Countdown to October 7th - Wall Street Banks Teeter

[Andre]

People carried boxes out of the headquarters of Lehman Brothers in New York on Sunday.

Is this the opening salvo for the prediction by Cliff and George of Half Past Human? Using extracts from dynamic radical linguistics on line, they have determined that September will very tumultuous, raising a great clatter and commotion in a buildup towards total chaos by October 7th, lasting till February of 2009. Read, interpret, analyze and warn your family and friends. We must be prepared.

This article was reported by Jenny Anderson, Eric Dash and Andrew Ross Sorkin and was written by Mr. Sorkin.

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, hurtled toward liquidation after it failed to find a buyer.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.

But even as the fates of Lehman and Merrill hung in the balance, another crisis loomed as the insurance giant American International Group appeared to teeter. Staggered by losses stemming from the credit crisis, A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive.

The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.

“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street and threatened the broader economy.

Questions remain about how the market will react Monday, particularly to Lehman’s plan to wind down its trading operations, and whether other companies, like A.I.G. and Washington Mutual, the nation’s largest savings and loan, might falter.

Indeed, in a move that echoed Wall Street’s rescue of a big hedge fund a decade ago this week, 10 major banks agreed to create an emergency fund of $70 billion to $100 billion that financial institutions can use to protect themselves from the fallout of Lehman’s expected failure.

The Fed, meantime, broadened the terms of its emergency loan program for Wall Street banks, a move that could ultimately put taxpayers’ money at risk.

Though the government took control of the troubled mortgage finance companies Fannie Mae and Freddie Mac only a week ago, investors have become increasingly nervous about whether major financial institutions can recover from their losses.

How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation’s growth rate has slowed.

What will happen to Merrill’s 60,000 employees or Lehman’s 25,000 employees remains unclear. Worried about the unfolding crisis and its potential impact on New York City’s economy, Mayor Michael R. Bloomberg canceled a trip to California to meet with Gov. Arnold Schwarzenegger. Instead, aides said, Mr. Bloomberg spent much of the weekend working the phones, talking to federal officials and bank executives in an effort to gauge the severity of the crisis.

The weekend that humbled Lehman and Merrill Lynch and rewarded Bank of America, based in Charlotte, N.C., began at 6 p.m. Friday in the first of a series of emergency meetings at the Federal Reserve building in Lower Manhattan.

The meeting was called by Fed officials, with Treasury Secretary Henry M. Paulson Jr. in attendance, and it included top bankers. The Treasury and Federal Reserve had already stepped in on several occasions to rescue the financial system, forcing a shotgun marriage between Bear Stearns and JPMorgan Chase this year and backstopping $29 billion worth of troubled assets — and then agreeing to bail out Fannie Mae and Freddie Mac.

The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman’s stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.

Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their own precarious situation.

The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation’s largest brokerage force and its name is known in towns across America, while Lehman’s main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.

Knowing that investors were worried about Merrill, John A. Thain, its chief executive and an alumnus of Goldman Sachs and the New York Stock Exchange, and Kenneth D. Lewis, Bank of America’s chief executive, began negotiations. One person briefed on the negotiations said Bank of America had approached Merrill earlier in the summer but Mr. Thain had rebuffed the offer. Now, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, the two parties proceeded with discussions.

On Sunday morning, Mr. Thain and Mr. Lewis cemented the deal. It could not be determined if Mr. Thain would play a role in the new company, but two people briefed on the negotiations said they did not expect him to stay. Merrill’s “thundering herd” of 17,000 brokers will be combined with Bank of America’s smaller group of wealth advisers and called Merrill Lynch Wealth Management.

For Bank of America, which this year bought Countrywide Financial, the troubled mortgage lender, the purchase of Merrill puts it at the pinnacle of American finance, making it the biggest brokerage house and consumer banking franchise.

Bank of America eventually pulled out of its talks with Lehman after the government refused to take responsibility for losses on some of Lehman’s most troubled real-estate assets, something it agreed to do when JP Morgan Chase bought Bear Stearns to save it from a bankruptcy filing in March.

