America's presidential race
The Palin effect
John McCain has wiped out Barack Obama's lead in the polls
BOUNCES are, by definition, temporary. Nearly a fortnight has passed since the end of the Republican convention and it is clear that it, and the Democratic get-together beforehand, have produced more than just a bounce. The conventions, and especially John McCain’s choice of Sarah Palin, have changed the course of the presidential race. On Monday September 15th both candidates sought to make tough statements on the demise of Lehman Brothers and the turmoil on Wall Street. And both attempted to score points off the other over the strength of those responses.
Even battling for small victories is important at this stage of the race. Before the conventions, Barack Obama enjoyed modest, but enduring, poll leads for weeks on end. Just after, Mr McCain suddenly shot to big leads in many polls himself. Now, public opinion shows that the race is probably tied or that Mr McCain has a small lead. The electoral college is of course more important. But here, too, the dynamics seem to be changing.
A big reason for Mr McCain’s boost seems to be Mrs Palin. She is both a staunch Christian conservative and a western governor. This has helped Mr McCain in the territorial battle. When Mr Obama was riding high, he confidently put resources into states that Democrats had disdained, especially the interior West and the South. Polls provided him with good reason for doing so, showing a race that was surprisingly close in unlikely states such as Montana, North Dakota, North Carolina and Georgia. But Mrs Palin’s selection has brought the Christian wing of his party, formerly sceptical, not only into line but enthusiastically so. Mr Obama is scaling back some of his more ambitious efforts, including pulling money and staff from Georgia (to put them in North Carolina, where he has a slightly better chance).
Other aspects of public opinion have changed too. A post-convention poll shows the two candidates nearly tied in perceptions of who would change Washington. Independents are moving towards Mr McCain despite Mr Obama’s strong advocacy of “change” in his campaign. The “enthusiasm” gap is closing, too: before, many voters told pollsters that they would vote for Mr McCain, but not happily. Now, many more are pleased with their pick. Again, Mrs Palin's elevation has much to do with this. At the Republican convention in St Paul, she generated such enthusiasm that there was jocular talk of flipping the ticket to put her at the top and Mr McCain in the vice-presidential slot.
Mr McCain has not taken control of the race, by any means. But having solidified support in previously wobbly states, it means he can concentrate more closely on a handful of swing states that Mr Obama must win himself. Once again, Ohio is pivotal, along with Pennsylvania and New Hampshire. Mr Obama also has a shot in Virginia and Colorado, traditional Republican territory. If he wins these states, he will probably win the election. If Mr McCain simply holds the states that George Bush won in 2004, naturally he wins. And Mr McCain thinks he also might snatch Michigan from the Democrats.
There is concern, but not panic, on the Democratic side. On Monday, both Mr Obama and his running mate, Joe Biden, sharpened their attacks. And they had good news to back them up: in August, Mr Obama once again smashed the monthly fundraising record for a presidential candidate, hauling in $66m. His press team is responding quickly and furiously to attacks from Mr McCain. One last week was particularly scurrilous: a television advertisement saying Mr Obama wanted kindergartens to have sex education. In fact, Mr Obama supported a bill that would include teaching designed to prevent child sex abuse.
Mr McCain has also been caught telling some straightforward fibs, for example that Mrs Palin, as governor, had “never” sought federal earmark money for her state—her request per head for Alaska was the biggest in the country. He and Mrs Palin continue to insist that she killed an infamous “bridge to nowhere” project in Alaska, even though every journalist in America now knows she did so only after supporting it, and only after it became a political albatross. Mr McCain has good reason to worry about his reputation for straight-talk, the strongest part of his political brand.
Commentary by Amity Shlaes
Sept. 16 (Bloomberg) -- Paulson. Merrill Lynch. Lehman. Bernanke. Names are what investors start talking about at moments like this. Names, the faith is, will rescue Wall Street and by extension the U.S. economy. When a market crash is big enough, people are too panicked to think about the technicalities of reform. They think about the names they are losing and the names who, they hope, will save the day.Names certainly have their uses in tense moments like this one. But only rules can bring the markets back in the longer run.
Consider the analogy most mentioned as markets take in Treasury Secretary Henry Paulson's decision to cut off Lehman Brothers Holdings Inc.: the Panic of 1907. Then a name, J.P. Morgan, pulled fellow bankers and the Treasury together, putting forward a plan to supply cash so banks wouldn't fail.
