Home > Economics, Future, Money, Organisations, USA > Sub-Prime – the Dominos are falling and …

Sub-Prime – the Dominos are falling and …

September 16, 2008 Leave a comment Go to comments

So now more large corporations are going to the wall – the effects of this worthless Sub Prime paper is now in full swing in the USA, as well as other banks and financial institutions around the world.

Lehman Brothers investment bank are seeking Bankruptcy protection, and as a result some 23,000 employees are out of work, and most of them will lose their homes, and their other assets as well, but there may be hope for Lehman brothers or at least parts of it as Treasury and Federal Reserve officials are working on a sale of Lehman Brothers Holdings Inc., the 158-year-old investment bank that reported a third-quarter loss of $3.9 billion. U.S. Treasury Secretary Henry Paulson, who lead a government takeover of the mortgage giants Fannie Mae and Freddie Mac last weekend, has said he’s reluctant to use Federal funds to rescue Lehman.

Greenspan said – ““What they are trying to do with Lehman is find a way in which there is no government money involved in this particular set of negotiations,’ –  “If they can’t, they have to make a very key decision as to whether they allow it to liquidate or support it,‘ he said, adding that he doesn’t know enough details to recommend the right move.

Another huge shakedown in the form of Merrill Lynch –  here from the press release on the Merryl Lynch website – here is the part thereof.. However in the new form as part of Bank of America, at the very least – it will remain viable part even after the sale at at a knock down – fire sale price – this really may look like the end, but its not – its only what is immediately visible.  Then of course will come the inevitable rationalisations of branches, staff, computer & IT and …..

Bank of America expects to achieve $7 billion in pre-tax expense savings, fully realized by 2012. The acquisition is expected to be adding to growth & earnings by 2010.

The transaction is expected to close in the first quarter of 2009. It has been approved by directors of both companies and is subject to shareholder votes at both companies and standard regulatory approvals.  The combined company would have leadership positions in retail brokerage and wealth management. By adding Merrill Lynch’s more than 16,000 financial advisers, Bank of America would have the largest brokerage in the world with more than 20,000 advisers and $2.5 trillion in client assets.

However did you note the part about they want to achieve $7 Billion in pre-tax expense saving .. more rationalisation, and more jobs lost .. another victim of business self regulation, greed and the Sub-Prime.

What caused the fall of Merrill Lynch – perhaps this list of the 101 dumbest moments:–    In the first quarter of 2007, thanks to its $1.3 billion purchase of First Franklin Financial, Merrill Lynch becomes the world’s top underwriter of sub-prime-mortgage-backed securities. Nonetheless, with the market in meltdown just a few months later, Merrill CFO Jeffrey Edwards (pictured) tells analysts that the firm’s sub-prime exposure is “limited, contained, and appropriately marked.” In October, Merrill announces a quarterly loss of $2.24 billion after $7.9 billion in sub-prime-related write-downs.

The next big problem area maybe in Insurance industry – and any other company that is directly involved with the finance markets, the stock markets, rating agencies, and more banks and of course their customers.  Others likely to be at risk in the very short term in the USA will be AIG (American Insurance) the worlds largest insurer and Internationally CBD – the German CommerzBank – which seems to be a well managed institution, which however did become involved with the Sub Prime – as well due to its recent purchase of the Dresdner Bank, an investment it made recently, though not yet finalised, will correct over time – with the proposed slashing of 9,000 jobs from the Investment Banking group Dresdner Kleinwort.

The flow on effect of this ever world wide tightening of confidence – and hence credit not only between banks  and other financial institutions – but between banks and their clients – do remember than clients come in all shapes and sizes – from citizens to corporations to Governments themselves.  I suppose Governments can always print more money – which of course isn’t too good for the value of the money itself and can be very detrimental when it comes to using our currency to buy other currencies – thereby affecting the balance of trade.

Throughout history, governments have tried to solve financial problems by simply printing more money, akin to what the USA is doing now in a small way (any thoughts as to why the US Dollar is at such a low level – still) . This can drive the value of money drastically downward, especially in modern markets where money is not backed by gold. Twice as many dollars in an economy makes those dollars worth half as much. So I would ask the Federal Reserve to perhaps call Greenspan – if you need any education as to the effect on money supply on inflation.  Greenspan does have some comments – here in a Bloomberg report – saying that he believed it to be a once in a 100 year event.

There are other flow on effects from the death or severe contraction of large corporations (1) What happens when all of those big tenants vanish from the building they occupy – obviously lenders will then get another round of failures on top of the failures of the financial institutions themselves as well as all of those former highly paid people from those expired organisations dumping their own real estate , cars, shares, securities on the market in bulk – what do you think this will do to the prices of these former assets – the golden rule – Scarcity has a direct relationship to value – if all of these assets become available at once – the prices they realise will be fire sale and hence we then lead onto the next chain – the financiers for these former employees.

Tomorrow is ‘D Day” for one of the two Monsters of the Merchant Banks that are left in New York – with the release of Morgan Stanley’s 3rd Quarter figures – it will give an indicator of whether the financial services sector will survive as we know it, in any shape to go forward.

Of course there are real hardship issues here – not everyone has been laying a golden egg – many were just getting by, month to month – as a result of this highly leveraged consumerist society – they will experience real hardship in the short term until they can be obtain employment.

I can only wish them all good luck for the future..

 

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