A leading proposal to rescue Lehman would have divided the bank into two entities, a “good bank” and a “bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would have agreed to absorb losses from the bank’s troubled assets, to two people briefed on the proposal said. Taxpayer money would not have been included in such a deal, they said.

Other Wall Street banks also balked at the deal, unhappy at facing potential losses while Bank of America or Barclays walked away with the potentially profitable part of Lehman at a cheap price.

For Lehman, the end essentially came Sunday morning when its last potential suitor, Barclays, pulled out from a deal, saying it could not obtain a shareholder vote to approve a transaction before Monday morning, something required under London Stock Exchange listing rules, one person close to the matter said. Other people involved in the talks said the Financial Services Authority, the British securities regulator, had discouraged Barclays from pursuing a deal. Peter Truell, a spokesman for Barclays, declined to comment. Lehman was expected to seek bankruptcy protection for its holding company in what would be the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago, people close to the matter said.

Lehman’s subsidiaries were expected to remain solvent while the firm liquidates its holdings, these people said. Herbert H. McDade III, Lehman’s president, was at the Federal Reserve Bank in New York late Sunday, discussing terms of Lehman’s fate with government officials.

Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firms, Lehman cannot hope to reorganize and survive. It was not clear whether the government would appoint a trustee to supervise Lehman’s liquidation or how big the financial backstop would be.

Lehman has retained the law firm Weil, Gotshal & Manges as its bankruptcy counsel.

The collapse of Lehman is a devastating end for Richard S. Fuld Jr., the chief executive, who has led the bank since it emerged from American Express as a public company in 1994. Mr. Fuld, who steered Lehman through near-death experiences in the past, spent the last several days in his 31st floor office in Lehman’s midtown headquarters on the phone from 6 a.m. until well past midnight trying to find save the firm, a person close to the matter said.

A.I.G. will be the next test. Ratings agencies threatened to downgrade A.I.G.’s credit rating if it does not raise $40 billion by Monday morning, a step that would crippled the company. A.I.G. had hoped to shore itself up, in party by selling certain businesses, but potential bidders, including the private investment firms Kohlberg Kravis Roberts and TPG, withdrew at the last minute because the government refused to provide a financial guarantee for the purchase. A.I.G. rejected an offer by another investor, J. C. Flowers & Company.

The weekend’s events indicate that top officials at the Federal Reserve and the Treasury are taking a harder line on providing government support of troubled financial institutions.

While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed chairman, Ben S. Bernanke, and Mr. Paulson had warned that they would not put taxpayer money at risk simply to prevent a Lehman collapse.

The message marked a major change in strategy but it remained unclear until at least Friday what would happen. “They were faced after Bear Stearns with the problem of where to draw the line,” said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisors, a forecasting firm. “It became clear that this piecemeal, patchwork, case-by-case approach might not get the job done.”

Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger bailout of Fannie Mae and Freddie Mac.

Officials noted that Lehman’s downfall posed a lower systemic threat because it had been a very visible and growing risk for months, which meant that its customers and trading partners had had months to prepare themselves.

Outside the public eye, Fed officials had acquired much more information since March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives. In the end, both Wall Street and the Fed blinked.

Reporting was contributed by Edmund L. Andrews, Eric Dash, Michael Barbaro, Michael J. de la Merced, Louise Story and Ben White.

[Oiran]

Thanks for posting this. This is very important and timely news... and it follows right in line with what many of Camelot's sources have come forward with, especially George Green.

Do you have a link to this article??? Thanks Andre!

[Andre]

Thanks!

You can find the link here: http://www.nytimes.com/2008/09/15/bu...ll&oref=slogin

[Andre]

http://link.brightcove.com/services/...ctid1785349372


Courtesy of the Wall Street Journal

Bank of America to Buy Merrill

By MATTHEW KARNITSCHNIG, CARRICK MOLLENKAMP and DAN FITZPATRICK
September 15, 2008; Page A1

In a rushed bid to ride out the storm sweeping American finance, 94-year-old Merrill Lynch & Co. agreed late Sunday to sell itself to Bank of America Corp. for $50 billion.

