Indian stock markets have taken a huge beating as a result of developments in Wall Street such as the bankruptcy filings of Lehman Brothers, Bank of America’s buyout of Merrill Lynch and AIG’s attempts to raise cash. Bombay Stock Exchange is down more than 800 points while NIFTY is down 240-odd points.
Wall Street is in crisis with Lehman Brothers, the 158 year old bank, filing for bankruptcy on Sunday, while Merrill Lynch has been bought for $50 billion by Bank of America.
The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and also facilitated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, is believed to have acted tough with Lehman, according to a report in Wall Street Journal.
Apparently, the US government “refused to provide a financial backstop to potential buyers”, says WSJ. The result was Barclays PLC and Bank of America, the two most interested buyers, walked away from a deal with Lehman. So on late Sunday night, Lehman said it would file for for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York.
Lehman said none of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts, Lehman said. But Australian Securies Exchange has suspended Lehman Brothrs as a participant for one month initially.
However, Lehman said it is exploring the sale of its broker-dealer operations. It said it is in advanced discussions with a number of potential purchasers to sell its Investment Management Division. So they are not part of the bankruptcy filings.
Lehman Brothers India exposure includes over $1 billion invested in real estate SPVs. Also it has some exposure in India through participatory notes. Also Lehman is a client of IT majors HCL Technologies and Satyam.
Merrill Lynch Sold To BoA
In another significant development on Sunday night, Bank of America struck an all-stock deal to buy Merrill Lynch for $29 a share, or $50 billion. Merrill shares closed at $17.05 on Friday. The deal will prevent Merrill becoming the next casualty of the credit crisis. Merrill is a 101 year old company.
BoA was also in talks to acquire Lehman Brothers but decided to go with Merrill Lynch. The deal between the two is expected to close next year. BoA expects to achieve $7 billion in pre-tax expense savings, fully realized by 2012. The acquisition is expected to be accretive to earnings by 2010. The deal would also bring BoA 50% ownership in BlackRock, one of the world’s largest publicly traded investment management companies with $1.4 trillion in AUM.
AIG To Raise $40 Billion From Fed
American International Group, the world’s largest insurance company, has asked the Federal Reserve to give it $40 billion bridge loan. The loan is being raised by AIG so that its protected against potential downgrade from credit ratings agencies. Buyout firms J.C. Flowers, TPG and KKR have showed an interest in AIG. The troubled giant’s stock price has gone down by 46% last week, and the possible credit downgrades that could force it to post more than $13 billion in collateral.