...SUNDAY, SEPTEMBER 14HT: Simon Hinrichsen
I don’t know how this happened.
When, at 8 A.M., John Thain returned to Ken Lewis’s apartment to pursue the rescue of Merrill Lynch by Bank of America, he sensed that Lewis had grown more eager to make a deal. As Lewis offered Thain coffee, he seemed entranced by the possibility of instantly becoming America’s largest retail broker. Thain was growing anxious. The previous night’s meeting with John Mack and other Morgan Stanley executives had made it clear that Morgan Stanley couldn’t move fast enough. He hadn’t yet heard anything about the Goldman meeting then under way. Bank of America might be the only option. Lewis was emphatic about one thing. “We’re only interested in buying a hundred per cent,” he said.“Then it can’t be a lowball price,” Thain replied.
Lewis assured him that he wasn’t trying to get Merrill on the cheap.
After about half an hour, Thain left for the Fed. When he arrived, Kelly and Kraus told him that Goldman had proposed buying a 9.9-per-cent stake in Merrill and providing a $10-billion line of credit—just what Thain had been looking for originally. Goldman wanted to start examining Merrill’s books as soon as possible. “Let’s get this going,” Thain said.
Kelly called Greg Fleming, who was in midtown negotiating with Bank of America, and asked him to send a team of Merrill bankers to the firm’s headquarters, downtown, to help Goldman with its due diligence. Fleming balked. “That’s not happening,” he said. He’d got Bank of America to agree to $29 a share, a remarkably high price under the circumstances. “If they hear about a Goldman Sachs deal, they’ll be spooked.” Fleming refused to release any of his team. Shortly afterward, Thain called Fleming. The tone of their exchange was icy. “Get people down here,” Thain ordered.
Fleming grudgingly agreed to send a couple of people, but there was less than twenty-four hours remaining before the markets opened, and Goldman, a traditional Merrill rival, was liable to walk away once its bankers got a good look at Merrill’s balance sheet. A Bank of America deal could collapse as well. To some of those involved, $29 a share was beginning to seem wildly optimistic.
Paulson had been at his desk since seven, trying to organize the day’s schedule and meeting with Treasury teams. At about eight, he took a call from John Varley, the Barclays chairman, in London.Hector Sants, the chief executive of Britain’s Financial Services Authority, felt that he had made it clear to Barclays that the F.S.A. would not approve a deal that put Barclays at risk, and Barclays had readily agreed. Although Barclays was well capitalized, and the F.S.A. thought it would weather the crisis, Sants did not believe that it was strong enough to absorb all the risk. He worried that doing so might trigger a crisis in confidence in Barclays that could become self-fulfilling. Barclays is one of Britain’s largest retail banks, with millions of depositors. Sants expected something similar to the kind of backing that JPMorgan Chase had received in the Bear Stearns deal. It didn’t matter to Sants whether it came from the bankers meeting in New York or from the Fed, and he urged Callum McCarthy, the chairman of the F.S.A., to make this clear to Geithner.
McCarthy tried to convey the British concerns to Geithner in a call on Sunday morning, mentioning the issues about Barclays’ capital position. He also told Geithner that the F.S.A. lacked the authority to waive the shareholder vote required for Barclays to guarantee Lehman’s operations. But perhaps McCarthy, in his understated British manner, was too elliptical. “Callum, you have to decide,” Geithner said. “Are you going to approve this or not? You’re not saying no, you’re not saying yes.” He felt they were talking in circles.
One of the British participants said, “We could never get clarity” from the Americans.
When Geithner briefed Paulson and Christopher Cox on the exchange, Geithner was visibly angry. Why were the British raising this obstacle so late in the process? Geithner said that he had asked McCarthy three times if he was going to block the deal and never got a straight answer.
Cox called McCarthy and said, “Tell me what your view is.” The normally affable McCarthy seemed cool and detached. “My responsibility is that you understand the things that have to be done,” he said. “I don’t see them happening.”
Cox reported to Geithner and Paulson, “He won’t budge.”
Paulson placed another call to Alistair Darling, who had been in regular contact with Prime Minister Gordon Brown and McCarthy.
“Your F.S.A. is creating a lot of difficulties,” Paulson said.
“You have to understand we have a responsibility to the British taxpayer,” Darling replied.
The various calls between the Americans and the British that morning remain a point of contention. From the American point of view, there was never a solid proposal that they could respond to. The British (and some on the American side) maintain that the issue of a shareholder vote is a red herring. The British also felt that they were never presented with a deal that they could respond to. “It was not the high point of Anglo-American relations,” one person familiar with the conversations says.
Lehman’s C.E.O., Dick Fuld, had had months to find a buyer and hadn’t done so. Now that Bank of America had set its sights on Merrill Lynch and Barclays was procedurally hung up, the only way to save Lehman would be for the government to essentially take an ownership stake—a step that would amount to nationalization and one for which the government says it did not have authority....MUCH MUCH MORE
At noon, Steven Shafran, a senior adviser at the Treasury, text-messaged his colleagues, “We lost the patient.”
