With files from Reuters
September 13, 2008
WASHINGTON -- Two more large U.S. financial institutions, Lehman Brothers Holdings Inc. and Washington Mutual Inc., are scrambling to find buyers this weekend and avoid collapse as the worst U.S. banking crisis since the Depression continues unabated.
The government's dramatic seizure this week of mortgage giants Fannie Mae and Freddie Mac was designed to stabilize financial markets.
Instead, the rescue has merely shifted focus to the next weakest links in the chain of beleaguered financial service companies, putting renewed pressure on a U.S. government that appears reluctant to sink any more taxpayer money into the industry.
"Anyone hoping the Treasury's takeover of Fannie Mae and Freddie Mac would somehow mark the bottom of the credit crunch is likely sorely disappointed," said John Silvia, chief economist at Wachovia Corp. "There are still formidable financial challenges ahead for the economy."
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Treasury Secretary Henry Paulson has reportedly told key industry players that he isn't prepared to bankroll any more deals, including a takeover of Lehman, one of the biggest players in the mortgage bond market.
Bank of America Corp., the largest U.S. bank by market value, was considering a joint bid for Lehman along with private equity investor J.C. Flowers and sovereign wealth fund China Investment Co., according to published reports. Lehman has declined to comment.
Senator Richard Shelby, the top Republican on the Senate banking committee, told CNBC that the Treasury and the U.S. Federal Reserve Board were trying to work a deal that involved no U.S. government money. But he said he couldn't guarantee it wouldn't be needed at some point to prevent Lehman from collapsing.
"I'm hoping that some big firm will want them more than the Fed wants them," Mr. Shelby said.
The investment bank is struggling to find a solution to the worst crisis of its 158-year history. Lehman, the No. 4 U.S. broker, wrote down its assets by $5.6-billion (U.S.) in the third quarter, triggering a second successive quarterly loss of $3.9-billion.
Lehman has so far failed to attract investors to shore up its capital position, weakened this year by its outsized exposure to commercial real estate and residential mortgage assets hard hit by the continuing credit crunch.
Meanwhile, JPMorgan Chase & Co., which swallowed Bear Stearns earlier this year with the help of a $29-billion loan from the Fed, is in "advanced talks" to acquire Seattle-based Washington Mutual, the country's largest savings-and-loan company, Reuters reported, citing a source close to the discussions.
Lehman shares fell to a 14-year low yesterday, shedding 13.5 per cent of their value. Washington Mutual tumbled by 3.5 per cent. Investor fear has also spread to other institutions, including leading brokerage Merrill Lynch & Co. Inc. and American International Group Inc., a major insurer.
"The Fed, and now Treasury, have essentially installed a take-a-number machine on their front door steps, and the lineup is getting longer by the week," Bank of Nova Scotia economist Derek Holt said in a research report.
Mr. Holt pointed out that growing credit spreads suggest the crisis isn't nearly over.
A long list of companies, from banks to auto makers, is now making the case to Washington that they too are too big to fail.
U.S. auto makers, for example, have hired lobbyists to push for $25-billion in federal loan guarantees to help them modernize and build more fuel-efficient cars.
We are witnessing the "socialization of American capitalism," and there's more coming, Mr. Holt predicted.
"The state's role in the U.S. economy was already among the greatest in the industrialized world, and it is now on the verge of running a far bigger swath ... which may further distort long-run incentives and moral hazard," he said.
Merrill Lynch economist David Rosenberg warned that it will take "some time" for the credit crunch to work its way through the supply chain.
"It started between banks, migrated into mortgages and is now working its way through to the rest of consumer credit," he said.
LEHMAN (LEH)
Close: $3.65, down 57¢
WASHINGTON MUTUAL (WM)
Close: $2.73, down 10¢
***
CREDIT CRUNCH
SAVING LEHMAN BROTHERS
Year of the bear
for banks
Lehman Bros -94.42
Washington Mutual -79.9
Merrill Lynch -68.2
Wachovia -62.5
Legg Mason -44.8
Citigroup -38.9
Percentage losses in share value in 2008
$1.21-trillion
The market cap the S&P 500 financials index has shed since its Oct. 5, 2007 high of 483.87, or about 42 per cent.
$125-billion
Amount the failure of about 700 savings and loans cost U.S. taxpayers in the late 1980s and early 1990s.
Last weekend it was Henry Paulson, the U.S. Treasury secretary leading a monumental bailout of mortgage lenders Fannie Mae and Freddie Mac. The move was greeted with a wave of relief, but within days two other lenders were brought to their knees as Washington Mutual and Lehman Brothers, the storied 158-year-old investment bank, saw their shares collapse.
This weekend, the Treasury will be joined by Federal Reserve officials and top bankers from Wall Street and around the world, including China to work up a plan to save the banks. In the rescue of Bear Stearns, the federal government agreed to absorb as much as $29-billion (U.S.) in potential losses. With Fannie-Freddie, it's been estimated it could have to inject up to $100-billion. But on Friday, the message coming from sources at Treasury was that officials were pushing for a deal, possibly with multiple suitors, that would not involve government money. A key concern is that another rescue would trigger even more bailouts.
Source: http://www.theglobeandmail.com/servlet/story/LAC.20080913.RLEHMAN13/TPStory/Business