The deal, worked out in 48 hours of frenetic negotiating, could instantly reshape the U.S. banking landscape, making the nation's prime behemoth even bigger. Late Sunday night, the companies' boards had approved the deal, but lawyers were negotiating over last-minute details.

Driven by Chief Executive Kenneth Lewis, Bank of America has already made dozens of acquisitions large and small, including the purchase of ailing mortgage lender Countrywide Financial Corp. earlier this year. In adding Merrill Lynch, it would control the nation's largest force of stock brokers as well as a well-regarded investment bank.

The combination, if approved by shareholders, would create a bank of vast reach, involved in nearly every nook and cranny of the financial system, from credit cards and auto loans to bond and stock underwriting, merger advice and wealth management.

Through the weekend, federal officials, including Federal Reserve Bank of New York head Timothy Geithner, made it clear that they strongly encouraged a deal to sell Merrill. They worried the firm could be the next to approach the brink of failure after Lehman Brothers Holdings Inc., said people familiar with the matter.

The all-stock deal came together quickly. With Merrill stock dropping sharply last week, Merrill President Gregory Fleming, a former financial-institutions adviser, urged Merrill Chief Executive John Thain to contact Mr. Lewis to see if he would be interested in a sale. The two banks had had preliminary discussions in the past, so the interest was there, according to a person familiar with the matter.

The Better Deal

On Saturday afternoon, Mr. Thain called Mr. Lewis, who responded favorably. Bank of America, which by then had been considering a bid for Lehman as well, decided that Merrill was the better deal and felt more comfortable with Merrill since the two had engaged in prior discussions. Mr. Thain then went to the Federal Reserve Bank of New York. He quickly saw that a deal for Lehman was unlikely, according to a person close to him, which strengthened his resolve to pursue a deal with Bank of America.

With a deal looming, Mr. Thain canceled a previously planned trip to Asia. The two camps began a marathon series of meetings at Wachtell, Lipton, Rosen & Katz, the law firm which has long represented Bank of America in its deals.

Word began to leak out on Sunday at the New York Fed, where top Wall Street executives had been huddled to discuss the fate of Lehman. Executives were relieved that Merrill had found a buyer. "Who was the magician who pulled this rabbit out of a hat?" exclaimed a top executive of one bank.

Word began to leak out on Sunday at the New York Fed, where top Wall Street executives had been huddled to discuss the fate of Lehman. Executives were relieved that Merrill had found a buyer. "Who was the magician who pulled this rabbit out of a hat?" exclaimed a top executive of one bank.
[PeterKraus, head of strategy and investments for Merrill Lynch, leaving the NewYork Federal Reserve.]
Bloomberg News/Landov
Peter Kraus, head of strategy and investments for Merrill Lynch, leaving the New York Federal Reserve.

The deal shows how the credit crisis has created opportunities for financially sound buyers. At $50 billion, Merrill is being sold at about two-thirds of its value of one year ago and half its all-time peak value of early 2007.

The deal values Merrill at $29 a share. Merrill's shares changed hands at $17.05 each on Friday, after falling sharply in the wake of Lehman's looming demise.

"Why would Bank of America do this?" said analyst Nancy Bush at NAB Research LLC in Annandale, N.J. "Ken Lewis always likes to buy the biggest thing he can. So why not this? You are master of the universe, basically."

Merrill could give Bank of America strength around the world, including emerging markets such as India. And Merrill is also strong in underwriting, an area Bank of America identified last week at an investors' conference where it would like to be more aggressive.

Bank of America and Merrill Lynch wouldn't comment on any discussions.

The deal is all the more dramatic because Merrill, upon the arrival of Mr. Thain, did more than many U.S. financial giants to insulate itself from the financial crisis that began last year. It raised large amounts of capital, purged itself of toxic assets and sold big equity stakes, such as its holding in financial-information giant Bloomberg LP. That Merrill has opted to sell itself thus underscores the severity of the crisis.

