Financial Blowup

As of 9:00 p.m. CST, here’s what I know: 

  • Lehman Brothers is about to file for bankruptcy after failing to get someone to buy them.  Keep in mind, this is a 158 year old company.  What a shame.  That’s what leveraging yourself 30-40 to 1 will do when things go bad.  A bunch of banks are providing a financial backstop so there is an orderly liquidation in conjunction with the Fed.  I hear the fund that will be created will be around $70 billion. 
  • We also have Merrill Lynch being bought buy Bank of America for $44 billion ($29 per share after closing around $17 per share on Friday).  This apparently was basically a forced deal by the Fed.  They went to Merrill Lynch and said, you’re next.  Things would have gotten really bad for Merrill Lynch had they not been taken over.  Now, only Morgan Stanley & Goldman Sachs remain as the last of the Mohicans as far as big investment banks go.
  • AIG turns down buyout offers from private equity firms and instead decides to ask the Fed for help.  They are trying to avoid having their credit be downgraded.  Lenders are wanting more collateral from AIG as conditions worsen. 
  • The Dow Jones futures are down almost 300 points.
  • Gold is rallying over $22 ounce and the dollar is plummeting as money floods into treasuries for safety.
  • Oil and gas down after hurricane Ike missed a lot of the refineries.

Materials could rally sharply in the morning as a weak dollar could lead to global investors to buy commodities.  Remember that most commodities are priced in dollars.  Weaker dollar means higher commodity prices.

For those paying attention (and I assume you are because you’re reading this), this is an event you probably will never see replicated in your lifetime.  This is truly amazing.  Think about it.  We have huge financial institutions failing and consolidation happening right in front of us.  Bank of America was trying to buy Lehman Brothers earlier in the day.  Then, they turn around just a few hours later and buy Merrill Lynch.  Amazing.  The Fed & Treasury are having to step in and basically broker these various deals.  They are also taking all kinds of securities as collateral in exchange for credit, including equities.  This isn’t just about Lehman Brothers.  All these big institutions met today like heads of various mafia families used to.  They realize if they don’t step in and help one another (even though they don’t want to), it could mean they go under as well. 

If we get a big 500 point drop early in the morning tomorrow, I may use some of my cash to buy some securities on the cheap in the middle of the fear.  Remember the old adage of buying when there is blood in the streets.  This is it!  Also, this might be the best opportunity of a lifetime in the high yield bond market.  Fear drives up interest rates.  And, fear is extremely high while defaults are still low.  So, this might be a great opportunity to buy some really high income producing securities. 

Have a good night.

1 Response to “Financial Blowup”

  1. 1 Tom September 15, 2008 at 9:01 am

    Is this a good opportunity to buy more Citigroup?

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