by Calculated Risk on 9/15/2008 12:00:00 AM

Update: Reuters Headline: Lehman Brothers Holdings Inc says filing for Chapter 11 bankruptcy; says no subsidiaries will be included in filing

Original: There is no news yet of a Lehman bankruptcy filing. Recent stories suggest the bankruptcy will be filed before the market opens on Monday.

An announcement from AIG is expected early Monday morning on their restructuring plan. The AIG news might be the biggest shocker of the day.

Scroll down to see stories on BofA buying Merrill, the Fed's initiatives, and the banks $70 billion liquidity fund.

Update: Krugman: Financial Russian Roulette

Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain. You see, Lehman Brothers, a major investment bank, is apparently about to go under. And nobody knows what will happen next.

Update2: for those with access, this WSJ article compares the Lehman marks to AIG and Citi, and suggests there are huge write downs coming for both AIG and Citi: Wake-Up Call: Lehman's Mortgage Marks

by Calculated Risk on 9/14/2008 09:44:00 PM

This is a wild day for the financial markets. Here is a summary post (scroll down for actual posts):

UPDATE: from Bloomberg: Banks, Firms Set Up $70 Billion Fund for Liquidity

A group of banks including Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. are putting up $70 billion for a borrowing fund aimed at providing liquidity.

1) Lehman is expected to file bankruptcy before midnight ET.

2) AIG rejected private equity investment and has asked the Fed for help. A restructuring plan will be announced tonight or early tomorrow morning. Update: From the NY Times:

The American International Group is seeking a $40 billion bridge loan from the Federal Reserve, as it faces a potential downgrade from credit ratings agencies that could spell its doom, a person briefed on the matter said Sunday night.

3) BofA bought Merrill Lynch for $29 per share in stock.

4) The Fed has expanded its lending facilities, including accepting equities.

Here are some sources for stock market futures:

CBOT mini-sized Dow (more liquid than big Dow above).

Barchart.com indices futures. (make sure you look at the ones with times - not dates - in the time column)

Bloomberg Futures.

Note: today has been a VERY heavy news day, and I'm still digesting all the news - so I apologize for no analysis.

by Calculated Risk on 9/14/2008 09:39:00 PM

From the Federal Reserve:

The Federal Reserve Board on Sunday announced several initiatives to provide additional support to financial markets, including enhancements to its existing liquidity facilities.

"In close collaboration with the Treasury and the Securities and Exchange Commission, we have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses," said Federal Reserve Board Chairman Ben S. Bernanke. "The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets."

"We have been and remain in close contact with other U.S. and international regulators, supervisory authorities, and central banks to monitor and share information on conditions in financial markets and firms around the world," Chairman Bernanke said.

The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities.

The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.

These changes represent a significant broadening in the collateral accepted under both programs and should enhance the effectiveness of these facilities in supporting the liquidity of primary dealers and financial markets more generally.

Also, Schedule 2 TSLF auctions will be conducted each week; previously, Schedule 2 auctions had been conducted every two weeks. In addition, the amounts offered under Schedule 2 auctions will be increased to a total of $150 billion, from a total of $125 billion. Amounts offered in Schedule 1 auctions will remain at a total of $50 billion. Thus, the total amount offered in the TSLF program will rise to $200 billion from $175 billion.

The Board also adopted an interim final rule that provides a temporary exception to the limitations in section 23A of the Federal Reserve Act. It allows all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. This exception expires on January 30, 2009, unless extended by the Board, and is subject to various conditions to promote safety and soundness.

by Calculated Risk on 9/14/2008 09:17:00 PM

Wow. The wild ride continues ...

From the WSJ: AIG Scrambles to Raise Cash, Talks to Fed

AIG turned down a capital infusion from a group of private-equity firms because it would have effectively given them control of the company ... chairman and chief executive, Robert Willumstad, took the extraordinary step of reaching out to the Federal Reserve for help.

The details of the AIG restructuring will probably be released late tonight or early tomorrow morning. It's unclear what the Fed can or will do.

