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Bank of America buys Merrill Lynch; AIG begs Fed for help


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Bank of America Will Buy Merrill to Gain Brokerage Customers

By David Mildenberg and Bradley Keoun

Sept. 15 (Bloomberg) -- Bank of America Corp. cemented its status as the largest U.S. consumer bank by agreeing to acquire Merrill Lynch & Co., the world's biggest brokerage firm, for about $50 billion.

The bank will swap 0.8595 shares of its stock for New York- based Merrill Lynch, according to a statement from Bank of America today. The bank pulled out of talks yesterday to acquire Lehman Brothers Holdings Inc., the beleaguered securities firm.

The sale would mean 94-year-old Merrill, led by John Thain and known for its familiar bull logo, won't become the next casualty of the global credit crisis, which pushed Lehman to the brink of failure. While Merrill has suffered almost $19 billion in net losses tied to mortgages, Bank of America would gain the firm's the 16,690-person staff of advisers managing about $1.6 trillion for retail customers.

``If Bank of America can put a fence around the bad assets, that retail distribution is a powerhouse,'' said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati, which manages $16.5 billion in assets. ``The Merrill Lynch combination makes more sense than a Lehman deal.''

Merrill Lynch is the second bargain picked up this year by Bank of America Chief Executive Officer Kenneth Lewis tied to the collapse of U.S. mortgage markets. Bank of America paid $2.5 billion in stock last July for Countrywide Financial Corp., making the Charlotte, North Carolina-based bank the nation's biggest home lender. Merrill Lynch has plunged more than 80 percent from its January 2007 high of $97.53.

Merrill's Value

Lewis, 61, has been CEO for seven years, a tenure that has included more than $100 billion in acquisitions, including FleetBoston Financial Corp. and credit-card issuer MBNA Corp.

In Merrill's case, he's buying assets worth more than $40 a share, according to a Sept. 12 Citigroup Inc. analysis. The wealth management unit alone is worth $16 a share, said the report by Prashant Bhatia.

Merrill also owns about half of BlackRock Inc., the New York-based money-management company that had a market value of $24 billion as of Sept. 12. The total value of the Bank of America bid includes stock options, restricted stock units and convertible securities, a person familiar with the deal said.

``The fact that the biggest brokerage would be bought by the biggest retail bank is certainly historic,'' said John Medlin Jr., 74, retired chief executive officer at Wachovia Corp. ``Bank of America decided they weren't going to take on the Lehman risk, but they concluded the risk wasn't as severe at Merrill Lynch.''


AIG Seeks $40 Billion Fed Bridge Loan, Times Says (Update1)

By Hugh Son

Sept. 14 (Bloomberg) -- American International Group Inc., the insurer struggling to avoid credit downgrades, is seeking a $40 billion bridge loan from the Federal Reserve as it tries to sell assets, the New York Times reported.

The insurer has turned down a private-equity investment because it would have meant handing over control of the company, the Wall Street Journal said on its Web site, citing unnamed people. AIG may get access to the Fed's borrowing window in an ``extreme liquidity scare,'' Citigroup Inc. analyst Joshua Shanker said in a Sept. 12 research note.

AIG Chief Executive Officer Robert Willumstad, 63, is under pressure to raise capital after three quarterly losses totaling $18.5 billion and a 79 percent stock slide this year. Investors are concerned the New York-based insurer can't raise enough cash to withstand coming writedowns from credit-default swaps, which are contracts AIG sold to protect fixed-income investors.

``The driving force in this is to raise capital to give them more of a cushion to stave off a downgrade,'' said Janet Tavakoli, president of Chicago-based Tavakoli Structured Finance.

Standard & Poor's said Sept. 12 it may downgrade AIG's credit ratings because the share declines may crimp the insurer's access to capital.

A ratings cut may have ``a material adverse effect on AIG's liquidity'' and trigger more than $13 billion in collateral calls from debt investors who bought the swaps, the insurer said in an Aug. 6 filing. AIG has already posted $16.5 billion in collateral through July 31. A downgrade could also set off early termination of swaps that may cause $4.6 billion in payments, AIG said.

`The Public Good'

``We would not be surprised to see the Federal Reserve open its borrowing window to AIG,'' Shanker said in a note to investors Sept. 12. ``The Fed could argue the action is for the public good as it protects the security of many housing loans.''

