Welcome to another Black Monday.
Or rather, Red Monday — red for all the hemorrhaging taking place on Wall Street.
Lehman Brothers is filing for bankruptcy; Bank of America Corp. is buying Merrill Lynch & Co. For once, they didn’t get straight-out bailouts from Washington. But the Fed took several actions “to provide additional support to financial markets, including enhancements to its existing liquidity facilities.”
And there may be more on the way. U.S. automakers are pushing for $25 billion in government-backed low-interest loans. Naturally, the auto industry denies it is asking for a bailout, but taxpayers will be on the hook if the automakers fail to repay the loan. Insurance giant AIG also wants a government hand-up, if not a direct handout.
And now is the time where I get to say, “See, I told you so.” From March 17, 2008, as the Bear Stearns bailout was underway:
I warned from the start of stimulus-palooza that we were headed in this direction. Both political parties support these massive government interventions–from empowering judges to meddle with private contracts to backing billions in mortgage securities. This isn’t the last step. It’s the first. And you know who will end up getting screwed: The responsible and the frugal.
More from Business Week:
“Mondays better not get any more manic than this. Wall Street expected to spend today trying to contain the damage from a bankruptcy filing by Lehman Brothers (LEH) after the fourth-largest investment bank failed to find a buyer for its broken balance sheet over the weekend.
And that’s not all. There’s the distressed sale of Merrill Lynch (MER) to Bank of America (BAC) for approximately $44 billion, and a radical restructuring plan for American International Group (AIG), the insurance giant which became a major player in mortgage-related securities and derivatives.
…The plunging prices of Merrill and AIG raised the possibility that the market had figured out that the two are harboring big new losses from mortgage-linked securities. Worse, if Merrill and AIG lost a lot of capital, Wall Street sees fewer ways to replace that capital since the Fannie and Freddie deals. Terms of the government’s takeovers of Fannie and Freddie trashed the value of their preferred stock.
Until now, preferred stock has been a prime tool for daring investors to inject new capital into a company needing rehabilitation. The Fannie and Freddie deals indicated that preferred investors could lose big, along with common stock investors, in distressed takeovers. Both Merrill and AIG raised new capital early this year by issuing securities similar to preferred. Lehman also raised money from preferred investors, who are now likely to be wiped out in a bankruptcy. So now big issues of preferred securities may not be available to fill holes in balance sheets from new losses.
After a bad week, a working weekend, and a manic Monday, Wall Street can only hope the credit storm is at its worst.
Update: Lehman Bros. associates gave far more to Democrats than to Republicans. Just something to remember when Democrats blame this mess on the Bush Administration. (And now that The One is weighing in, let’s not forget this either.)blog comments powered by Disqus
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