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Archive for September, 2008

My Take On The Markets

September 25th, 2008 at 11:00 am

Where do I even start? Ok, first let me say that I don't hold presidents responsible for economic issues. So, I won't be bashing Bush, Clinton or Bush.

Was it caused by real estate speculators, the mortgage brokers writing loans with out proof of income and employment and 100% + loans, was it caused by credit agencies rating all the paper off of SIVs and CDOs AAA and Aaa?

I believe the underlying problem started after the S&L crisis. Coming out of the S&L we hit a little recession where the unemployment rate hit 7.5% and middle management was being squeezed. From 1991-1992, the fed lowered the fed fund rate 375 basis points in less then 2 years. This made credit very easy to get, whether it was buying stocks, loans for companies, and yes even mortgages.

When everything is clicking, this added leverage in the economy causes the economy to expand. Jobs are easy to find, labor pay increases … life is good. But leverage can also cut the other way too.

You could even go further back in time. The S&L crisis caused a recession which caused the fed to loosen the economy. The deregulation of the 1980's caused the S&L crisis. The inflation of the early 1980's caused the deregulation as a last ditch attempt for the S&Ls to save themselves. In the 1970's, S&Ls didn't realize that their business models were fundamentally changing and didn't have a plan when inflation hit.

I could probably go on and on. One thing feeding of another. If I had to choose one thing, it would be the fed aggressively open up credit to everyone in the 1990s, and this has evident in all industries, corporations,

So here we are today. We have underlying assets devalueing or correcting (which ever term you want to use). When these assets started to devalue, firms went out and raised capital (in other words debt). Some of the headlines were Baclays raises 4.5 billion, Fifth Third raise 2 billion, Lehman posts 3 billion loss and sets 6 billion stock sale.

But recently something happened in the markets. The write downs of the assets didn't stop and investors stopped loaning money and buying preferred stock.

So now we are in September, AIG's assets deterred to a point where they had to keep putting up more capital and just couldn't do it any more. Lehman was basically shut out of the capital markets. Write downs are still occurring and financial ratios are still deteriorating.

So what has the government done? First is to save AIG. AIG is basically the insurance provider for the financial industry. If they went under, it would have caused a ripple affect of failures as hedged positions became unhedged.

The second issue was the common citizen losing confidence in the financial system. This was seen when there was a run on money market accounts. Money Market accounts invest in safe short term paper (except the cash enhanced which invest in CP on SIV and CDOs. Black Rock wrote about this last December). In any case, if everyone sells out of a money market fund, the portfolio manager must liquidate the fund. This causes them not to get full value and liquidate for less then a dollar. We say State Street lose 35% of its value in one day because of this.

So the government has now set up $400 billion to guarantee that money markets will have a dollar price. This has had the effect of stopping the run on the mutual fund industry and chances are the none of the $400 billion will be used. If the market works with out panic, the portfolio managers can unwind there positions without forcing to liquidate at a fire sale.

The next piece is to free up capital and let the credit markets work again. This is the $700 billion. Right now, the institutions carrying this debt bad assets keeps writing them down and doesn't have capital to lend and people with capital to lend don't want to lend it because these write off just keep continuing.

Some the $700 billion is there to buy this debt from the financial institutions. The consensus is that the price will be above the fire sale price currently out there put below the maturity value of the debt. The government will then hold the securities until the market recovers or keep them to maturity. There is talk of starting with the MBS (mortgage backed securities) and moving to others.

So a MBS is security that represents a pool of mortgages. So they take a bunch the 30 year fixed at 5.5% and sell a slice to the bond fund. Most people pay there mortgages so most of the mortgages in the pool will be fine. It's just this small percent that will default and no one knows how much it is. So there is now a supply of MBS and not a lot of buyers. The yield on these are 15%-20%, so the are already steeply discounted.

Now the government is going to come in and basically buy the securities so the yield might be 10% - 15% and hold until the market recovers or the pools mature.

Personally, I expect the government to make money on the AIG deal and the MBS deal and maybe loss less then a billion on the money market thing. Also the terms are that the money will be available if needed. This usually means that the government will sell treasury if the money is needed, they don't have it on hand.

There is an urgency to this. You don't want the credit markets to sieze.

