Making History: Lehman, AIG, Merrill, Chanos, Oil, Gold and More!

by Addison Wiggin & Ian Mathias

  • Time to make history… the blow-by-blow of “Black Sunday”
  • Dan Amoss on what (or who?) can still save Wall Street
  • The Fed steps in… but with empty pockets?
  • Legendary short seller says he’s done with financials, moving onto…
  • Oil falls as Ike “disappoints”… what’s moving the commodity markets today

  “Black Monday” happened in 1987. We wonder, will this go down as… Black Sunday?

After a weekend of desperate scrambling, financials are serving up a trifecta of not-so-brilliant news this morning. If you don’t have time for our 5 Min. today, here’s the sum of it: Lehman is dead. Merrill Lynch is on life support. AIG is looking for a donor.

  As our “Extreme” Ian forecast on Friday
, Lehman Brothers went kaput over the weekend.
The Federal Reserve invited financial CEOs from far and wide to Wall Street, hoping to entice a buyout or merger to keep Lehman afloat. Bank of America made a bid, but ultimately walked away. Barclays did the same.

No love from the SWFs either. “It is not the best time to invest,” said Abu Dhabi Mubadala’s chief operating officer, Waleed al-Muhairi. “Right now, we, like some others, will wait and see.”

So this morning, Lehman played its last card. After 158 years in business, Lehman has filed for bankruptcy. We pity the judge who gets this one… Lehman has over $613 billion in debt. Anyone still holding Lehman shares today is wiped out.

Reporters and tourists alike were gawking at Lehman employees exiting the building this morning with boxes full of desk trinkets, picture frames, nameplates and pen sets. As many as 25,000 will follow suit, effective immediately.

  But Bank of America didn’t want to leave the N.Y. Fed Bank Building empty-handed.
Instead of buying LEH… it bought Merrill Lynch (!) for $50 billion. Who saw that coming? After gobbling up Countrywide in December, Ken Lewis and his crew at BoA must really be gluttons for punishment.

The buyout values Merrill at $29 a share, about 42% higher than Friday’s closing price. In early 2007, at Merrill’s peak, $50 billion wouldn’t have fetched you even half of the firm.

Thus, Merrill Lynch’s 94-year legacy of independent trading comes to an end, as well. Will Merrill’s 60,000 employees be joining Lehman’s on the Street? Details have yet to emerge.

  Bank of America shares are down 17% on the news.

  The world’s largest insurer is scrambling to stay in business this morning, too. Dow component AIG is looking for someone — anyone — to lend it $40 billion.

Standard & Poor’s warned Friday that without such a massive cash injection, it would cut AIG’s credit rating. Should that happen today, AIG will be faced with another $13 billion in collateral calls from debt investors and $4.6 billion in swap payments. That would be bad.

AIG has asked the Federal Reserve, but Bernanke and his brood said no. In our sick minds, we saw something like this:

Shares of AIG opened down nearly 50%. You can pick them up, if you’re inclined, for $6 a pop today.

  “I’ve been in the business 35 years,”
lamented the legendary Pete Peterson to the press this morning, “and these are the most extraordinary events I’ve ever seen."
Pete is the co-founder of the Blackstone Group, former secretary of Commerce, former Lehman Bros. CEO, and newly minted acquisitor of our film, I.O.U.S.A.

We are faced with a “once in a century” crisis, Alan Greenspan agreed yesterday. He told ABC, while hawking the new edition of his book, that the situation “is in the process of outstripping anything I’ve seen. It still is not resolved, and it still has a way to go."
 

  “What Wall Street really needs are a few good men,”
opines our resident short seller and CFA Dan Amoss. “In nearly every big financial blowup of the past year, executives have failed to make tough choices that might have salvaged shareholder value, and instead gambled on a miraculous future turnaround.

“Think about how much better off Lehman Brothers would be if its management hadn’t put off the process of reporting losses, dumping impaired assets and raising new capital. Would its stock be 26 cents today? Probably not.

“While all of those decisions would have been painful at the time, they could have salvaged much more shareholder wealth — just as a successful retreat preserves an army’s ability to fight another day.

“The speed of Lehman Brothers’ deterioration is shocking even to its skeptics. Despite my already low opinion of Lehman management, expressed several times in this space, I’m amazed at its failure to structure a deal or asset sale to salvage a respectable amount of shareholder value. Lehman even had the advantage of immunity to a ‘bank run,’ thanks to the Federal Reserve’s lending facilities. Bear Stearns wished it could have used the same; it was finished as soon as creditors lost faith in its solvency.

“Lehman shareholders and its 25,000 employees deserved better.”

