. . . but what will they figure out?
Say what you want about "bail outs" or the "death of capitalism" or government "overreach," but this week's action by the Fed and Treasury (Mr. Bernanke and Mr. Paulson) have been both significant and necessary. If nothing else, their decisions have relieved the immediate pressure from our financial banks and given them a little time to figure out the conditions around them. In particular, the ban on short-selling has reversed the pain precisely where the two remaining investment banks (Goldman and Morgan Stanley) were starting to feel it the most -- their falling stock prices. It will be interesting to see what Morgan Stanley, in particular, does. Does the bank turn to China to keep a semblance of its independence? Does it merge with an American commercial bank and basically lose that independent standing? We should know within a few weeks, because remember, the banks don't have unlimited time: the ban on short-selling could be lifted as early as October 2.
From today's FT:
Rescue plan slows Morgan-Wachovia talks By Francesco Guerrera, Henny Sender and Greg Farrell in New York
Morgan Stanley and Wachovia have slowed down their talks over an all-stock merger and are reassessing the merits of a deal in light of the US government action to rescue the financial sector.
The cooling in the discussions is a sign of how the government plan could change merger-and-acquisitions dynamics in the troubled financial services sector.
“The government plan gives everybody time to take a deep breath and see how the new environment can change things,” said a person familiar with the talks.
The news came as it emerged on Friday that the value of securities held by investment bank Lehman Brothers, which filed for bankruptcy protection on Monday, had fallen to $47.4bn from $72bn – revealed in bankruptcy court proceedings.
That could prompt Barclays to revise the terms of its $1.75bn acquisition of Lehman’s brokerage business or even scrap the deal, according to people familiar with the situation. Barclays and Lehman declined to comment.
People close to the Morgan Stanley-Wachovia discussions said negotiations would continue over the weekend but added that they lacked the urgency of the past few days when Morgan Stanley’s shares were in freefall. The investment bank’s shares rose 21 per cent on Friday as financial stocks rallied on relief at the government plan.
John Mack, Morgan Stanley’s chief executive, is considering a sale of a large stake to China Investment Corp, the state investment fund that owns 9.9 per cent of the bank, as an alternative to the Wachovia deal.
Gao Xiqing, CIC’s president, flew to New York for talks with Mr Mack on Friday.
Executives at Morgan Stanley and Wachovia are trying to understand how a government vehicle to buy bad assets from banks would affect a tie-up. A potential sticking point is that both companies might have to take further writedowns on the sale of their mortgage-backed assets to the vehicle.
The government rescue efforts led one analyst to suggest that Merrill Lynch’s shareholders might vote against the $50bn takeover by Bank of America, announced on Sunday. Glenn Schorr, an analyst at UBS, wrote to clients that Merrill’s shareholders may now “be less interested in seeing this deal happen”.
The so-called bad bank plan presented by Hank Paulson, US Treasury secretary, could make it easier to find a buyer for Washington Mutual, the troubled regional lender.
People familiar with the discussions said WaMu’s ability to offload its bad assets to the new government vehicle could make it more attractive to potential bidders.
WaMu continued its search for a buyer on Friday with a number of banks – including Citigroup, JPMorgan Chase, Wells Fargo, HSBC and Banco Santander – still combing its books.
A deal could be announced as early as the weekend, bankers said.
Additional reporting by Joanna Chung in Washington, Julie MacIntosh in New York and Jamil Anderlini in Beijing
Copyright The Financial Times Limited 2008