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Another One Bites the Dust! Lehman Brothers, Merrill Lynch, Aig and Washington Mutual
What a mess.
Lehman Brothers filed for bankruptcy this weekend. Merrill Lynch was bought out by Bank of America. American International Group (AIG) is on the edge bankruptcy or being acquired for pennies on the dollar. Last week the federal government took over Fannie Mae and Freddie Mac.
The US government set a potentially ugly precedent of not letting financial companies fail when it guaranteed JP Morgan Chase’s takeover of Bear Stearns in March. This was reinforced with the takeover of the quasi-government agencies: Freddie Mac and Fannie Mae.
Rumors of Lehman Brothers demise started last week. The Government went into the weekend saying that it wouldn’t bail out Lehman. The Government put the burden of finding a solution on the financial sector. Several financial institutions were in the running, but it boiled down to Bank of America or nothing. The answer was nothing.
It was kind of strange: Bank of America started the weekend in talks to take over Lehman Brothers, but ended up walking away with Merrill Lynch by the end of the weekend. I guess they didn’t want any more subprime garbage after acquiring Countrywide.
The real test is seeing what happens with AIG. AIG currently is on the brink of being downgraded by Standard & Poors. This will cost AIG billions of dollars. They can avoid the downgrade by raising capital by either selling assets or getting more outside financing. Either prospect is painful. Though, selling some of their assets might help get them back to their core business of insurance.
The catch to AIG is how much money they need. They used to have a market capitalization of around $200 billion. At the end of the day on September 15th, their market capitalization was around $15 billion. They are looking for financing of $50 billion. Why would someone lend a company money for 3x their market value? Will they be too big to fail?
Check out 104Finance.com for more information about this crazy financial situation we seem to have gotten ourselves into.
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