What is going on with the economy?

[2Real4me!]

Shock waves hit Wall St. as 2 big firms fall
Monday September 15, 2:23 pm ET



2 storied Wall Street firms fall as US financial markets roiled by further shock waves

NEW YORK (AP) -- In a stunning reshaping of America's financial landscape, two venerable Wall Street firms fell from the shock waves of a credit crisis that has plunged the financial system into turmoil, as stocks tumbled across the globe Monday.
Lehman Brothers, a 158-year-old investment bank choked by the credit crisis and falling real estate values, filed for Chapter 11 protection in the biggest bankruptcy filing ever and said it was trying to sell off key business units. Bank of America Corp. said it is snapping up Merrill Lynch & Co. Inc. in a $50 billion all-stock transaction.
Stock markets fell and Treasury bond prices soared, though investors had a measured response to some of the biggest economic news in modern U.S. history. The Dow Jones industrial average fell 250 points -- a number that has become almost commonplace over the past year amid the ongoing troubles in the financial sector -- possibly because investors were relieved by the Merrill Lynch takoever. Bond prices soared as investors sought the safety of government debt.
The developments took place as U.S. voters, who rank the economy as their top concern, prepare to elect a new president in seven weeks. Presidential candidates John McCain, a Republican, and Democrat Barack Obama, immediately called for stricter financial regulation.
Obama called the news "the most serious financial crisis since the Great Depression" of the 1930s.
President George W. Bush meanwhile signaled that the government would not continue to bail out Wall Street, saying only that "we are working to reduce disruptions and minimize the impact of these financial market developments on the broader economy."
"The policymakers will focus on the health of the financial system as a whole," Bush said during the White House appearance with visiting Ghanian President John Kufuor.
The demise of the independent Wall Street institutions comes six months after the collapse of Bear Stearns and 14 months after the beginning of the credit crisis, sparked by bad mortgage finance and real estate investments.
Ominously, American International Group Inc., the world's largest insurance company, was asking the Federal Reserve for emergency funding and planned to announce a major restructuring Monday. New York Gov. David Paterson said he would allow American International Group Inc. to use $20 billion in subsidiary company assets to provide the cash needed for the troubled insurer to stay in business.
A global consortium of banks, working with government officials in New York, announced a $70 billion pool of funds to lend to troubled financial companies. The aim of the bank consortium, according to participants who spoke to The Associated Press, was to prevent a worldwide panic on stock and other financial exchanges.
Ten banks -- Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS -- each agreed to provide $7 billion "to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets."
The Federal Reserve also chipped in with more largesse in its emergency lending program for investment banks. The central bank announced late Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.
Europe's major central banks also moved quickly to calm markets, pumping billions of euros and pounds into the financial system to shore up confidence.
The European Central Bank said it received 51 bids for 90.3 billion euros ($127 billion) on its one-day tender of 30 billion euros ($42.6 billion) with a bid rate of 4.25 percent, a clear sign that demand for cash is over the top.
Similarly, the Bank of England in London offered 5 billion pounds (nearly $9 billion) in a three-day auction that drew bids for 24.1 billion ($43 billion), or nearly five times the amount that was offered.
The Zurich-based Swiss National Bank said it was also providing liquidity in "a generous and flexible manner" at an overnight rate of 1.9 percent, but wouldn't say how much was on offer.
Still, the FTSE-100 share index was down 4.07 percent in London, the Paris CAC-40 was off 4.5 percent and Germany's DAX 30 index of blue chips sagged 3.23 percent. India's Sensex tumbled 3.4 percent, Taiwan's benchmark index plummeted 4.1 percent and Singapore dropped 3.2 percent.
Lehman fell under the weight of $60 billion in soured real estate holdings, and the credit market's dislocation ultimately forced it to seek court protection. The credit crisis has caused global banks to write down more than $300 billion in asset value since last year, and caused the shotgun sales of Merrill Lynch & Co. and Bear Stearns Cos.
Lehman's bankruptcy filing marks the end of a Wall Street firm that started the U.S. cotton trade before the Civil War and financed the railroads that built a nation.
The company's roots began in 1844 when Henry Lehman immigrated from Rimpar, Germany to Alabama, where he established a dry goods store that catered to local cotton farmers in Montgomery. Lehman Brothers evolved from merchandising to a commodities broker, and then later into underwriting where the firm helped finance construction of the Pennsylvania Railroad, among others.
Chairman and Chief Executive Richard S. Fuld, who joined Lehman as a college student in 1969 and was the longest serving CEO on Wall Street, now has the dubious task of winding down the company's $639 billion of assets. It has about 25,000 employees worldwide, joining the swell of unemployed bankers and traders hurt by the credit crisis.
Many Lehman employees seen entering its headquarters in midtown Manhattan tucked their chins down to avoid talking to the media and others who had lined up behind metal barriers in front of the building.
