• C++ Programming for Financial Engineering
    Highly recommended by thousands of MFE students. Covers essential C++ topics with applications to financial engineering. Learn more Join!
    Python for Finance with Intro to Data Science
    Gain practical understanding of Python to read, understand, and write professional Python code for your first day on the job. Learn more Join!
    An Intuition-Based Options Primer for FE
    Ideal for entry level positions interviews and graduate studies, specializing in options trading arbitrage and options valuation models. Learn more Join!

Lehman Merrill Lynch AIG Fannie Freddie WaMu Madoff Citibank saga

alain

Older and Wiser
Alain, I'm very surprised by your comment. I realize you were using hyperbole...

Indeed, it is a hyperbole.

The Fed is playing its role of lender of last resort but why do I need to do to get bailed out? Get big enough? LEH was left to die but not AIG. Where is the competition? There are hundreds of financials companies that disappear why aren't they infused with cash to help them survived?

BTW, I understand the reasons behind the bail out but it is setting a precedent and that could be used in court.

In the market, some survive and some die... unless you are big enough, is that the message? How long before somebody sues the Fed/Government because of the bail out?

Also, I haven't read the terms of the AIG transaction but, does it mean AIG is going to disappear eventually? is it going to be taken over by somebody else in the future? What is going to happen with the 79.9% after the 2 year period that is mentioned?
 

Eugene Krel

sunmulA
Apparently the Fed is charging AIG LIBOR+8.5% interest on that little loan. I suspect that will lead to the general liquidation of the parent company while preserving the profitable subsidiaries. I don't see how they can pay back that loan at that rate.
 
Well, now that we-the-people own an investment bank, mortgage businesses, and an insurance company, I look forward to seeing a nice dividend check in my mailbox next quarter. I can hardly wait...
 
If AIG was not bailed out it would be a disaster for a whole economy. The same applies to Freddie and Fannie. I'm not happy that my tax money were spent to do so, but this was probably the best choice. However, the people who made this mess with those companies should go to jail at least but instead press is discussing the issue if CEOs of Freddie and Fannie should pocket their multi-million dollar retirement packages.
 
Indeed, it is a hyperbole.

The Fed is playing its role of lender of last resort but why do I need to do to get bailed out? Get big enough? LEH was left to die but not AIG. Where is the competition? There are hundreds of financials companies that disappear why aren't they infused with cash to help them survived?

BTW, I understand the reasons behind the bail out but it is setting a precedent and that could be used in court.

In the market, some survive and some die... unless you are big enough, is that the message? How long before somebody sues the Fed/Government because of the bail out?

Also, I haven't read the terms of the AIG transaction but, does it mean AIG is going to disappear eventually? is it going to be taken over by somebody else in the future? What is going to happen with the 79.9% after the 2 year period that is mentioned?


If your potential insolvency threatens to bring down the governments of Japan, China and Luxembourg, the Fed might be your answer. ;)

Once again, if you think about it, the deal appears to be structured to keep the balance sheet solvent until the marks become real. The interest rate is a penalty rate designed to incentivize a settlement of the loan as early as feasible.
 
There are lots of dealing and wheeling going on "the week that changed Wall Street forever" that much of us laymen have no idea.
This is a very detailed account, blow by blow of how things went down that week
http://www.nytimes.com/2008/09/21/business/21exec.html?pagewanted=all
Mr. Fuld stayed in his office from 7 a.m. until after midnight on Saturday and on Sunday, calling regulators, potential buyers and his own team. But his options were fading. Even promising talks with Barclays, a British bank, were running aground.
Late in the day on Sunday, Mr. Fuld learned that the Fed would expand its lending by allowing banks to post a wider variety of collateral, and that the banking industry had cobbled together a $70 billion lending pool.
According to people briefed on the conversations, Mr. Fuld implored the regulators to let Lehman have access to those new funds — a move that he believed would have saved the firm. No, he was told: these measures are to stabilize the market in the aftermath of a Lehman liquidation, not to prevent it.
In fact, the pool was intended to help Merrill, industry participants said. Ironically, though, Merrill wouldn't need that capital because it was completing its deal with Bank of America.
Regulators and bankers tried to wait for Lehman's bankruptcy filing before announcing the two new lending options. But by 10 Sunday night, Lehman still hadn't filed, because Mr. Fuld was still trying to do a deal with Barclays.
After Barclays fell through, Mr. Fuld directed his lawyers at 12:30 a.m. Monday to file for bankruptcy. Within hours, Mr. Thain announced his deal.
On Wednesday, Barclays offered the bankruptcy court $1.75 billion — far less than Lehman wanted for that firm's core capital markets and investment banking business, its headquarters and two data centers.
And with each day the drama continues. On Friday, the rumor mill was speculating that a huge market rebound sparked by the federal bailout of Wall Street might mean that Merrill wouldn't need to sell itself to Bank of America.
UPDATED 9/20/08:
Lehman Brothers Holdings Inc., the U.S. investment bank that filed the largest bankruptcy in history, won federal court approval to sell its North American business to London-based Barclays Plc for $1.75 billion. U.S. Bankruptcy Judge James Peck in Manhattan overruled objections from Lehman creditors who said the sale was moving too quickly, setting the stage for Barclays, the U.K.'s third- biggest bank, to close the deal over the weekend.

