Finance Globe

U.S. financial and economic topics from several finance writers.
3 minutes reading time (602 words)

Mortgage Crisis Takes More Casualties

Two more pillars of Wall Street fell over the weekend, shaking any last bit of investors' confidence in the integrity of the global financial system. Stock markets around the world tumbled in response to the failures of the massive companies. And, another pillar is in deep trouble.

Lehman Bothers goes bankrupt.
Lehman Brothers, the nation's fourth largest investment bank, announced on Monday that it will file for Chapter 11 bankruptcy. The decision for the 158 year-old bank to file bankruptcy came this morning when it become clear that they would not find an investment partner willing to help them recover from losses of $60 billion in bad real estate investments.

A desperate meeting between Lehman Brothers executives and Treasury and Federal Reserve officials over the weekend failed to materialize any government assistance that may have encouraged a buyer to close on the deal. To avoid panic selling on Wall Street, the government announced that it will help Lehman Brothers customers.

Merrill Lynch is acquired by Bank of America.
Merrill Lynch, the world's largest and most widely recognized brokerage firm, has suffered huge losses through mortgage backed securities. Under government pressure, Bank of America has agreed to buy Merrill Lynch & Company in an all-stock purchase worth about $50 billion. Shares of Bank of America (BAC) fell by 19% after the announcement, and Merrill shares gained 14%. The transaction will probably go through in the first quarter of next year.

Earlier in the year, Bank of America acquired Countrywide Mortgage. With $150 billion worth of key acquisitions in the past five years, Bank of America is put in a position unparalleled by any other financial institution in the U.S.; the bank now has a prominent retail market in consumer banking, mortgage financing, and investment services.

AIG is in bad shape.
Insurance company American International Group is worried of its survival through its exposure to mortgage securities and the significant claims likely to result from Hurricane Ike's damage in Texas. AIG has already managed to raise $20 billion, but is asking for a $40 billion line-of-credit from the U.S. Federal Reserve.

AIG hopes to stave of a credit-rating downgrade by the credit-rating firms, which will hurt their chances of gaining additional capital. Standard and Poor's, the credit rating agency, warned consumers that it was reviewing AIG's credit rating on Thursday; the company currently has a rating of AA-minus, the fourth highest possible credit rating.

UPDATE: New York Governor David Patterson announced that AIG will be allowed to borrow $20 billion from its operating subsidiaries to cover day-to-day expenses. Making a bridge loan to itself essentially buys time for AIG to raise more capital.

The "mortgage meltdown" is still melting.
While many hope that we are nearing the end of the ill-effects caused by the mortgage crisis, this news points that we may have a long way to go before we can be sure of the extent of the damage to the financial systems.

This news follows the shocking collapse of Bear Stern's Investment Bank in March, and the U.S. government's seizure of mortgage giants Fannie Mae and Freddie Mac last week. The worst housing crisis since the Great Depression continues with no end in sight.

Treasury officials have made it clear that the government will not bailout any more failed banks with taxpayer money, but reassured consumers that 98% of banks are still safe and financially healthy.

So that leaves 2% that may fail...still not very reassuring, coming from a government that tends to underestimate the extent of the damage until it's clear they can't hide it anymore.

Government Gives $85 Billion Loan to AIG
What the GSE Bailout Means to Consumers


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Monday, 26 February 2024

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