Money & Investing - Banks.com

Right now, things are getting a little dicey on Wall Street. After yesterday’s rather dramatic tumble in trading (was it an ultimatum to Congress?), things are looking toward a partial recovery today. The stock market is slowly turning around, doing its best to struggle to a rally. But the real question on everyone’s mind is this:

Which companies will survive the financial crisis?

It seems as though no company is immune from the effects. But some companies seem to be getting government help (AIG) and others are left to fail (Lehman Brothers). Others are recipients of guarantees and help to buy other companies out (JP Morgan). Indeed, as Stephen Simpson points out on Investopedia, it appears that the government is deciding who will survive and who will fail:

It seems apparent to me that the federal government has made an increasingly implicit (but not yet fully explicit) determination that a small group of larger banks will be allowed to play the role of buyer-of-last-resort. I doubt that the acquisitions of Merrill Lynch or Washington Mutual would have been permitted just a year or two ago, but now a lot of the anti-trust and regulatory oversight has been suspended in the name of keeping the whole system running. 

Of course, in this climate, it is hard to decide  which companies to invest in, with the hope that they will emerge intact and eventually thrive. It does appear, though, that Citigroup is likely to be in this group, as is JP Morgan and some of the other investment banks and others that are being helped along.

All this deal-making, though, is bad for the ordinary investor. The companies that are bought — like Wachovia — are finding that the value of their stocks is dramatically reduced, leaving investors (including those who have holdings in investment accounts) with practically nothing.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

The big news on Wall Street this morning is the multiple whammy involving these events:

• Lehman Brothers (LEH) and bankruptcy.
• Bank of America (BAC) to buy Merrill Lynch (MER).
• What will happen to Washington Mutual (WM).

Credit default swaps
One of the main offenders right now is what is known as the credit default swap (CDS). BloggingStocks explains the “freedom” CDSs have provided to investors, mortgage lenders and any number of market players:

Gramm’s 262-page amendment, dubbed “The Commodity Futures Modernization Act,” according to Texas Observer, freed financial institutions from oversight of their CDS transactions. “Prior to its passage, they say, banks underwrote mortgages and were responsible for the risks involved. Now, through the use of [CDSs]-which in theory insure the banks against bad debts-those risks are passed along to insurance companies and other investors,” wrote Texas Observer.

The idea, of course, was to encourage more and more risky investment. And, of course, pump up Wall Street profits and allow for more speculation. What the widespread use of CDS arrangements did, though, was pave the way for mortgage lenders to approve borrowers irresponsibly (since they could just pass the risk off to someone else) and open up the U.S. economy to a rather large economic debacle. Indeed, the CDS market is a $62 trillion market — much larger than the “paltry” losses due to subprime.

Investment banks are dropping like flies. All of the risky assets they hold, from CDOs to CDSs to rapidly depreciating real estate are coming back to haunt them. And these big banks are getting ready to continue to fail. The government has made it clear that Bear Stearns, Fannie and Freddie have pretty much maxed out what it is willing to add to its already maxed out balance sheets.

It remains to be seen whether  loan pool from Wall Street investment banks will really staunch the bloodflow.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Tags: stock market, stock market news, investing blog, credit default swaps,
economy, investments, investment banks

This morning, Lehman Brothers (LEH) announced a plan to try and save itself, even as it acknowledged an almost $4 billion loss. The company is battling for survival, and has outlined its ideas for raising capital. These ideas mainly focus around these three steps:

1. Spin off of retail real estate into a different company.
2. Sell a majority stake in the investment management division of the company.
3. Cut the dividend from 68 cents a share to 5 cents a share.

The Wall Street Journal reports on the largest benefit — the stake in the investment management division:

Lehman’s plans to sell a majority interest in its investment-management division are expected to result in a tangible book value benefit of more than $3 billion. The company expects to maintain the majority of its pretax income from the unit, which include Neuberger Berman, Lehman’s prized asset-management division that was rumored in recent months to be on the chopping block.

Dividend stocks to continue taking hits?

For those who rely on regular dividend payouts to provide them with income, this is yet another blow. There has been a general trend amonst dividend paying stocks to cut to the bone. Fannie and Freddie both slashed dividends a great deal in the months leading up to the government takeover. And yet it didn’t work.

Other companies are likely to cut dividends as well, if the stock market continues in its overall bear trend (right now, stocks are a bit optimistic on the Lehman news).

No matter how noble Lehman tries to be, though, is there a possibility that it could fail anyway? And is this just posturing? There are those that figure that after a few days of desperate measures, the federal government will step in and bail the company out. After all, if Bear Stearns was “too big to fail,” isn’t Lehman?

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Tags: stock market, stock market news, investing blog, Lehman Brothers,
divdends, investments, LEH