CBI latest to warn of recession
The CBI has become the latest organisation to predict that the UK will fall into recession this year.
The business group estimates that the economy will shrink by 0.2% between July and September, and then by a future 0.1% from October to December.
Its report follows similar warnings from the European Commission and the British Chambers of Commerce.
An economy is generally considered to be in recession after two successive quarters of declining output.
'Twin impacts'
Although the CBI predicts two quarters of downturn, it adds that it will be a "shallow recession", and not a return to the prolonged economic woes of the early 1990s.
The UK may have entered a mild recession that will hopefully prove short lived CBI director general Richard Lambert
For 2009, the CBI predicts the UK economy will grow at a "feeble" rate of 0.3% - the worst performance since 1992.
CBI director general Richard Lambert blamed the likely recession on the sharp rise in energy and food costs this year, and the downturn in the housing market, both of which had knocked consumer sentiment.
"Over the past year our forecasts for economic growth have been shaved lower and lower as the UK economy continues to struggle with the twin impact of higher energy and commodity prices and the credit crunch," he said.
"Having experienced a rapid loss of momentum in the economy over the first half of 2008, the UK may have entered a mild recession that will hopefully prove short lived."
'Falling inflation'
The CBI added that while inflation - as measured by the government's preferred consumer price index - should hit a peak of 4.8% this quarter - it expects it to fall back "quite rapidly" over 2009 as energy and other commodity prices decline.
This will give the Bank of England the breathing space to start cutting interest rates, says the CBI, which predicts that rates will fall from the current 5% to 4% by next spring.
"As inflation falls, we should be well placed to move beyond this difficult stage in the business cycle," added Mr Lambert.
The latest official data from the Office for National Statistics (ONS) showed that the UK economy failed to grow between April and June.
The ONS has also said that UK manufacturing output fell in July for a fifth straight month.
Story from BBC NEWS:http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7615207.stm
Monday, September 15, 2008
Merrill Lynch sold in $50bn deal
Merrill Lynch sold in $50bn deal
Bank of America is to buy Merrill Lynch in a deal worth $50bn (£28bn) that will create a new financial giant.
The deal came amid a hectic weekend on Wall Street, with Lehman Brothers announcing that it would file for bankruptcy protection.
There were worries that Merrill would be the next bank to lose the confidence of investors as it has been hit hard by bad mortgage debt.
Merrill has written down more than $40bn of assets in the past year.
Under the terms of the deal, Bank of America will pay about $29 for each Merrill share.
While that represents a 70% premium to the closing share price on Friday, Merrill's share price stood at $50 in May and was above $90 at the start of 2007.
'Great opportunity'
"Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders," said Bank of America chairman and chief executive Ken Lewis said in a statement.
[The deal] catapults Bank of America into positions of strength in three businesses where they were weak James Ellman, Seacliff Capital
"Together, our companies are more valuable because of the synergies in our businesses."
The deal will also see three Merrill Lynch directors join the board of Bank of America.
"Merrill Lynch is a great global franchise and I look forward to working with Ken Lewis and our senior management teams to create what will be the leading financial institution in the world with the combination of these two firms," said John Thain, Merrill's chairman and chief executive.
The deal - which is expected to be completed in the first quarter of 2009 - has been approved by directors of both companies, but now will need the approval of shareholders and regulators.
Merrill's share price had fallen last week as Lehman Brothers undertook its ultimately unsuccessful search for a buyer.
Analysts said the combination of Bank of America and Merrill Lynch would be a good fit.
"It catapults Bank of America into positions of strength in three businesses where they were weak," said James Ellman from hedge fund Seacliff Capital.
"Now Bank of America has one of the best and largest retail brokerages in the country, one of the top investment banks in the world, and a large stake in one of the best investment managers in the world."
Story from BBC NEWS:
Bank of America is to buy Merrill Lynch in a deal worth $50bn (£28bn) that will create a new financial giant.
The deal came amid a hectic weekend on Wall Street, with Lehman Brothers announcing that it would file for bankruptcy protection.
There were worries that Merrill would be the next bank to lose the confidence of investors as it has been hit hard by bad mortgage debt.
Merrill has written down more than $40bn of assets in the past year.
Under the terms of the deal, Bank of America will pay about $29 for each Merrill share.
While that represents a 70% premium to the closing share price on Friday, Merrill's share price stood at $50 in May and was above $90 at the start of 2007.
'Great opportunity'
"Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders," said Bank of America chairman and chief executive Ken Lewis said in a statement.
[The deal] catapults Bank of America into positions of strength in three businesses where they were weak James Ellman, Seacliff Capital
"Together, our companies are more valuable because of the synergies in our businesses."
The deal will also see three Merrill Lynch directors join the board of Bank of America.
"Merrill Lynch is a great global franchise and I look forward to working with Ken Lewis and our senior management teams to create what will be the leading financial institution in the world with the combination of these two firms," said John Thain, Merrill's chairman and chief executive.
The deal - which is expected to be completed in the first quarter of 2009 - has been approved by directors of both companies, but now will need the approval of shareholders and regulators.
Merrill's share price had fallen last week as Lehman Brothers undertook its ultimately unsuccessful search for a buyer.