AIG, the largest U.S. insurer by assets, has units that originate, guarantee and invest in mortgages.

AIG spokesman Nicholas Ashooh and the Fed's Michelle Smith didn't immediately return phone calls seeking comment.

The Federal Reserve widened the collateral it accepts for loans to Wall Street bond dealers as the financial industry braced for a Lehman Brothers Holdings Inc. bankruptcy filing.

``The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets,'' Fed Chairman Ben S. Bernanke said in a statement released in Washington today.

J.C. Flowers

The insurer was in discussions with buyout firms including KKR & Co. LP and J.C. Flowers & Co. to raise $20 billion in capital, said people familiar with the situation. The private equity firms met with AIG executives today in New York, said one of the people, who declined to be named because the talks were private. AIG is said to be working with advisers JPMorgan Chase & Co., Citigroup Inc. and Blackstone Group LP.

J.C. Flowers had offered $8 billion for a stake in the insurer that would have given the firm an option to buy the rest of AIG, the Times said on its Web site, citing an unidentified person.

The insurer may also seek $20 billion through asset sales, said a person familiar with AIG's planning.

American General Finance, AIG's consumer lender, could fetch more than $6 billion if the unit sold for twice its book value. AIG Investments could sell for more than $3 billion if it sold for 2.5 percent of clients' assets under management. The company's stake in reinsurer Transatlantic Holdings Inc. is worth about $2.2 billion, based on the Sept. 12 share price.

Bank of America Corp. analyst Alain Karaoglan said Willumstad should reconsider the decision to keep its aircraft- leasing unit, which could sell for $7 billion to $14 billion.

Dinallo, Paterson

New York Governor David Paterson and Insurance Superintendent Eric Dinallo have been ``very, very closely involved,'' in AIG's planning, said David Neustadt, a spokesman for Dinallo. ``We've spent the last two days at AIG headquarters.''

AIG's former CEO and Chairman Maurice ``Hank'' Greenberg, who controls the largest stake in the insurer, wasn't involved in the company's planning this weekend and has ``repeatedly offered'' to assist the firm, said spokesman Glen Rochkind.

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AIG wants $40B from Fed; Market Cap is $32B

This post is an update to AIG Struggling To Stay Alive, Begs Fed For Cash. We now have the number: A.I.G. Seeks $40 Billion in Fed Aid to Survive.


AIG's Market Cap is only $32.6 Billion. Barring some miracle, AIG's cap will be worth far less than that at the open. $20 billion would not surprise me, especially since it is holding much of the same garbage Lehman will be forced to dump. AIG should not have turned down the private equity opportunity it did earlier today. The Fed should not provide a penny.

I suspect the ratings agencies will be asked to not downgrade AIG. I also suspect the rating agencies will honor the request citing unfair stress or some other nonsense. The hope will be what it always is: to buy time.

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I do blame Bush for this one (Congress 2nd).

In 2002 when he came out and said we are GOING to up housing for minorities for 5million people as this is unfair. We are going to get rid of the 20% up front as that is holding too many "families" back?

There was a reason there was the cash up front and the 3months worth of pay stubs and bank statements and a credit check: It worked.

Sounds like Star Wars:

1. Create a problem

2. Watch it happen

3. Swoop in and save the day

4. Own more power over everything.

5. Mission Accomplished.

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United Socialist States of America... those people arguing against the Fed sound pretty smart to be me now...


Last time I checked, B of A is a private company...one that's bought some decent assets on the cheap. I already have some, but I'm strongly considering backing up the truck because once all this shakes out, I think they're going to make $$$ hand over fist.

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Why the socialist comments?

There are no bail outs here.

It's a possibility. The Fed pushed the sale of BSC to allow it to happen. The effectively took over FNM and FRE (both trading at under a dollar).

If the bank lobbyists can push this through, then it's a distinct possibility.

Glass-Steagall Act of 1933 was put in place to protect investors.

You allow lending institutions to also do investment banking, and you put individual lenders at risk. The firm takes big hits from derivatives, etc, and suddenly the money in the bank is at risk. Keep them separate.

Gramm-Leach-Bliley Act was one of the worst mistakes the US govt has ever made.

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It's a possibility. The Fed pushed the sale of BSC to allow it to happen. The effectively took over FNM and FRE (both trading at under a dollar).