The Lehman of the day was Knickerbocker Trust. The Dow Jones Industrial Average lost about half its value, and Knickerbocker Trust faded. But the Wall Streeters succeeded. Men, it was said, had saved the Street.
But what made World War I and the 1920s more manageable was the existence of new institutions, not men. The Federal Reserve Act became law in 1913. The Fed's initial structure was imperfect, a fact that would become more than apparent in the early 1930s. But the Fed did help stabilize the economy in the critical intervening decade and a half since 1913.
Then new names could rise to take the place of the old in the U.S. economy. Among the most important of these was Henry Ford.
Heroic Roles
Today, too, men have played heroic roles. Paulson will go down in history as the Treasury secretary who could say ``no.''
But maybe it was too many heroes on the stage that got us to this point. Former Federal Reserve Chairman Alan Greenspan assumed the rank of deity in the last decade of his tenure. In hindsight, his task would have been simpler and more transparent had he not been required to advance the Fed's two conflicting mandates: keeping employment high and inflation low.
Another set of big names, Moody's Investors Service and Standard & Poor's, were at the heart of the buddy-buddy system that led to problematic credit ratings.
And while Paulson stood firm with Lehman, he has courted conflict by formatting Treasury's takeover of Fannie Mae and Freddie Mac as a conservatorship, a legal structure to keep the businesses open.
Three Rules
Conservatorship, as Peter Wallison of the American Enterprise Institute has pointed out, suggests a postponement of the reckoning of Fannie's and Freddie's value. Had Paulson insisted on a receivership instead, the shock of Fannie's and Freddie's takeover by the government might have been greater at first. As markets have since shown, even conservatorship didn't provide stability.
At least three rules-based reforms cry out for implementation:
First, no more bailouts. Otherwise, it is already clear, the auto companies will be next. The airlines are also in line.
Heck, you can even give this reform a name: The Lehman Rule -- and then hope that the Treasury abides by it. One reason the Dow drooped during Paulson's press briefing yesterday was that he seemed to be indicating he might break the rule soon.
Second, clean up the rating system so that numbers speak something closer to the truth.
Death of Banker
Third, make the U.S. more competitive by lowering corporate taxes and other levies so foreign firms will want to fill our new vacuum. The worst thing about John McCain's new ``crisis'' advertisement is that it suggests a strong man -- and not a strong country -- is the answer. Here President George W. Bush's response, that he had faith in our economy, was more useful.
Back in the 1990s, when life had a much different texture, the financial historian Ron Chernow published a book called ``The Death of the Banker.'' His thesis was that market securitization had replaced the need for the individual relationship with one's trusted adviser at the desk.
There will be some now who call for the return of the banker. Sure, we need heroes at this hour. But it's probably best to keep that old fellow in the morgue. Better rules will lay the quickest path to recovery, and keep markets alive.
Sept. 16 (Bloomberg) -- Central banks from Tokyo to New York injected more than $200 billion of cash into the financial system in a bid to calm markets roiled by the demise of Lehman Brothers Holdings Inc. and crisis at American International Group Inc.
The U.S. Federal Reserve added $50 billion in temporary reserves to the banking system, while the European Central Bank awarded 70 billion euros ($99.8 billion) in a one-day money- market auction, more than double yesterday's amount. The Bank of Japan added a total of 2.5 trillion yen ($24 billion) and the Bank of England pumped in 20 billion pounds ($36 billion).
Stocks dropped around the world and bonds surged for a second day today after the collapse of Lehman and concern about AIG's survival prompted traders to flee from private assets to government debt. The Fed yesterday pumped $70 billion into the banking system, the most since the September 2001 terrorist attacks, and may cut its benchmark lending rate today.
``Central banks have to show they are ready to take action to ensure stability,'' said Thomas Lam, an economist at United Overseas Bank Ltd. in Singapore. ``Precautionary steps are high on their list to prevent any significant impact and support their markets.''
`Chain Reaction'
Money-market rates may rise further on speculation American International Group Inc. will fail to raise enough cash to stay afloat. The cost of borrowing in dollars overnight more than doubled to 6.44 percent today, its biggest jump, according to the British Bankers' Association. The so-called Libor OIS spread, which measures the availability of funds in the market, widened 11 basis points to 116 basis points, the most since at least December 2001.
``The authorities are afraid of a chain reaction and a further tightening of financial conditions, which would ultimately have a negative impact on the economy,'' said Tomoko Fujii, head of economics and strategy at Bank of America N.A. in Tokyo. ``They have no choice but to try to calm the markets.''