So that's my take. Hope it may sense.

Retirement Numbers

September 24th, 2008 at 08:38 am

Every financial site has there 2 cents on how to determine a retirement number. Some are complex formulas that use monet carlo simulations. They simulate various market conditions and inflation scenarios about a 1,000 times to spit out numbers like there is an 87% chance that you will reach 73% of your goal.

So what is a lay person to do?

Personally, I like simple and easy things. So the first thing is to determine the amount of income you need in retirement. Some sites say 80%, some others say less. I use 100% of my income.

Why? First, it is easy to compute (income * 100% = income). Secondly, I know I can live off this income (I am doing it know). Third, I am actually living below it so I have some cushion. Forth, even if I retired, my work related expenses would decrease but my leisure expenses would increase so it would probably be a wash.

Now take your income and multiply by 25. Why 25? Because 25 times your salary would allow you to withdraw your salary every year and allow for your savings to grow and keep up with inflation. So, if you could get an 8% return, you could take out 4% and increase your yearly withdrawal by 4% to keep pace with inflation.

But that number is huge!!! 25 times let's say 100k = 2.5 million. That is a lot of money. This number can also be adjusted down. If you have a pension, annuity, income producing real estate, or social security, you could reduce that number significantly.

Let's say I am going to get 1,500 a month for SS or 18,000 a year. I have a three family that's paid of when I retire and I can get 2,200 a month from that after expenses or 26,400 a year. Well, that's 44,400 a year in income. So theoretically, I would only need to generate 55,600 a year and my number would need to be 1.39 million instead of 2.5 million.

Now, I am figuring this all off of invested assets. I am not including my house, automobiles, furniture, etc. I am not including the house because I don't know where I will live in retirement. It may cost more or less. But I could live in my house for most of retirement.

I didn't include the rest because the resale value is negligible on a nest egg of 1.39 million.

What I also like is that this approach tends to be pretty conservative. In other words, I am retiring on what I am currently making adjusted for inflation without touching my 1.39 million nest egg. This allows me to have a cushion for the unforeseen, take care of nursing home expenses, leave a little something to the people I love, and most importantly not be a financial burden.

FDIC

September 22nd, 2008 at 06:22 am

If you have under $100,000, you money is safe. Since FIDC started, it has not lost a penny of any depositors money under the $100,000 threshold. Either your deposits will be transferred to another FIDC insured bank or FIDC will send you a check.

If you have over $100,000 in one account (there are multiple type of accounts you can have and I think each one has the 100k limit), the acquiring bank can buy the deposits in full or a percentage (even 0%) of the uninsured deposits. So even though, the deposit is uninsured, you have a good chance of getting something. Of course, I would recommend you keep within those insured limits.

FDIC has its own fund. All FDIC banks pay a premium to the fund. If the fund were to run out, FDIC has the ability to borrow as much money as it needs directly from the Treasury. There is interest charged to the loan.

Most of the bank failures do not cause the FDIC to take a loss. Indy Mac is an example of one where the FIDC will need to pay money. It currently looks like FIDC will need to pay 8.9 billion for the 32 billion bank failure.

All the talk about the FIDC fund drying up is because the reserve ratio (the funds balance divided by insured deposits) fell to 1.01 in June form 1.19 in March. The FDIC is forced to restore the ration back to 1.15, meaning banks will need to pay a higher premium in 2009.

The decline from 1.19 to 1.01 was mainly due to 10.2 set aside for insurance losses. (This number does include 8 billion set aside for Indy Mac.)

This was the lowest level since 3/31/1995 when it was 0.98.

Sigh...Monster Up Day Setting up

September 19th, 2008 at 05:31 am

The futures are currently pointing to a huge up day today on top of the 400 point surge yesterday.

As I look premarket GS is up $32 to $140. STT is up $6 to $65. WM is up a buck to $4. Hell, Apple is even up almost $8. Oil is at $97.5 probably going down today. Gold is down $54.

So what happened? Is everyone drunk? Is it like someone about to jump off the ledge and the sun comes out?

