Capital Markets

Sunday, Bloody Sunday

Hold on tight as Lehman's weekend Chapter 11 filing, Merrill's Sale to B of A, and AIG's effort to stop its bleeding lead us into a tumultuous Monday.
Marie Leone and Sarah JohnsonSeptember 15, 2008

After a string of devastating hurricanes, Sunday’s Wall Street storm may have topped them all.

Calling to mind other “black” days in the American finance world, a three-pronged crisis took shape: a Chapter 11 bankruptcy filing by Lehman Brothers Holdings, Merrill Lynch & Co.’s sale to Bank of America, and American International Group’s efforts with insurance regulators to protect policyholders as it searches for capital.

Coming on the heels of the unprecedented federal bailout of Fannie Mae and Freddie Mac, the latest developments have the finance community wondering what’s next, and what will be the collective and individual impacts on corporate finance.

The 158-year-old Lehman confirmed early Monday that it has filed protection under the U.S. Bankruptcy Code. None of the broker-dealer subsidiaries or other subsidiaries, including star-performing asset management company Neuberger Berman Holdings, are being included in the filing, however. As a result, the subsidiaries will continue to trade or take other actions with respect to their accounts.

In what appears to be an unprecedented act, the U.S. Securities and Exchange Commission issued a statement on Sunday night saying that it is working with Lehman to ensure that customers of the investment bank and regulated broker-dealer subsidiary will not be adversely affected by its bankruptcy.

The SEC staff, who have been on-site at Lehman’s broker-dealer operations, will remain in place in coming weeks. According to the SEC, any actions taken by the holding company, the broker-dealer’s parent, will not affect the SEC’s protection of customers. Broker-dealer customers are protected under SEC rules, including segregation of customer securities and cash, as well as insurance by the Securities Investor Protection Corporations.

The Lehman filing ” is expected to lead to the winding down of Lehman Brothers Inc., its U.S. regulated broker-dealer, outside of bankruptcy.”

The agency said that SEC staff “will remain in place to oversee the orderly transfer of customer assets to one or more SIPC-insured brokerage firms. The holding company bankruptcy filing does not affect in any way the SIPC protection applicable to the firm’s customers.” It said the agency also is coordinating with overseas regulators to protect Lehman customers and to maintain orderly markets.

The sale of Merrill Lynch to Bank of America was an all-stock, $50 billion deal. The purchase is largely seen as a way to keep the brokerage firm’s business alive after 94 years. But for B of A, it opens the banking giant to vast underwriting businesses, making it the largest brokerage firm, with $2.5 trillion in client assets.

The Merrill news comes nearly a year after Stanley O’Neal and Jeffrey Edwards resigned as its CEO and CFO, respectively, following the firm’s $8 billion write-down for its exposure to mortgage-backed securities that had declined in value.

John Thain was hired as CEO in December to turn the firm around. Much of his job entailed raising capital and offloading billions of dollars of problematic assets. But it wasn’t enough; the Bank of America deal values Merrill at two-thirds of its worth compared to a year and a half ago, when it was at an all-time high, the Wall Street Journal reports.

B of A has agreed to exchange 0.8595-share of its common stock for each of Merrill’s common shares, the firms announced Monday morning. In turn, Bank of America believes it will realize $7 billion in pretax expense savings by 2012. They expect the deal to close the first quarter of 2009, pending shareholder approval.

Rounding off the historic weekend on Wall Street came insurance giant AIG’s announcement that it is seeking an additional $40 billion in emergency funds. That move was designed to help it avoid a credit rating downgrade, according to reports from the Wall Street Journal and the New York Times. Those funds may be coming from the Federal Reserve, the Associated Press noted .

Last week, AIG’s stock dropped 45 percent on speculation that the financial stability of the company was waning. As a result, the New York Insurance Superintendent Eric Dinallo and a representative of the New York governor’s office were dispatched this weekend to AIG to work with the insurance company to devise a plan to ensure that policy holders remain protected, according to the wire service.