The Bear Sterns bailout was misguided. I think it showed that either the Treasury didn't understand the true depth of the financial crisis or didn't want to. They should have been allowed to fail.

The GSE's needed to be protected, no matter how painful.

I'll go one record now as saying there will be no more bailouts of private companies. The government and the taxpayers can't afford it. Literally.

As far as those banking lobbyists go...they better investigate other employment opportunites. They are quickly running out of available clients.

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I don't really understand all this market stuff so..

Someone please explain what this means. CNN is making it sound like some kind of doomsday thing.

I'll try from what little I know. (Hopefully, I don't sound too stupid)

A lot of people (the investment banks) made bets on the rising housing market. This made them a lot of money. When the subprime housing market started to collapse, a lot of those bets turned ****ty. The problem is the bettors borrowed money to make the bets and they don't have enough cash on hand to pay off the bets.They try to sell their assets (bonds, stocks) to raise money to pay off the debts, but it isn't enough. The bettors have to declare bankruptcy or ask the govt for help.

What makes this really bad is that the bettors also made bets with each other about the housing market. When some of the bettors declare bankruptcy (and ensuring they won't have to pay off all their bets), the other bettors (who made bets with them) get scared, since they aren't going to get their winnings. And they borrowed money, too. They start selling assets to raise money, people who bet with them start to get worried, rinse, repeat, etc.

Think of it as a chain reaction that will only stop when it reaches the people who made mostly good bets.

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The rest of them, well, risk managment was supposed to be their job, not ours.

It's a bit of a catch 22. Both sides seem to be correct- you are right of course, but what's the alternative? Watch our credit markets dry up?

So we'll be right, and we'll all be homeless. Or they'll be wrong, but the economy won't **** the bed.

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It's a bit of a catch 22. Both sides seem to be correct- you are right of course, but what's the alternative? Watch our credit markets dry up?

So we'll be right, and we'll all be homeless. Or they'll be wrong, but the economy won't **** the bed.

Let them collapse. The actual assets will remain, will be sold off to actual banks that act like banks rather than casino gamblers, and will retain whatever value they really had.

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New York Governor Says AIG Can Access $20 Billion (Update1)

By Hugh Son and Andrew Frye

Sept. 15 (Bloomberg) -- American International Group Inc., the largest U.S. insurer by assets, has been given special permission to access $20 billion of capital in its subsidiaries to free up liquidity, New York Governor David Paterson said.

The move ``is not a government bailout,'' Paterson said today at a New York City press conference. The arrangement allows AIG to make a bridge loan to itself, and the New York- based insurer remains ``extraordinarily solvent,'' he said.

AIG may need to raise $20 billion in capital and sell $20 billion of assets to ease a cash crunch brought on by the collapse of U.S. mortgage markets, people familiar with insurer's plans said. Prospects dimmed today when Lehman Brothers Holdings Inc. went bankrupt after failing to find new funds or a buyer. Bank of America Corp. Chief Executive Kenneth Lewis said today AIG's failure would be a ``much bigger problem'' than Lehman's demise.

AIG has a ``liquidity problem'' and will be able to use assets held by units as collateral for cash to run the ``day to day operations'' of the insurer, Paterson said. ``We have seen some of the companies that serve as the bedrock of our financial system unraveling before our eyes,'' Paterson said.

AIG plunged as much as 71 percent in New York trading. The stock was down 50 percent to $6.05 a share as of 12:30 p.m. in New York Stock Exchange composite trading after Paterson's statement.

Eric Dinallo, the New York State insurance superintendent, has become the lead regulator charged with finding a solution to AIG's financial crunch, according to two people familiar with the situation. The people declined to be identified because talks between Dinallo and AIG are confidential.

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Let them collapse. The actual assets will remain, will be sold off to actual banks that act like banks rather than casino gamblers, and will retain whatever value they really had.

I think you underestimate the role that confidence plays in the health of the credit markets

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I think you underestimate the role that confidence plays in the health of the credit markets

Not at all, actually. But I don't think that overall market confidence can be regained by bailing out a few multimillionaires at the top of the food chain. That is a road that has no end, and leads to the same bad behavior that got us into this mess.

Now if you find it necessary to do a government TAKEOVER in order to stabilize a market, then I might be with you. I am not with you if you are, in essence, passing the risk ob bad lending along to the taxpayer while leaving the profits in the hands of the private entity and its stockholders.

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