Analysts said the combination of Bank of America and Merrill Lynch would be a good fit.
"It catapults Bank of America into positions of strength in three businesses where they were weak," said James Ellman from hedge fund Seacliff Capital.
"Now Bank of America has one of the best and largest retail brokerages in the country, one of the top investment banks in the world, and a large stake in one of the best investment managers in the world."
Story from BBC NEWS:
Q&A: Lehman Brothers bank collapse
Q&A: Lehman Brothers bank collapse
Wall Street bank Lehman Brothers has filed for chapter 11 bankruptcy protection after emergency talks to find a buyer failed.
Confidence in the 158-year-old investment bank - the fourth largest in the US - crumbled last week amid growing concerns that its large portfolio of mortgage-backed assets was worth far less than it was originally valued.
During the past year Lehman reported billion-dollar losses and saw its share price plummet more than 95%.
Why did Lehman fail?
Lehman Brothers is considered one of Wall Street's biggest dealers in fixed interest trading and was heavily invested in securities linked to the US sub-prime mortgage market.
With these investments now shunned as high risk, analysts say it was inevitable that confidence in Lehman Brothers would likely be hit - particularly after the collapse of Bear Stearns earlier this year.
In its June to August period last year, the bank said it would make write downs of $700m as it adjusted the value of its investments in residential mortgages and commercial property.
One year on this figure soared to $7.8bn, which last week resulted in Lehman reporting the largest net loss in its history. The bank also admitted that it still had $54bn of exposure to hard-to-value mortgage-backed securities.
Despite having access to cash reserves, worried investors pummelled the firm's shares last week after talks to raise billions of dollars from outside investors ran into a brick wall.
How does it affect me?
Nobody has a Lehman Brothers cheque book or current account. The company is an investment bank that specialises in big and complex deals and investments.
Despite this, Lehman's collapse will probably be felt by millions of people around the world - at least indirectly.
Most of our banks and pension funds have dealings with Lehman, or with firms like hedge funds that traded extensively with Lehman.
Unwinding Lehman's complex deals could take weeks or months. During that time the global financial system will be snarled up. Many banks won't know for sure how much they are exposed to Lehman, and will have difficulty freeing up the money in those deals.
This in turn is likely to intensify the credit crunch, with potentially dire consequences for businesses and consumers.
And the dramatic collapse of Lehman Brothers has also shaken the financial markets, with share prices slumping around the world.
Are any other firms in trouble?
Well, for starters there is Merrill Lynch, another large US investment bank. In a surprise move, Bank of America agreed on Sunday to buy Merrill Lynch.
The fear was that investors would have started a witch hunt for the next bank with heavy exposure to debt linked to mortgages, the value of which continues to tumble, and Merrill Lynch would have been the likely suspect.
The biggest worry, though, is insurance giant AIG. Reports suggest that AIG has asked the US central bank for a $40bn bridging loan.
If AIG is in trouble, it would directly affect millions of consumers and companies around the world. It would also hurt the whole financial system.
And compared to AIG, the crisis surrounding Bear Sterns and Lehman is small beer.
Why didn't the US Treasury save Lehman Brothers?
When Bear Stearns ran into trouble, the US Treasury made the terms favourable for JP Morgan Chase to buy it.
And just last week, the US government effectively nationalised Fannie Mae and Freddie Mac, which between them own or guarantee about half of the $12 trillion US mortgage market.
So already the US tax payer has been put at risk of shouldering the burden of billions of dollars of losses, and it is becoming politically less acceptable for the government to keep bailing out private companies.
By not giving UK bank Barclays a guarantee for Lehman's trading obligations as part of a deal to buy the business, analysts say the US Treasury has put a line under its willingness to use public money to rescue banks which have made wrong decisions.
Instead, government officials have focused on supporting the financial system in other ways, announcing measures to ease access to emergency credit for struggling financial companies.
How big is Lehman Brothers?
Founded in 1850 by three Jewish immigrants from Germany, Lehman Brothers has been a prominent investment bank in Wall Street for decades.
It operates at a wholesale level, dealing with governments, companies and other financial institutions, employing 25,000 people worldwide, including 5,000 in the UK.
Its core business includes buying and selling shares and fixed income assets, trading and research, investment banking, investment management and private equity.
As the crisis in financial markets has gathered momentum, it has seen its share price collapse from $82 to less than $4 - a fall of 95%.
Story from BBC NEWS:http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7615974.stm
Wall Street bank Lehman Brothers has filed for chapter 11 bankruptcy protection after emergency talks to find a buyer failed.
Confidence in the 158-year-old investment bank - the fourth largest in the US - crumbled last week amid growing concerns that its large portfolio of mortgage-backed assets was worth far less than it was originally valued.
During the past year Lehman reported billion-dollar losses and saw its share price plummet more than 95%.
Why did Lehman fail?
Lehman Brothers is considered one of Wall Street's biggest dealers in fixed interest trading and was heavily invested in securities linked to the US sub-prime mortgage market.
With these investments now shunned as high risk, analysts say it was inevitable that confidence in Lehman Brothers would likely be hit - particularly after the collapse of Bear Stearns earlier this year.
