by Calculated Risk on 9/15/2008 04:50:00 PM

Here is the TED Spread from Bloomberg (hat tip James, Glenn and others)

The TED spread has increased to 2.01% (from just over 1% last week). This is close to the highs reached in August 2007, late 2007 and in the spring of 2008 (the three previous waves of the credit crisis).

Note: the TED spread is the difference between the three month T-bill and the LIBOR interest rate. Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries).

by Anonymous on 9/15/2008 04:28:00 PM

I thought maybe we'd need some comic relief on a day like today. And there's nothing like Gretchen Morgenson for comedy.

This may be the single dumbest thing Morgenson has ever written. I had to read this over several times, aloud, to make sure I wasn't misreading it:

Here is a modest suggestion for James B. Lockhart, chairman of the F.H.F.A., to consider: Do the new owners — us deep-pocketed taxpayers — a favor, and open up Mac ’n’ Mae’s books so we can see exactly what we own.

Also, force both companies to disclose details on every mortgage they guaranteed or purchased in the last 10 years. This would include loan type, the year when the loan was made, the original rating on the security and its originator.

That way, the new owners would be able to see how deep into the subprime loan swamp Fannie and Freddie waded during the lending spree. After all, according to Inside Mortgage Finance, an industry publication, Mac ’n’ Mae bought almost $170 billion in subprime mortgage-backed securities in 2005, roughly one-third of the total issuance that year. And they bought an additional $120 billion in subprime mortgage securities in 2006, or 27 percent of the total amount issued.

I can't even start with the fact that after all this time, Morgenson still can't keep straight on the difference between the rating of a security (or a tranche of one) and the "rating" of a mortgage loan. She has been making that mistake for about two years now, as far as my memory serves, and she will apparently never stop.

No, today we must contemplate the "modest" suggestion that Fannie and Freddie report loan-level data on every loan purchased or guaranteed in the last ten years, so that the taxpayers can see for themselves what we've got here.

By my rough calculation, the two GSEs purchased about $10.013 trillion in mortgage loans between 1997 and 2007. (Data here, Figure 26.) I do not have average loan size figures for all of those years, but in 2002, the midpoint, the average loan size was $160,000. Using that average, we get 62,581,250 loans.

(Wait, you say. The total mortgage debt outstanding for all holders of mortgage loans for the whole country at the end of 2007 was only $12 trillion. And total Fannie and Freddie portfolio (retained and MBS) at the end of 2007 was only about $5 trillion. Well, yes. But Morgenson wants data on every loan ever purchased in those years, whether they are still outstanding or not.)

So how are Billy Joe and Bobby Sue Taxpayer going to examine a database of 62.5 million loans? Fairly slowly, I'd guess. Since the Taxpayers don't generally run mainframes, it just wouldn't do to "disclose" this information on magnetic tape. A lot of them do have PCs, of course, and many of those PCs run Excel. Excel 2003 has a maximum number of rows per spreadsheet of 65,536, so you could get 62.5 million loans into no more than about 950 separate spreadsheets.

Maybe this could just be for the Taxpayers who run Access. Access has no limit for the number of records, although the database size is limited to 2GB. We don't really know how much data per 62.5 million loans Morgenson wants, so I don't really know how many separate databases we'd need here. I just know I wouldn't want to try to manipulate one on my home PC; I'd guess that it wouldn't exactly run very fast.

Of course there's always paper, which can be made available online as pdf. With a limited number of columns and a small font, you might be able to get 100 loans on a page. That would only require a 625,812.5 page "disclosure." That shouldn't create any server problems, and we could all go long on manufacturers of toner cartridges.

Now that I think about it, it would be sort of fun if Lockhart decided to take Morgenson up on her modest suggestion. That is, if he generated a 625,812.5 page report and emailed it to Morgenson. The Times must have pretty big servers, no?

You know you are in the presence of a not very well hidden agenda when someone proposes something this dumb. "The taxpayers" do not have the time or the expertise or the technology to browse through a disclosure regarding 62.5 million loans. Most sophisticated institutional investors don't have it, either. The GSEs disclose summary data because life is too damned short for anyone to get anything but summaries. All Morgenson is doing here is making a ridiculous demand that won't be met, so that she can then claim that Fannie and Freddie "refuse to disclose fully."

by Calculated Risk on 9/15/2008 03:32:00 PM

From MarketWatch:

Feds ask Goldman, JPMorgan Chase to lead AIG lending: report

AIG lending facility could be $70 bln-$75 bln: report

by Calculated Risk on 9/15/2008 03:19:00 PM

An open thread for comments ...

Both Wachovia and WaMu are off 26%.

AIG is off 56%.

No word from the NY Fed meeting on AIG.

by Calculated Risk on 9/15/2008 01:33:00 PM

Just headlines for now ...

NY Fed spokesman confirms meeting on AIG.

NY Fed hosting meeting with Treasury, Banks on AIG.

Geithner (NY Fed President), Dinallo (Superintendent of Insurance for New York State) at meeting that began at 11:30 AM ET.

CNBC reported the NY Fed hired Morgan Stanley to negotiate bridge loan for AIG.

