Franco-Belgian bank Dexia gets bailout, Neubeger sold to private equity

Dexia received 6.4 billion euro bailout on Tuesday (Belgian government putting in 3 billion euros, French government put in 1 billion euros, and French state-controlled Caisse des Depots (CDC) 2 billion euros). Dexia stated new funding would boost Tier 1 capital ratio to 14%.

Neuberger Berman, the 69-year old asset management firm founded in 1939 by Roy Neuberger, agreed to be acquired by Bain Capital Partners LLC and Hellman and Friedman LLC.

Citigroup takes over Wachovia, B&B nationalised, Fortis Bailed Out over Weekend, Oil Price drops, House rejects US Bailout

Citigroup will take over all the assets and liabilities of Wachovia in a $2.2bn all-stock deal. According to CMA DataVision,
Citigroup's credit default swaps widened to about 416 basis points following the news from 328 basis points on Friday, i..e. it now costs $416,000 a year to protect $10m of Citi-debt, an increased cost of $88K a year. To raise capital, Citigroup will sell $10bn of common stock, and will cut its quarterly dividend in half to 16c a share to preserve capital.

Fortis was part-nationalised by the governments of the Benelux countries, being seen as too big to go under. To save the bank ministers agreed to put up 11.2bn euros ($16.1bn). ECB president Jean-Claude Trichet played a role. As part of the deal, Fortis will have to sell its stake in Dutch bank ABN Amro which is part-took-over last year. Fortis chairman Maurice Lippens will be forced to resign.

Oil dropped below $100 a barrel as fears spread that global economic weakness will drive down demand (November NYMEX futures was trading at $98.70 a barrel), irrespective of the $700bn bailout.

Eurostoxx is now down close to 3000 level, closing 4.69% down at 3008. FTSE dropped 5.3%, to 4818 (3yr low). The lower house of the US congress has rejected the bailout; many members of George W Bush's Republican party were strongly opposed to it (226 against versus 207 for). S&P is down 6.13%.

Also, on Reuters today: "Iceland's government bought a 75 percent stake in Glitnir for 600 million euros ($878 million) after the bank said its funding position had deteriorated due to turmoil on international financial markets".

Political Wrangling Continues over $700bn Bailout, Billions Pumped in to Defrost Frozen Money Markets, Gold Sales Suspended

Banks no longer want to lend to other banks. Interbank lending has dried up.
The liquidity crisis has spread to the US commercial paper market, an essential source of funding for many companies' daily operations (used e.g. for purchasing inventory or managing working capital / operating liquidity), which Reuters reports has shrunk to its smallest level in 2 years.

With the US having to finance the bailout with the sale of billions of bonds, America's sovereign triple A rating could come under scrutiny. Euromoney's bi-annual country risk index (evaluating political and economic stability, but focusing on sovereign default risk) puts the US in 10th place. In 1st place is The Grand Duchy of Luxembourg. Many duchies existed during the Napoleonic Wars but Luxembourg is the last remaining one in the modern world. But that's by the wayside - how is the US going to finance the payback of these bonds? It will invest the money in mortgages and if the people holding those mortgages eventually pay them back, the Treasury can use the money to pay back investors.

What seems clear is that a lower leverage business model will evolve among banks. Even with less leverage, confidence is still a prerequisite to survival. And what of the future of credit securitisation? What new laws will be put in place to control credit speculation?

Also last week panic buying of commodities including gold forced the U.S. Mint to suspend sales of American Buffalo 24-karat gold coins because it couldn't keep up with soaring demand from investors for commodities and similar asset classes believed to be "safe havens" from the credit crisis (reported in msnbc).

Meanwhile, FinanceAsia evaluates Nomura versus Goldman Sachs.

Greedy JPMorgan gobbles up WaMu, will have to digest its sub-prime assets

As part of the deal, JPMorgan Chase will absorb WaMu's subprime and option-ARM mortgages. The emergency sale was announced late Thursday and was arranged by regulators. Deal value was $1.9 billion. CNBC reports WaMu saw an exodus of $16.7 billion in deposits since Sept. 15, in a massive 10-day bank run. The severity and speed of the decline of WaMu prompted regulators to seize control on Thursday night, rather than Friday, which is more typical for bank closures.

BBC reports WaMu "had about $307bn of assets but only about $188bn of deposits, which meant it had to raise funding on money markets, which has become increasingly expensive." Banks are unusual in that its assets are its loans (the reverse of a normal company) and deposits are its liabilities. The size of WaMu's assets have made it the biggest banking failure in history.

Who is WaMu anyway? The bank was incorporated on September 25 1889, providing a vehicle for investing and lending and helping Seattle residents rebuild after a fire. The bank went public in 1983, and within 6 years of going public, the banks assets more than doubled.