China lowered its interest rate for the first time in six years late yesterday and may do so again to protect growth. While the Fed's policy-setting Open Market Committee hasn't signaled a rate cut and few economists predict one, futures traders put the odds of a reduction at 100 percent, up from 12 percent at the end of last week.
The Fed added $50 billion to the banking system today when it arranged overnight repurchase agreements, or repos, after adding $70 billion in reserves yesterday, the most since the September 2001 terrorist attacks, to bring borrowing costs down after the Lehman bankruptcy triggered a hoarding of cash.
Overbidding
The increase in Japanese funds was the first since June 30 and the biggest since March 31, when the central bank added 3 trillion yen. Japanese bonds jumped, sending the yield on the benchmark 10-year bond to its biggest drop in five years on concern the credit crisis will worsen. Unlike its counterparts in Europe, the Bank of Japan didn't act yesterday because its markets were closed for a holiday.
The Bank of England said today financial institutions bid for almost three times as much money as it was offering. It loaned 5 billion pounds for three days yesterday.
The ECB, which yesterday awarded 30 billion euros for one day, said there were 56 bids at its auction today totaling 102.48 billion euros. In its regular offering of seven-day funds, the ECB said 533 banks bid for a total of 328.7 billion euros, the most since December. It allocated 150 billion euros.
The Frankfurt-based ECB pledged yesterday to ``contribute to orderly conditions'' as needed.
Australia, Switzerland
Among the other central banks, the Reserve Bank of Australia injected A$1.848 billion ($1.5 billion) into the financial system, adding to yesterday's $2.1 billion. The Swiss National Bank offered overnight funds at 1.90 percent, the same rate as yesterday when it released about 8 billion francs ($7.2 billion) into its market.
The People's Bank of China reduced the one-year lending rate to 7.20 percent from 7.47 percent, effective today. It lowered the reserve-requirement ratio for smaller banks to 16.5 percent from 17.5 percent. Taiwan's government instructed its four major funds and state-owned banks to buy shares to help reverse the stock market's slump. The index closed 4.9 percent lower today in Taipei.
Taiwan's central bank pumped $3.59 billion into the foreign-currency interbank market today, the monetary authority said.
Since the credit crisis began in August 2007, major central banks outside the U.S. have lacked the Fed's scope to lower interest rates, preferring instead to fight market tensions with tools that boost liquidity while keeping monetary policy focused on curbing inflation.
U.K. Inflation
Bank of England Governor Mervyn King said in a letter to Chancellor Alistair Darling today that he expects U.K. inflation will stay ``markedly'' above its target. Inflation in the 15- nation euro area eased for the first time in four months in August, yet at 3.8 percent remained almost double the ECB's 2 percent limit, a report showed today.
Economists at Morgan Stanley said central banks may start to weigh rate cuts if financial markets become disorderly. ``Central banks may want to counter the implied tightening of financial conditions and cut rates to stabilize confidence and prevent a negative feedback loop between falling asset prices and the real economy,'' the economists said in a report yesterday.
Sept. 16 (Bloomberg) -- In 1999, Kim Jung Yul sat at a table negotiating the sale of Korea First Bank to San Francisco-based Newbridge Capital LLC as it sought cash to stay afloat during the Asian financial crisis. Nine years later, he's scouting for a Korean buyer for a U.S. bank.
``I was determined to squeeze one more dollar out of them,'' said Kim, recalling four months of talks in Seoul as the state- run company he worked for sold its controlling stake. ``Now, it's U.S. institutions that desperately need capital.''
Kim's new role, working as a consultant for a bank he declines to identify, underscores the resurgence of the financial industry in a nation that a decade ago was bailed out by the International Monetary Fund. As banking writedowns from the implosion of the U.S. mortgage market swelled past $510 billion, Merrill Lynch & Co. has received cash from South Korean investors and Lehman Brothers Holdings Inc. held unsuccessful talks about selling a stake to state-owned Korea Development Bank.
Korean investors are seeking to use cash and expertise amassed as they emerged from the country's debt crisis to hunt for bargains among U.S. banks. Even so, they're encountering resistance from Wall Street firms unwilling, like Kim in 1999, to sell out too cheaply.
KDB's talks with New York-based Lehman stalled last week because of disagreements over price, as did Korea Asset Management Corp.'s bid to buy bad loans from Merrill.