In its June to August period last year, the bank said it would make write downs of $700m as it adjusted the value of its investments in residential mortgages and commercial property.
One year on this figure soared to $7.8bn, which last week resulted in Lehman reporting the largest net loss in its history. The bank also admitted that it still had $54bn of exposure to hard-to-value mortgage-backed securities.
Despite having access to cash reserves, worried investors pummelled the firm's shares last week after talks to raise billions of dollars from outside investors ran into a brick wall.
How does it affect me?
Nobody has a Lehman Brothers cheque book or current account. The company is an investment bank that specialises in big and complex deals and investments.
Despite this, Lehman's collapse will probably be felt by millions of people around the world - at least indirectly.
Most of our banks and pension funds have dealings with Lehman, or with firms like hedge funds that traded extensively with Lehman.
Unwinding Lehman's complex deals could take weeks or months. During that time the global financial system will be snarled up. Many banks won't know for sure how much they are exposed to Lehman, and will have difficulty freeing up the money in those deals.
This in turn is likely to intensify the credit crunch, with potentially dire consequences for businesses and consumers.
And the dramatic collapse of Lehman Brothers has also shaken the financial markets, with share prices slumping around the world.
Are any other firms in trouble?
Well, for starters there is Merrill Lynch, another large US investment bank. In a surprise move, Bank of America agreed on Sunday to buy Merrill Lynch.
The fear was that investors would have started a witch hunt for the next bank with heavy exposure to debt linked to mortgages, the value of which continues to tumble, and Merrill Lynch would have been the likely suspect.
The biggest worry, though, is insurance giant AIG. Reports suggest that AIG has asked the US central bank for a $40bn bridging loan.
If AIG is in trouble, it would directly affect millions of consumers and companies around the world. It would also hurt the whole financial system.
And compared to AIG, the crisis surrounding Bear Sterns and Lehman is small beer.
Why didn't the US Treasury save Lehman Brothers?
When Bear Stearns ran into trouble, the US Treasury made the terms favourable for JP Morgan Chase to buy it.
And just last week, the US government effectively nationalised Fannie Mae and Freddie Mac, which between them own or guarantee about half of the $12 trillion US mortgage market.
So already the US tax payer has been put at risk of shouldering the burden of billions of dollars of losses, and it is becoming politically less acceptable for the government to keep bailing out private companies.
By not giving UK bank Barclays a guarantee for Lehman's trading obligations as part of a deal to buy the business, analysts say the US Treasury has put a line under its willingness to use public money to rescue banks which have made wrong decisions.
Instead, government officials have focused on supporting the financial system in other ways, announcing measures to ease access to emergency credit for struggling financial companies.
How big is Lehman Brothers?
Founded in 1850 by three Jewish immigrants from Germany, Lehman Brothers has been a prominent investment bank in Wall Street for decades.
It operates at a wholesale level, dealing with governments, companies and other financial institutions, employing 25,000 people worldwide, including 5,000 in the UK.
Its core business includes buying and selling shares and fixed income assets, trading and research, investment banking, investment management and private equity.
As the crisis in financial markets has gathered momentum, it has seen its share price collapse from $82 to less than $4 - a fall of 95%.
Story from BBC NEWS:http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7615974.stm
Lehman Bros files for bankruptcy
Lehman Bros files for bankruptcy
The fourth-largest investment bank in the US, Lehman Brothers, has said it will file for bankruptcy protection, amid a growing global financial crisis.
Lehman had incurred losses of billions of dollars in the US mortgage market.
The move threatens to deal a further blow to the global financial system, as banks unwind their deals with Lehman.
Merrill Lynch, also stung by the credit crunch, has agreed to be taken over by Bank of America in a dramatic weekend of events for Wall Street.
Stock markets in Europe and Asia dropped sharply and the dollar tumbled against the euro and the yen as Lehman's failure raised fears about the strength of the global financial system.
The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence Robert Peston, BBC business editor
The FTSE 100 index of leading UK shares was down 160 points, almost 3%, at 5256.50 in early exchanges.
Wall Street is also expected to open lower in what is likely to be a tense day of trading.
The Bank of England and the European Central Bank said they were monitoring money markets and stood ready to intervene if necessary.
Talks collapse
The chance that Lehman Brothers could collapse increased sharply after the strongest potential buyers pulled out at the weekend.
Barclays and Bank of America had been in talks to rescue the bank but negotiations faltered when it became clear that the US Treasury was strongly opposed to using government money to help clinch a deal.
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Lehman Brothers employees leave their office with cardboard boxes Greg Wood, the BBC's North America business correspondent, said that police had cordoned off the bank's headquarters in New York and staff were leaving with cardboard boxes as onlookers gathered to watch the bank's demise.
"I think the whole history - 150 years of effort and hard work - that's the most saddening part for me," said one Lehman employee as she left the building.
The bank, which employs about 25,000 staff worldwide, including 5,000 in the UK, was founded in 1850 by three brothers.
'Extraordinary 24 hours'
Lehman Brothers said it intended to file for Chapter 11 bankruptcy protection, which allows a company time to reorganise and devise a plan to pay creditors over time.