"U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed moving troubled assets from the balance sheets of American financial companies into a new institution. "

and

"U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff. They spoke on condition of anonymity because the plans may change. "

Source: http://www.bloomberg.com/apps/news?pid=20601103&sid=am.XqrSCUntI&refer=news

AIG Deal and Changes to Naked Short Rules

September 17th, 2008 at 08:18 pm

AIG Deal

Just to be clear about the deal. It's an $85 billion 2 year revolving credit loan at 3 month LIBOR + 850 bps.

The loan is collateralized by all the assets of AIG which is estimated to be be about $1 trillion. Just the air leasing and foriegn life insurance division are estimated to be worth about $94 billion.

The other piece is a 79.9% equity stake in AIG, where the government can veto dividends to common and preferred shareholders.

Now the 3 month LIBOR is around 2.88. Or, the interest on the loan is 11.38%. That ain't cheap money and the government has enough power to liquidate the company and get their money first. But it did this to give AIG time to unravel and not have to put everything on a fire sale.

Source: http://www.federalreserve.gov/newsevents/press/other/20080916a.htm


~~~~~~~~
Naked Shorts - Technical

The Commission's actions were as follows:

1)Hard T+3 Close-Out Requirement;

Penalties for Violation Include Prohibition of Further Short Sales, Mandatory Pre-Borrow

The Commission adopted, on an interim final basis, a new rule requiring that short sellers and their broker-dealers deliver securities by the close of business on the settlement date (three days after the sale transaction date, or T+3) and imposing penalties for failure to do so.

If a short sale violates this close-out requirement, then any broker-dealer acting on the short seller's behalf will be prohibited from further short sales in the same security unless the shares are not only located but also pre-borrowed. The prohibition on the broker-dealer's activity applies not only to short sales for the particular naked short seller, but to all short sales for any customer.

Although the rule will be effective immediately, the Commission is seeking comment during a period of 30 days on all aspects of the rule. The Commission expects to follow further rulemaking procedures at the expiration of the comment period.

2)Exception for Options Market Makers from Short Selling Close-Out Provisions in Reg SHO Repealed

The Commission approved a final rule to eliminate the options market maker exception from the close-out requirement of Rule 203(b)(3) in Regulation SHO. This rule change also becomes effective at 12:01 a.m. ET on Thursday, Sept. 18, 2008.

As a result, options market makers will be treated in the same way as all other market participants, and required to abide by the hard T+3 closeout requirements that effectively ban naked short selling.
Rule 10b-21 Short Selling Anti-Fraud Rule

The Commission adopted Rule 10b-21, which expressly targets fraudulent short selling transactions. The new rule covers short sellers who deceive broker-dealers or any other market participants. Specifically, the new rule makes clear that those who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver. This rule also becomes effective at 12:01 a.m. ET on Thursday.

Source: http://www.sec.gov/rules/other/2008/34-58572.pdf

Russian Markets Halted as Emergency Funding Fails to Halt Rout

September 17th, 2008 at 06:30 am

Could be worse....

Sept. 17 (Bloomberg) -- Russian markets stopped trading for a second day after emergency funding measures by the government failed to halt the biggest stock rout since the country's debt default and currency devaluation a decade ago.

The ruble-denominated Micex Stock Exchange suspended trading indefinitely at 12:10 p.m. after its index erased a 7.6 percent gain and plunged as much as 10 percent within an hour. The benchmark fell 17 percent yesterday, the biggest drop since Bloomberg started tracking the gauge in May 2001. The dollar- denominated RTS halted trading after similar declines.

The government yesterday injected $20 billion into the interbank lending market via central bank and Finance Ministry auctions in a bid to contain soaring borrowing rates as credit dried up in the wake of the Lehman Brothers Holdings Inc. bankruptcy. The one-day MosPrime overnight rate, a gauge for monitoring liquidity demand, leapt 25 basis points to a record 11.08 percent today.

The Finance Ministry attempted to stop the selloff by offering 1.13 trillion rubles ($44 billion) of budget funds to the country's three biggest banks, OAO Sberbank, VTB Group and OAO Gazprombank, for at least three months. That measure came as KIT Finance, a Russian brokerage, said it's in talks to find a buyer after failing to meet some financial obligations related to repurchase agreements.

Bond Market `Closed'