Lehman yesterday filed for Chapter 11 bankruptcy protection after failing to find a buyer. Bank of America Corp., the biggest U.S. consumer bank, agreed to acquire Merrill Lynch & Co., the third-biggest U.S. securities firm by market value, for about $50 billion in stock.
`Buyer's Market'
``The tables have turned, and U.S. banks have to realize that,'' said Lee Chol Hwi, chief executive officer of state-run Korea Asset Management Corp., known as Kamco, who was trying to buy $200 million of nonperforming loans from Merrill. ``It's practically a buyer's market there.''
Kamco, which helped liquidate distressed assets in South Korea after the 1997 to 1998 financial crisis, is seeking to buy as much as 1 trillion won ($904 million) of bad loans in the U.S. CEO Lee says there are plenty of U.S. companies seeking Korean money. Fund managers, companies and even state governors in the U.S. have requested a few minutes of his time during a trip he's planning there later this month, Lee said.
``That was unthinkable in the past,'' he said.
Banking Overhaul
South Korea's economy shrank 6.9 percent in 1998, during the worst recession since the Korean War ended in 1953, prompting citizens to turn over $2.2 billion of gold to the treasury as the crisis pushed the country to the brink of a sovereign default.
During the banking overhaul that followed, the government allowed more than 630 financial companies to fail and sold two of the biggest lenders to overseas investors. Korea also began building its foreign exchange holdings to prevent another crisis. Its foreign currency reserves swelled from $8.9 billion at the end of 1997 to $243.2 billion on Aug. 31, the sixth-largest in the world, as exports of ships, cars and electronic goods rose.
``Korea's financial industry has made remarkable progress over the past 10 years,'' said Chung Duck Koo, who led the South Korean delegation to talks with the IMF in late 1997, resulting in a $57 billion bailout. Today's credit market turmoil ``sets the stage for Korean financial firms to go global.''
Expansion Plans
Min Euoo Sung, the former Lehman executive who took the helm at Korea Development Bank in June, said last week that he plans to make it Asia's third-largest bank within five years. The government plans to sell its 100 percent share in the lender by 2012, with an initial public offering planned next year.
KDB's talks with Lehman started in July and collapsed on Sept. 10, Min told reporters today. The Korean bank sought to buy a controlling interest for a third the price Lehman was offering, with the investment to be made in late February, 2009, he said.
``I am certain Lehman wouldn't have been pushed to bankruptcy had the deal gone through,'' Min said. ``It would have been a win-win situation.''
South Korean firms have invested about $720 million in securities linked to Lehman, the country's financial regulator said in a statement released yesterday.
South Korea flexed its financial muscles in January when Korea Investment Corp., the $30 billion sovereign wealth fund known as KIC, invested $2 billion in New York-based Merrill. Hana Bank, Korea's fourth-biggest, bought a $50 million stake in Merrill in February.
Merrill plunged more than 60 percent in the year to Sept. 12 in New York Stock Exchange composite trading. Bank of America will pay $29 a share in stock, 70 percent more than the Sept. 12 closing price, for Merrill.
Regional Challenge
Chin Young Wook, KIC's chief executive officer, said July 29 the fund will approach future U.S. deals ``carefully.''
KIC's investment in Wall Street is smaller than Singapore's Temasek Holdings Pte, which invested more than $5 billion in Merrill, and China Investment Corp., which put $8 billion into Morgan Stanley and Blackstone Group LP during the past year. Morgan Stanley is the second-largest U.S. securities firm and Blackstone manages the biggest leveraged buyout fund. Both are based in New York.
``Korea faces challenges from other players in the region like Temasek who have much more expertise in making such cross- border investments,'' says Kim Ja Bonn, a researcher at the Korea Institute of Finance in Seoul. ``It's important to seize a chance when it comes, while accurately assessing the deal.''
Stuttering Economy
Jun Kwang Woo, chairman of the Financial Services Commission, has cautioned Korean firms about the risks of buying U.S. banks twice in the past month.
The regulator's warning comes as Korea's economy stutters. Inflation is at a 10-year high and the won has slumped 19 percent this year against the dollar, making it the worst-performing Asian currency.
That hasn't damped enthusiasm among South Korean investors, said Kim, 51, who started DW Consulting in 2004 and advised Seoul-based LIG Insurance Co. on the sale of its life insurance affiliate to Seoul-based Woori Finance Holdings Co. and London- based Aviva Plc, the U.K.'s biggest insurer, earlier this year.
