About Lehman, AIG And Merrill Lynch

Also numbers are changing.  Last night the numbers being reported by the press were that Lehman (LEH) had $50bb in bad Real Estate assets. Now, suddenly a few are reporting $85bb. That makes all the difference in the world. No wonder they can’t get a deal through with their $30bb ‘bad bank’ idea.

This story is all about getting the assets off Lehman’s books so they don’t have devastating effects on everyone else’s books upon a 15 cent fire sale. But now the numbers have changed from 60 cents on the dollar ($50bb in assets @ $30bb purch price) to 35 cents on the dollar ($85bb @ $30bb purch price).

Why would these 10 banks spend $3bb that they don’t have when they still have a massive mark coming when the deal goes down at 35 cents? Why burn shareholder money in a barrel and allow a competitor to scoop up LEH and compete with you?  If I am GS, I am thinking, lets let Lehman go BK.  Even if my (GS) stock falls 30% I am still alive and over next 10 years I have one less competitor.

On the .Gov side, the poker game continues and .Gov is playing hard ball. Gov can’t play ball with a massive backing, because they have to keep their powder dry for WM (WM), MER (MER) and AIG (AIG).  Gov refunding time is upon us, which is why they are playing hard ball in the first place. If they back down, it could precipitate a Treasury run. They are screwed - we are all screwed. They are damned if they do, damned if they don’t here.

Oh ya, and I am not even factoring in Lehman owning 10% of all CDS counter party risk into the mix. This is going to be a fun next few hours.  I will keep you posted by adding to this post anything I hear.

Follow-up News:

1pm PST - BofA and Merrill in merger talks. This is good news.

3:30pm PST - SPZ open down 42 handles.

5pm PST - CNBC is on right now talking about sweeping changes on Wall Street and updated events surrounding all the troubled companies.

Notes below (will keep updating as events unfold). Hang on gang, this is getting interesting. AIG is the real threat here. Keep an eye out.

$50bb Collateralized Borrowing Pool of Funds: AP Report - Banks Will Pool Funds to Prop Troubled Companies.  A top banking official says US and foreign banks are planning major steps to inoculate the global financial system as a BK filing by Lehman appeared likely. The official said Sunday the banks would create a pool of $50bb to lend to troubled financial companies.

7pm PST Update on Collateralized Borrowing Pool - $70bb pool from 10 banks. No one bank can borrow more than a third. This is a ‘get ready for rally bad stuff to happen’ fund.

LEH: CNBC has a split screen up with with Lehman’s front door on half screen. Employees are streaming in empty handed and out with boxes in hand.

LEH: paper not good at TAF window any longer. I told you! CNBC has said for weeks that reduced borrowing at the Fed window by the investment banks is great because they don’t need the money. I have been screaming that ‘they don’t have the ‘investment grade’ assets to put up as collateral’ and its a bad thing.

MER:  CNBC says ‘Merrill likely to be purchased by BofA’.  They better be careful. Haven’t they learned their lesson yet.

5:30pm PST - Charley Gasparino is floating a rumor that Merrill is being bought by BofA for $29. 

5:40pm PST - Rumor is true. Merrill bought at $29 per share in stock. CNBS actually posed a great question - “if Merrill can command a premium then why sell?”.  Financials guru Michale C says “They can sell at a premium TO BAC …. they always pay too much (25% of CFC for $17 per share and $21bb for LaSalle just to name the most recent ones)”

David Faber on AIG: Trying to raise $40bb to avoid ratings downgrades.  If downgraded will have to put up a lot more collateral on CDS. They want to sell assets, raise new new capital and move capital from regulated insurance companies. AIG has liquidity. They need more liquidity or they will be downgraded. They are connected in deriv markets in all sorts of different ways and it would be a bad thing.

6:10pm PST WILD NEWS -AIG looking for a Fed bridge loan tonight for asset sales it will then undertake. They can move ahead to raise capital from private equity firms from KKR and TPG.  This is totally unprecedented.

Cramer comes on spewing: Said ‘when Bear fell it was a buying opportunity’. He said ‘if BAC buys MER’ he will buy the DOW down 250. If AIG raises $40bb, he will do the same. Bla bla bla. Cramer says ‘buy NASDAQ’ tomorrow. He said buy Pulte Homes. Oh my.

Bill Gross: He said the CDS side of the equation is scary. Expect extreme volatility in the CDS as everyone tries to get right side up again. Fed may not lower rates on Tuesday.

Harvey Pitt - Kalorama Partners: Classic run on the bank but the bank happens to be brokerages, insurance companies etc. The firms have to restructure. LEH had a lot of notice after Bear but nobody listened. Now they have to pay a large price.

Carlos Mendez: Absolute counter party risk here.  Major calls on capital from anyone trading with Lehman.  In their CDS unwind test runs this weekend, all scenarios surrounding Lehman were a total mess.  BAC buying MER means nothing to the market.

Maria Bartoromo - The US is keeping out Private Equity firms due to tighter regulations and she is speculating they will ease restrictions on private equity so they can jump in. Focus on the crisis at hand damnit Maria. Take off the pump hat for an hour.

Vince Farrell is on now: It’s PUMP TIME.  Merrill and BofA is a great deal and positive for the market. Every time you have had a run on the bank it is a buying opportunity. Screw him.

5:45pm PST MAJOR NEWS OUT - Fed will accept stocks, short-term notes and legal-sized copy paper at Discount Window.

How is putting the entire Fed’s remaining balance sheet at risk going to be viewed? Is it going to be a positive or a panic move? Why would they do this though?  Stocks and short-term notes are not the problem. They are more liquid than anything else. But overall, it is not about a liquidity issue it is about a capital issue. This makes no sense other than for a feel good move.

6:40pm PST  - BAC and MER deal FOUR MONTHS OUT! This is by no means a ‘done deal’ yet. Just like with CFC, the all-stock deal looked much different than at the beginning. Plus, BAC said ‘we have no intention of honoring all CFC debt’.  This was a Merrill bailout and nothing more.

7:20pm PST - Former Treasury Secretary Roger Altman was on and said ‘this is clearly a negative for the financial markets and not a positive or a neutral’. He said more but he talks really choppy and slow. But in a nutshell, the previous statement sums it up.

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