``The bond market remains effectively closed and banks are reluctant to lend to one another,'' said Julian Rimmer, head of sales trading at UralSib Financial Corp. in London. ``The problems experienced by KIT Finance have heightened counterparty risk and reduced liquidity further.''

Finance Ministry Minister Alexei Kudrin said on state television that the decision to increase the amount of budget funds available to three state-controlled banks would ``smooth over the shock changes'' in the markets and enable the banks to make loans to smaller competitors.

``We must soften such shock changes connected with the market falling,'' Kudrin said. ``With foreign borrowing stopping, we must soften the impact with additional funds, then the situation will stabilize.''

Sberbank, eastern Europe's biggest bank, can borrow as much as 754 billion rubles, VTB has a limit of 268.5 billion rubles and Gazprombank can get 103.9 billion rubles. About 400 billion rubles more of unspent budget funds is available to other banks.

``These are market-making banks capable of insuring the liquidity of the banking system,'' the Finance Ministry said in a statement today. The government and central bank will take more measures to improve liquidity this week, the ministry said.

Sberbank dropped 2.1 rubles, or 6.1 percent, to 32.55 rubles. VTB sank 0.44 kopek, or 14 percent, to 2.73 rubles, a record low.

``The primary objective of these measures is to inject liquidity to calm nervousness,'' Alexander Morozov, chief economist at HSBC Bank in Moscow, said by telephone. ``Hopefully other banks will be able to get this money via the interbank market and this should prevent the rise of rates,'' he said.

Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aIRza4.azeC4&refer=worldwide

Russian Markets Halted as Emergency Funding Fails to Halt Rout

September 17th, 2008 at 06:29 am

Could be worse....

Sept. 17 (Bloomberg) -- Russian markets stopped trading for a second day after emergency funding measures by the government failed to halt the biggest stock rout since the country's debt default and currency devaluation a decade ago.

The ruble-denominated Micex Stock Exchange suspended trading indefinitely at 12:10 p.m. after its index erased a 7.6 percent gain and plunged as much as 10 percent within an hour. The benchmark fell 17 percent yesterday, the biggest drop since Bloomberg started tracking the gauge in May 2001. The dollar- denominated RTS halted trading after similar declines.

The government yesterday injected $20 billion into the interbank lending market via central bank and Finance Ministry auctions in a bid to contain soaring borrowing rates as credit dried up in the wake of the Lehman Brothers Holdings Inc. bankruptcy. The one-day MosPrime overnight rate, a gauge for monitoring liquidity demand, leapt 25 basis points to a record 11.08 percent today.

The Finance Ministry attempted to stop the selloff by offering 1.13 trillion rubles ($44 billion) of budget funds to the country's three biggest banks, OAO Sberbank, VTB Group and OAO Gazprombank, for at least three months. That measure came as KIT Finance, a Russian brokerage, said it's in talks to find a buyer after failing to meet some financial obligations related to repurchase agreements.

Bond Market `Closed'

``The bond market remains effectively closed and banks are reluctant to lend to one another,'' said Julian Rimmer, head of sales trading at UralSib Financial Corp. in London. ``The problems experienced by KIT Finance have heightened counterparty risk and reduced liquidity further.''

Finance Ministry Minister Alexei Kudrin said on state television that the decision to increase the amount of budget funds available to three state-controlled banks would ``smooth over the shock changes'' in the markets and enable the banks to make loans to smaller competitors.

``We must soften such shock changes connected with the market falling,'' Kudrin said. ``With foreign borrowing stopping, we must soften the impact with additional funds, then the situation will stabilize.''

Sberbank, eastern Europe's biggest bank, can borrow as much as 754 billion rubles, VTB has a limit of 268.5 billion rubles and Gazprombank can get 103.9 billion rubles. About 400 billion rubles more of unspent budget funds is available to other banks.

``These are market-making banks capable of insuring the liquidity of the banking system,'' the Finance Ministry said in a statement today. The government and central bank will take more measures to improve liquidity this week, the ministry said.

Sberbank dropped 2.1 rubles, or 6.1 percent, to 32.55 rubles. VTB sank 0.44 kopek, or 14 percent, to 2.73 rubles, a record low.

``The primary objective of these measures is to inject liquidity to calm nervousness,'' Alexander Morozov, chief economist at HSBC Bank in Moscow, said by telephone. ``Hopefully other banks will be able to get this money via the interbank market and this should prevent the rise of rates,'' he said.

Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aIRza4.azeC4&refer=worldwide

US Govt Owns 79.9% of AIG for 85 bill

September 16th, 2008 at 06:29 pm

WASHINGTON - In a bid to save financial markets and economy from further turmoil, the U.S. government agreed Tuesday to provide an $85 billion emergency loan to rescue the huge insurer AIG.
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The Federal Reserve said in a statement it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said.

"The President supports the agreement announced this evening by the Federal Reserve," said White House spokesman Tony Fratto. "These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy."

Treasury Secretary Henry Paulson said the administration was working closely with the Fed, the Securities and Exchange Commission and other government regulators to "enhance the stability and orderliness of our financial markets and minimize the disruption to our economy."

"I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect taxpayers," Paulson said in a statement.

The Fed said in return for the loan, the government will receive a 79.9 percent equity stake in AIG.

Earlier, Fed chairman Bernanke and Paulson met with Sen. Christopher Dodd, D-Conn., Majority Leader Harry Reid, D-Nev., and House Republican leader John Boehner of Ohio, to brief them on the government's option.

"At the administration's request, I met this evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. They expressed the administration's views on the deepening economic turmoil and shared with us their latest proposals regarding AIG," Reid told reporters. "The Treasury and the Fed have promised to provide more details in the near future, which I believe must address the broader, underlying structural issues in the financial markets."

On Tuesday, shares of the insurance company swung violently as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent — and another 45 percent after hours. Still, no deal emerged.

The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn't make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week's collapse of the investment bank Lehman Brothers.

The worries were triggered after Moody's Investor Service and Standard and Poor's lowered AIG's credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance — such as banks and other financial companies — would have found themselves without protection against losses on the debt they hold.

"It might not just bring down other financial institutions in the U.S. It could bring down overseas financial institutions," said Timothy Canova, a professor of international economic law at Chapman University School of Law. "If Lehman Brother's failure could help trigger AIG's going down, who knows who AIG's failure could trigger next."

New York-based AIG operates an insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. Those traditional insurance operations are considered healthy and the National Association of Insurance Commissioners said "they are solvent and have the capability to pay claims."

Source: http://news.yahoo.com/s/ap/ap_on_bi_ge/aig

BOA buys Merrill for 44 bill and Lehman No more

September 14th, 2008 at 08:21 pm

Seems that BAC bought Merrill for 44 billion and Lehman after 158 years in business is out.

Bank of America Reaches Deal for Merrill
By MATTHEW KARNITSCHNIG, CARRICK MOLLENKAMP and DAN FITZPATRICK
September 15, 2008

In a rushed bid to ride out the storm sweeping American finance, 94-year-old Merrill Lynch & Co. agreed late Sunday to sell itself to Bank of America Corp. for roughly $44 billion.

The deal, which was being 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 boards of the two companies approved the deal Sunday evening, according to people familiar with the matter.

Driven by Chief Executive Kenneth Lewis, Bank of America has already made dozens of acquisitions large and small, including the purchase of ailing mortgage lender Countrywide Financial Corp. earlier this year. In adding Merrill Lynch, it would control the nation's largest force of stock brokers as well as a well-regarded investment bank.

A combination would create a bank of vast reach, involved in nearly every nook and cranny of the financial system, from credit cards and auto loans to bond and stock underwriting, merger advice and wealth management.

It would also show how the credit crisis has created opportunities for financially sound buyers. At $44 billion, or roughly $29 a share, Merrill would be sold at about two-thirds of its value of one year ago, and half its all-time peak value of early 2007. Merrill shares changed hands at $17.05 each on Friday, after falling sharply in the wake of Lehman's looming demise.

"Why would Bank of America do this?" said analyst Nancy Bush at NAB Research LLC in Annandale, N.J. "Ken Lewis always likes to buy the biggest thing he can. So why not this? You are master of the universe, basically."

