The world financial system met with extreme turmoil Monday morning as Lehman Bros., one of Wall Street's best-established investment banks, began the day by filing for bankruptcy protection in federal court.
The latest victim of the ongoing liquidity crisis, Lehman failed to find a buyer of last resort to rescue its failing franchise. Shares fell to 21 cents at the close of the session. Lehman had traded as high as 60 in January of 2008.
Fast of the heels of that dour note, news that Bank of America (BAC) was in talks to buy out Merrill Lynch (MER) for $50 billion (a mammoth premium) and troubled insurer AIG (AIG) was seeking $20-40 billion in loans from the Federal Reserve, hit the street rapid fire. (Later in the day, NY Governor Patterson approved a deal which would allow the company to borrow funds from its subsidiaries, allowing more time to negotiate with the Fed or negotiate the sale of additional assets.)
Markets opened to the negative and soon encountered steep losses. By 10:00 am, the Dow was off by more than 300 points. By the end of the day, the blue chips had turned in one of their worst-performing sessions in recent memory.
Dow 10,917.51 -504.48; NASDAQ 2,179.91 -81.36; S&P 500 1,192.69 -59.01; NYSE Composite 7,681.25 -410.59
Indices in Asia were spared the downdraft, as the news came off the wires as those markets were closing or already closed. In Europe, however, the carnage was widespread, as markets from Great Britain to Spain to Germany all suffered losses of between 2 and 5%.
In US markets, the internals confirmed that the selling was broad-based, though led by financial stocks. Overall, declining issues commanded a nearly 10:1 advantage over winners, 5803-615. New lows dominated new highs by an even greater ratio, approaching 20:1, at 1062-55.
Rather than call the washout session a bottom, analysts were more or less holding their breath along with their tongues, in anticipation of even worse news that seems to follow every few days.
The NASDAQ fared best of the major indices. While falling more than 80 points it still finished above the March 10 low of 2169.34. The Dow, however, fell below the July 15 closing low of 10,962.54. The S&P 500 was in near-panic mode, crashing through its July 15 low of 1214.91.
The last time the S&P closed this low was on October 27, 2005, when it ended the session at 1178.90. Today's close on the Dow was its lowest since February 13, 2006 (10,892.32).
What's concerning to many is the new policy stance of the Federal Reserve, which chose not to fix a buyer to Lehman, like it did in its rescue of Bear Stearns. While the Fed and Treasury are strong proponents of the Merrill-Bank of America marriage, they allowed Lehman to fail and also don't seem committed to helping AIG with loan guarantees or any other action. AIG's condition is different, however, in that it is not in a liquidity squeeze caused by malinvestments, but in a position to be downgraded by ratings agencies, making it more difficult for the firm to raise cash.
Still, the Fed's inaction on Lehman clearly displays a shift in policy, to a more hands-off stance, placing individual companies in a more precarious position while the Fed seeks to find more systemic remedies.
In the commodities area, oil and energy futures took a beating, led by crude oil, which saw futures for November delivery fall to $95.69, off $5.56. Gold rebounded $22.50, to $787.00. Silver gained 34 cents to $11.14.
Trading volume on the major indices was brisk.
NYSE Volume 1,876,814,000
NASDAQ Volume 2,727,545,000
Monday, September 15, 2008
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