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TheStreet.com TV

Dylan Ratigan, CNBC’s Closing Bell Co-Anchor:
“If you go into history you will see that as a CEO of Goldman Sachs he [Pauslon] was one of the folks who testified and pushed and pushed the SEC to allow for more relaxed standards for the assumption of risk — self regulation, but even worse than that, he was one of the ones that said allow us the ability to go 40-1, allow us the ability to take more risks. We have to figure out a way to spread risk around the world such that it will not have negative repercussions — let us do it.

Now at the same time he and the other four banks that were involved: Merrill, Goldman, Lehman, Bear, — all those executives running those banks were then in effect allowed to take the entire bank and go nakedly long on the housing market. The risk of that naked long now pushed on to the tax payer. They were able to bonus themselves hundreds of millions of dollars by being nakedly long in the housing market. It doesn’t take a rocket scientist to get nakedly long or nakedly short anything. Particularly if it goes the other way, you don’t bear the risk.

The question is, is he the best qualified person to unwind this now because he is one of the individuals who advocated the system, or is it outrageous that somebody who was an advocate of the system is now given the authority to disassemble it, not to mention do it is secret? In other words, the Treasury meeting with the bank CEO’s has no transcript. There were no shareholders there. There’s no record of that.”

Nouriel Roubini
It is obvious that the current financial crisis is becoming more severe in spite of the Treasury rescue plan (or maybe because of it as this plan it totally flawed). The severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe in spite of the nuclear option (after the Fannie and Freddie $200 billion bazooka bailout failed to restore confidence) of a $700 billion package: interbank spreads are widening (TED spread, swap spreads, Libo-OIS spread) and are at level never seen before; credit spreads (such as junk bond yield spreads relative to Treasuries are widening to new peaks; short-term Treasury yields are going back to near zero levels as there is flight to safety; CDS spread for financial institutions are rising to extreme levels (Morgan Stanley ones at 1200 last week) as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package (US market are down about 3% this morning at their opening).

Let me explain now in more detail why we are now back to the risk of a total systemic financial meltdown…

It is no surprise as financial institutions in the US and around advanced economies are going bust: in the US the latest victims were WaMu (the largest US S&L) and today Wachovia (the sixth largest US bank); in the UK after Northern Rock and the acquisition of HBOS by Lloyds TSB you now have the bust and rescue of B&B; in Belgium you had Fortis going bust and being rescued over the weekend; in German HRE, a major financial institution is also near bust and in need of a government rescue. So this is not just a US financial crisis; it is a global financial crisis hitting institutions in the US, UK, Eurozone and other advanced economies (Iceland, Australia, New Zealand, Canada etc.).

And the strains in financial markets – especially short term interbank markets - are becoming more severe in spite of the Fed and other central banks having literally injected about $300 billion of liquidity in the financial system last week alone including massive liquidity lending to Morgan and Goldman. In a solvency crisis and credit crisis that goes well beyond illiquidity no one is lending to counterparties as no one trusts any counterparty (even the safest ones) and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker dealers the rest of the shadow banking system has not access to this liquidity as the credit transmission mechanisms is blocked.

After the bust of Bear and Lehman and the merger of Merrill with BofA I suggested that Morgan Stanley and Goldman Sachs should also merge with a large financial institution that has a large base of insured deposits so as to avoid a run on their overnite liabilities. Instead Morgan and Goldman went for the cosmetic approach of converting into bank holding companies as a way to get further liquidity support – and regulation as banks – of the Fed and as a way to acquire safe deposits. But neither institution can create in a short time a franchise of branches and neither one has the time and resources to acquire smaller banks. And the injection of $8 b of Japanese capital into Morgan and $5 b of capital from Buffett into Goldman is a drop in the ocean as both institutions need much more capital. Thus, the gambit of converting into bank while not being banks yet has not worked and the run against them has accelerated in the last week: Morgan’s CDS spread went through the roof on Friday to over 1200 and the firm has already lost over a third of its hedge funds clients together with their highly profitable prime brokering business (this is really a kiss of death for Morgan); and the coming roll-off of the interbank lines to Morgan would seal its collapse. Even Goldman Sachs is under severe stress losing business, losing money, experiencing a severe widening of its CDS spreads and at risk of losing most of its values most of its lines of business (including trading) are now losing money.

Both institutions are highly recommended to stop dithering and playing for time as delay will be destructive: they should merge now with a large foreign financial institution as no US institution is sound enough and large enough to be a sound merger partner. If Mack and Blankfein don’t want to end up like Fuld they should do today a Thain and merge as fast as they can with another large commercial banks. Maybe Mitsubishi and a bunch of Japanese life insurers can take over Morgan; in Europe Barclays has its share of capital trouble and has just swallowed part of Lehman; while most other UK banks are too weak to take over Goldman. The only institution sound enough to swallow Goldman may be HSBC. Or maybe Nomura in Japan should make a bid for Goldman. Either way Mack and Blankfein should sell at a major discount of current price their firm before they end up like Bear and be offered in a few weeks a couple of bucks a share for their faltering operation. And the Fed and Treasury should tell them to hurry up as they are both much bigger than Bear or Lehman and their collapse would have severe systemic effects.