Senator Richard Selby castigates Bailout: "We need to do the right thing", CB funds wrecked, The Benefits of Being Nimble

Republican Senator Richard Selby of the Senate Banking Committee, one of the most vocal opponents of the proposed bailout, said on CNN: "we need to do the right thing not just the expedient thing". Republicans and Democrats have expressed concern over the plan. Comparisons are being made with 1929, which led to Glass-Steagal Act and 1980s S&L crisis.

The FBI are investigating failed financial institutions including Fannie Mae and Freddie Mac, on issues of misrepresentation of finances.

In energy sector, French group EDF agreed a £12.5 billion takeover of British Energy. EDF will take control of all BE's nuclear power stations, including Sizewell B (PWR) in Suffolk and will play a leading role in the development of new stations in the UK. BE produces 1/6th of the UK's electricity and employs about 6000 staff.

City AM reports of recent wreckage in CB arbitrage funds, which "had the worst performance of any hedge funds, according to investors, as large portfolios of bonds were dumped into the market - probably....as...Lehman Brothers' proprietary trading desks closed".

Also on the recruitment market, City has a note of optimism: "while the big names of investment banking are suffering, the smaller, more nimble firms with less exposure to the sub prime markets are continuing to hire".

Nomura buys Lehman Europe, US anger over Paulson Plan

In a remarkable 48 hour manouevre, Nomura has bought over Lehman's equity and investment banking businesses in Europe and the MidEast.

In the US, anger spreads over the $700bn bailout of Wall Street.

Nomura buys Lehman Asia, "White Knight" Sought for B&B, MS sucks up to the Fed

Nomura will buy Lehman's Asia-Pacific franchise, including Japan and Australia and 3,000 staff. Nomura is Japan's top underwriter for stock offerings and also tops M&A tables in Japan.
Last year, Nomura bought Instinet Inc. (US online brokerage firm) for 1.2 billion dollars as part of its overseas expansion strategy.

In the UK, the FSA is believed to have sounded out potential "white knights" for Bradford and Bingley (source: CityAM) now of the UK's weakest banks. Parties to talks are believed to be Santander, ING and Australia National Bank. B&B made losses of £17.2m in the first half.

Also Turquoise, a new trading platform, has gone live. T allows customers to trade 1200 stocks in 13 European markets. Prepare for a price war with existing exchanges!!!

GS and MS have become retail banks today, to access the Fed's $700bn funding pool and placing them under the Fed regulatory spotlight. Get used to reduced leverage and fighting for deposits!! Hedgies and boutiques may do well?

USD500bn (NAY 700 BILLION) rescue plan, Shorts close positions, Market Rallies

One of the biggest one-day rallies in history resulted from investors betting on a US$500 billion plan to fix the credit crunch, buying toxic bank assets to free up credit markets.

CNN reports that this week alone, investors had withdrawn $210bn from money market funds. This was precipitated by the news of soured investments from Reserve Management Co. due to investments in Lehman Bros.

"What they're doing is jumping from crisis to crisis," said Senator Shelby, on the Federal Reserve and Treasury.

$180bn of liquidity offered to banks outside the US, Short sale of UK banks is banned, Barclays claims Lehman indexes, Morgans Stanley "vol" explodes

In a co-ordinated strike, $180bn in liquidity has been offered by central banks and regulators to banks outside the US in desperate need of dollars. For its part, the Bank of England has pumped 40 billion USD (£22.3 billion) into money markets, over four times the amount it pumped in on Monday when Lehman collapsed. Other actors in the stage-play included the ECB, Bank of Canada and Bank of Japan. Lehman, HBOS and AIG this week have led to banks hoarding cash and pushing up the rates of inter-bank lending. When commercial banks end up in a liquidity freeze, central banks step in to ease the cash deadlock.

The FSA has banned the short-selling of UK financial stocks, "a move unprecedented in modern times" according to the FT on Thursday, categorising it as a "market abuse" offence. Market makers are exempt from this rule. The rule takes effect from midnight Thursday until January 2009, and there will be a review after 3o days which may result in the ban being extended to other sectors.

Barclays also staked their claim on Lehman's bond indexes.

MS redefined volatility Thursday. After 1 p.m. Thursday,MS dipped below $13 (an all time low), beginning to rally around 2:30 p.m. Morgan's shares with news of a possible government-led solution to the loan crisis, and by 3 p.m., the stock hit $23.