Barclays President Robert Diamond called it the deal of a ``lifetime'' when the bank acquired Lehman's North American investment banking arm on Sept. 17, two days after Lehman collapsed. Barclays may add other parts of the failed investment bank to help it boost equity and advisory units in Europe and Asia, Diamond told analysts at the time.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aU2fVYAIZsSY&refer=home
 

Sanket Patel

i do stuff
"I french-kissed a homeless man for an egg mcmuffin. Where's my bailout?"
 

Bastian Gross

German Mathquant
Time to usher in a new era of risk-management
Time to usher in a new era of common sense.

But principally time to realize and appreciate, that risks matters.
Also Quants should arrange better risk-management and (fund-) managers should extend their common sense.
 

Bastian Gross

German Mathquant
Did you heard about the german KfW-Bank related to Lehman Brothers?
In consequence of an "malfunction accident" KfW-Bank transfers almost 350 mio. € to an acount of Lehman long after it had declared itself insolvent.

Risk-management .... No chance!
 
Yes, that's why former Lehman employees in Europe were so mad of: after they wired a huge amount of money to New York, they are facing the situation that not sure if they can get the paycheck of Sept, while NY headquarter anounced that those who stay with Barclay will get 100% of last year bonus.....

Just found out, the huge screen on the Lehman headquarter building changed over night to "Barclay Capital..."

Bye, Lehman!
 
Lehman employees paycheck had a different story: every weekend Lehman Europe transfered all its money to the US because of better interest rates they could make on it, and every Monday they would get money back. Last transfer was $8 billion and that money didn't come back to Europe on Monday because Lehman declared bankruptcy. That's why European employees didn't have any money to pay even current paychecks.

As to KfW story:
KfW had determined prior to the transfer that “Lehman doesn’t look so good” in an internal analysis. But the bankers decided to proceed with the now infamous transfer. Although KfW officials saw Lehman’s impending doom the weekend before it filed for bankruptcy, they apparently decided there was no compelling reason to try and halt the €350-million transfer.
 

aoglobalent

Alpha & Omega
Charlesdwright, I truly appreciate your train of thought.
 

bob

Faculty (Undercover)
If your potential insolvency threatens to bring down the governments of Japan, China and Luxembourg, the Fed might be your answer. ;)

Once again, if you think about it, the deal appears to be structured to keep the balance sheet solvent until the marks become real. The interest rate is a penalty rate designed to incentivize a settlement of the loan as early as feasible.

This has always seemed like the most sensible guiding principle for a bailout: pay them market, but lend them the difference between that and book. Give them a prepay option and a share in any equity that might result from the the surrendered securities performing better than implied by market vals. Give them some reward for their book vals being reasonable.

The devil is in the details, though. What securities will wind up here? At an extreme, I'd insist that they hand over *everything* related to mortgages if they want to take advantage, not just the crap. Again, they're getting book in cash for it, so it's not a ripoff. But the rescue vehicle should not just be a dumping ground; otherwise, we really are giving them a handout.

How do they account for the bailout loan / sale on their books? If you give them a share in the upside, can they value it at something other than 0? Can they take positions in one another to hedge the possibility that 1 or 2 defaults take the whole deal down?

We're a little busy here at work this week, so I'll admit I don't know the details of the proposed deal as well as I'd like, but it seems to me you'd have to be VERY careful to get it right. Unfortunately, it looks like this thing is turning into a Christmas tree rather than a well structured deal....
 
The devil is in the details, though... but it seems to me you'd have to be VERY careful to get it right...

Couldn't agree more.

This is where the marketplace of ideas, with all its imperfections and susceptibility to manipulation, gets to have its volatility spike.

The solution will not be perfect. But if all goes well, it will work.

WRT the Big Plan (that has been proposed since this thread began) t seems the market is handicapping congressional interference on a moment-by-moment basis.

Let's hope they put everything partisan aside and just get the job done. Otherwise, the VIX may test that spike again.
 
Barclays may eliminate up to 5,000 employees in three months, recruiters report.
The estimate, based on the $2.5 billion Barclays set aside for severance and retention costs, would mean half the Lehman employees transferred to the London-based company may be let go. Barclays, which paid $1.7 billion for the business, said it will decide in three months who will be offered permanent positions.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a6gVGhNJ3N8s&refer=home
 
Trim off overlapping business after merge/takeover is for sure :) JPMorgan turned out to cut 60% of Bear's and around 4,000 of itself. The street can expect to see more after this wave of failure, bancurpcy, takeover, merge.....
 
Top