Merrill Lynch's woes far from over It announces huge write-down, sells debt at bargain basement price AS ONE analyst says, Merrill Lynch seems to be experiencing death by a thousand cuts. The third-largest US investment bank said on Monday that it will be taking another huge write-down - US$5.7 billion (S$7.8 billion) for the third quarter - as it unloads huge amounts of risky debt, and will also raise US$8.5 billion by selling new stock. This comes less than two weeks after Merrill posted a US$4.9 billion second-quarter loss after being hit by US$9 billion of write-downs in that same period. In a sign of how toxic Merrill's debt holdings have become, it has agreed to sell US$30.6 billion of collateralised debt obligations (CDOs), a kind of repackaged debt, to an affiliate of private equity fund Lone Star Funds for just US$6.7billion, or about 22 US cents on the dollar.
A Deal at Merrill Puts Spotlight on Others Somehow, $4.4 billion just evaporated at Merrill Lynch. Less than two weeks ago, Merrill Lynch valued the toxic mortgage investments on its books at $11.1 billion. Now, it is selling those investments for $6.7 billion — and financing most of the purchase to boot. The fire sale raises a troubling question for the nation’s battered financial industry: Have other banks with similar investments overestimated their values? That question reverberated across Wall Street on Tuesday as analysts began assessing the implications of Merrill’s move to cleanse its tainted balance sheet. Executives at Citigroup, JPMorgan Chase and Bank of America began reviewing the bundles of mortgages, known as collateralized debt obligations, or C.D.O.’s, that their companies hold on their books. Those companies may have to lower their valuations, and take additional charges, if their assets are similar to those sold by Merrill.
Fed extends emergency loan program U.S. central bank says Wall Street banks can borrow emergency funds through Jan. 30. The Federal Reserve said Wednesday it is extending its emergency borrowing program to Wall Street firms and is taking other steps to ease a severe credit crunch that has hobbled the national economy. The Fed said the program, where investment houses can tap the central bank for a quick source of cash, will now be available through Jan 30. Originally the program, started on March 17, was supposed to last until mid-September.
Banks pressed to follow Merrill debt sale Leading global banks including Citigroup and UBS on Tuesday faced renewed pressure to write down or sell billions of dollars in toxic assets following Merrill Lynch’s disposal of $30bn in mortgage-related securities at a cut price. Merrill’s move to sell collateralised debt obligations (CDOs) for $6.7bn, or 22 cents on the dollar – announced on Monday night – raised hopes that other banks would be able to strike similar deals and purge their balance sheets of bad assets. However, the low price paid by Lone Star Funds, a distressed debt investor, to buy Merrill’s CDOs sparked fears that the financial system could enter another spiral of huge writedowns followed by highly dilutive capital raisings.
What Hath Merrill Wrought? Tally of Likely Fallout from CDO Writedown Rises Merrill's surprising, mere ten days after its last investor combo writedown/fundraising announcement still has financial analysts toting up the collateral damage. Remarkably, the US stock market staged a peppy rally, clearly choosing to ignore the implications. The cause for pause was the sale of $30.6 billion in face amount of super senior CDOs at a ostensible price of 22 cents on the dollar. But the sale was 75% financed, non-recourse, and could almost be characterized as a call rather than a sale. Worse, the CDOs were mainly 2005 vintage, and thus should have better quality underlying assets than 2006 and 2007 deals.
Fed Extends Emergency Loan Programs Through January The Federal Reserve extended its emergency lending programs to Wall Street firms through January after policy makers judged that markets are still too weak to go without a backstop from the central bank. The Fed also plans to give securities dealers options for tapping one of the loan programs to ensure financing through key dates, such as the ends of quarters, when funding needs can jump. Commercial lenders will be able to borrow from the central bank for a longer period, and the Fed boosted its swap line with the European Central Bank. Today's announcement reflects continued turmoil in financial markets, after three U.S. banks failed in as many weeks. Chairman Ben S. Bernanke and New York Fed President Timothy Geithner spearheaded the introduction of three lending programs since December as the credit crisis engulfed Wall Street and caused the collapse of Bear Stearns Cos.
Government announces plans to borrow $27 billion Bush plans $27 billion in borrowing next week as part of effort to handle soaring deficits The Bush administration gave details Wednesday on how it plans to borrow the billions of dollars it will need to cope with the soaring budget deficits. Those plans include raising $27 billion by selling a new 10-year note and a new 30-year bond at the regularly scheduled quarterly auctions to be held next week. The government needs to borrow $171 billion during the current July-September quarter, the second highest quarterly borrowing total on record. The increased borrowing needs reflect the exploding federal budget deficit which is projected to more than double in size this year and to hit an all-time high of $482 billion in the 2009 budget year.