``This is the chance of a lifetime for Korean companies to enter the U.S. market,'' said Kim, who was an official at state- run Korea Deposit Insurance Corp. when it sold a controlling stake in Korea First Bank to Newbridge. The buyout firm made a $1 billion profit selling its interest to London-based Standard Chartered Plc in 2005.
``We were naive back then,'' Kim said. ``We paid a high price to learn from the crisis, and it's time to put what we've learned to use.''
Sept. 16 (Bloomberg) -- Republican presidential nominee John McCain called for a commission to study the crisis in U.S. financial markets like the one that investigated the Sept. 11 attacks and said the government shouldn't rescue insurer American International Group Inc.
``We need to set up a 9/11 Commission in order to get to the bottom of this and get it fixed and act to clean up this corruption,'' McCain said in an interview on CBS's ``Early Show.''
In a series of six satellite interviews from Miami this morning with TV talk shows, McCain previewed the themes he will sound at rallies in Tampa, Florida, and Youngstown, Ohio, today.
The spreading market turmoil is taking center stage in the campaign as AIG, the biggest U.S. insurer by assets, is seeking capital to stay afloat, Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection and Bank of America, the biggest U.S. consumer bank, took over Merrill Lynch & Co.
The Arizona senator said on NBC's ``Today'' show that taxpayers should not be ``on the hook'' for AIG, which may be on the verge of collapse. He praised Treasury Secretary Henry Paulson for denying requests for a bailout, saying Paulson ``has been correct'' in asserting taxpayers aren't responsible for business failures.
Assessing the Economy
McCain economic adviser Doug Holtz-Eakin said separately that the candidate is sticking to his assertion that parts of the economy are sound. Democratic candidate Barack Obama has derided McCain's repeated statements that the fundamentals of the economy are strong.
``You shouldn't run for president by running from everything in sight and trying to scare people,'' Holtz-Eakin told reporters in Miami.
AIG fell 61 percent in New York trading after its credit ratings were cut in the latest tremor to shake the global financial industry. The New York-based insurer is seeking as much as $75 billion in loans.
``There are great efforts being made to try to raise sufficient capital to keep AIG in business,'' McCain said in an interview with CNBC. Taxpayers shouldn't be held responsible for the bad performance of U.S. institutions and ``the moral-hazard issue is something that we have to take head-on,'' he said.
The idea of moral hazard is that bailouts encourage additional risk taking. It has been applied particularly to the insurance industry where coverage against a loss might increase risky behavior.
Closer Regulation
The Republican nominee and Obama, an Illinois senator, have been calling for more regulation as the financial crisis spreads.
The government must make a commitment to the American people that ``we will fix this and it will never happen again,'' McCain, 72, said today in his TV interviews.
Regulatory agencies that were designed in the 1930s should be consolidated to improve transparency and regulation of markets in a ``global, instantaneous economy,'' he said.
``There is a risk of overregulation and overreacting,'' McCain added. ``Congress has a tendency to do that, but to say this is just a blip on the radar -- this is serious. This isn't just going to cost jobs on Wall Street; this is going to cost jobs all over America.''
Sept. 16 (Bloomberg) -- The Wall Street convulsions that took down two of the largest investment banks in 24 hours threaten to make it harder for consumers and companies to borrow, push unemployment higher and put pressure on the Federal Reserve to consider an interest-rate cut.
The Federal Open Market Committee is meeting in Washington today amid a crisis atmosphere triggered by the collapse of Lehman Brothers Holdings Inc. with $613 billion of debt. While policy makers haven't signaled a cut and few economists predict one today, futures traders put the odds of a reduction at 98 percent, up from 12 percent at the end of last week.
``The turn of events over the weekend is going to make things more difficult,'' said Dan North, chief economist of credit insurer Euler Hermes, a unit of Allianz SE, in Owings Mills, Maryland. ``The Fed has made a lot of credit available, but no one wants to use it because there's still fear that whoever you lend it to is going to go bankrupt.''
By pushing up the price of money, the meltdown may further depress consumer spending that was propped up last quarter by tax rebates. That would leave the economy, which some economists say is already in recession, increasingly dependent on exports as the jobless rate climbs and industrial production contracts.
The cost of borrowing in dollars overnight more than doubled as banks hoarded cash amid speculation more financial institutions will fail. The overnight dollar rate soared 333 basis points to 6.44 percent today, its biggest jump, according to the British Bankers' Association.