FROM THE TODAY PROGRAMME
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It said that its broker-dealer division and asset management division Neuberger Berman Holdings would not be included in the filing.
The accounting firm PriceWaterhouseCoopers said the UK operations of Lehman Brothers have been placed under administration, and the business would be wound down in an orderly fashion.
Bank of America said it had agreed to buy investment bank Merrill Lynch for $50bn (£28bn), in a deal that will create the world's largest financial services company.
Three of the top five US investment banks have now fallen victim to the credit crunch. Lehman and Merrill join Bear Stearns, which was sold to JP Morgan for a knockdown price in March.
The BBC's business editor, Robert Peston, said that it had been Wall Street's most extraordinary 24 hours since the late 1920s.
He said that Merrill's sale was almost as shocking as Lehman's demise.
"The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence," he said.
Insurer in trouble
In addition to Lehman and Merrill Lynch, problems at AIG, once the world's largest insurer, are also mounting.
Reeling from losses on its exposure to real estate, AIG has sought $40bn from the Federal Reserve to shore up its finances, the New York Times has reported.
To help prevent panic on financial markets, the Federal Reserve said for the first time it will accept stocks owned by banks as collateral for short-term cash loans, broadening its emergency lending programme.
Also 10 of the world's biggest banks on Sunday agreed to establish a $70bn emergency fund, with any one of the banks able to able to tap up to a third of it should they face any liquidity problems.
Story from BBC NEWS:http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7615931.stm
The fourth-largest investment bank in the US, Lehman Brothers, has said it will file for bankruptcy protection, amid a growing global financial crisis.
Lehman had incurred losses of billions of dollars in the US mortgage market.
The move threatens to deal a further blow to the global financial system, as banks unwind their deals with Lehman.
Merrill Lynch, also stung by the credit crunch, has agreed to be taken over by Bank of America in a dramatic weekend of events for Wall Street.
Stock markets in Europe and Asia dropped sharply and the dollar tumbled against the euro and the yen as Lehman's failure raised fears about the strength of the global financial system.
The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence Robert Peston, BBC business editor
The FTSE 100 index of leading UK shares was down 160 points, almost 3%, at 5256.50 in early exchanges.
Wall Street is also expected to open lower in what is likely to be a tense day of trading.
The Bank of England and the European Central Bank said they were monitoring money markets and stood ready to intervene if necessary.
Talks collapse
The chance that Lehman Brothers could collapse increased sharply after the strongest potential buyers pulled out at the weekend.
Barclays and Bank of America had been in talks to rescue the bank but negotiations faltered when it became clear that the US Treasury was strongly opposed to using government money to help clinch a deal.
Please turn on JavaScript. Media requires JavaScript to play.
Lehman Brothers employees leave their office with cardboard boxes Greg Wood, the BBC's North America business correspondent, said that police had cordoned off the bank's headquarters in New York and staff were leaving with cardboard boxes as onlookers gathered to watch the bank's demise.
"I think the whole history - 150 years of effort and hard work - that's the most saddening part for me," said one Lehman employee as she left the building.
The bank, which employs about 25,000 staff worldwide, including 5,000 in the UK, was founded in 1850 by three brothers.
'Extraordinary 24 hours'
Lehman Brothers said it intended to file for Chapter 11 bankruptcy protection, which allows a company time to reorganise and devise a plan to pay creditors over time.
FROM THE TODAY PROGRAMME
Please turn on JavaScript. Media requires JavaScript to play.
It said that its broker-dealer division and asset management division Neuberger Berman Holdings would not be included in the filing.
The accounting firm PriceWaterhouseCoopers said the UK operations of Lehman Brothers have been placed under administration, and the business would be wound down in an orderly fashion.
Bank of America said it had agreed to buy investment bank Merrill Lynch for $50bn (£28bn), in a deal that will create the world's largest financial services company.
Three of the top five US investment banks have now fallen victim to the credit crunch. Lehman and Merrill join Bear Stearns, which was sold to JP Morgan for a knockdown price in March.
The BBC's business editor, Robert Peston, said that it had been Wall Street's most extraordinary 24 hours since the late 1920s.
He said that Merrill's sale was almost as shocking as Lehman's demise.
"The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence," he said.
Insurer in trouble
In addition to Lehman and Merrill Lynch, problems at AIG, once the world's largest insurer, are also mounting.
Reeling from losses on its exposure to real estate, AIG has sought $40bn from the Federal Reserve to shore up its finances, the New York Times has reported.
To help prevent panic on financial markets, the Federal Reserve said for the first time it will accept stocks owned by banks as collateral for short-term cash loans, broadening its emergency lending programme.
Also 10 of the world's biggest banks on Sunday agreed to establish a $70bn emergency fund, with any one of the banks able to able to tap up to a third of it should they face any liquidity problems.
Story from BBC NEWS:http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7615931.stm
Bank Of America 2 buy Merill for $50billion
Bank of America to buy Merrill for $50 billion
Mon Sep 15, 2008 5:29am EDT
By John Poirier and Elinor Comlay
WASHINGTON/NEW YORK (Reuters) - Bank of America Corp said it agreed to buy Merrill Lynch & Co Inc in an all-stock deal worth $50 billion, snagging the world's largest retail brokerage after one of the worst-ever weekends on Wall Street.
