What a momentous weekend we’ve had. In case you’re just tuning in, last weekend saw not one but three major news stories among key financial players unfold simultaneously. Here’s the play-by-play:
• Lehman Brothers is declaring bankruptcy, after deals with Barclays and Bank of America failed to materialize.
• Bank of America is buying Merrill Lynch, and, if that wasn’t enough news…
• Insurer AIG is radically restructuring its assets to avoid a credit downgrade, hoping for help from the Fed as it does so.
The precedents set by all this movement are pretty staggering. Over one weekend, the entire landscape of global investment banks and brokers has thinned by several key players. Billions of market capitalization has evaporated (or been salvaged by white-knight purchasers, depending on your point of view). Either the financial-sector crisis has hit critical turning point, where finally all the dirtiest laundry is being aired -- or we’re on the brink of a precipitous new vista, where a situation already pretty bad reveals itself as fully capable of getting even worse. No-one knows where markets will open today, or how they will process all this news. Last but not least, the Fed’s most effective role in managing all this chaos is getting tested right, left and center. Historians will have plenty of grist to chew after a weekend like this.
Of course the blogosphere is aflame with commentary on all these deals. I plan on reading onward as things develop, but in the meantime I thought I’d share a few especially interesting reads:
Roger Ehrenberg at Seeking Alpha opines on the three deals and hopes like crazy for sufficient liquidity to wind up all the loose ends. His take? B of A is foolish to buy Merrill; LEH may not turn out to be the sausage-factory scenario it looks like now, and, as he puts it, “AIG is scary”.
Barry Ritholz has been steadily and succinctly blogging throughout the weekend. Check out the Big Picture for a tight, blow-by-blow record of events as they developed along with Barry’s usually trenchant commentary.
I gather from the WSJ story on LEH that credit default swaps figure large in their downfall, so reading up on this instrument could be useful in penetrating what’s going on here. The Wikipedia entry on CDS looks pretty detailed, although this TIME article from back in March provides a more beginner-friendly overview. The blog AccruedInt takes that overview one step further. Like CDOs and other arcane mortgage-securities markets, here’s yet another positively enormous market, apparently under-regulated, that all investors need to brush up on fast.
Folks, let’s help each other make sense of all of this. There will doubtless be TONS of news coverage on these subjects over the next days and weeks, and the toughest part will be to parse the valuable analysis from the flash-and-drama stuff designed primarily to sell newspapers or advertising space. I’d love to get your help in separating the wheat from the chaff, so we can really get to the bottom of what’s happening here.
Talk to me, please! Share your best reads and analysis on these subjects here – I’d love to hear from you, and I know many others would, too.
[image: financial services logos from various players’ websites]
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