EuroStoxx closed at the 3000 mark, 59bps below Wednesday's close.
Lloyds TSB paid £12bn for HBOS (the transaction having been waved through by Gordon Brown, side-stepping the Competition Commission), 232p per share. City AM's headline today is "CONTAGION" with a picture of a horse and the comment "LLOYDS TSB and HBOS will create a megabank with £1 trillion in assets. Picture:PA".

In stark contrast to the seriousness of the day's events in the money markets, the london paper ran lead stories on how madonna helped Gwyneth Paltrow out of post-natal depression and how Kate Middleton, girlfriend of Prince William, fell down at a roller disco in Vauxhall.

HBOS and Lloyds TSB in merger talks, Barclays buys Lehman Brothers North America, Morgan Stanley ruminating merger

Announcement came after a third disastrous day of trading in HBOS shares. HBOS dropped 19% during the day from 182 to 147. HBOS was admitted to trading on 10 September 2001. The government instigated Lloyds TSB to take HBOS under its wing, acting quicker than it did in last year's Northern Rock crisis. Merging the two will create the UK's fourth largest bank by assets.

Barclays takeover of Lehman North America ($1.5bn for the real estate and $250m for the business) was announced. The advisers on the deal, according to Bloomberg, were Credit Suisse Group AG, Deutsche Bank AG and JP Morgan Cazenove Ltd.

The cost of credit protection on Morgan Stanley's debt has accelerated over the last two days. Morgan's stock price is down 46% this year. They are rumoured to be mulling a merger (with Wachovia). The credit crisis has meant the financial landscape is changing fast. There is huge consolidation in the banking sector. Recent turbulence suggests the market will head towards more regulation, particularly of hedge funds, and more limits on risk taking and leverage.

Market virus.

Fed Plans Rescue of AIG ($85bn bailout/NATIONALISATION)

Following bailout of Freddie Mac and Fannie Mae, the Fed plans to stave off bankruptcy of AIG, by providing $85bn in funding in exchange for 80% stake in the insurer. US is following Venezuela in nationalising financial institutions.

AIG owns 50% of City Airport, located in Royal Docks, East London, less than 3 miles from Canary Wharf . AIG bought the airport from Irish financier Dermot Desmond in October 2006. It sold its stake to GIP (an infrastructure fund founded by Credit Suisse and General Electric), in Sept 2008.

Lehman Brothers is Bankrupt, ML sold to BoA for $50bn, BoE injects £5bn into markets, Two of the World's Biggest Banks Gone in One Day

BoA purchased ML on Sunday, and early Monday morning 158-year old LEH filed for Chapter 11 bankruptcy protection. The sudden and shocking demise of Lehman Brothers followed soon after Barclays and Bank of America pulled their interest in a possible takeover. Both bidders had something up their sleeve - BoA merged with ML and Barclays seemed to be waiting for the business to collapse before cherry-picking select businesses at bargain basement prices. Pictures of Lehman's staff bearing "Iron Mountain" boxes littered the news channels and newspapers. Some time later, prior to a G-7 meeting in Washington when the aftermath of Lehman's collapse became readily apparent, French economy minister Christine Lagarde remarked: "For the equilibrium of the world financial system, this was a genuine error...once we let one domino fall, the rest risk collapsing".

Now GS and MS are left as Wall Street's biggest investment banks.

In the UK the Bank of England auctioned £5bn through an exceptional fine tuning open market operation at 9.45 Monday. These loans will mature Thursday. (BoE stated they received £24.1bn in bids for its £5bn injection).

Reaction:

"The ECB stands ready to contribute to orderly conditions in the euro money market" - ECB

"I've been in the business 35 years and these are the most extraordinary events I have seen." - Peter G Peterson, Blackstone Group

Lehman Stock Battered

CityAM reports "some analysts are forecasting that the bank...will go bust within six months".

GSEs Bow Before the FHFA

The US government has analysed the capital requirements of mortgage GSEs (Government sponsored enterprises) Freddie Mac and Fannie Mae, which have lost billions in cash as a result of the US housing crash (referred to by the Treasure as "housing correction"). The GSEs have 5.3 trillion dollars of debt outstanding and MBS securities. They will now be administered by the FHFA (Federal Housing Finance Agency).

Fortune magazine covers the "Frankenstein business model" of the two institutions in the article "The $5 trillion mess". The two companies under the FHFA will not be able to make any payments to shareholders until the end of 2009.

The statement was made by Henry Paulson, Secretary of the US Treasury, prior to which he was CEO of Goldman Sachs.

Pound sell-off versus Euro

Alistair Darling added fuel to the already dire sentiment on the British economy, sending the pound to a new low against the dollar.

To make matters worse, OECD predicted recession for the UK in second half of 2008 (a recession is defined as two consecutive quarters of negative growth).