The deal came after tense negotiations over the fate of Lehman Brothers Holdings Inc, which triggered concern that market participants would lose faith in other investment banks. Lehman said early on Monday that it would file for Chapter 11 bankruptcy protection.
"It catapults Bank of America into positions of strength in three businesses where they were weak," said James Ellman, portfolio manager at hedge fund Seacliff Capital.
"Now Bank of America has one of the best and largest retail brokerages in the country, one of the top investment banks in the world, and a large stake in one of the best investment managers in the world," Ellman said.
Bank of America agreed to pay 0.8595 shares of Bank of America common stock for each Merrill Lynch share. The price is 1.8 times stated tangible book value.
The bank is buying about $44 billion of Merrill's common shares, as well as $6 billion of options, convertibles, and restricted stock units.
Bank of America said it expects to achieve $7 billion in pretax expense savings, fully realized by 2012, and expects the deal to be accretive to earnings by 2010. The transaction is expected to close in the first quarter of next year.
The price, which comes to about $29 per share, represents a 70 percent premium to Merrill's share price on Friday, although Merrill's shares were trading at $50 in May and over $90 at the beginning of January 2007.
The deal has been approved by directors of both companies. Three Merrill directors will join the Bank of America board.
Stuck with some of the same toxic debt -- much of it mortgage-related -- that torpedoed Lehman's balance sheet, Merrill has been hit hard by the credit crisis and has written down more than $40 billion over the last year.
Last month, Thain arranged to sell over $30 billion in repackaged debt securities to Dallas-based private equity firm Lone Star Funds for 22 cents on the dollar.
In spite of its exposures to complex debt securities, the bank had seen by some as undervalued, in part because of its massive brokerage business, which analysts have said is worth more than $25 billion. The brokerage is the largest in the world by assets under management and number of brokers.
Merrill also has a stake of about 45 percent in the profitable asset manager BlackRock Inc, worth more than $10 billion.
"It could be a powerful fit," said Rick Meckler, chief investment officer at LibertyView Capital Management in New York, before news of the deal emerged.
DUE DILIGENCE
Still, there are risks for BofA, which had little time to complete due diligence of Merrill's books, a particular concern given the complexity of the company's exposure to mortgage-related securities and other complex debt.
"While we view this clearly as a long-term positive for (Bank of America), the stock will likely not respond accordingly as investors near term will focus on greater systemic risk," Oppenheimer & Co analyst Meredith Whitney said in a report on Sunday.
With the brokerage and the BlackRock shares worth more than $35 billion combined, and Merrill's market capitalization at around $26 billion on Friday, investors had been ascribing a negative value to the investment bank, implying huge potential embedded losses.
But this is not the first time Bank of America has done a quick acquisition. In 2005, the bank bought credit card company MBNA after less than a week of due diligence, with Lewis saying the company was comfortable with the acquisition because it knew the people and business well.
Bank of America under Lewis has in fact become renowned for large acquisitions and it has spent over $100 billion since 2004 buying other companies.
Most recently it acquired troubled mortgage lender Countrywide Financial Corp and -- although many were skeptical about this purchase -- veteran analyst Dick Bove said last week the takeover could prove to be a master stroke by Lewis, since the government takeover of mortgage agencies Fannie Mae and Freddie Mac could fuel business for other lenders.
Bank of America was advised by JC Flowers & Co, Fox-Pitt Kelton Cochran Caronia Waller and Bank of America Securities. It was represented by Wachtell, Lipton, Rosen & Katz. Merrill Lynch was represented by Shearman & Sterling.
(Additional reporting by Paritosh Bansal and Dan Wilchins; Editing by Quentin Bryar)
© Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world.
Mon Sep 15, 2008 5:29am EDT
By John Poirier and Elinor Comlay
WASHINGTON/NEW YORK (Reuters) - Bank of America Corp said it agreed to buy Merrill Lynch & Co Inc in an all-stock deal worth $50 billion, snagging the world's largest retail brokerage after one of the worst-ever weekends on Wall Street.
The deal came after tense negotiations over the fate of Lehman Brothers Holdings Inc, which triggered concern that market participants would lose faith in other investment banks. Lehman said early on Monday that it would file for Chapter 11 bankruptcy protection.
"It catapults Bank of America into positions of strength in three businesses where they were weak," said James Ellman, portfolio manager at hedge fund Seacliff Capital.
"Now Bank of America has one of the best and largest retail brokerages in the country, one of the top investment banks in the world, and a large stake in one of the best investment managers in the world," Ellman said.
Bank of America agreed to pay 0.8595 shares of Bank of America common stock for each Merrill Lynch share. The price is 1.8 times stated tangible book value.
The bank is buying about $44 billion of Merrill's common shares, as well as $6 billion of options, convertibles, and restricted stock units.
Bank of America said it expects to achieve $7 billion in pretax expense savings, fully realized by 2012, and expects the deal to be accretive to earnings by 2010. The transaction is expected to close in the first quarter of next year.