When investors don’t trust any more even venerable institutions such as Morgan Stanley and Goldman Sachs you know that the financial crisis is as severe as ever and the fear of collapse of counterparties does not spare anyone. When a nuclear option of a monster $700 billion rescue plan is not even able to rally stock markets (as they are all in free fall today) you know this is a global crisis of confidence in the financial system. We were literally close to a total meltdown of the system on Wednesday (and Thursday morning) two weeks ago when the $85 b bailout of AIG led to a 5% fall in US stock markets (instead of a rally). Then the US authorities went for the nuclear option of the $700 billion plan as a way to avoid the meltdown together with bans on short sales, a guarantee of money market funds and an injection of over $300 billion in the financial system. Now the prospect of this plan passing (but there is some lingering deal risk the votes in the House are not certain) -as well as the other massive policy actions taken to stop short selling “speculation” and support interbank markets and money market funds - is not sufficient to make the markets rally as there is a generalized loss of confidence in financial markets and in financial institutions that no policy action seem to be able to control.

The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions; such a silent cross border bank run has already started as foreign banks are worried about the solvency of US banks and are starting to reduce their exposure. And if this run accelerates - as it may now - a total meltdown of the US financial system could occur. We are thus now in a generalized panic mode and back to the risk of a systemic meltdown of the entire financial system. And US and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 bps reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.

Peter Schiff: “I think when they [BoA] saw Lehman go under without a bailout, I think they realized that the same fate awaits them, and they figured why not just buy Merrill, we’ll get so big they’ll [the Government] have to bail us out. And I think Merrill probably saw the same writing on the wall, they know there gonna go under, and they figured why not agree to get acquired of BoA, at least this way we’ll be so enormous, that maybe they’ll bail us out.”

Anthony M. Freed
Your Mortgage or Your Life
AIG, Lehman Brothers, Merrill, WaMu - This weeks Four Horsemen of the Markets have had a tremendous, even historical effect on every aspect of business and finance this week, and the surprises keep coming. Just as the Markets hit lows for the year, the Fed has now announced that they want Goldman Sachs and JP Morgan to fund a $70BB rescue fund for AIG. This announcement may have a saving effect here at the end of trading today. AIG was somehow allowed to bend the rules and borrow $20BB from it’s own subsidiaries, effectively eating it’s own tail - and this maneuver does not get them out of liquidity hot water - they still have to hunt down more money, which seemed more likely last week than it does this, given the shakeups. The stock has been hammered today on the news. Governor Patterson of NY seems willing to help in a regulatory manner, but there is no sign of the $40BB bridge loan life-line that AIG is looking for from the Feds.

Markets closed at record lows for the year, with the Dow down over 500 points, Nasdaq down more than 70 points, and the S&P down nearly a whopping 50 points.

Lehman Brothers is under Chapter 11 Bankruptcy protection - this essentially will buy time for Lehman to sell off some of their still valuable assets in an organized, not-so-firesale like manner. There are still buyers (Vultures) hanging around looking to pick up Nuberger Berman, if given the chance. Lehman has acknowledged today that they are still entertaining offers for Neuberger that were presented prior to the BK. which looks to be nothing more than a tactic employed by Dick Fuld to keep his job longer, and take the media pressure off while he sells off what is best about Lehman. More

(Bloomberg) – Merrill Lynch & Co., the third- biggest U.S. securities firm, is in merger talks with Bank of America Corp., people with knowledge of the negotiations said. The discussions came as Merrill’s smaller rival Lehman Brothers Holdings Inc. moved closer to filing for bankruptcy after Barclays Plc and Bank of America abandoned talks to buy the investment bank and Wall Street prepared for its possible liquidation. Bank of America spokesman Scott Silvestri declined to comment on Merrill. “We don’t comment on speculation,” said Bank of America spokesman Bob Stickler.

Source: Option Armageddon
The NYT will report in tomorrow’s paper that Merrill is seeking a buyer for its 20% stake in Bloomberg LP, the maker of the ubiquitous financial terminals. According to the Times: …Merrill, which has already raised $15 billion since John A. Thain took over as chief executive last fall, is finding it difficult to raise additional capital through previously used means, like selling preferred stock to sovereign wealth funds and other institutional investors, and it would prefer to avoid diluting the holdings of existing investors.

You can imagine SWFs are gun-shy since they’ve already lost billions on the first wave of Wall Street capital infusions made last year. I wonder if flush private equity players have been invited to invest recently. Merrill hopes to get $5-$6 billion for their stake, which would imply a $25-$30 billion valuation for all of Bloomberg. Hizzoner owns a 72% stake, so that valuation would put his net worth between $18 and $22 billion. If the $5 billion raised from a Bloomberg sale isn’t enough, Merrill may raise another $10 billion selling its BlackRock stake. Citigroup is also planning a fire sale in order to raise capital.

The more assets sold, the more capital will go back onto Wall Street balance sheets, which is good news…..theoretically, anyway. The banks may finance some of these asset sales with their own balance sheets, which the Times article notes Merrill may do to sell the Bloomberg stake back to Bloomberg.