FYI | Sep 15 2008
By Chris Shaw
It wasn’t the expected buyout but the goings on among the major investment banks on Wall Street continues after it was announced today Bank of America is to buy Merrill Lynch for US$29.00 per share. The deal values the company at US$44 billion, an amount about half its peak value from early in 2007.
As a result, Lehman Brothers said less than an hour ago that it intends to file for Chapter 11 bankruptcy. The company said in a statement a short time ago that the filing will be by the holding company and won’t include any of its subsidiaries and that it is still exploring the sale of its broker-dealer operations and its is continuing to hold talks on the sale of its asset-management unit.
The announcement followed on from local news that Australia Securities Exchange had suspended the US investment bank as a participant of the exchange. Berndale and Citigroup are to meet all unsettled on-market trade obligations.
Back to Merrills, the price Bank of America has offered represents a solid premium to the previous closing price for Merrill Lynch shares, which ended last week trading at close to US$17.00 per share. The deal represents a big about face for Bank of America, as while it has long been interested in acquiring Merrill Lynch, market speculation up to a few hours ago had it as a likely buyer of Lehman Brothers, but the lack of any Federal government guarantee turned it away from buying that company and to the Merrill Lynch deal.
This lack of any guarantee for Lehman Brothers marks something of a change in policy, as the US government recently agreed to support both Freddie Mac and Fannie Mae, while a few months ago it supported the JP Morgan buyout of fellow failed investment bank Bear Stearns. But the decision, with respect to Lehman Brothers, scared off both Bank of America and Barclays as possible buyers.
The big question is: what does this mean for US financial markets when they open again on Monday night Australian time? Right now, reports indicate the government will take additional steps to try to stabilise the US financial system to allow existing banks to continue accessing funds.
This is unlikely to be easy though, as analysts suggest that with a number of banks all looking to offload leveraged securities at the same time in a market with few buyers will simply send prices even lower. The lack of confidence the financial crisis has caused is also seeing liquidity dry up on capital markets, which is increasing borrowing costs and creating an even tighter credit environment. Such an outcome is likely to flow through and cause the US economy to slow further.
Currently, Dow Jones Industrial Average futures are down more than 360 points, or more than 3%, pointing to a very rocky day of trading on Wall Street tonight.
With respect to the assets of Lehman Brothers, a relatively orderly wind down is expected by some market participants, as other firms are expected to move on the group’s assets rather than let them hit the market and so drive down prices generally.
But this is likely to do little in terms of improving what remains very fragile investor confidence, with respect to not only the US financial sector, but the health of the US and global economies generally, as the financial crisis continues to impact.
Considered still at risk are insurance firm American International Group, which has requested a US$40 billion financial lifeline from the US Federal Reserve, and Washington Mutual, the largest savings and loans group in the country. With the Merrill Lynch takeover there will be only two independent broking houses left on Wall Street, Morgan Stanley and Goldman Sachs.
Who’s next?
