News & Current Affairs

September 18, 2008

Central banks release more funds

Central banks release more funds

Dollar bills

The extra funds are aimed at easing banking sector woes

Global central banks are pumping billions of dollars of extra funds into money markets in a co-ordinated move to lift the amount of credit available.

The move is the fourth such joint effort since December last year. It will see the US Federal Reserve inject a further $180bn (£99bn).

The Bank of England is releasing $40bn, while the European Central Bank is to provide $55bn.

The Bank of Japan and Swiss National Bank have announced similar moves.

‘Appropriate steps’

“These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets,” said the Bank of England.

“The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.”

It does help to release some of those immediate tensions that have been building up in the money market
Ian Stannard, currency strategist, BNP Paribas

The central banks of South Korea, India, Canada and Australia have also released extra funds.

The co-ordinated move comes after four days of almost unprecedented turmoil in the global financial industry.

Firstly, US giant Lehman Brothers filed for bankruptcy protection, while compatriot Merrill Lynch lost its independence in a rescue takeover by Bank of America.

The US government has also had to bail-out insurance giant AIG, while in the UK, thousands of jobs are predicted to go at banking group HBOS following its sale to rival Lloyds TSB.

Major problem

Analysts said the latest move by the central banks should help to ease immediate fears.

“Obviously it does not tackle the underlying root causes of the problem, but it does help to release some of those immediate tensions that have been building up in the money market,” said Ian Stannard, senior currency strategist at BNP Paribas.

Koichi Haji, chief economist at NLI Research in Tokyo, said the co-ordinated move “shows how serious the problem has become”.

“I think the root cause was letting Lehman fail,” he said.

“That made investors reluctant to supply funds to their counterparts, particularly to the smaller banks.”

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September 15, 2008

Lehman set to go into insolvency

Lehman set to go into insolvency

Graph

Preparations are being made for Lehman Brothers, the fourth-largest investment bank in the US, to file for bankruptcy.

The two strongest potential buyers appear to have pulled out of talks to rescue Lehman – the latest victim of the American credit crisis.

If no new financing comes before Wall Street opens, it will have to seek “Chapter 11” bankruptcy protection.

This could result in a severe shock to the global financial system, as banks unwind their complex deals with Lehman.

Late on Sunday the US central bank, the Federal Reserve, announced new moves to ease access to emergency credit for struggling financial companies.

The Fed said the step – which broadens the types of securities financial institutions can use to obtain emergency loans – was designed to mitigate the potential risks and disruptions to markets.

In a related move, a consortium of 10 investment banks announced a $70bn (£39bn) loan program that troubled financial companies can use to help ease the credit shortage.

The banks – Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS – each agreed to provide $7bn (£4bn) to the pool.

On Monday, Asian stock markets fell amid concerns over the fate of Lehman Brothers.

Singapore stocks dropped 2.26% in morning trading and shares in Taiwan fell 1.83%.

Markets in Tokyo, Hong Kong, Shanghai and Seoul were closed for public holidays.

Lehman employs about 25,000 worldwide, including 5,000 in the UK.

Accountancy firm PWC has already been lined up to run the British operations of Lehman should the firm go into administration.

BBC business editor Robert Peston says UK bank Barclays’ decision to walk away from a Lehman deal was a huge setback for the effort to rescue the Lehman.

Barclays terminated the negotiations because it was unable to obtain guarantees in relation to financial commitments faced by Lehman when markets open on Monday.

Bad bank, good bank

The rescue effort for Lehman was being co-ordinated by the US Treasury and the New York Federal Reserve.

No other large firm should buy Lehman whole – its toxic real estate and securities are too difficult to value
Peter Morici
University of Maryland

The US government had hoped to arrange a bailout under which other US investment banks would finance a “bad bank” that would hold the most “toxic” investments of Lehman in the property and mortgage market.

The “good bank” or rest of the firm, including its investment and wealth management arms, would then be sold to another financial institution, for example Bank of America or the UK’s Barclays.

Although such a deal would have cost the other investment banks millions, it might have restored confidence in the sector and avoided a sharp drop in the share price of all banks.

However, it appears that this plan is falling apart.

“The only thing that can prevent Lehman collapsing would be a huge injection of taxpayers’ money,” a banker close to the talks told the BBC, but added that US Treasury Secretary “Hank Paulson has made it clear he doesn’t want to do that”.

Hard choices

Bank of America, meanwhile, is said to be unconvinced that buying Lehman would be in the interest of its shareholders.