Traders Anticipate Reversal
``Until the financial sector sorts itself out the economy is never going to resume normal growth,'' said Ken Rogoff, former chief economist at the International Monetary Fund and now a Harvard University professor.
The FOMC will keep its benchmark rate at 2 percent for a third straight meeting, according to 100 of 105 economists in a Bloomberg News survey. Traders, by contrast, are increasingly convinced that the Fed will lower rates, a reversal from last month, when officials ``generally'' agreed the next move would be an increase, minutes of the gathering showed.
Policy makers cut rates seven times from September 2007, a month after the credit crisis began, through April. They suspended the easing as oil prices surged, increasing expectations inflation would accelerate. The FOMC began its meeting this morning and is scheduled to announce its decision at about 2:15 p.m. in Washington.
Hoarding Cash
``It is more likely they will move in October if things don't improve,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. ``Mortgages and bank loans are going to be more difficult to get. The ability of anybody to make a loan and securitize it is going to be more difficult. It is going to be a challenge.''
Yesterday, the federal funds rate soared as high as 6 percent, triple the Fed's target, as banks hoarded cash. That spurred the Fed to pump $70 billion into money markets through repurchase operations, the most since September 2001.
Premiums on investment-grade U.S. corporate bonds climbed. The extra yield investors demand to buy such bonds instead of Treasuries with a comparable maturity soared to 3.80 percentage points, the highest since Merrill Lynch began keeping the data in 1996, from 3.44 percentage points on Sept. 12.
``Certainly there will be an increase in credit costs, manifested in rising credit spreads, that will contribute to the slowdown,'' said Mark Gertler, a New York University economist and research co-author with Bernanke.
`Surprised' at Markets
Should Chairman Ben S. Bernanke and his colleagues on the FOMC forego a rate decrease today, they may note in their statement that risks to financial stability have increased, while those of inflation have waned. That may offer a signal that officials are prepared to cut if needed to help the economy.
``I am surprised that the market has been pricing in such a high possibility of a rate cut,'' said former St. Louis Fed President William Poole in an interview with Bloomberg Television. ``If the Fed responds by cutting rates, it would be suggesting to the market that it believes turmoil is likely to continue and there must be much deeper repercussions.''
Credit was tightening before the events over the weekend. The Fed last month said more banks stiffened loan terms for consumers and businesses since April as delinquencies climbed.
Most ``domestic institutions reported having tightened their lending standards and terms on all major loan categories over the previous three months,'' the Fed said in its quarterly Senior Loan Officer Survey.
How much of an impact the crisis has may depend on banks' ability to keep credit flowing.
Banks Drop
National City Corp., Fifth Third Bancorp and Sovereign Bancorp Inc. fell in New York trading yesterday on concern that regional banks already facing losses tied to subprime mortgages are vulnerable to losses from Lehman or will pay more to borrow because of its failure.
The U.S.'s slide may also have an impact on other nations starting to falter. Japan and the 15-nation euro area contracted in the second quarter, while the European Commission says Spain and the U.K. are already in recession.
``It shortens the odds for a deeper global economic downturn,'' said Thomas Mayer, chief European economist at Deutsche Bank AG in London. ``The storm has emanated from the U.S. but'' it will ``weigh on the world economy everywhere.''
Sept. 16 (Bloomberg) -- Barclays Plc, the U.K.'s third- biggest bank, is in talks to buy assets from bankrupt Lehman Brothers Holdings Inc. two days after abandoning plans to acquire the entire securities firm.
Barclays is close to a bid for Lehman's broker-dealer unit to increase its U.S. securities revenue, three people familiar with the situation said. The London-based bank would take over licenses, buildings and as many as 10,000 people who trade and underwrite securities and advise on acquisitions. Barclays will pay about $2 billion for the business, the Wall Street Journal reported, citing unidentified sources.
Lehman is selling off pieces of itself, including the brokerage and asset-management units, that weren't included yesterday when the holding company filed the biggest Chapter 11 bankruptcy in history. Barclays President Robert Diamond said last month he wants the bank to take market share from Wall Street firms weakened by the credit crunch and break into the ``top tier'' of U.S. securities firms.
``If they can pick up the assets at attractive prices, they are worth considering,'' said Alex Potter, a London-based analyst at Collins Stewart, who has a ``sell'' rating on the stock.
Barclays was down 10 percent at 284 pence as of 2:10 p.m. in London, valuing the bank at 23.2 billion pounds ($4.2 billion). That compared with a 2.3 percent drop in the eight-member FTSE 350 Banks Index.