Apparently the Fed will expand its lending facilities tomorrow morning, accepting more securities including equities. The Fed will probably make an announcement in the morning.

by Calculated Risk on 9/14/2008 09:00:00 PM

From the WSJ: Bank of America Reaches Deal for Merrill

Merrill Lynch & Co. agreed late Sunday to sell itself to Bank of America Corp. for roughly $44 billion ... or roughly $29 a share...

by Calculated Risk on 9/14/2008 06:27:00 PM

Update: An overview of the wild day from Andrew Sorkin at the NY Times: In Frantic Day, Wall Street Banks Teeter

From the NY Times: Lehman to File for Bankruptcy Protection

Lehman Brothers will file for bankruptcy protection on Sunday night ... Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings ...

Dow Futures from CBOT.

CBOT mini-sized Dow (more liquid than big Dow above).

Barchart.com indices futures. (make sure you look at the ones with times - not dates - in the time column)

Bloomberg Futures.

by Calculated Risk on 9/14/2008 05:00:00 PM

I was hearing BofA wasn't interested in Lehman because Merrill was a better fit. I guess those rumors were true.

From the WSJ: Bank of America, Merrill Lynch In Merger Talks

From the NY Times: Bank of America in Talks to Buy Merrill Lynch

Bank of America is in advanced talks to buy Merrill Lynch for at least $38.25 billion in stock ... valued at between $25 a share to $30 a share, could be announced as soon as Sunday night

From Bloomberg: Bank of America Said to Walk Away From Lehman Talks

It sounds like the Lehman bankruptcy filing is expected before midnight ET tonight.

Update: And A.I.G. plans to announce a major restructuring, from the NY Times: A.I.G. to Plan Restructuring and Asset Sales

Several private equity firms were at A.I.G.’s headquarters in downtown Manhattan on Sunday, and may inject billions of dollars in capital into the firm ... Among the businesses likely to be sold is A.I.G.’s aircraft leasing business

This restructuring will apparently be announced early Monday morning.

by Calculated Risk on 9/14/2008 03:01:00 PM

From Bloomberg: Wall Street Prepares for Potential Lehman Bankruptcy Filing

Financial firms have started ``netting'' Lehman trades on credit, equity, interest-rate, foreign exchange, and commodity derivatives, according to a statement from the International Swaps and Derivatives Association e-mailed to Bloomberg News.

``ISDA confirms a netting trading session will take place between 2 p.m. and 4 p.m. New York time for over-the-counter derivatives,'' the ISDA said. ``Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time, Sunday, Sept. 14, 2008. If there is no filing, the trades cease to exist.''

by Calculated Risk on 9/14/2008 01:53:00 PM

From the NY Times: Lehman Heads Toward Brink as Barclays Ends Talks

Unable to find a savior, the troubled investment bank Lehman Brothers appeared headed toward liquidation on Sunday, in what would be one of the biggest failures in Wall Street history.
...
What remained unclear was how a liquidation might proceed. One option that was discussed on Saturday would have major banks and brokerage firms continue to do business with Lehman as it unwinds its assets and liquidates over a period of months, according to several people briefed on the discussions. ... The overarching goal of the weekend talks was to prevent a quick liquidation of Lehman...

This seems the most likely scenario right now.

Also from WSJ: Barclays Walks from Lehman Deal; Likelihood for Transaction Narrows

by Calculated Risk on 9/14/2008 01:08:00 PM

Bloomberg: Barclays Withdraws From Lehman Talks Over Credit Guarantees

NY Times headline: Barclays Says It Has Walked Away From Talks With Lehman

From the Telegraph: Barclays walks away from deal to rescue Lehman Brothers (hat tip energyecon)

British banking giant Barclays has decided to walk away from talks to buy some or all of troubled US investment bank Lehman Brothers.

Barclays, whose negotiating team is led by Barclays Capital chief Bob Diamond, is in the process of informing Lehman and the Federal Reserve Bank of New York that it no longer wants to take part in the discussions because of the US government's unwillingness to guarantee Lehman's assets.

Although Barclays is understood to be happy that the New York Fed was leading discussions for Lehman's $41.8bn of property assets to be ring-fenced, it is unhappy with the fact that its balance sheet would still be on the block for all the remaining counter-party and other risks within Lehman.
...
The surprise decision leaves a consortium led by Bank of America as the only potential buyer for Lehman ...