Putting a lasso on inflation Is there any good way to deal with the rapid inflation in commodity prices, or just lesser evils? Governments around the world have been trying a raft of different strategies to deal with the high costs of food and fuel. None of them offer a perfect solution to the problem, but some can be less damaging to an economy than others. One of the smartest solutions maybe the simplest: Income support for poor families. In countries as diverse as Malaysia, Pakistan and Haiti, consumers have received heavy subsidies from the government to aid their purchases of basic foods and fuels. These subsidies were intended to insulate consumers from the immediate effects of high prices, but they can have some fairly undesirable consequences.
Job Security [Hey, lighten up!. . . it's a spoof] Barack Obama's marching orders (as we imagine them) to the nation's top banker.
Good afternoon, Ben.
Thanks for taking the time to meet with me. I know Hank's been keeping you busy with his latest crazy bailout idea - rumor has it he wants to take over those horrid Washington Nationals. Maybe he can get the Yankees to underwrite the deal.
But I like that in meeting with me today you've made long-term career goals your top priority.
It's still early, but the polls and prediction markets say that I have a really good shot at being president. Have you read those stories?
Anyway, let's get to the matter at hand. As we both know, your term is up in January 2010 and it's not going to look great for me to keep around someone appointed by one of our country's worst presidents. At the same time, I know you probably don't want to have the shortest term at the Fed since Bill Miller. So maybe there's a compromise. . . . After 7 Years, Talks Collapse on World Trade World trade talks collapsed here on Tuesday after seven years of on-again, off-again negotiations, in the latest sign of India’s and China’s growing might on the world stage and the decreasing ability of the United States to impose its will globally. Pascal Lamy, director general of the World Trade Organization, could not bridge differences between a group of newly confident developing nations and established Western economic powers. In the end, too few of the real power brokers proved committed enough to make compromises necessary to deliver a deal. The failure appeared to end, for the near term at least, any hopes of a global deal to further open markets, cut farm subsidies and strengthen the international trading system.
America's house price time bomb With the American housing market in its worst crisis since the Great Depression of the 1930s, President Bush is expected to sign into law a massive new government intervention designed to slow the slide. The intervention would come as a little known quirk of US law threatens to drive down house prices even faster. Faced with seemingly never-ending falls in the value of their properties, some American home-owners are taking radical action; they are choosing to walk away from homes and their mortgages. In May 2006, at the height of the housing boom, Karen Trainer bought a $500,000 apartment in California - with money borrowed from her bank. By this year, Karen still owed $500,000 on her mortgage, but her apartment was worth $200,000 less. So she was deep in negative equity and, to make matters worse, the interest rate on her loan was about to increase. "I thought 'this is crazy'," Ms Trainer says. "It just does not make financial sense." Restaurant Chains Close as Diners Reduce Spending Several national restaurant chains were shuttered on Tuesday, possibly offering an early taste of what’s in store this year for businesses that depend on free-spending consumers whose budgets are now being squeezed. The parent company of Bennigan’s, an Irish-themed bar and grill with about 200 sites across the country, filed for bankruptcy, a move that will put hundreds of employees out of work and leave many landlords with empty retail space during a painful time in the real estate market. A sister brand, Steak & Ale, will also close. Franchise units of Bennigan’s will remain open for now, a spokeswoman, Leah Templeton, wrote in an e-mail message. The restaurants are the latest casualties in the so-called casual dining sector, considered a cut above fast food. Soaring food costs and a surfeit of locations have hurt the companies’ bottom lines just as Americans are choosing to take more meals at home.
Chrysler's credit rating downgraded Fitch cuts the automaker's credit rating two notches to deeper junk, saying tighter financing likely to curtail sales. Fitch Ratings cut Chrysler LLC's credit rating further into junk territory on Tuesday, saying restricted access to financing for its vehicles will result in lower retail volumes. The credit ratings agency lowered Chrysler's issuer default rating two notches to "CCC" from "B-". It said the company's restricted access to economic retail financing for its vehicles is likely to lead to a further slowdown in its retail sales and more costly sales incentives.