The integration of Merrill, known for its proud and sometimes testy brokerage force, could turn out to be the biggest test of Mr. Lewis's career. Typically, the bank has made one big deal and then taken time to carefully merge the two institutions. But in recent years, acquisitions have come at a furious pace. In 2004, the bank bought FleetBoston Financial Corp. A year later, the bank agreed to buy MBNA Corp., the credit-card firm. In 2007, Bank of America bought Chicago's LaSalle Bank as part of the breakup of Dutch bank ABN-Amro Holding NV. Then came this year's purchase of Countrywide.

'The Ultimate Realist'

Absorbing Merrill comes with huge risks. Merrill had the highest ratio of "problem assets" subject to write-downs to capital of the top three independent securities firms, according to Fox-Pitt, Kelton. Analysts were already betting it would have to write down another $3 billion or more in the third quarter beyond what it had announced in July.

"I think John Thain at Merrill is the ultimate realist," said Ms. Bush, the NAB Research analyst, who expected federal regulators to bless the deal. "He knows if Lehman goes under he is not far behind. He wants to cut the best deal he can."

In the past 15 months, Merrill and Lehman have both had tens of billions of dollars worth of risky, hard-to-sell assets carried on balance sheets that were piled high with debt. When the credit crunch hit in mid-2007, the assets kept deteriorating in value and couldn't easily be sold, eating into both firms' capital cushions. Recently, Lehman's balance sheet topped $600 billion and Merrill's $900 billion.

Merrill's previous chief, Stan O'Neal, was ousted in October 2007. His successor, Mr. Thain, tried to repair the firm's balance sheet by arranging an infusion of more than $6 billion in capital starting last December, tapping investors led by Temasek Holdings, a Singapore government investment fund.

But the losses kept coming this year. Mr. Thain was forced in July to sell a huge slug of more than $30 billion in collateralized debt obligations, or securities backed by pools of mortgages or other assets, at a price of just 22 cents on the dollar. That step required the firm to raise still more capital, under painful terms that re-priced some of the December stock sales at about half the original price.

During the flurry of historic deal making this weekend, Merrill also put out feelers to Morgan Stanley about a possible deal, which would have united two of Wall Street's oldest brands, according to a person familiar with the talks. But the talks didn't go anywhere because there wasn't enough time for Morgan Stanley to review the idea and Merrill wanted to do a deal quickly, this person said. Merrill was also stepping up talks with commercial banks both in Europe and the U.S.

Mr. Thain would collect an exit package worth about $9.7 million if Bank of America completes its takeover, according to David M. Schmidt, a pay consultant for James F. Reda and Associates LLC in New York.

That figure represents accelerated vesting of restricted stock units that Mr. Thain got when he took command last December. Only two thirds of those 500,000 units would become shares that he could sell.

One top Merrill executive lamented the sale of the venerable company, saying, "It's sad but inevitable." This executive said that he was pleased it was Merrill, rather than rival broker Morgan Stanley, that was hatching a deal with Bank of America.

Front and Center

The futures of both Morgan Stanley and Goldman Sachs will be front and center Monday morning, as Wall Street wakes up to a world where the independent broker-dealers are increasingly few in number. They would be the last of the big five independent firms, with Merrill and Bear Stearns Cos. having been sold and Lehman likely to close down.

This tumultuous year has made it clear that investment banks like Lehman and Bear Stearns face vulnerabilities that commercial banks such as J.P. Morgan and Bank of America are less prone to. The investment banks must constantly depend on short- and medium-term money markets to fund their operations. Commercial banks, meanwhile, can count on more stable consumer deposit bases.

Winthrop H. Smith Jr., a former Merrill executive whose father helped build the firm, said the acquisition would represent "a very sad moment for myself and my family and the thousands of families who worked for Merrill Lynch over our 94-year history, sad to see a firm that always prided itself on its independence absorbed" into another.

[Andre]

Fed moves to deal with financial crisis

WASHINGTON — The Federal Reserve announced late Sunday several steps to cope with the worst credit crisis in decades, including broadening the types of assets that investment banks can put up to get emergency loans from the Fed.

The action came as U.S. and foreign commercial banks were hashing out a plan to inoculate the global financial system against the possible failure of Lehman Brothers.