The price, which comes to about $29 per share, represents a 70 percent premium to Merrill's share price on Friday, although Merrill's shares were trading at $50 in May and over $90 at the beginning of January 2007.
The deal has been approved by directors of both companies. Three Merrill directors will join the Bank of America board.
Stuck with some of the same toxic debt -- much of it mortgage-related -- that torpedoed Lehman's balance sheet, Merrill has been hit hard by the credit crisis and has written down more than $40 billion over the last year.
Last month, Thain arranged to sell over $30 billion in repackaged debt securities to Dallas-based private equity firm Lone Star Funds for 22 cents on the dollar.
In spite of its exposures to complex debt securities, the bank had seen by some as undervalued, in part because of its massive brokerage business, which analysts have said is worth more than $25 billion. The brokerage is the largest in the world by assets under management and number of brokers.
Merrill also has a stake of about 45 percent in the profitable asset manager BlackRock Inc, worth more than $10 billion.
"It could be a powerful fit," said Rick Meckler, chief investment officer at LibertyView Capital Management in New York, before news of the deal emerged.
DUE DILIGENCE
Still, there are risks for BofA, which had little time to complete due diligence of Merrill's books, a particular concern given the complexity of the company's exposure to mortgage-related securities and other complex debt.
"While we view this clearly as a long-term positive for (Bank of America), the stock will likely not respond accordingly as investors near term will focus on greater systemic risk," Oppenheimer & Co analyst Meredith Whitney said in a report on Sunday.
With the brokerage and the BlackRock shares worth more than $35 billion combined, and Merrill's market capitalization at around $26 billion on Friday, investors had been ascribing a negative value to the investment bank, implying huge potential embedded losses.
But this is not the first time Bank of America has done a quick acquisition. In 2005, the bank bought credit card company MBNA after less than a week of due diligence, with Lewis saying the company was comfortable with the acquisition because it knew the people and business well.
Bank of America under Lewis has in fact become renowned for large acquisitions and it has spent over $100 billion since 2004 buying other companies.
Most recently it acquired troubled mortgage lender Countrywide Financial Corp and -- although many were skeptical about this purchase -- veteran analyst Dick Bove said last week the takeover could prove to be a master stroke by Lewis, since the government takeover of mortgage agencies Fannie Mae and Freddie Mac could fuel business for other lenders.
Bank of America was advised by JC Flowers & Co, Fox-Pitt Kelton Cochran Caronia Waller and Bank of America Securities. It was represented by Wachtell, Lipton, Rosen & Katz. Merrill Lynch was represented by Shearman & Sterling.
(Additional reporting by Paritosh Bansal and Dan Wilchins; Editing by Quentin Bryar)
© Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world.
Selected News for Today
Crisis on Wall Street as Lehman Totters, Merrill Is Sold, AIG Seeks to Raise Cash
Fed Will Expand Its Lending Arsenal in a Bid to Calm Markets; Moves Cap a Momentous Weekend for American Finance
By CARRICK MOLLENKAMP, SUSANNE CRAIG, SERENA NG and AARON LUCCHETTISeptember 15, 2008 4:24 a.m.
NEW YORK -- The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. said it would file for bankruptcy protection, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp.
It was a gut-wrenching weekend for Wall Street, with Lehman Brothers headed toward possible liquidation, Merrill Lynch about to be taken over and AIG facing shareholder wrath. WSJ's Dennis Berman and Matthew Karnitschnig look at what's ahead.
The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers. Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. Barclays said Monday it pulled out of the potential deal after deciding it wasn't in the best interest of shareholders.
Late Sunday night, Lehman said it intends to file for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. Lehman said none of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts, Lehman said.
On Sunday night, Bank of America struck an all-stock deal to buy Merrill Lynch for $29 a share, or $50 billion. (See related article.)
Though it steered clear of a bailout, the Federal Reserve is expected to take new steps to stabilize the broader financial system. These steps, expected to be temporary, would make it easier for banks and securities firms to borrow from the central bank by using a wider range of collateral. Bankers say these financial institutions might need short-term funds as they unwind their many trading positions with Lehman. (See related article.)
JOIN A DISCUSSION
How long will it be before the financial sector is stabilized, and what will it take to help bring that about? How should investors respond in the meantime? Share your thoughts.COMPLETE COVERAGE
Read more about Wall Street in Crisis. Plus, read posts in Deal Journal, MarketBeat and Real Time Economics.
The Lehman board authorized the filing of the Chapter 11 petition in order to protect its assets and maximize value, the firm said. In conjunction with the filing, Lehman intends to file a variety of first-day motions that will allow it to continue to manage operations in the ordinary course. Those motions include requests to make wage and salary payments and continue other benefits to its employees.
Lehman said it is exploring the sale of its broker-dealer operations and, as previously announced, is in advanced discussions with a number of potential purchasers to sell its Investment Management Division. Lehman said it intends to pursue those discussions as well as a number of other strategic alternatives. Neuberger Berman LLC and Lehman Brothers Asset Management will continue to conduct business as usual and will not be subject to the bankruptcy case of the parent company, and its portfolio management, research and operating functions remain intact. In addition, fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and aren't subject to the claims of Lehman Brothers Holdings' creditors, Lehman said.