Bank of America and Merrill Lynch wouldn't comment on any discussions.

Merrill would give Bank of America strength around the world, including emerging markets such as India. And Merrill is also strong in underwriting, an area Bank of America identified last week at an investors' conference where it would like to be more aggressive.

Dramatic Deal

A deal would be all the more dramatic because Merrill, upon the arrival of Chief Executive John Thain, did more than many U.S. financial giants to insulate itself from the financial crisis that began last year. It raised large amounts of capital, purged itself of toxic assets and sold big equity stakes, such as its holding in financial-information giant Bloomberg. That Merrill has opted to sell itself thus underscores the severity of crisis.

The integration of Merrill, known for its proud, and sometimes testy, brokerage force, could turn out to be the biggest test of Mr. Lewis's career. Typically, the bank has made one big deal and then taken time to carefully merge the two institutions. But in recent years, acquisitions have come at a furious pace. In 2004, the bank bought FleetBoston Financial Corp. A year later, the bank agreed to buy MBNA Corp., the credit-card firm. In 2007, Bank of America bought Chicago's LaSalle Bank as part of the break-up of Dutch bank ABN-Amro Holding NV. Then came this year's purchase of Countrywide.

As of Sunday evening, a deal had not yet been signed, said people briefed on the discussions. And other last-second bidders could emerge from the woodwork. Yet with news of the Bank of America talks breaking Sunday, it became all the more difficult for Merrill and Mr. Thain to rebuff a deal. Should the talks collapse, most on the Street were expecting Merrill's shares to fall even further amid widespread worries about independent broker-dealers.

Inside the Fed meetings in Lower Manhattan this weekend, there was a general worry that Merrill could be the next to fall after Lehman. Through the weekend, federal officials including Federal Reserve Bank of New York head Timothy Geithner made it clear that they strongly encouraged a deal to sell Merrill, said people familiar with the matter said.

If struck, a deal would come together at breakneck speed. On Friday, Bank of America's top executives were pushing for a deal with Lehman Brothers, scrambling to perform due diligence on Lehman's books. Just 48 hours later, they were locked in discussion with Merrill and its top executives.

During the flurry of historic dealmaking this weekend, Merrill approached Morgan Stanley about a possible deal, which would have united two of Wall Street's oldest brands, according to a person familiar with the talks. But the talks didn't go anywhere because there wasn't enough time for Morgan Stanley to review the idea and Merrill wanted to do the deal quickly, this person said. Merrill was also stepping up talks with commercial banks both in Europe and the U.S. While Mr. Thain had once orchestrated a trans-Atlantic deal for his old firm, NYSE Euronext, in this race, a U.S. deal proved the quickest, best option for Merrill.

'The Ultimate Realist'

"I think John Thain at Merrill is the ultimate realist," Ms. Bush said, the analyst, who expected federal regulators to bless the deal by relaxing deposit limits for bank-holding companies. "He knows if Lehman goes under he is not far behind. He wants to cut the best deal he can."

In the past 15 months, Merrill and Lehman have both had tens of billions of dollars worth of risky, illiquid assets carried on balance sheets that were leveraged at a debt-to-equity ratio of more than 20 to one. When the credit crunch hit in mid-2007, the assets kept deteriorating in value and couldn't easily be sold, eating into both firms' capital cushion. Recently, Lehman's balance sheet topped $600 billion and Merrill's $900 billion.

Merrill's one-time chief Stan O'Neal was ousted in October 2007, and his successor, Mr. Thain, tried to repair the firm's balance sheet by arranging an infusion of more than $6 billion in capital starting last December by investors led by Temasek Holdings, a Singapore government investment fund.

But as the losses kept coming this year, Mr. Thain was forced in July to sell a huge slug of more than $30 billion in collateralized debt obligations at a price of just 22 cents on the dollar. That step required the firm to raise still more capital, under painful terms that re-priced some of the December stock sales at about half the original price.

One top Merrill executive lamented the pending sale of the venerable company, saying "it's sad but inevitable." This executive said that he was pleased it was Merrill, rather than rival broker Morgan Stanley, that was hatching a deal with Bank of America.

