giving away cheap loans. I’m sure this isn’t the end of the situation either. Hopefully though, the end result will be new policies at banks to prevent a housing crisis like this from happening again. Banks aren’t the only ones to blame though. The Fed has a hand in this as well as low Fed rates have made cheap money available for some time now. And of course some blame has to go out to realtors and housing consumers for bad mortgages as well. (Check out the take on the Freddie Mac and Fannie Mae bailout at My Two Dollars).
Buckle yourself in, it’s gonna be a bumpy ride!