Lehman's filing is the biggest corporate bankruptcy in history in terms of assets held, Mike Bickford of Jupiter eSources said. The next biggest bankruptcy was Worldcom Inc., with $126 billion in assets, and Enron Corp., with $81 billion. The figures are not adjusted for inflation.
In London, the administrators who have taken control of key Lehman Brothers' businesses in the United Kingdom said it could take years to dispose of the company's assets to pay off creditors.
Tony Lomas of PriceWaterHouseCoopers said liquidating those assets will be more complex than disposing of Enron's European assets, which took six years after the U.S. energy company's 2001 bankruptcy.
Lehman Brothers' filing came after all potential buyers walked away. They were spooked by the U.S. Treasury's refusal to provide any takeover aid, as it had done six months ago when Bear Stearns faltered and earlier this month when it seized mortgage giants Fannie Mae and Freddie Mac.
Merrill Lynch, another investment bank laid low by the crisis that was triggered by rising mortgage defaults and plunging home values in the U.S., agreed to be acquired by Bank of America for 0.8595 shares of Bank of America common stock for each Merrill Lynch common share.
That values Merrill at $29 a share, a 70 percent premium over the brokerage's Friday closing price of $17.05, but well below what Merrill was worth at its peak in early 2007, when its shares traded above $98.
Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world's largest brokerage. A combination of the two would create a global financial giant to rival Citigroup Inc., the biggest U.S. bank in terms of assets.
If the deal goes according to plan, Bank of America will be able to offer Merrill's retail brokerage services to its huge customer base. Where there is duplication, however, the combination of the two companies could result in more layoffs. Both Merrill and Bank of America have already cut thousands of investment banking jobs over the past year.
The deal would not come without risks, however. Merrill Lynch, like many of its Wall Street peers, has been struggling with tight credit markets and billions of dollars in assets tied to mortgages that have plunged in value. Merrill has reported four straight quarterly losses.
Bank of America's own finances are far from robust. As consumer credit deteriorates, the bank has seen its profits decline, and the company is still in the midst of absorbing the embattled mortgage lender Countrywide Financial, which it acquired in January.
Insurer AIG, hit hard by deterioration in the credit markets, said it is reviewing its operations and discussing possible options with outside parties to improve its business after a week when its stock dropped 45 percent amid concerns about the company's financial underpinnings.
The Wall Street Journal and The New York Times both reported early Monday on their Web sites that the American International Group is seeking an additional $40 billion in emergency funds -- possibly from the Federal Reserve -- to help it avoid a credit rating downgrade, which would make it more expensive for AIG to raise money. The insurer has already raised $20 billion in fresh capital this year.
AIG was working with New York Insurance Superintendent Eric Dinallo and a representative of the governor's office through the weekend to craft a solution that protects policyholders, according to Dinallo's spokesman David Neustadt.
"It's clear we're one step away from a financial meltdown," said Nouriel Roubini, chairman of the consulting firm RGE Monitor.
The end of Lehman may not stop the financial crisis that has gripped Wall Street for months, analysts said. More investment banks could disappear soon.
The independent broker-dealers "are going the way of the dodo bird," said Bert Ely, an Alexandria, Virginia-based banking consultant.
That's partly because some of the firms, particularly Merrill, made bad bets on real estate. But several analysts said that investment companies will need the deep pockets of commercial banks to survive the next few years.
Roubini said it's difficult to accurately gauge the health of companies like Merrill because their financial health depends on how they value complex securities. As a result, their finances aren't very transparent, he said.
That can lead to a loss of confidence in the financial markets, he said, which can overwhelm an investment bank even if it is financially healthy by some measures.
"Once you lose confidence, the fundamentals matter less," he said.
The common denominator of the financial crisis, analysts said, is the bursting of the housing bubble. Home prices have dropped on average 25 percent so far. Roubini predicted they could drop another 15 percent.
The crisis has begun to slow the broader economy as banks make fewer loans and consumers have begun cutting spending. Many economists are now forecasting that the economy could slip into recession by the end of this year and early next year.
That, in turn, could cause additional losses for commercial banks on credit cards, auto loans and student loans.
The wreckage could prompt the Federal Reserve to do an about face and once again cut a key interest rate this week or possibly later this year. Just a few days ago, a rate cut appeared largely off the table, but now it has emerged as a possibility as the Fed prepares to meet Tuesday.
The International Monetary Fund predicted earlier this year that total losses from the credit crisis could reach almost $1 trillion. So far, banks have only taken about $350 billion in losses.
AP Business Writers Joe Del Bruno, Christopher S. Rugaber, Martin Crutsinger, Madlen Read, Tim Paradis, Stephen Bernard, Ieva Augstums, Michael Liedtke, Jeannine Aversa, George Frey and Matt Moore contributed to this story.

[2Real4me!]