What we were posting (the timestamp/headline discrepancies are the difference between Pacific Daylight and Eastern Daylight Time):
7:55a.m.
Implications of a Ten Day Refinery Outage
8:08a.m.
We Have Reached A Deal For Lehman, Sources Say
10:08a.m.
Valero says power restored to Houston refinery (VLO). And: Oil drops to six-month low
12:47p.m.
Which Concentrating Solar Companies Are Doomed?
Greentech Media's senior analyst Eric Wesoff says only about 10 percent of venture-backed concentrating photovoltaic companies will survive.1:10p.m.
Lehman Brothers: Links A/O 4:00 P.M. EDT
3:41p.m.
Lehman to File for Bankruptcy Protection (LEH)
3:42p.m.
Lehman: insolvency looms (the view from London) LEH
The BBC's Robert Peston
3:56p.m.
6:55 p.m. EDT: The Mother of All Mondays (AIG; LEH; MER)
UPDATE at 6:39 PM EDT: Dow Jones Industrial Average futures were down roughly 300 points in recent trading....4:10p.m.
US Dollar Falls In Asia On Lehman; US Stock Futures Drop
...Trade was extremely volatile because of public holidays Monday in Japan, Hong Kong and South Korea. China markets were also closed.4:17p.m.
"The market clearly went home Friday confident that someone would buy Lehmans by Sunday - surely they just had to agree to a price?" said Westpac Banking senior currency strategist Sean Callow....He added the lack of a deal is "quite disturbing
7:20 p.m. EDT; Bill Gross: "Risk of a Tsunami of Derivatives, Swaps Unwind[ing]" and: ISDA Statement on Lehman Bankruptcy Trades.
4:29p.m.
7:29 p.m. EDT; "It’s all about Merrill" (LEH; MER) and "Mean Street: If Lehman Liquidates, Wall Street Gets Set to Make a Killing"
4:39
Futures Prices Tumbling
4:45p.m.
7:45 p.m. EDT: Derivatives session to reduce risk from Lehman bankruptcy (LEH)
5:05p.m.
In other news:Lindsay Lohan Goes After Palin On Environment, Gay Rights
5:26p.m.
Rush Is On to Prevent A.I.G. From Failing (AIG)
5:30
8:30 p.m. EDT: Lehman threatens $62 Trillion CDS market (LEH)
6:02p.m.
9:00 p.m. EDT: Merrill Lynch- Board Meeting to Approve Takeover by BankAmerica (BAC; MER)
6:14p.m.
9:15 p.m. EDT: Flight to Safety- U.S. Treasuries Soar as Lehman Brothers May File for Bankruptcy
6:26p.m.
9:25 p.m. EDT: Australian Stocks Open Down 1.5%; Central Bank Adds Reserves
6:35p.m.
How Wall Street Can Save Itself. And: Bank of America Reaches Deal for Merrill (BAC; MER)
7:27p.m.
Earlier Headlines at BusinessSheet: " WALL STREET END OF DAYS: LEHMAN GONE, BOFA MAY SAVE MERRILL"
* Feisty Lehman bankers already insulting potential savior Bank of America7:45p.m.
* Lehman coffee vendors refuse to serve reporters at scene of implosion
* Dick Fuld's secretary still answering with a smile!
* 99% of Lehman employees about to get royally screwed
10:45 p.m. EDT: Lehman Brothers Top Holdings (LEH)
8:12p.m.
Climateer Quote of the Day. And: Federal Reserve Statement
Lifted in toto from Across The Curve:
The Federal Reserve has expanded the type of collateral it will lend against at the Primary Dealer Lending Facility.8:23p.m.
Separately, I was watching CNBC and they are reporting that AIG is looking for a bridge loan from the Fed.
CNBC also reports that the Fed forced Merrill to put itself up for sale.
THIS WHOLE THING IS FINANCIAL SCIENCE FICTION.
One Way or Another We Will Get Through This
I've got to get some rack time but before I head out I'll get a little more personal than I usually do. I have been at the market my entire adult life and have seen the best and worst of human nature. To augment personal experience I have studied and read tens of thousands of pages, everything from popular histories to incomprehensible academic works.
The one lesson worth knowing is: "There will always be opportunity". It may not be easy and it may not be fast but the opportunity is there every morning. The place to start is to PAY ATTENTION. That alone will get you into the second quartile.
Take a look at the first decade of the last century in the chart below:
A forty percent drop from 1901 to1903. A 120% up move in the next two years. Followed by a 50% crash in the next 23 months. Wrapping up with a 60% 13 month run to the upside.The next few weeks offered an awful lot of opportunity.
Two Panics, a Presidential assassination and an earthquake.
The conditions are different but we'll get through this.