Not Interested
There is no assurance that discussions with Lehman will lead to an agreement, Barclays said in a statement. It is not interested in Lehman's other units, the person familiar said.
Lehman is in discussions to sell its investment-management unit to private-equity bidders including Bain Capital LLC, Clayton Dubilier & Rice Inc. and Hellman & Friedman LLC, according to four people familiar with the negotiations. Lehman is proceeding with an auction announced last week as part of Chief Executive Officer Richard Fuld's failed plan to save the 158-year-old firm.
Diamond was in New York last weekend as Lehman met with Wall Street executives to discuss a rescue plan. Lehman needed a bailout after Korea Development Bank pulled out of a plan to provide new capital and Lehman shares lost most of their value.
Barclays declined to bid for all of Lehman after three days of emergency negotiations involving the U.S. Treasury and Federal Reserve, Barclays spokesman Leigh Bruce said Sept. 14. Barclays couldn't get guarantees from the government to mitigate what it called Lehman's ``open-ended'' trading obligations.
Strong Position
Lehman was forced into bankruptcy after both Barclays and Bank of America Corp. walked away. Barclays may now try to buy assets without taking on liabilities.
``Clearly Barclays's negotiating position is strong, which suggests a value-creating deal can be done,'' said JPMorgan Cazenove Ltd. analysts in an e-mail note to clients today. ``Investors will want reassurance on the impact on Barclays' capital,'' said the analysts, who rate Barclays ``neutral.''
Barclays's so-called core equity Tier 1 capital ratio, a closely followed measure of a bank's ability to absorb losses and writedowns, rose to about 5.8 percent from 5.1 percent after it raised 4.5 billion pounds in a share sale in June. Barclays's ratio lags behind U.K. peers including HBOS Plc and Royal Bank of Scotland Group Plc.
CEO John Varley, 52, said in June that Barclays would use half the proceeds for growth including acquisitions. Barclays sold shares to sovereign funds in Qatar, Singapore and China.
Troubled Assets
Barclays Capital, the bank's London-based securities arm, has 16,000 employees and contributes about 16 percent of Barclays's earnings, down from 39 percent a year ago. First-half pretax profit slumped 69 percent to 524 million pounds after the unit wrote down 2.8 billion pounds of subprime and Alt-A mortgages and other assets damaged by the credit turmoil.
Barclays's highest priority is to sell or liquidate troubled assets, Diamond said Aug. 7.
Lehman ranked No. 7 in global equity underwriter this year, according to data compiled by Bloomberg. Barclays, which wasn't listed among the top 25 on the list, could also use Lehman to increase its share of bond underwriting in the U.S. and add mergers and acquisitions advice worldwide.
Sept. 16 (Bloomberg) -- The Federal Reserve added $50 billion in temporary reserves to the banking system, pushing down the rate for overnight loans between banks to spur lending and ease a crisis of confidence in financial markets.
The fed funds rate declined to 2 percent, after opening at 3.75 percent, according to ICAP Plc, the world's largest inter- dealer broker. The Fed added $70 billion in cash yesterday, the most since the September 2001 terrorist attacks, to bring borrowing costs down after the bankruptcy of Lehman Brothers Holdings Inc. triggered a hoarding of cash.
Central banks from Tokyo to Frankfurt also injected more than $160 billion into their financial systems today in a bid to calm markets. Banks' demand for cash rose after American International Group Inc. had its credit ratings cut by Standard & Poor's and Moody's Investors Service late yesterday, threatening efforts to raise funds to keep the company afloat.
``The safety net that the Fed has been throwing out there is pretty wide,'' said George Goncalves, chief Treasury and agency debt strategist in New York at Morgan Stanley, the second- biggest U.S. securities firm.
Funds traded to as high as 7 percent yesterday. That margin was the greatest at least since Bloomberg began tracking the data in 1998. The rate closed at 0.25 percent yesterday, and reached as low as 0.01 percent.
Rate Cut Speculation
The Fed will lower its target rate by at lease a quarter- percentage point to 1.75 percent, futures trading showed. Contracts on the Chicago Board of Trade put the odds on a cut at 98 percent, compared with 2 percent a week ago. Of the 105 economists surveyed by Bloomberg News, 100 expect the Fed to leave rates unchanged today.
The European Central Bank awarded 70 billion euros ($99.8 billion) in a one-day money-market auction today. The Bank of Japan added a total of 2.5 trillion yen ($24 billion) and the Bank of England pumped in 20 billion pounds ($36 billion). Counterparts in Australia and Switzerland took similar steps.
