Sunday, September 14, 2008


Good evening folks!

Just a quick update tonight. There is much to digest tonight so I don't want to get ahead of myself.

Anyone wanna play the card game 52 pickup? This is what Wall St. is essentially doing tonight as it tries to clean up this disaster. I am afraid Humpty Dumpty just had a great fall and we all know how that ended.

Here is what we know.

WSJ just confirmed to CNBC that Bank of America has agreed to purchase of Merrill Lynch at $29/share. Lehman looks to be headed into some type of bankruptcy. The details on this are still not out yet. Here is the most recent Bloomberg update. Please note that according to the Wall St. Journal, the Merrill deal is done.

A great question raised tonight by the CNBC panel is why did Bank of America pay such a high price for Merrill? They refused to buy Lehman at $1 but then they turn around and cough up a $29/share offer to Merrill?

This makes no sense. You know both of their balance sheets are a mess. All of these banks had Level 3 assets that if stacked in a pile would be taller than the Empire State Building. I don't see how Goldman makes it out of this mess when its all said and done.

Bottom Line:

I need a lot of time to see how this all goes down. The futures are now down over 300 points on the DOW. I expect a drop of 3-5% in the stock markets tomorrow.

Folks, I am stunned at how fast all of this is happening. The ramifications in the CDS market are my biggest concern. This is why AIG went down the toilet on Friday. They were the big CDS insurer on Wall St. Their exposure is $500 billion to financial derivatives. They need capital and they need it fast.

Guys, if this triggers a major explosion in the derivatives market, the financial system might be toast. The pigmen really did a number on themselves with this crisis. The ball is starting to gain steam rolling downhill and I don't see how these pigs can stop it. This is what happens when you create financial crisis and then constantly get bailed out by the Fed.

You keep pushing and pushing until you go too far. This is why the line of "moral hazard" must not be crossed. We are in uncharted territory folks. I have no idea what happens from here. The one thing I am sure of is you will see total chaos in the markets this week.

Hunker down in your financial bunker and ride out the storm. I will have much more on this tomorrow as I try to get my hands around it.

Major intervention and reforms will be needed because they aren't going to be able to put Humpty Dumpty back together again.


growler said...


growler said...


Avl Guy said...

BofA, not JPMorgan, with regards to buying Merrill.
I reckon you caught that by now anyway.

Well Im going to sleep...I wonder how the CNBC gang will put a positive spin on this in the AM.
And how does Kudlow still yap about the strength of the markets and the sins of gov't involvement?

Cant believe Ben created more feeding holes at the gov't trough for 'equities' and other stuff.

johndaniels said...

I am noticing Bank of America is being very aggressive; now they control too much debt and have too much exposure to the market; and almost soley represents the future of the financla sector! Clearly they have behind the scenes government backing; which should REALLY raise flags, because that means WE as taxpayers are on the hook, right along with BAC. Scary. Bank of AMerica paying a huge premium for Merrill, and considering the price they paid for countrywide, makes me think they are short the dollar; or they are more concerned with acquisition of assets over capital preservation...again; not a good sign for the dollar. pre market down 270 putting DOW at 11,100 and change...this is a key support level; will be interesting I am hoping you guys stay on top of this ; there should be lots of data next week and i like looking in one place! good luck

Jeff said...

avl thanks for the catch..My mistake...changing as I speak...I am at a hotel and was rushed!

Jeff said...

John D

I agree with your BofA conclusion. I thought the Countrywide deal was a terrible deal for BofA.

My only conclusion was the Fed promised them some relief on the Countrywide "bubble debt".

My first thought is Bof A didn't want the Mighty "bloated pig" Merrill.

IMO, the pigmen all got together and forced this deal on BofA because they were one of the few that had the balance sheet to take the losses.

These big banks realize its better to take the losses on the books versus getting killed on counterparty losses.

Its a matter of picking your own poinon!

Jeff said...

Fleckenstein had a great quote this weekend. Check out his commentary:

"I believe we still see so much denial because of the following: The folks whose careers have spanned only the Greenspan era have developed the financial muscle memory that tells them that all crises are to be bought -- because that worked in the past as we built up to the housing bubble. These folks don't know how markets really work or how dire the current situation is.
Mr. Market, I believe, is about to demonstrate that the two decades when Greenspan ran the show taught too many people the wrong lesson. The country is going to spend a long time paying a big price for his (and their) mistakes."

Minton Mckarkquey said...

Growler, I'm speechless too. Jeff, I think this could be the big one this week. Holy sh*t.

johndaniels said...

BAC is scary. These are obviously overeducated fools that are speculating on a full recovery. Why would they pay a premium for an investment house, when people will have less money to invest? The business plan for MER is charge $125 bucks a trade for basically 0 investment advise; and "create" investment derivaties so watered down, there is virtually no real equity. Look at CFC. Probably more than 50% of their loans are 2004 and later: Where now the 20% fixed rate ones are under water enough to justify a "walk away"..i.e. a near worthless loan portfolio; and now BAC inherits the property taxes, HOA fees, utility assesments, etc all with a crawling forclosure rate. These guys may know banking, but don't know dick about investing. This is the new standard for American finance? sounds like one big coverup...

Jeff said...


Remember the guy from "Sanford & Son" always grabbing his heart and saying this was the big one when things didn't go his way?

He ended up dying from a heart attack later in real life. Maybe this its deja vu?

John Daniels

I can't see BaC's CEO being this stupid without a backstop from the Fed.

I feel like this whole meltdown is a playbook and they all know how this is going to go down.

Only the tinman from the wizard of oz would be buying a bunch of sh*t sandwiches like Kenny at BofA does.

I think we drop tomorrow but I think the Fed is in full sticksave mode tomorrow.

Who knows how the loonies in this market react to this. Tomorrow should be bloody but the Fed is going to try and plug the leaks.

I agree with Minton, I think by the end of the week we are in deep trouble.

johndaniels said...

I just have a problem with them not disclosing what EXACTLY the fed backing is for BAC. Aren't we the taxpayers responsible for it? This is all behind closed doors...its like two teenagers; one has daddy's wallet without him knowing it and buys his freind a porsche. What about AIG? 40 bill..I mean, the FED and bernake are sure generous with our money...

Avl Guy said...

I recall that BofA was placed in a 'win-win' situation with CFC thanks to tax law on 'using losses acquired from CFC', given BofA's unique tax situation. This gr8tly mitigated the CFC risks involved.
BAC trumpeted, on this mornings conf call on Bloomberg, Merrill's potential for growth & profits overseas. Also, can BofA soon sell the domestic Merrill's assets that fit least within their new strategy? Maybe this works for BofA for awhile.

More importantly, all these new 'temporary loosening' of collateral requirements for liquidity at the Fed feeding trough are changing the equations for 'survival'.
Hank & Ben have conjured up so much financial alchemy to re-write the 'Periodic Table of Finance' that much of our pre-2007 market/financial expertise & knowledge may be temporarily irrelevant in forecasting how the next shoes will drop and when they do so. An ability to manipulate tax laws is having a similar effect, e.g.: Britain reported that 1 major US investment bank’s UK subsidiary will not have to taxes for the next 70 years based on current UK tax laws on losses.

The shoes may still fall, just now harder to know when.