Still, having seen the writing on the wall, Dan called LEH in Strategic Short Report back in April. Had they sold their puts when he recommended, Dan’s readers would have pocketed 462% gains. Anyone brave enough to hold on till this morning is sitting on over 740% profits, in just four months.

Plenty of downside remains. If you want to be on the right side of these trades, we couldn’t recommend Dan any more urgently than this morning. Check SSR out here.

  There isn’t a market in the world immune to this morning’s shocks.
Traders in Europe were the first to hit the “sell” button. Nearly every major index there closed down 3-4%.

  Here in the U.S., the Dow opened down 300 points.
Futures, before the open, suggested worse… down 400-plus. As we write, there seems to be some stability around 200 down. We’ll give you the full body count tomorrow…

  For its part, in effort to stave off a full-blown panic, the Fed is offering three all-new ways for these firms to go deeper in hock this morning:

First, the Fed now accepts a wider range of collateral at its loan auctions. For the first time ever, equities or any investment-grade debt security can be brought to the discount window or TSLF.

Second, the Fed will now conduct TSLFs every week, and offer three times as many loans. Each auction now offers $150 billion.

Last, banks can now offer handouts to affiliates in a way that has heretofore been forbidden. This morning, the Fed granted an exception to a rule restricting banks from injecting their brokerage affiliates with the cash they need to stay afloat.

Just in time, eh?

  "We have probably seen the worst in the financials,"
legendary short seller Jim Chanos announced this morning. The man who’s famous forecast of the Enron implosion was documented in the film Enron: The Smartest Guys In The Room
says he’s now set his short sights on a new sector: commodities.

“We would short companies that might depend on cement prices or steel prices going up," he proclaimed. Of course, he didn’t name names. But as usual, Chanos said his focus isn’t so much on the macro theme of commodity prices, but on low-quality (maybe fraudulent) commodity companies.

“I think it’s a great idea,” confessed our managing editor Chris Mayer, a self-proclaimed commodity bull in many regards. “In the course of this commodity boom, lots of marginal players got involved with leveraged balance sheets. I believe the commodity bull run has legs yet, but the shakeout could be nasty. Well-financed companies need not worry. In fact, they will have some excellent opportunities to pick among the rubble.

“Also, the flip side of Chanos’ thesis is to go long companies that benefit from falling steel or cement prices. Longtime Capital & Crisis pick Northwest Pipe would be one. Their biggest challenge has been dealing with the rising price of steel — and the stock still doubled during this time. Now, with falling steel prices, their profit margins could expand.”

  Chanos has a good track record on these things… but he might be a bit early. Oil fell below $100 a barrel today for the first time in six months.

Light sweet crude plummeted $6 over the weekend, to as low as $95 a barrel this morning.
Despite the fact that Hurricane Ike barreled straight through the Texas oil patch, shutting down 3.5 million barrels of daily oil production, deflation in the markets around the world has oil on the run too. As we write, it’s $96 a barrel.

  The dollar has retreated from its lofty recent highs.
The dollar index shed 2 full points over the weekend, to as low as 78. For every detail we’ve listed above today, not to mention the U.S. government’s recent nationalization of $5 trillion in mortgage debt, traders FINALLY took profits on the greenback today. Dare we call an end to the dollar rally? Not just yet. For reasons we struggle to explain, the dollar index is back up to 79 as we write.

  Still,
one of the only assets squarely in the black today — gold.
The spot price is up about $25 from Friday’s low, to about $775. At that price, it’s still a bargain.

  “I have what I hope to be a minor request,”
writes a reader. “Please, please, please stop with the Jim Rogers stuff. There have got to be other well-qualified people who have an opinion on China, the economy and government. I don’t care if they’re famous or not, just please find other people to ask. Life is just too flippin’ short to listen to a bow tied American scream about the U.S. government and economy from Singapore.

“In my mind, the day Jim Rogers abandoned the country of his birth, the one that made him a rich man, and threw in his lot with a totalitarian government was the moment he lost all credibility. And what’s worse is he that didn’t do that, because he’s not actually living in China. As it is, it’s pretty obvious what he cares about, and it has nothing to do with the U.S. Seriously, you all are too good to need Jim Rogers.”

The 5:
Hmmnmn… no comment.

Addison Wiggin
The 5 Min. Forecast

P.S. Special thanks, once again, to Ian Mathias
for holding down the fort here at The 5 HQ last week.

Your editor took a much-needed break, split some wood and got the kids all set up in their fall school routines. It’s kind of an inauspicious day in the markets to return to, we must say, but we’re happy to be back. Thanks, Ian.

 

rspertzel

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