Federal Reserve Chairman Ben Bernanke announced the actions in a statement, saying they were being taken after a weekend of discussions with officials from the Treasury Department and the Securities and Exchange Commission and top executives of financial firms.

Those talks were aimed at seeing whether another financial institution would be willing to take over venerable investment bank Lehman Brothers and failing that, how other institutions could pool resources to protect the global financial system.

Bernanke said the discussions had been aimed at identifying "potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses."

"The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets," Bernanke said.

Besides expanding the types of collateral that can be used, Bernanke said the Fed would also increase the frequency of some of the auctions being used to get loans to banks from every other week to a weekly basis.

In a separate statement Treasury Secretary Henry Paulson said he supported the Fed's moves and said the actions taken should "strengthen and enhance our financial markets. These initiatives will be critical to facilitating liquid, smooth functioning markets and addressing potential concerns in the credit markets."

Paulson, who was involved in three days of talks at the New York Federal Reserve Bank, said he appreciated the efforts by other financial firms involved in the discussions to promote "orderliness and stability in our financial markets as we work through this extraordinary environment."

Christopher Cox, the chairman of the Securities and Exchange Commission, said in a statement that the SEC was working to make sure that the customers of Lehman's broker-dealer operations "will not be adversely affected by recent market events." Cox was also involved in the weekend talks that failed to find a buyer for Lehman Brothers.

The Fed's steps represented the latest in a series of actions the central bank has taken over the past year to try to protect the U.S. financial system from a credit crisis that erupted as a result of rising loses in subprime mortgage lending.

The central bank in August 2007 invited commercial banks to make use of its emergency loan program if they found themselves short of cash. Then last December, it expanded the program to auction off loans to cash-strapped banks, seeking to overcome a perceived stigma from banks getting direct assistance from the Fed.

Last March, it implemented the biggest expansion in the emergency loan program since the Great Depression by announcing that investment banks could obtain money from the Fed. That action came after the near-collapse of investment bank Bear Stearns, which was taken over with the help from a $29 billion Fed loan by JP Morgan Chase and Co.

[Andre]

AIG Scrambles to Raise Cash, Talks to Fed
Insurer Looks to Sell Automotive Business, Annuities Unit;
It Seeks $10 Billion in Fresh Capital as Downgrade Threatens

By MATTHEW KARNITSCHNIG, LIAM PLEVEN and PETER LATTMAN
September 15, 2008; Page C1

Insurer American International Group Inc., succumbing to relentless investor pressure that drove its shares down 31% on Friday alone, is pulling together a survival plan that includes selling off some of its most valuable assets, raising more capital and going to the Federal Reserve for help, people familiar with the situation said.
[Geithner, Timothy]

The measures are aimed at staving off a downgrade by major credit-rating firms. AIG executives worried that such an action would set off a chain reaction that could be fatal to the firm. The insurer, which has already raised $20 billion in fresh capital so far this year, was seeking to raise an additional $40 billion to avoid a downgrade.

During a weekend scramble to shore up its finances, AIG turned down a capital infusion from a group of private-equity firms led by J.C. Flowers & Co. because an option tied to the offer would have effectively given them control of the company, an 89-year-old giant that does business in nearly every corner of the world.
[Willumstad, Robert]

The proposed option would have allowed the firms to acquire AIG for $8 billion under certain conditions. That price is just one-fourth of AIG's current market value.

J.C. Flowers didn't respond to messages seeking comment.

When AIG's board rejected the capital infusion, the company's recently appointed chairman and chief executive, Robert Willumstad, took the extraordinary step of reaching out to the Federal Reserve for help. Mr. Willumstad asked New York Federal Reserve President Timothy Geithner if the Fed could backstop some asset sales.

Two other private-equity firms -- Kohlberg Kravis Roberts & Co. and TPG -- offered to inject capital into AIG if the Fed agreed to provide the insurer with a bridge loan until its restructuring plan was completed.

AIG viewed the request to the Fed not as a bailout but rather as a temporary measure that would give the insurer some breathing room until it was able to dispose of the assets.