Oil deepens slide to $122, looks to U.S. fuel stocks Oil prices extended their steepest slide in a year and a half on Tuesday, as traders looked ahead to U.S. oil stock data expected to show a rise in fuel inventories amid eroding demand in the world's biggest consumer. Prices, which are now at their lowest in nearly three months, were also under pressure from signs of strength in the U.S. dollar, which held firm after rallying on a combination of weaker oil prices and an unexpected rise in U.S. consumer confidence. U.S. light crude for September fell 9 cents to $122.10 a barrel by 11:16 p.m. EDT after slumping by $2.54 on Tuesday, hitting an intra-day low of $120.42, the lowest since May 6 and marking the deepest sell-off in prices since early 2007.
NY Gov Paterson Warns of Economic Crisis In a rare, brief televised address, Gov. David A. Paterson announced on Tuesday afternoon that he would call the Legislature into an emergency session on Aug. 19 to address what he called an economic and budget crisis confronting New York State as a result of plummeting revenues and rising costs. The new governor avoided any mention of new taxes, instead arguing forcefully for austerity. He said he was calling on the Legislature to reduce the size of the state workforce; cut agency spending; reduce property taxes for homeowners; aid New Yorkers with the soaring costs of home energy; and even consider public-private partnerships that would take over state assets.
U.S. is on brink of survival crisis, according to Moscow Moscow thinks that the United States could face a serious domestic crisis in the near future. "The U.S. is on the brink of a mass crisis of surviving," a source with the Russian Foreign Ministry told journalists on Tuesday. "The U.S. is on the track of drastic and painful changes," he said. "At first, they have to learn to live within their means," the diplomat added. Speaking about relations between Moscow and Washington, the source said that less interdependency in Russian-U.S. relations would be useful. "We can in the future reach the moment when we will be able to stop discussing only the issues the U.S. side is interested in," he said. "We are not enemies with the U.S., and unfortunately we are still not friends, but we are depending on each other less and less," the diplomat said.
Oil? Ah, let Russia have it State Department gives away 125,000 square miles of Alaskan ocean floor Even if Congress follows President Bush's lead in opening off-shore oil exploration, there exist over 125,000 square miles of sea bottom that won't be explored, because the State Department – amid controversy and against the will of Alaskans – has surrendered the land to Russia. Eight islands and their surrounding sea floors were ceded to the former Soviet Union as part of the U.S.-U.S.S.R. Maritime Boundary Treaty in 1991, a treaty signed by the U.S. Senate and President George Bush but never ratified by the Soviets. Nonetheless, an executive agreement enforcing the terms of the treaty until ratification has been in place through three presidencies, meaning the State Department officially recognizes the islands as Russian territory. Alaskan legislators, who were given no input or authority on the island giveaway, have long protested the treaty, declaring it null and void without Russian ratification. US general warns Russia on nuclear bombers in Cuba Russia would cross "a red line for the United States of America" if it were to base nuclear capable bombers in Cuba, a top US air force officer warned on Tuesday. "If they did I think we should stand strong and indicate that is something that crosses a threshold, crosses a red line for the United States of America," said General Norton Schwartz, nominated to be the air force's chief of staff. He was referring to a Russian news report that said the military is thinking of flying long-range bombers to Cuba on a regular basis. It was unclear from the report whether that would involve permanent basing of nuclear bombers in Cuba, or just use of the island as a refueling stop. In his confirmation hearing to become the air force's chief of staff, Schwartz was asked what he would recommend if Russia were to base nuclear capable bombers in Cuba.
Russia Warns of Military Response to US Missile Shield A dispute between Russia and the United States over the planned deployment of a U.S. anti-missile defense shield in eastern Europe deepened Tuesday, with Moscow warning of a “military-technological” response to the move. Reacting to the signing of an agreement between Washington and Prague on setting up a radar base as a key part of the system, Moscow’s foreign ministry reiterated its view – long denied by the U.S. – that the shield poses a threat to Russia. Russia has no doubts that the plan aims to weaken Russia’s strategic deterrent, it said. “If the real deployment of the U.S. strategic missile defense system begins near our borders, then we will have to respond using not diplomatic but military-technological methods.” Secretary of State Condoleezza Rice and her Czech counterpart Karel Schwarzenberg on Tuesday signed the main treaty on the stationing of a U.S. radar base on Czech soil.
Chavez Goes Weapons Shopping in Russia Amid Arms Race Venezuelan President Hugo Chavez heads to Moscow to shop for air defense systems, submarines and other weaponry as Latin America's arms race quickens amid signs that his regional influence is waning. Past Venezuelan arms purchases from Russia have strengthened ties with Moscow as its rivalry with the U.S. intensifies over President George W. Bush's plans for an Eastern Europe missile defense system and other issues. Chavez, 53, also plans to visit Belarus, a Russian ally that the U.S. considers a dictatorship.
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