Stocks Fall as Big Insurer Gets a Lifeline
By MICHAEL M. GRYNBAUM
nytimes.com
( Man! I LOVE IT when "president Bush tries to calm nervous investors"! )
Nervous investors tried to make sense of a rapidly changing financial landscape on Monday as the State of New York offered American International Group a lifeline, the Bank of America began the task of assimilating Merrill Lynch and Lehman Brothers started its journey into bankruptcy.
In response, the Dow Jones industrial average was down more than 270 points at midday, following the major European stock exchanges lower in the first wave of investor reaction to some of the most dramatic developments in the history of high finance.
On Wall Street, the broader Standard & Poor’s 500-stock index was down 2.3 percent at midday. Benchmark indexes in London, Berlin and Paris were off about 4 percent.
New York State officials stepped in Monday to try and help the world’s largest insurance company, A.I.G., as it sought financial assistance in the face of a potential downgrade from credit ratings agencies.
Gov. David A. Paterson of New York said the state would allow A.I.G. to lend itself $20 billion to bolster its capital as it faces potentially disastrous credit downgrades.
Shares in A.I.G. tumbled as much as 50 percent on Monday, as investors grew concerned that the company lacked capital to withstand cuts to its debt rating.
A.I.G. approached the state for help, Mr. Paterson said, and state officials worked closely with the firm throughout the weekend. A.I.G. has sought a $40 billion bridge loan from the Federal Reserve as a lifeline, as the three-part rescue plan it had devised appeared to crumble, a person briefed on the matter said.
In Washington, President Bush tried to calm nervous investors.
“In the short run, adjustments in the financial markets can be painful both for the people concerned about their investments and for the employees of the affected firms,” Mr. Bush said at the White House after a meeting with President John Kufour of Ghana. “In the long run, I’m confident that our capital markets are flexible and resilient, and can deal with these adjustments.”
In New York, Kenneth D. Lewis, chairman and chief executive of Bank of America, explained Monday in a conference call why he was willing to pay more than $50 billion, or $29 a share, for Merrill Lynch, whose stock has been in free fall. Merrill’s stock was up 23 percent Monday, to $20.93, still significantly below the purchase price.
Mr. Lewis said that he did not want to risk losing the opportunity to buy the wealth management giant because of a discount bid.
“Merrill had the liquidity and capacity to see this through,” Mr. Lewis said.
Although Mr. Lewis said Monday that no decisions had been made about layoffs, thousands of people were expected to lose their jobs. One group that seemed relatively safe was Merrill’s 17,000 financial advisers, which Mr. Lewis called “the crown jewel of the company.” Bank of America may offer Merrill’s brokers a bonus to stay after the merger, he said.
But a white knight did not appear at Lehman Brothers over the weekend, and the investment bank began the task of trying to reorganize and sell assets under court protection.
The bankruptcy filing did not include the firm’s broker-dealer operations and other units, like its asset management division Neuberger Berman. Those businesses will continue to do business, although Lehman is expected to liquidate them.
In its court petition, Lehman said that as of May 31, it had assets of $639 billion and debt of $613 billion. It listed Citigroup among its biggest unsecured creditors, with about $138 billion in bonds as of July 2. The Bank of New York Mellon Corporation was listed as holding about $17 billion in debt.
As the elements continued to unfold Monday, traders on Wall Street tried to adjust.
On the floor of the New York Stock Exchange, James Maguire, a managing director at Christopher J. Forbes, a trading firm, said that traders had been shaken by Lehman’s collapse and Merrill’s sudden sale.
“There’s a lot of fear of the unknown,” Mr. Maguire said. “There’s a fear of more financial land mines.”
In the minutes leading up to the 9:30 a.m. opening bell, dozens of traders clustered around the posts where A.I.G. and Bank of America were bought and sold, shouting bids and offers as the specialists who oversee trading tried to determine the proper opening prices for the stocks.
“Sell a million-five,” one trader shouted. “A.I.G. six-and-a-half, seven,” another yelled. Incongruously, photographs of a smiling baby were taped to the flat-panel monitors on the outside of the A.I.G. post.
Within a few minutes, the trading in both stocks had steadied and the area around the posts was largely clear. While the Dow Jones industrial average was down almost 300 points, there were no signs of a cataclysmic sell-off, and Lawrence Liebowitz, the head of United States markets for the exchange, pronounced himself satisfied. “It feels like people are organized,” he said. “People are not panicking.”
Yields on Treasury notes plummeted as investors scrambled to hide their cash in ultra-safe government notes. The dollar also weakened against several foreign currencies.
In another surprise development, the price of crude oil dropped more than $7 a barrel in electronic trading, nearing the $94 mark, as investors appeared to bet that a global downturn would cause a sharp drop in demand for energy. Oil was trading around $96 a barrel as the futures pits opened in New York.
Monday’s sell-off, though widely predicted, came despite moves by central banks around the world to restore investor confidence by injecting enormous amounts of capital into the financial system. The European Central Bank distributed 30 billion euros to major banks; the Bank of England issued £5 billion, or about $9 billion, in loans.
The Federal Reserve said it would accept a broader array of collateral in exchange for large loans to securities firms. And a group of 10 banks that includes JPMorgan Chase, Goldman Sachs and Citigroup gathered a $70 billion fund to help ensure market liquidity.
The major stock markets in Japan, South Korea, Hong Kong and China were all closed for holidays on Monday, granting some reprieve to investors in those areas. But other Asian markets slid, with the benchmark Taiwan index down 4.1 percent and the BSE losing 3.6 percent in Mumbai.
Analysts interviewed on Monday morning stressed that the atmosphere stopped short of panic.
“Investors are wandering around in a daze,” Stephen Lewis, head of research at Monument Securities in London, said. “It’s not a panic by any means, but there is a sense that we’ll see a few more weekends like the last two and then we’re looking at a long, long convalescence.”
In the Lehman talks Sunday, the United States government was worried about the precedents that it had set in bailing out the investment bank Bear Stearns and the de facto takeover of the mortgage finance giants Fannie Mae and Freddie Mac the previous weekend. Washington wanted Wall Street to collectively take on the risk that Lehman’s assets were worth far less than the firm claimed.
Mr. Lewis of Monument Securities said the only parallel that he could remember was the banking crisis in Britain in the 1970s, which peaked around 1975, but was not fully resolved until about 1980.
Bond prices, meanwhile, rallied as investors sought the safer waters of fixed-income investments. Treasuries surged, sending two-year notes up the most since January. The yield on two-year notes dropped 37 basis points, to 1.8 percent. The 10-year German bund yield fell 19 basis points to 3.98 percent. Japanese government bonds did not trade.
In European equity markets, the main focus was on banks and insurers amid fears that they will face more write-downs and the possible need for government support.
“Confidence has really collapsed,” said Yann Azuelos, fund manager at Meeschaert, an asset manager in Paris. “With the rescue of Fannie and Freddie, we thought the worst had passed. Now we know it hasn’t.”
Reporting was contributed by David Stout in Washington, Keith Bradsher in Hong Kong, Carter Dougherty in Paris, Matthew Saltmarsh in Paris, Andrew Ross Sorkin in New York and Julia Werdigier in London.
Copyright 2008 The New York Times Company |