The damage on Wall Street is the latest consequence of a storm that began last year with the sharp decline in American housing prices and losses on loans and other assets tied to home values. Massive capital infusions have failed to stem write-offs and losses, and financial firms are running out of options to escape the damage.
Regulators and others were preparing for a hectic Monday. The New York Stock Exchange prepared contingency plans over the weekend to reassign the approximately 200 blue-chip stocks that Lehman's specialist unit trades, according to people familiar with the matter. If Lehman is forced into liquidation, the exchange will likely transfer the stocks to one or more of the remaining specialist firms, most likely using the same technology and staff that currently trade the stocks.
Dozens of Wall Street desks have trades with Lehman. As word spread that the Barclays deal was falling apart, worries that the company could be thrown into bankruptcy mounted, and traders labored to get out of those contracts.
At approximately 2:30 p.m., government officials hosted a call, and a trading session was opened to ease fears. One trader said it was agreed that other brokers would pick up contracts that trading desks have with Lehman. If Lehman does open on Monday, the deals struck on Sunday, often at a worse price, would be void. "It is utter chaos here," the trader said.
At many Wall Street firms, traders of credit-default swaps -- contracts that act as insurance against debt defaults -- were told to come to work immediately. Concerned investors were rushing to buy swaps tied to other brokerages and corporations, sending the cost of protection on investment banks such as Goldman Sachs and others sharply higher.
In a statement Sunday, the International Swaps and Derivatives Association, a trade group whose members include many large dealers, said a "netting trading session" took place between 2 p.m. and 6 p.m. on Sunday. The idea was to allow firms to try to unwind their derivatives transactions with Lehman by finding other parties to step into Lehman's shoes.
"The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy filing," it said. It added that trades conducted during this period "are contingent on a bankruptcy filing on or before 11:59 p.m. New York time" on Sunday. If no filing takes place, the trades will be canceled, ISDA said.
Some traders said it was difficult to find new counterparties for many of their outstanding trades with Lehman. The snags included different terms and maturity dates on derivatives contracts, and market prices changed rapidly Sunday afternoon. "People were screaming at each other over the phone, asking: How can this work?" one trader said.
William Gross, chief investment officer at bond-fund giant Pacific Investment Management Co., said very few Lehman trades were offset. "There's an immediate risk related to the unwind of these positions," he said.
Many Wall Street firms concluded that a liquidation of Lehman's assets likely would proceed in an orderly fashion, people familiar with the situation said. That means other firms could quickly buy real estate, securities and other investments, preventing the assets from flooding the market. Because of that, these people said, some participants in the New York Fed talks decided that liquidation was no worse an option than selling Lehman to a buyer such as Barclays.
"There will be an orderly wind down," said one banker involved in the matter. "This was the default option. It happens when you have no buyer."
The outside firms decided that instead of making guarantees for Barclays or some other purchaser of Lehman, they would prefer to pool their resources and buy the assets themselves, taking on the risks and carrying costs, along with the possibility of profiting down the road.
Those firms would likely then buy assets such as mortgage-backed securities, leveraged loans, private-equity positions and investments in real estate or hedge funds.
Roger Freeman, a nine-year Lehman employee who analyzes brokerage firms, spent the weekend gathering cellphone numbers and email addresses from colleagues who also are likely to lose their jobs. He plans to clean out his desk Monday morning. "We worked long hours here, we've made some of our best friends here. We're suddenly being ripped apart," he said. "It's just unbelievable."
--Jon Hilsenrath, Jeffrey McCracken and David Enrich contributed to this article.
Fed Will Expand Its Lending Arsenal in a Bid to Calm Markets; Moves Cap a Momentous Weekend for American Finance
By CARRICK MOLLENKAMP, SUSANNE CRAIG, SERENA NG and AARON LUCCHETTISeptember 15, 2008 4:24 a.m.
NEW YORK -- The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. said it would file for bankruptcy protection, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp.
It was a gut-wrenching weekend for Wall Street, with Lehman Brothers headed toward possible liquidation, Merrill Lynch about to be taken over and AIG facing shareholder wrath. WSJ's Dennis Berman and Matthew Karnitschnig look at what's ahead.
The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers. Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. Barclays said Monday it pulled out of the potential deal after deciding it wasn't in the best interest of shareholders.
Late Sunday night, Lehman said it intends to file for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. Lehman said none of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts, Lehman said.
On Sunday night, Bank of America struck an all-stock deal to buy Merrill Lynch for $29 a share, or $50 billion. (See related article.)
Though it steered clear of a bailout, the Federal Reserve is expected to take new steps to stabilize the broader financial system. These steps, expected to be temporary, would make it easier for banks and securities firms to borrow from the central bank by using a wider range of collateral. Bankers say these financial institutions might need short-term funds as they unwind their many trading positions with Lehman. (See related article.)
JOIN A DISCUSSION
How long will it be before the financial sector is stabilized, and what will it take to help bring that about? How should investors respond in the meantime? Share your thoughts.COMPLETE COVERAGE
Read more about Wall Street in Crisis. Plus, read posts in Deal Journal, MarketBeat and Real Time Economics.