The fate of both Morgan Stanley and Goldman Sachs will be front and center Monday morning, as the Street wakes up to a world where the independent broker-dealer are increasingly thin in number.

This tumultuous year has made it clear that investment banks like Lehman and Bear Stearns face vulnerabilities that commercial banks such as J.P. Morgan and Bank of America are less prone to. The investment banks must constantly depend on short- and medium-term money markets to fund their operations. Commercial banks, meanwhile, can count on more stable consumer deposit bases.

In a highly volatile market, some advantages accrue to banks that can rely on those more stable deposit bases.

At Merrill, "we became convinced that for investment banking to be possible, we need to be part of a much bigger capitalized commercial bank," the Merrill executive said.

Merrill acted to avoid the same fate as Bear Stearns and Lehman, some analysts said. "Bear didn't think it could happen to them and Lehman didn't think it could happen to them either," said analyst David Trone of Fox-Pitt, Kelton. "I think management looked at Bear and Lehman and said we're not going to go down that slope, we're going to try and get our shareholders something before we end up in the same camp."

source: http://online.wsj.com/article/SB122142278543033525.html?mod=special_coverage

Wall Street Prepares for Potential Lehman Bankruptcy (Update3)

By Craig Torres and Shannon Harrington

Sept. 14 (Bloomberg) -- Wall Street readied for a potential Lehman Brothers Holdings Inc. bankruptcy after Bank of America Corp. and Barclays Plc pulled out of talks to buy it and the government indicated it wouldn't provide funds to prevent a collapse.

Banks and brokers today held a session for netting derivatives transactions with Lehman, or canceling trades that offset each other, in case the New York-based firm files for bankruptcy before midnight.

``The purpose of this session is to reduce risk associated with a potential Lehman'' bankruptcy, the International Swaps and Derivatives Association said in a statement today. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the U.S. and abroad.

The step indicates Wall Street lacks confidence that three days of talks to find a buyer for Lehman, held at the Federal Reserve Bank of New York, will be successful. Treasury Secretary Henry Paulson, who has led the talks with New York Fed President Timothy Geithner, was adamant two days ago against using taxpayer funds to help a purchaser take Lehman over.

U.S. regulators are betting that the financial system will be able to withstand the failure of a large institution without severe disruptions to an already weak economy.

A benchmark gauge of credit risk that banks and investors use to speculate on corporate creditworthiness or to hedge against losses was being quoted at the widest levels ever, contingent on a Lehman bankruptcy.

Confidence Deteriorates

The Markit CDX North America Investment Grade Index, linked to the bonds of 125 companies in the U.S. and Canada, was trading at about 200 basis points, said Brian Yelvington, a strategist at CreditSights Inc. in New York. It closed at 152 basis points Sept. 12, according to CMA Datavision in London. The index, which rises as investor confidence falls, reached 198 basis points in March, CMA data show.

A gauge of risk in the U.S. leveraged-loan market that falls as credit risk increases was being quoted 1.75 percentage points lower, contingent on a Lehman bankruptcy, according to Goldman Sachs Group Inc. The Markit LCDX index was being quoted at a mid- price of 94.25. The index is tied to the high-yield, high-risk loans of 100 companies.

If Lehman files for bankruptcy, ``that obviously puts a lot more risk in the market, so it's definitely going to be wider,'' Yelvington said.

Paulson's Stance

Paulson opposed using government money because Wall Street has had time to prepare for the Lehman situation, a person familiar with his thinking said two days ago. That would make the case different from the Bear Stearns Cos. collapse in March, when the Fed provided $29 billion of financing to help JPMorgan Chase & Co. take over the firm.

``Treasury and the Fed have determined that markets have adjusted to the situation since Bear Stearns,'' said Gilbert Schwartz, a partner at Schwartz & Ballen LLP in Washington and a former Fed Board attorney. ``If the markets, every time a big institution went bust, expected the government to step in, no one would ever adapt.''

Paulson, Geithner and Securities and Exchange Commission Chairman Christopher Cox held talks with Wall Street chiefs from the evening of Sept. 12.

The market value for all over-the-counter derivatives swelled 50 percent last year to $14.52 trillion, with interest- rate contracts accounting for almost half of the total, according to the Bank for International Settlements.

Insolvent Banks