Update: the last time the Fed hired Morgan Stanley was to advise on possible alternatives for Fannie and Freddie. That didn't work out too well for investors.

by Calculated Risk on 9/15/2008 11:53:00 AM

AIG was expected to announce a restructuring plan this morning. Apparently no news is bad news, and AIG stock is now off 63%.

MarketWatch is reporting: NY state governor to make statement about AIG at midday

Also, WaMu is off 20% and Wachovia is off 25%.

Update from MarketWatch: AIG allowed to access $20 bln in assets from subsidiaries

Update2: Governor Paterson (based on headlines):
AIG has liquidity problem.
Paterson urges Federal government to take action.
Paterson wants Fed's to provide bridge loan.
Paterson wants AIG to be able to shift capital (beware policy holders!)

by Calculated Risk on 9/15/2008 10:24:00 AM

At a news conference announcing the BofA purchase of Merrill, BofA CEO Ken Lewis just said that he expects the rest of 2008 and most of 2009 to be tough for financial services. Lewis expects the economy to recover in the 2nd half of 2009, but charge-offs to continue to rise until sometime in 2010.

Transcript (hat tip Brian):

NY Times: I wanted to see if each of you could tell us a little bit, as you look ahead, a year out, how you think the industry will look different -- areas like jobs, leverage ratios, business mix, competitive landscape. What do you think are going to be the most different-looking parts of the business in a year? And I mean industrywide?

KEN LEWIS: You mean financial services, not just investment banking and not just banks?

NY Times: Yes, yes.

KEN LEWIS: I think it's going to be -- I think the remainder of this year and all of next year will be a relatively tough time for the financial services industry. Now, having said that, we expect the economy to begin recovering in the second half of next year, but not at a pace that would cause charge-offs to dramatically decrease. I think that's probably a 2010 situation. So, I think revenue opportunities will be tough, and high levels of charge-offs will continue in the commercial banking side, and we're going to have to be very focused on being efficient and gaining market share to get the kind of revenue growth that we want. But I don't see the clouds parting as I would like them to in 2009.

JOHN THAIN: I think the only thing I would add to that is, for those firms who have large trading businesses and/or carry large amounts of less liquid assets, I think you'll see a continued reduction in risk, a continued shrinkage in leverage ratios, and a continued focus on improving core equity ratios to risk-weighted assets. Of course, with the demise of both Bear Stearns and Lehman, there's already been a pretty dramatic change to the shape of the industry.I also would say that, as we go forward, size is going to matter, so the ability to have a diversified stream of earnings, the ability to maintain high degrees of funding certainty are going to continue to be very important.

KEN LEWIS: You could probably look back and say, I would think, that we've gone through a golden era of banking and financial services in general, and things are just going to be -- they may be simpler because you're not going to have the highly complex structured products, etc., but it's going to be tougher and so there are going to be fewer companies, and we're going to have to be better at what we do.

by Calculated Risk on 9/15/2008 08:38:00 AM

Away from financials, the economy continues to weaken. The New York Fed reported this morning: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that manufacturing activity in New York State weakened in September. ... The general business conditions index fell 10.2 points in September to -7.4, reversing most of the gains in the preceding two months and suggesting some renewed weakening in business conditions.

There was some good news on prices, but overall the report was weak.

UPDATE: From MarketWatch: U.S. Aug. industrial output plunges 1.1%

Led by a big drop in auto production, industrial output plunged 1.1% in August, the biggest drop since Hurricane Katrina three years ago, the Federal Reserve reported Monday. ... Industrial production has now fallen 1.5% in the past year and 2% since the peak in January.

by Calculated Risk on 9/15/2008 07:55:00 AM

From Bloomberg: Lehman Files for Biggest Bankruptcy as Suitors Balk

Brothers Holdings Inc. ... a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The collapse of Lehman, which listed more than $613 billion of debt, dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990.
...
Lehman's filing was made by lawyers from New York's Weil Gotshal & Manges LLP led by Harvey Miller.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

And so the day begins ...

by Calculated Risk on 9/15/2008 12:57:00 AM

From Lehman Brothers: Lehman Brothers Holdings Inc. Announces It Intends to File Chapter 11 Bankruptcy Petition; No Other Lehman Brothers' U.S. Subsidiaries or Affiliates, Including Its Broker-Dealer and Investment Management Subsidiaries, Are
Included in the Filing

NEW YORK, September 15, 2008 – Lehman Brothers Holdings Inc. (“LBHI”) announced today that it intends to file a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. None of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings, LLC, may continue to trade or take other actions with respect to their accounts.

The Board of Directors of LBHI authorized the filing of the Chapter 11 petition in order to protect its assets and maximize value. In conjunction with the filing, LBHI intends to file a variety of first day motions that will allow it to continue to manage operations in the ordinary course. Those motions include requests to make wage and salary payments and continue other benefits to its employees.

LBHI is exploring the sale of its broker-dealer operations and, as previously announced, is in advanced discussions with a number of potential purchasers to sell its Investment Management Division (“IMD”). LBHI intends to pursue those discussions as well as a number of other strategic alternatives.
Neuberger Berman, LLC and Lehman Brothers Asset Management will continue to conduct business as usual and will not be subject to the bankruptcy case of its parent, and its portfolio management, research and operating functions remain intact. In addition, fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and are not subject to the claims of Lehman Brothers Holdings’ creditors.

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 ...