As of late Sunday, the Fed had yet to decide whether to offer the assistance. The Fed usually deals with banks and brokers, and it wasn't clear what it could do. An AIG spokesman had no comment.

The Fed may not draw the line with AIG's request for support as clearly as it has with Lehman, distinguishing between its lending programs and the use of taxpayer funds. But any Fed action to help the firm still would have a high bar. Central bank officials took an extraordinary step in expanding the discount window to securities firms earlier this year. Expanding it to other firms would be another big step, though it could be considered if a case can be made for how such a lending lifeline would be critical to overall financial stability.

The assets AIG intends to sell include its domestic automotive business and its annuities unit, according to people familiar with the matter. It also looked into selling its aircraft-leasing arm, International Lease Finance Corp., but it isn't clear whether action on ILFC will be part of the emergency steps.

AIG also considered shifting assets from its regulated insurance business to its holding company, which would help the holding company respond to demands for cash or collateral. But that plan was met with resistance from regulators and by late Sunday it appeared unlikely it would come together.

The rush for cash represents a remarkable comedown for AIG, whose role in global finance is in many ways as critical as investment banks such as Lehman Brothers. AIG's troubles were one of the subjects at the weekend meeting of Wall Street chiefs and regulators at the New York Fed.

Eric Dinallo, the insurance superintendent in AIG's home state of New York, took a significant role in the talks over the weekend, according to a person familiar with the matter. One key issue, the person said, was the proposed shift of assets. Insurers typically face stringent regulations on how they use their assets, as regulators seek to make sure that they can meet their obligations to policyholders.

The turmoil in housing and credit markets has hammered AIG, largely because of contracts it sold protecting others against losses tied to subprime loans and other risky assets. AIG's stock has fallen nearly 80% this year. It reported a second-quarter net loss of $5.36 billion last month after a first-quarter loss of $7.81 billion.

Among its challenges: It doesn't have access to the Fed's lending window, as some other troubled financial firms do. It could face significant claims from Hurricane Ike, which battered the Texas coast over the weekend. It had to pay a stiff premium in August when it borrowed money in the corporate bond market.

As recently as Thursday, AIG said it was sticking to a schedule to unveil its strategic plan on Sept. 25. But its shares fell 31% on Friday alone. Late that day, Standard & Poor's warned that it could cut AIG's credit rating by one to three notches, citing concerns that AIG would have difficulty raising capital. Such a step would make it more expensive for AIG to borrow and further undermine investor confidence in the company.

Earlier this year, AIG considered selling or spinning off ILFC, the aircraft-leasing arm, but it decided against the idea in June. Since then, AIG's position has deteriorated, making it more likely that it would try again to unload the unit.

AIG could also raise cash by selling its investments in Blackstone Group LP, which is also helping to advise the insurer on its restructuring. AIG owns a stake in Blackstone worth about $700 million. It also has roughly $1 billion in investments in Blackstone's funds, according to regulatory filings, that it could sell in the secondary market.

It's not clear whether AIG has buyers lined up for any of the assets it wants to sell. Also unclear is how much interest private-equity firms would take in an AIG investment, and whether they have enough capital to make a dent in AIG's problems.

"The numbers are too daunting," said a senior executive at a large private-equity firm. Given AIG's huge balance sheet, "we just don't have enough capital to fill the hole."

Over four decades, former Chief Executive Maurice R. "Hank" Greenberg built AIG into one of the world's largest financial firms. He made major acquisitions, and pushed AIG into businesses beyond the world of traditional insurance. For years, investors paid a hefty premium to buy AIG shares.

Now AIG is not even the most valuable insurer in the U.S., as measured by market capitalization.

A 2005 accounting scandal precipitated Mr. Greenberg's departure. He has denied wrongdoing. A protégé, Martin Sullivan, ran the company until this summer when he was replaced under shareholder pressure with Mr. Willumstad, a former Citigroup Inc. executive who has been AIG's chairman since 2006.