The Lehman board authorized the filing of the Chapter 11 petition in order to protect its assets and maximize value, the firm said. In conjunction with the filing, Lehman intends to file a variety of first-day motions that will allow it to continue to manage operations in the ordinary course. Those motions include requests to make wage and salary payments and continue other benefits to its employees.
Lehman said it is exploring the sale of its broker-dealer operations and, as previously announced, is in advanced discussions with a number of potential purchasers to sell its Investment Management Division. Lehman said it intends to pursue those discussions as well as a number of other strategic alternatives. Neuberger Berman LLC and Lehman Brothers Asset Management will continue to conduct business as usual and will not be subject to the bankruptcy case of the parent company, and its portfolio management, research and operating functions remain intact. In addition, fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and aren't subject to the claims of Lehman Brothers Holdings' creditors, Lehman said.
The damage on Wall Street is the latest consequence of a storm that began last year with the sharp decline in American housing prices and losses on loans and other assets tied to home values. Massive capital infusions have failed to stem write-offs and losses, and financial firms are running out of options to escape the damage.
Regulators and others were preparing for a hectic Monday. The New York Stock Exchange prepared contingency plans over the weekend to reassign the approximately 200 blue-chip stocks that Lehman's specialist unit trades, according to people familiar with the matter. If Lehman is forced into liquidation, the exchange will likely transfer the stocks to one or more of the remaining specialist firms, most likely using the same technology and staff that currently trade the stocks.
Dozens of Wall Street desks have trades with Lehman. As word spread that the Barclays deal was falling apart, worries that the company could be thrown into bankruptcy mounted, and traders labored to get out of those contracts.
At approximately 2:30 p.m., government officials hosted a call, and a trading session was opened to ease fears. One trader said it was agreed that other brokers would pick up contracts that trading desks have with Lehman. If Lehman does open on Monday, the deals struck on Sunday, often at a worse price, would be void. "It is utter chaos here," the trader said.
At many Wall Street firms, traders of credit-default swaps -- contracts that act as insurance against debt defaults -- were told to come to work immediately. Concerned investors were rushing to buy swaps tied to other brokerages and corporations, sending the cost of protection on investment banks such as Goldman Sachs and others sharply higher.
In a statement Sunday, the International Swaps and Derivatives Association, a trade group whose members include many large dealers, said a "netting trading session" took place between 2 p.m. and 6 p.m. on Sunday. The idea was to allow firms to try to unwind their derivatives transactions with Lehman by finding other parties to step into Lehman's shoes.
"The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy filing," it said. It added that trades conducted during this period "are contingent on a bankruptcy filing on or before 11:59 p.m. New York time" on Sunday. If no filing takes place, the trades will be canceled, ISDA said.
Some traders said it was difficult to find new counterparties for many of their outstanding trades with Lehman. The snags included different terms and maturity dates on derivatives contracts, and market prices changed rapidly Sunday afternoon. "People were screaming at each other over the phone, asking: How can this work?" one trader said.
William Gross, chief investment officer at bond-fund giant Pacific Investment Management Co., said very few Lehman trades were offset. "There's an immediate risk related to the unwind of these positions," he said.
Many Wall Street firms concluded that a liquidation of Lehman's assets likely would proceed in an orderly fashion, people familiar with the situation said. That means other firms could quickly buy real estate, securities and other investments, preventing the assets from flooding the market. Because of that, these people said, some participants in the New York Fed talks decided that liquidation was no worse an option than selling Lehman to a buyer such as Barclays.
"There will be an orderly wind down," said one banker involved in the matter. "This was the default option. It happens when you have no buyer."
The outside firms decided that instead of making guarantees for Barclays or some other purchaser of Lehman, they would prefer to pool their resources and buy the assets themselves, taking on the risks and carrying costs, along with the possibility of profiting down the road.
Those firms would likely then buy assets such as mortgage-backed securities, leveraged loans, private-equity positions and investments in real estate or hedge funds.
Roger Freeman, a nine-year Lehman employee who analyzes brokerage firms, spent the weekend gathering cellphone numbers and email addresses from colleagues who also are likely to lose their jobs. He plans to clean out his desk Monday morning. "We worked long hours here, we've made some of our best friends here. We're suddenly being ripped apart," he said. "It's just unbelievable."
--Jon Hilsenrath, Jeffrey McCracken and David Enrich contributed to this article.
Sunday, September 14, 2008
Be on Top of The world
Salam.
We as Muslim cannot deny that the power of information in this world.With a great and vast information all a round the world we may connect those relationship in giving the best protection to our society.Thus start to read and be remember that "KNOWLEDGE IS CONNECTING THE DOTS BETWEEN EACH AND ANOTHER."
Tq Allah, my family and DR.ARIF..
We as Muslim cannot deny that the power of information in this world.With a great and vast information all a round the world we may connect those relationship in giving the best protection to our society.Thus start to read and be remember that "KNOWLEDGE IS CONNECTING THE DOTS BETWEEN EACH AND ANOTHER."
Tq Allah, my family and DR.ARIF..
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