Thursday, September 18, 2008

AIG Receives $85 Billion Loan, Fear, Not Fundamentals Is Driving the Market, Merger Mania?, SEC Makes Short Selling Rules

On Wednesday, all three major indices fell more than 4% a day after AIG was given an $85 million loan (12% interest rate) in exchange for an 80% equity stake by the Federal Reserve. It did allow the management of AIG to be removed and a new CEO Edward Liddy, the retired Allstate Corp. CEO, to be named. Liddy, 62, will succeed Robert Willumstad, who is leaving after the government took control of the troubled insurer.

Liddy's experience at some major Chicago-area corporations undergoing restructurings is expected to serve him well as he oversees a company struggling with billions of dollars in subprime-mortgage write-downs. New York-based AIG, with $1 trillion in assets, lost $18 billion in recent quarters.

"This is really a Franklin Delano Roosevelt moment." - Jim Cramer

Cramer on Wednesday night gave one of his better pep talks explaining some of the history he has seen since the early 80's. The huge moves of 1987, 1990, and 1998. He put it in perspective by saying that the market is trading on fear. "The only thing we have to fear is fear itself," said FDR, and investors seem to be fearful. Cramer continued by stating that he wanted everyone to understand that the companies he bought during the crash of 1987 made him money six months later. It might be early, but the good stocks are out there. In the end, Cramer stated that the loan to AIG has made things better than they were on Tuesday even after the market drop. It would be the beginning of putting some faith back into the financial sector that banks around the world would be better.

Also, in the wake of today's panicked selling, a rash of possible mergers hit the wires after the close. In Britain, Lloyds TSB struck a deal to buy major mortgage lender HBOS for 12 billion pounds in stock ($22 billion), a source familiar with the situation said. Washington Mutual, beleaguered by mortgage losses, put itself up for sale, sources familiar with the situation said with potential suitors being Citigroup, JPMorgan, Wells Fargo and HSBC. Morgan Stanley was discussing a merger with regional banking powerhouse Wachovia.

Morgan Stanley released their earnings a day early and beat expectations, but the market did not listen. Instead the stock fell 27% on more fears of credit issues. Likewise, Goldman reported earnings that beat, but their stock was also punished 16%.

"It's very clear to me -- we're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down," Morgan Stanley Chief Executive John Mack told employees in a memo obtained by Reuters. "There is no rational basis for the movements in our stock or credit default spreads."

On Thursday morning, the futures look to be trading up substantially on three indices prior to the open.

SEC Finally Steps in With Short Selling Rules

New rules governing the conduct of people who profit from stock declines were issued by the U.S. Securities and Exchange on Wednesday as shares of major financial institutions plummeted on fears of a global credit crunch.

The three SEC rules cover shares of all publicly traded companies and follow a brief emergency rule this summer that was aimed at curbing abusive naked short selling in 19 major financial stocks.

Under a measure that takes effect Thursday, short sellers and their broker dealers must deliver securities by the close of business on the settlement date, three days after the sale.

"These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short selling," SEC Chairman Christopher Cox said in a statement.

More and more people are also asking the SEC to reinstate the "uptick" rule, but there has been no change on that issue.

Sources: Chicago Tribune, Reuters, CNBC

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