Wall Street crisis could put Fed rate cut in play



By JEANNINE AVERSA, AP Economics Writer1 hour, 13 minutes ago


Wreckage from a massive crisis on Wall Street could prompt the Federal Reserve to do an about face and once again cut a key interest rate this week or possibly later this year, economists said Monday.

Just a few days ago, a rate cut appeared largely off the table. Now it has emerged as a possibility as the Fed prepares to meet Tuesday against a backdrop of historic upheaval in the U.S. financial system.

Lehman Brothers Holdings Inc., the country's fourth-largest investment firm, filed for bankruptcy protection on Monday. And, Bank of America is buying Merrill Lynch in a $50 billion deal.

"It puts a Fed rate cut back on the table," said Stuart Hoffman, chief economist at PNC Financial Services Group.

Seeking to calm frazzled markets, President Bush assured the country his administration is "working to reduce disruptions and minimize the impact of these developments on the broader economy."

But neither Bush, nor Treasury Secretary Henry Paulson, who offered words of reassurance Monday, could stem the panic. The Dow Jones industrial average plunged 504.48 points to close at 10,917.51. It was the Dow's biggest point drop since the September 2001 terror attacks.

On the other side of the Atlantic, major European central banks plowed billions into markets Monday with the hope of averting a lending freeze-up in the wake of Lehman's failure.

"It is an ongoing process and we have to remain extraordinarily alert," said European Central Bank President Jean-Claude Trichet.

In Asia, China's central bank cut a key interest rate to stimulate growth as inflation has eased. It was the first rate cut there in almost six years. Chinese regulators have steadily raised interest rates over the past three years to contain inflation pressure.

During emergency sessions over the weekend, Fed Chairman Ben Bernanke and Paulson made clear there would be no government bailout of Lehman. The Fed took steps Sunday night to keep cash flowing to major Wall Street players by expanding its loan programs, however.

Before the extraordinary events over the weekend, the prevailing wisdom was that the Fed would hold its key interest rate steady at 2 percent at its next meeting on Tuesday.

Although that still could happen, a growing number of economists and investors now believes there is a chance the Fed could reduce its rate by one-quarter or even a bolder one-half percentage point on Tuesday. Much hinges on the information the Fed gets about how the inner workings of the U.S. financial system are functioning and how Wall Street investors react to the crisis.

"It is a different ballgame. Anything can be expected and a rate cut is possible," said economist Richard Yamarone, economist at Argus Research. Yamarone thinks the Fed on Tuesday will decide to stay the course and leave rates alone, fearing another cut would hurt the value of the U.S. dollar more. Hoffman, too, isn't convinced a rate cut will happen.

Were the Fed to slice its key rate, the prime lending rate for millions of consumers and businesses — now at 5 percent — would drop by a corresponding amount. The prime rate applies to certain credit cards, home equity lines of credit and other loans. The Fed's key rate and the prime rate are at four-year lows.

Even if the Fed doesn't lower rates on Tuesday, analysts believe the central bank could switch signals and suggest it could cut rates sooner down the road.

Over the last few months, Bernanke and his Fed colleagues have signaled that the central bank's next move on interest rates would probably be an increase to fend off inflation. Given all the economic and financial stresses, though, economists are now saying the likelihood of a rate increase over the next six to nine months is virtually nil.

A recent retreat in record-high oil prices and improved readings on wholesale prices, however, gives the Fed more leeway to lower rates if needed or at least hold them steady.

The Fed in June halted its most aggressive rate-cutting campaign to shore up the economy out of fears that those low rates were aggravating inflation. It didn't budge the rate at the last meeting in August for the same reason.
Fed officials have suggested that harder-to-get credit and financial troubles have blunted the energizing impact of the central bank's already-ordered rate cuts on consumers and businesses. Economic growth is slowing and the unemployment rate is at a five-year high of 6.1 percent.
Some argued that an additional rate cut might offer a psychological boost to shaken Wall Street investors, but probably wouldn't do much to turn around worried consumers and bolster the economy. Others feared another rate cut could send a wrong message to financial companies that made bad bets.
"I see very little gain of lower rates at this time and some may argue that extremely low rates may encourage the type of risky behavior on the part of investors which is exactly what the Fed wants to avoid," said Victor Li, an economics professor at the Villanova School of Business.

[IV]

Barrel of oil jumped by over 25 bucks today...in just one day. Hmmm...no speculation in the commodities market?

Oh nooooo...none at all.

[Pavel]

So, where is the $700 Billion supposed to go?

[IV]

I sent a letter to Congress. I told them that I require only 1/16 of that pocket liningpackage for my future to be fiscally sound. (heck...even 1/32 would do)

[RedOctober]

Pavel Wrote:So, where is the $700 Billion supposed to go?

To buy out the mortgage backed securities. Where is coming from? Start the presses everyone!!!!