- The mood remains somber this morning as markets reel in the wake of the
Federal bailout of AIG and the US financial system shows continued weakness.
Indices opened down more than 1. 0% and have fallen further in mid-morning
trading. The August housing starts reading came in below estimates, showing
construction of new homes falling to the lowest level in the last 17 years. The
DoE readings showed US gasoline stocks at their lowest levels since records
began in 1990, while the price of crude picked up a bit to just short of $93
after the steep declines of recent days. In addition, two leading Russian stock
exchanges remain closed until Thursday due to massive losses. Traders should
also note that the SEC said new rules against naked short selling would take
effect on Sept 18, requiring all short sellers to deliver stock on the
- Developments at AIG moved rapidly after the close yesterday, as earlier
efforts to raise as much as $75B from a consortium of banks fell flat. Reports
circulated that the US government was considering a
conservatorship and that Treasury Secretary Paulson and Fed Chairman Bernanke
were meeting with Congressional leaders to hammer out a response to the day's
market turmoil. Other reports noted that AIG had even gone as far as to hire
the law firm Weil Gotshal to draw up bankruptcy papers (ironically this is the
same firm handling Lehman's bankruptcy). The Wall Street Journal then broke the
news that the Fed was seriously considering a extending a large bridge loan to
AIG in exchange for warrants in a move that would likely dilute shareholders'
positions. By late in the evening Fed officials confirmed that the New York Fed
would grant AIG a $85B, 24-month term loan in exchange for a 79.9% equity stake
in the company, while emphatically denying that the company has been
nationalized. Overnight Fitch revised its outlook on AIG to Evolving from
Negative, although none of the other ratings agencies have made any moves. UBS
cut its price target to $5 from $26, noting that the potential for credit
ratings upgrades is very remote. The firm will likely be removed from the
S&P500 and the DJIA very soon.
- - In a surprise move, Morgan Stanley announced its third quarter results a
day early yesterday after the close. The firm beat estimates by a long shot and
came in $2B ahead of revenue estimates, and said they would maintain their
dividend. The firm said its net subprime exposure was zero at the end of
August, and noted that its tier 1 ratio is 12.7% and level 3 assets were 8% of
total. Analysts responded with enthusiasm overnight, given this is about the
only ray of sunshine in finance recently, with Bank of America and Credit
Suisse raising their full-year earnings estimates. Goldman Sachs Analyst Tanono
called MS the most attractive name in the large-cap brokerage space. Regardless
shares are down more than 40% and credit default swaps are blowing out. Just
before the open, CNBC's Charlie Gasparino reiterated that his sources say the
firm is not holding merger talks with anybody. The firm's shares opened down
nearly 25%, but were recovering in early trading. The remaining major financial
firms opened down 5-10% and the selling has accelerated.
- Other movers this morning include SNDK+45% after Samsung said it might be willing to pay a
significant premium to the $28.75 closing price on May 22, well above its
former offer of $26/shr. SNDK's board rejected the offer, noting the offer does
not reflect the value of the synergies Samsung could attain from an acquisition.
NT-36% has fallen steeply after lowing its Q3 revenue outlook, citing the
economic downturn and sluggish consumer demand. Shares in Constellation Energy
plunged yesterday afternoon on fears surrounding their commodities trading
business and the company's ties to Lehman. This morning CEG reaffirmed their
outlook for the coming quarter and the year, noting they have also retained UBS
and Morgan Stanley to evaluate strategic alternatives, and is holding talks
with potential strategic partners. CEG is +19% in mid-morning trading.
- Currency and bond trading has been marked by renewed concerns over the health
of the global financial sector. As noted at the European open, FX, equity and
fixed-income traders are all fixated on the need for USD funding. The overnight
dollar LIBOR fixing brought a slight relief with a 5.03% rate compared to
yesterday's 6.44% fixing, but attention soon shifted to the three-month fixing,
which rose by a whopping 19 bps to 3.06%, the largest daily increase since
1999. The market tension was mirrored the TED Spread (the difference between
what banks and the Treasury pay to borrow for three months), which hit its
highest level since the October 1987 market crash, at 234 bps. The TED Spread
was around 50 bps before the credit crisis began in Aug 2007. Fed funds
continued to remain over its 2. 0% target rate as the New York Fed reiterated
that it will continue to supply the market with the necessary liquidity. The
2-year yields has fallen below 1.65% and Nov fed fund futures are fully pricing
in a 25 bp cut at the Oct FOMC meeting and even putting 16% odds on a 50 bp
- Dealers noted enormous flows of money seeking the safety into the short end
of US Treasury curve. Dealers noted that the 4-week bills reached briefly below
ZERO percent, which is the lowest level since the one-month bill was
reintroduced in 2001. North American dealers expressed some serious concerns
over the degree of dislocation within the commercial paper and money markets at
The UK's BOE extended its drawdown period for
special liquidity schemes while the US Treasury Department announced the
initiation of a temporary Supplementary Financing Program at the request of the
- Compounding the â€śflight to safetyâ€ť was the situation developing in the
Russian equity market. Both the MICEX and RTS equity exchanges were again
halted and failed to reopen for trading on Wednesday. Following Tuesday's steep
losses, the Russian interruption created an additional uncertainty. Spot gold
joined the global chorus of safe-have as the metal surge $50 to trade above the
$830 area. Thus trading today exhibited a 'loss of confidence' in paper assets
aided the widening credit spreads. The Russian Central bank responded to its
market crisis by slashing its reserve requirement for Rouble deposits by
400bps, effective on Thursday.
- The USD held steady against the European pairs despite the surge in gold and
firmer energy prices. The steady USD was complementing the earlier scenario of
safety and displaying a 'decoupling' to its usual relation ship to commodity
price action. Carry- related pairs were softer as global equity market gave
back advances seen following the FOMC decision to hold rates steady and the US
Gov't bailout of insurer AIG
TED Spread (The difference between what banks and the Treasury pay to borrow
for three months)
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