After the Bear Stearns episode, Paulson pushed for a resolution mechanism to shutter a failing investment bank, similar to how the Federal Deposit Insurance Corp. resolves insolvent commercial banks.

``We must limit the perception that some institutions are either too big or too interconnected to fail,'' Paulson said in a June 19 speech. ``If we are to do that credibly, we must address the reality that some are.''

Without such a mechanism in place, a failing firm has the option of filing for bankruptcy. Bear Stearns officials told the Fed in March they would have to make such a filing without emergency assistance.

Fed Chairman Ben S. Bernanke said in April that he wanted to avoid another Bear Stearns case.

``The financing we did for Bear Stearns is a one-time event,'' Bernanke said in April. ``It's never happened before and I hope it never happens again.''

Lehman Trades

The fourth-largest securities firm until the past week, Lehman has thousands of such trades in credit, equity, commodity, interest rates and currency derivatives.

The ISDA said the ``netting trading session'' began at 2 p.m. and will continue until at least 6 p.m. New York time.

``Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time, Sunday, Sept. 14, 2008,'' the ISDA said. ``If there is no filing, the trades cease to exist.''

Barclays, the U.K.'s third-biggest bank, said earlier today it abandoned talks to buy Lehman, contending it couldn't obtain guarantees to protect against potential losses at the U.S. securities firm.

Less than three hours after the Barclays news, Bank of America also pulled out, according to a person with knowledge of the matter.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.netShannon Harrington in New York at Sharrington6@bloomberg.net

source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aNMh_8NRE6QM&refer=worldwide

Goals Review - August

September 3rd, 2008 at 09:51 am

Wow, what a month. My wife's birthday in Boston wasn't cheap but worth it and everyone had a great time. Went on a mini vacation to New Hampshire with 2 other families and went Storyland (amusement park for little kids). Greatest part no new debt!!!

So let's get started.

My goals for 2008 are:

1) Pay off debt (except mortgage) by October 1st
. DONE a) Pay off CC by April 1st
. DONE b) Pay off Car 1 by June 1st
. DONE c) Pay off Car 2 by Aug 1st
. DONE d) Pay off wifes braces by June 1st
. e) Pay off sons medical by October 1st
2) Invest $15,000 by year end
3) Invest $15,500 in 401(k)
DONE 4) Review and reallocate retirement funds by end of Q1
DONE 5) Will by end of Q2
DONE 6) Life Insurance by end of Q2
MOVED TO 2009 7) Save $4,000 for college by end of Q4

1) Pay off all debt but the mortgage by October 1st

Total Debt
08/31/2008 - $13,898 ($2,162 paid)

Wife's braces (0% interest rate)
08/31/2008 - $0 ($1,560 paid)

All paid off!!!

Son's medical (0% interest rate)
08/31/2008 - $13,898 ($602 paid)

And then there was one. Only on debt left!!! Not a bad month, I had some extra expenses I need to pay also, like preschool and life insurance policy on top of the fun money a mentioned above.

Next week, I am going to the Cape for vacation. I wouldn't get paid for that week from work. I figure I need to save about $350 from my next paycheck in order to be able to get through the week. I have a budget of about $500. The place is paid for. So, it's pretty much gas to get me there, miniature golf, maybe one a meal out, and some groceries. Maybe I should up it to $750. I'll need to go through the finally budget numbers with the wife.

2) Invest $15,000 by yearend

This goal will be started in Q4, only a month away. This is really just to top off my emergency fund.

3) Invest $15,500 in 401(k)

Invest $15,500 in 401(k)
08/31/2008 - $13,848 invested

I am thinking this goal will be accomplished with my 10/10 paycheck, then I'll go back to goal 2.

4) Review and reallocate retirement funds by end of Q1

DONE

5) Will by end of Q2

DONE

6) Life Insurance by end of Q2

DONE. Bill paid!!!!

7) Save $4,000 for college by end of Q4

I am actually moving this to my 2009 goals. The $18k goal will fully catch me up to where I think I need to be with the 529 plans. Basically, if I started saving $2k a year for each at birth.

Summary

So, this is the last month of the third quarter. I am still on track for the end of the year. I'll take another look this month at my 2009 goals and see what I need to do now to stay on track.

As an aside, you should have a will and life insurance policy. If you haven't done it yet, set it up as a Q4/Q1 goal. Being a man or a woman today means being responsible for your family. If you are gone, what happens to your family? If you and your spouse are gone what happens to your family or pets? Do you have enough money to take care of the house, children, college? Just do the right thing and get it done.

Also, Q4 is less then a month away. I have already started looking at budgeting for the holiday season.