Sunday night has become a big time for dealmaking on Wall Street. You can tell how bad everything is when the paper is signed only when the market is closed. As I write this, two monster deals are happening:
Lehman Brothers (LEH) is preparing to file for bankruptcy, and
Bank of America (BAC) is preparing to buy Merrill Lynch (MER).
These are huge for their own reasons. I predicted there would be a lot of major deals, but I expected the government to be more involved. Apparently, Treasury Secretary Henry Paulson insists that no government money be involved in the deals to save Wall Street. That means that they are interested in defending the dollar even to the point of risking Depression, which I did not think would happen. They’ve done it before, however, so we shouldn’t be entirely surprised. What counts in all of this is that the magnitude of the problem is starting to become apparent.
As Lehman’s BK winds its way through the derivative market, look for other houses with large exposure to have problems, including JP Morgan and Citi. Together, their total exposure is about $32 Trillion, with a “T”, and it’s highly leveraged. A sudden shock to the derivatives market will cause a lot of pain.
The BOA purchase of MER is also very troubling. Sources say that MER was within days of throwing in the towel, hunting desperately for a buyer with a good cash flow. That’s why BAC, a consumer lender, was a good fit. What remains to be seen is how their own mortgage problem will get them through this process, or indeed if the market can absorb the stock they intend to float to by MER. If BAC tanks hard, they won’t be able to raise the money to make this deal happen – and we’re back to square one with 2 days left until implosion.
Meanwhile, insurance giant AIG is on its knees begging the Fed for money that it has found it can’t raise privately. They are a major re-insurer, an old fashioned form of derivative that used to be very lucrative. They were too highly leveraged and the chain has started to break.
Bottom line on all this? Look for the circuit breaker to be tripped early on Wall Street, which is to say a 1150 point loss on the Dow that closes trading for an hour. When it reopens, your guess is as good as mine. No one sane will want this crap, especially knowing that Washington Mutual and General Motors (and GMAC) are still out in the woods.
Fasten your seatbelts.