Instead, according to a report in the New York Times, Bank of America is in “advanced talks” to buy investment bank Merrill Lynch for more than $38bn.

HAVE YOUR SAY

It’s amazing that companies which charge high interest to cover risk still need to be bailed out by the taxpayer.

Jack, Canada

Like other US investment banks Merrill has suffered losses of tens of billions of dollars in the subprime crisis, and has seen its share price plummet during recent months.

“No other large firm should buy Lehman whole – its toxic real estate and securities are too difficult to value,” said Peter Morici of the business school of the University of Maryland.

Lehman is up for sale after it reported a $3.9bn (£2.2bn) quarterly loss last week amid concerns over its long term financial viability.

The firm’s share price has plummeted as fears over its future have mounted.

Former Federal Reserve boss Alan Greenspan said the US government faced “very difficult decisions” over Lehman if it could not secure a rescue deal that did not involve public funds.

Yet Mr Greenspan said it would be “unsustainable” for the government to bail out every US bank that got itself into difficulty.

Predicting that Lehman would not be the last to require rescuing, Mr Greenspan added that this would not necessarily pose a problem.

“The ordinary course of financial change has winners and losers,” he said.

September 14, 2008

Talks over sale of Lehman resume

Talks over sale of Lehman resume

Lehman Brothers headquarters

Lehman is the fourth largest US investment bank

Negotiations have restarted to find a buyer for troubled US investment bank Lehman Brothers, before a Sunday evening deadline.

Bank of America and UK lender Barclays are said to be the main candidates to buy all or part of the company.

Lehman is up for sale after it reported a $3.9bn (£2.2bn) quarterly loss last week amid concerns over its long term financial viability.

The firm’s share price has plummeted as fears over its future have mounted.

‘Rescue package’

The talks to sell Lehman are being led by senior officials from the US Treasury Department and the Federal Reserve.

Graph

It is understood that the US government wishes to arrange a bailout package under which other US investment banks – such as Citigroup, JPMorgan Chase, Morgan Stanley and Goldman Sachs – would contribute funds to a rescue deal which would see Lehman’s balance sheet cleaned up before its sale.

Although this is expected to cost the banks many millions, the alternative would likely be a sharp fall in their share prices if Lehman was to fail.

A number of sources report that US Treasury Secretary Henry Paulson is determined that no tax payers’ money will be used to help Lehman.

‘Difficult decision’

Former Federal Reserve boss Alan Greenspan said the US government faces “very difficult decisions” over Lehman if it cannot secure a rescue deal that does not involve public funds.

” “They [will then] have to make a very difficult decision as to whether or not they allow it to liquidate or they support it,” he said.

Yet Mr Greenspan said it would be “unsustainable” for the government to bail-out every US bank that got itself into difficulty.

Predicting that Lehman would not be the last to require rescuing, Mr Greenspan added that this would not necessarily pose a problem.

“The ordinary course of financial change has winners and losers,” he said.

Bad mortgage woes

Lehman could be sold off as one company, or else broken up into parts and sold separately.

While the firm got itself into financial difficulty due to extensive bad mortgage debts, its fund management business is in relatively good shape, analysts say.

Neither Bank of America or Barclays have made any comment.

Lehman’s shares lost 80% of their value last week, and its quarterly loss was the largest in its history.

The firm is the fourth-largest US investment bank.

Concerns over the fate of Lehman follow the bail-out last weekend of mortgage giants Freddie Mac and Fannie Mae.

The lenders were thrown into financial difficulty after the collapse of the US sub-prime mortgage market.

September 10, 2008

Lehman reports third quarter loss

Lehman reports third quarter loss

Lehman Brothers office

Lehman has suffered heavy losses from the credit crunch

Troubled US bank Lehman Brothers has reported a third quarter net loss of $3.9bn as it unveils radical restructuring plans.

The losses were at the top end of analysts’ expectations.

The bank’s shares on Tuesday plunged 45% on fears about the state of its financial health.

Korea Development Bank (KDB) has said talks with Lehman Brothers have ended for now with regard to possible investment in the US bank.

KDB said in a statement: “We are announcing that we ended talks at this point in time because of a disagreement over conditions of a transaction and considering domestic and foreign financial market conditions.”

State-run KDB said the decision came because of disagreement over terms and current financial market conditions.

Lehman, the fourth-largest US investment bank, had hoped to secure a deal with the Korean fund before announcing its third-quarter earnings.

A Wall Street Journal report said Lehman might be considering selling UK property assets to BlackRock.

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