When Mr. Willumstad said in June that he would release his turnaround plan in a few months, some wondered whether that gave him enough time to get his hands around such a multifaceted enterprise. But rapid shifts in the market have forced his hand.

Mr. Willumstad reached out to Mr. Greenberg after taking over in June, But a spokesman for Mr. Greenberg said the former CEO wasn't involved in the weekend talks, "though he repeatedly offered to assist in anyway he could" -- suggesting that Mr. Willumstad was pursuing his own strategy.

The aircraft-leasing arm could be part of his efforts. Founded in 1973, ILFC boasts a fleet of more than 900 airplanes valued at more than $50 billion. It is the largest single customer for both Boeing Co. and European Aeronautic Defence & Space Co.'s Airbus. Given that ILFC logged record operating income of $352 million in the second quarter, its value may be relatively high at the moment compared to some other AIG units.

S&P said AIG had enough money to pay claims and post collateral, if needed -- an important statement, given that AIG could have to post billions of dollars if it got downgraded.

AIG had over $1 trillion in assets at the end of the second quarter. Its shareholders equity -- assets minus liabilities -- stood at about $78 billion at that point.

[Andre]

Massive Shifts on Wall St.
Troubled Investment Bank To File for Bankruptcy

By Heather Landy and Neil Irwin
Washington Post Staff Writers
Monday, September 15, 2008; Page A01

NEW YORK, Sept. 15 -- Lehman Brothers announced early Monday morning that it will file for bankruptcy, becoming the largest financial firm to fail in the global credit crisis, after federal officials refused to help other companies buy the venerable investment bank by putting up taxpayer money as a guarantee.

The failure of the nation's fourth-largest investment firm offers a profound test of the global financial system, and government and private officials had been bracing Sunday night for an upheaval in a range of financial markets that have never before experienced the bankruptcy of such a large player. To keep cash flowing normally through these markets, the Federal Reserve announced new lending procedures, while 10 major banks combined to create a new $70 billion fund.

After a marathon series of negotiations over the weekend, Federal Reserve and the Treasury stepped aside to allow a wrenching transformation of Wall Street to proceed. After galloping to the rescue of other major financial institutions in recent months, the federal government drew the line with Lehman Brothers, ignoring pleas from would-be buyers of the company who insisted on receiving federal backing for its troubled assets.

Leaders of the Federal Reserve and Treasury Department decided that Lehman was unlike the investment bank Bear Stearns, whose sudden collapse in March threatened the world financial system, or Fannie Mae and Freddie Mac, whose potential insolvency did the same.
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In betting that Lehman could be allowed to fail without catastrophic consequences, New York Federal Reserve President Timothy F. Geithner, Fed Chairman Ben S. Bernanke, and Treasury Secretary Henry M. Paulson Jr. were making it clear that struggling financial firms cannot count on a bailout.

The decision not to intervene carries the risk that the ripples of Lehman's failure will prove impossible to contain. What worries regulators and Wall Street is a massive, multitrillion-dollar lattice of interlocking financial instruments known as derivatives. The most worrisome to bankers are "credit default swaps," in essence a form of insurance against corporate failures. If the financial firms themselves fail, the value of the insurance they have written will be tested as never before.

So would the market for "triparty repo" -- a form of debt that funds all sorts of financial firms and is held in the money market mutual funds of ordinary Americans -- which is also looking at potential losses from the Lehman bankruptcy.

It was that fear that led the Fed specifically to broaden the types of collateral it will accept at its lending window for investment banks, so that cash can keep flowing through the repo market. Even with that move, they are were steadying themselves for a tumultuous week in that market.

The steps the Fed announced last night, Bernanke said in a statement, "are intended to mitigate the potential risks and disruptions to markets."

"Bankruptcy is a perfectly natural thing, but you hope that the firm is in a position so that it can be an orderly bankruptcy and not cause other problems," said Susan Phillips, dean of the George Washington University School of Business and a former Federal Reserve governor.