The Fed added the reserves through overnight repurchase, or repo, agreements. They don't signal a policy shift.
In repos, the Fed buys U.S. Treasury, mortgage-backed and so-called agency debt from its 19 primary dealers for a set period, temporarily raising the amount of money available in the banking system. At maturity, the securities are returned to the dealers, and the cash to the Fed.
The Fed will also auction $20 billion in 28-day repos for mortgage-backed securities for one-day forward delivery at 9:30 a.m. in New York.
The forward transactions, done each Tuesday, are part of the Fed's so-called Single-Tranche OMO Program. Under the program announced March 7, the Fed agreed to make up to $100 billion available through weekly 28-day repurchase agreements.
The Fed has $78 billion in repos maturing today.
Overnight Repos: Type of Collateral Submitted Accepted Stop Rate U.S. Treasuries $7.25 billion None N/A Agency $27.2 billion $21.2 billion 2 percent Mortgage-backed $28.8 billion $28.8 billion 2.06 percent TOTAL $63.25 billion $50.0 billion
Sept. 16 (Bloomberg) -- The cost of borrowing in dollars overnight more than doubled to the highest since 2001 as the collapse of Lehman Brothers Holdings Inc. and credit downgrades of American International Group Inc. led banks to hoard cash.
The overnight dollar rate soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers' Association. The rate was as low as 2.07 percent in June.
Banks are driving up short-term lending rates on concern that AIG will follow Lehman into bankruptcy and leave financial institutions with losses on $441 billion of credit derivatives issued by the biggest U.S. insurer. Central banks around the world pumped more than $210 billion into the financial system as they sought to alleviate the credit-market seizure.
``It's fear, you don't know who has exposure and who might not be getting their money anymore,'' said Imke Jersch, a senior money-market trader in Hanover at Norddeutsche Landesbank Girozentrale AG, Germany's fourth-biggest state-owned bank. ``It's a domino effect. You never know who might fall next.''
The increase underscores how the credit seizure that started in August 2007 with the collapse of the U.S. subprime- mortgage market is worsening, causing more than a dozen U.S. banks to fail. Money-market costs are used to calculate rates on $360 trillion of financial products worldwide from home loans to credit derivatives.
Treasuries, Stocks
U.S. Treasuries soared, stocks dropped and the cost of default protection on Wall Street banks rose to a record as investors sought the safety of government assets. The yield on the 10-year note dropped to the lowest in five years and the Standard & Poor's 500 Index lost as much as 1.6 percent. Credit- default swaps on Morgan Stanley, Goldman Sachs Group Inc. and Citigroup Inc. all traded at record highs.
The difference between the London interbank offered rate for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, widened 12 basis points to 117 basis points, the most since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.
The cost of borrowing euros for one week jumped 7 basis points to 4.49 percent today, the highest level since Dec. 24, according to the European Banking Federation. It was the biggest increase since July 3.
Rate-Cut Bets
The Fed added $50 billion in temporary reserves to the banking system today through overnight repurchase agreements, or repos. The European Central Bank offered 70 billion euros ($100 billion) in a one-day refinancing operation and the Bank of England injected 20 billion pounds ($36 billion). The Bank of Japan added 2.5 trillion yen ($24 billion) and the Reserve Bank of Australia injected A$1.85 billion ($1.5 billion).
Traders raised bets the Fed will cut interest rates at a meeting today. Futures on the Chicago Board of Trade showed a 90 percent chance the central bank will lower its 2 percent target rate by a quarter-percentage point, compared with 68 percent yesterday and no chance a week ago. Policy makers are scheduled to announce their decision at 2:15 p.m. in Washington.
``It's all a mess out there, it's unbelievable, it's very tough,'' said Padhraic Garvey, head of investment-grade strategy in Amsterdam at ING Bank NV. ``There really is no sign of this going away. If the Fed were to cut rates, it's not necessarily going to solve anything.''
Writedowns, Losses
Financial institutions have posted more than $514 billion in losses and writedowns since the beginning of last year as the U.S. mortgage crisis deepened. Bank of America Corp., the biggest U.S. consumer bank, agreed to acquire Merrill Lynch & Co. yesterday for about $50 billion.
The seizure in the credit markets and increase in short- term borrowing costs this year triggered doubts over the validity of Libor, which is administered by the London-based British Bankers' Association.
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