Financial Jitters In USA

Breaking News: Bank of America will buy Merrill Lynch. For John Thain to have to sell despite having sold tons of assets to try to remain afloat, tells me that if Merrill has to be sold, then those infected with toxic assets will have to be absorbed as well. It also looks like there won't be a similar bailout plan ala Bear Stearns. If ML has to be sold, then Lehman (which is in worse state) will have to declare bankruptcy. This will mean Washington Mutual, Suntrust and Wachovia will have a very high chance of being bought out in order to survive (in that order of likelihood).

Dealbook/WSJ/Bloomberg: The heads of Wall Street’s biggest firms descended upon the New York Federal Reserve on Saturday to figure out how to shore up the American financial system.

The extraordinary meeting, including the heads of Wall Street’s remaining investment banking giants, was covened to discuss options for Lehman Brothers, the faltering securities firm whose collapse could ripple throughout the global financial network.

Also weighing on the likes of Citigroup’s Vikram S. Pandit and Merrill Lynch’s John A. Thain were the troubles besetting the American International Group, the giant insurance company; Washington Mutual, the nation’s largest savings and loan; and Mr. Thain’s own firm.

Representatives from many other major firms were also present, including Morgan Stanley’s John Mack, Goldman Sachs’s Lloyd C. Blankfein, JPMorgan Chase’s James Dimon, Credit Suisse’s Brady Dougan, Bank of New York Mellon’s Robert Kelly and UBS Americas’s Robert Wolf.

Robert E. Diamond of Barclays, one of Lehman’s potential buyers, was seen entering the New York Fed’s employee entrance, clutching a briefcase. However Bank of America’s Kenneth Lewis, another potential bidder, was not present.

Government officials there included Treasury secretary Henry M. Paulson Jr. and New York Fed president Timothy Geithner, who together led the discussions. Securities and Exchange Commission chief Christopher Cox was also in attendance.

It was in some ways a replay of 1998, when Wall Street’s top executives were summoned to the same building to discuss plans for Long-Term Capital Management, the big hedge fund whose failing health similarly threatened the fragile financial network. Many recall one of the bitter ironies of today’s situation: Lehman then was considered in danger of failing, owing to its large exposure to Long-Term.

As one can imagine, heavy security surrounded the building where the heads of global finance had gathered for most of the day.

Formal talks broke off at 6 p.m., and Wall Street’s chiefs are expected to regroup at 9 a.m. on Sunday.

Comments: Well, it looks very likely that Lehman Brothers is a goner, and maybe Washington Mutual as well. The big banking unit that was predicted to fall, which was not mentioned in the above report, should very well be Wachovia. These developments will weigh heavily on financials in US and Europe. The Treasury and Federal Reserve would definitely try their hardest NOT TO BE seen as bailing out any more financials. Could see a run in USD if the bailouts were to be seen to continue. More bad assets will appear as collateral on Federal Reserve balance sheet.

p/s photo: Taw-Natoporn Taemeeruk