Government officials drew a sharp contrast with the threat posed by the difficulties of Bear Stearns. In that situation, in March, Fed and Treasury leaders were convinced that its abrupt demise would have caused extensive damage across the financial system resulting in economic distress in the United States and beyond. For that reason, senior federal officials strongly encouraged J.P. Morgan Chase to buy Bear Stearns and backed $29 billion worth of its risky assets to make the deal happen.

Several firms, especially Bank of America and the British bank Barclays, wanted control of Lehman's investment banking and asset management businesses. However, they wanted no part of billions in shaky real estate and other investments on Lehman's books, and wanted either taxpayers or other financial firms to assume part of that risk.

But other companies decided they didn't want to take over the distressed assets, leaving only the good ones for Bank of America or Barclays. They concluded that they would rather risk potential problems in the financial markets on Monday than plow their limited cash into a venture that would be expected to have poor returns. And the Fed and Treasury refused to make government money available.

On Capitol Hill, key lawmakers either declined to comment on the Lehman's fate or did not return calls. A spokesman for Sen. Charles E. Schumer (D-N.Y.), for whom the day's events represent a hometown crisis, said Schumer, who chairs the Joint Economic Committee, was withholding comment until the status of Lehman Brothers became clear.

Lehman confirmed early Monday that its holding company intends to file for Chapter 11 with the U.S. bankruptcy court for the Southern District of New York, and will make motions that would allow the firm to continue to pay employees and to keep its operations running.

Lehman also said it is exploring a sale of its broker-dealer operations, and confirmed it remains in advanced talks with "a number of potential purchasers" for its investment-management division, which includes Neuberger Berman and Lehman Brothers Asset Management. Those two subsidiaries will conduct business as usual and will not be subject to the bankruptcy case, Lehman said. Customers of Lehman and Neuberger Berman can continue to trade in their accounts, the company said.

Lehman's rank-and-file employees were unsure what they would find when they went to their offices Monday morning. "There's no word. It's not clear what's happening or what's going to happen," said a Lehman bond trader who spoke on condition of anonymity because of the sensitivity of the situation. On Friday, "we thought the options were clear, that either we got bought or we got sold off in small pieces. Nobody thought it was actually going to go to bankruptcy."
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Lehman's dissolution has been gradual, over several months. If Bear Stearns experienced a run on the bank, Lehman has experienced a walk on the bank. That means that its various business partners have had time to bolster themselves for potential losses, and, in the view of these government officials, the risks to the system as a whole are therefore less.

It likely means the end of a Wall Street titan, a firm with 24,000 employees and 158 years of history. Lehman Brothers dates back to 1850, to a general store that Henry Lehman and two siblings opened in Montgomery, Ala. The brothers accepted cotton for cash and started a trading business on the side.

A century ago, the firm helped arrange financing for Sears Roebuck. It expanded globally through the twentieth century and became one of the top investment banks. A decade ago, chief executive Richard S. Fuld Jr. faced down rumors that the firm was on the brink of insolvency and put Lehman on an aggressive expansion course. In 2001, with its trading floors destroyed by the terrorist attacks in New York, he regrouped quickly, and the firm managed the first initial public offering to come to market after the attacks.

Fuld's aggressive and competitive nature is not uncommon on Wall Street, but friends and rivals have said the intensity with which Fuld expresses those traits are unmatched.

Lehman, which was outmuscled in merger advising and other traditional investment banking businesses, seized on the mortgage market as an area it could dominate in recent years.

Lehman, the number one underwriter of mortgage-backed bonds last year, amassed a giant portfolio of properties and mortgage-related securities. But the value of the assets began to sink last year amid a spike in mortgage defaults by homeowners with subprime credit.

Lehman shares have fallen from a high of $86.18 in February 2007, when the company's stock market value was approaching $50 billion, to Friday's closing price of $3.65, which left the firm with a market capitalization of $2.5 billion.

"Six months to the day since Bear Stearns went under, I'm viewing our experience in a whole new light," said John Ryding, a former Bear Stearns economist. "We were lucky to be first. We got out with $10 a share, which looked really bad at the time, but it looks a whole lot better than what Lehman shareholders are likely to get."

Staff writers David Cho, Binyamin Appelbaum and Lori Montgomery contributed to this report.