When big news strikes my world, I often take the time to write an extensive review. This is both to make sure I understand what happened and to put it in plain English. An example would be: “AIG must raise $40 billion in new capital or face the liquidity troubles plaguing the financial markets.” Instead I would say “AIG has no cash, if they don’t have a yard sale or something, they’re screwed”.
Like I said, I prefer to do some type of comprehensive analysis of each situation. However, in the past couple of weeks there has simply been too much to cover. Instead I’ve produced a little consolidated form with a brief summary and maybe some analysis to boot.
WaMu fires their CEO: Following in the footsteps of Citi, Merrill Lynch, and Wachovia, WaMu broke up with Kerry Killenger via text message. The news spread like wildfire after Killenger updated his Facebook profile to “Single” from “In A Relationship with WaMu”. Thats a lie, but he was fired. What does this mean? Not much, unless you own stock in WaMu, which tanked. Their troubles come from Option ARMs. People often chose 3 ARMs, which everyone knows the body can only support 2, thus trouble. Oh well, at least the other 3 CEOs now have enough for a foursome at Pebble Beach
Fannie and Freddie: I’ve talked about this once this week. In a nutshell, the mortgage giants didn’t have enough cash to make up for their losses on the mortgages. The Federal Government exercised its right to take over the enterprises. In keeping with the trend, the CEOs were fired. If Countrywide was a house of straw, and Bear Stearns an house of sticks, Fannie and Freddie are now a house of brick with steel reinforced concrete barriers. But as we know, levees can break. We’ll keep an eye on this one.
Lehman Brothers: Never go into business with a family member. Tragedy will strike, even if you’re long and dead and the company is almost 160 years old. Its just too risky!! Anyway, Lehman, one of the country’s largest investment banks announced a bad quarter. The stock tumbled and all of a sudden Lehman found themselves looking for a buyer over the weekend. The Treasury and Fed offered to help broker a deal, but 2-3 suiters walked away from the table because no government backing was coming. Props to the government for not holding up a private institution. Let them fail, they must so we can move on. Lehman was forced to file for bankruptcy. Many Harvard and Columbia MBAs will lose their jobs.
Merrill Lynch: Another weekend story. Bank of America was one of the potential buys for Lehman. They said “nah, we like Merrill Lynch’s logo better”. So they bought them. Bank of America bough Countrywide earlier this year for $4 billion. Merrill cost them another $50 billion. Both were bargains. Look for Bank of America to hold off on the buyouts going forward. There isn’t much left for them to buy. Both purchases are smart, but risky. if they overextend themselves then they’ll hurt. But if they do it right, BofA will emerge from the crises as the largest financial institution in the country, by far.
American International Group Loans Itself Some Money: Hilarious. The state of New-York has allowed AIG to literally loan themselves money. See AIG is struggling to have enough cash, but the smaller companies they own aren’t. AIG will force those smaller companies to loan them money. If this works then they’ll be fine. If it doesn’t, and I don’t think it will, this will actually be a company that can implode itself. Brilliant.
Whew! When I made my predictions for the second half of 2008, I predicted at least one more big news break to occur. We got a big ones with Fannie/Freddie, and Lehman. Merrill, AIG, and WaMu are mostly collateral damage from the meltdown. I consider these the ongoing troubles as we recover. This is the greatest shakeup of the American economy since 1929. We’re not done yet, but I can say with confidence the worst is over.
Update:
Breaking news this morning: The Fed engineered a bailout worth $87 billion last night. I’ll do a more detailed write-up after I read some more about it. This is another “huge thing”.
 By The Weakonomist |
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