Lehman Brothers Fails; AIG On the Brink

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Investors didn't react favorably (obviously) to news out over the weekend that Lehman Brothers was going to be filing for bankruptcy. Not only that, but Merrill Lynch agreed to be bought out by Bank of America, and AIG is teetering on the brink themselves. The Merrill Lynch buyout was strictly a defensive move by the well-known and storied brokerage, and was done to prevent Merrill Lynch from suffering the same fate that Lehman Brothers suffered.

The markets reeled on the news, with the Dow falling over 500 points and the Nasdaq falling over 80 points. The closing bell on Monday likely minimized the damage suffered by the markets, as the indices looked like they were dropping off a cliff when the closing bell rang.

Lehman Brothers dropped 94% on Monday, and is now trading at a scant 21 cents per share. If you are a common stock holder in Lehman Brothers then I wouldn't expect to receive anything in any restructuring of the company. The common stock will very likely end up being completely worthless.

Bank of America dropped over 20% on the session to close at $26.55. Many feel as though Bank of America grossly overpaid for Merrill Lynch, and could have secured a much better deal had they waited a few more days. I am sure that Bank of America was "pushed" towards a deal by the government. A bankrupt Merrill Lynch would have created an even bigger financial tsunami.

Merrill Lynch, despite agreeing to a $44 billion dollar buyout from Bank of America (which works out to about $29 per share), only traded up a penny to close at $17.06 after hitting an intraday high of $22.68. Bank of America got whacked on Monday, and took Merrill Lynch down with it. Don't forget that this was an all-stock transaction, so the $29 per share value was not a guaranteed amount, but rather an estimated price based on Bank of America's closing value on Friday.

AIG continues to search for a financial lifeline and lost an additional 61% on Monday. AIG is the next company that is running the real risk of having to declare bankruptcy if they don't shore up their finances, and fast.

Other major institutions that are in real danger of imploding are: Washington Mutual and Wachovia. You need to keep an eye on these two as well.

What's next for the markets? Based on the action heading into the closing bell on Monday, I would expect a large gap-down on Tuesday morning. I would also bet that we get an emergency 50 basis point interest rate cut on Tuesday as well, and this likely won't be the last.
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Filed under: The Economic Meltdown |