Lehman Brothers, Lehman Brothers, Wherefore Art Thou, Lehman Brothers? + Vic Wisemann’s Thoughts on: BAC, JPM, C, WFC, AIG, GS, MS
 InvestorsObserver Featured Contributor Vic Wisemann |
I remember it all too well. It was mid-September, 2008 and I was talking with some friends about how Lehman Brothers had been teetering on the brink of collapse for months. We were all amazed, really, at how the venerable old institution had managed to stay afloat. We were also madly trying to manage positions embroiled in the mess that would be left behind if Lehman went under.
The following Monday, Lehman went bankrupt. Just like that, the world had changed. Lehman's failure rocked the financial system to its core, sending shockwaves around the world and sparking a global crisis that can still be felt today. Lehman reported that it had been in talks with Bank of America (BAC) and Barclays for the company's possible sale. However, both Barclays and Bank of America ultimately declined to purchase the entire company.
In the wee hours of the morning, Lehman Brothers announced it would file for Chapter 11 bankruptcy protection citing bank debt of $613 billion, $155 billion in bond debt, and assets worth only $639 billion. A group of Wall Street firms agreed to provide capital and financial assistance for the bank's orderly liquidation, and the Federal Reserve, in turn, agreed to a swap of lower-quality assets in exchange for loans and other assistance from the government.
In July, four of the congressional committees responsible for health-care legislation approved proposals. The three House committees still have to merge those bills for a House vote. The Senate has one committee bill proposed, but is still waiting for the Finance Committee to release its recommendations.
Read on to see how you can make scary profits with financial stocks.
FREE for 90 days: Get the InvestorsKeyhole Service and our other premium investor services. Plus Over $1,000 In FREE Bonuses! CLICK HERE to begin your 90 DAYS FREE. We can make this 90 day FREE offer because we are confident you will find our service an essential part of your investing toolkit and stay a subscriber for many years to come. Our biggest risk is that we do find people cancel their subscriptions when they move to their own private islands without internet access. |
On the same day, Bank of America announced it would purchase Merrill Lynch, signaling the demise of another Wall Street giant. After the firm had written down billions in losses associated with the national housing crisis and removing E. Stanley O'Neal as its chief executive, the company spiraled down and was sold for the bargain basement price of $50 billion. Apparently given the choice between the two, BAC saw Merrill as a better "investment."
In the year since, institutions have changed as some have grown larger and others disappeared as have the people who lead them. JPMorgan (JPM) acquired the banking operations of Washington Mutual in a transaction facilitated by the FDIC. Citigroup (C) attempted to purchase the banking operations of Wachovia with help from the FDIC. Wells Fargo (WFC) announced a competing proposal to purchase Wachovia that did not require assistance from the FDIC. WFC won the battle and acquired Wachovia in October 2008.
The list of failures, mergers and acquisitions goes on and on, not to mention the funds doled out through the Troubled Asset Relief Program (TARP). The list is long and distinguished and includes some of the biggest players in the financial industry. Citigroup and American International Group (AIG) took over $40 billion each; JPMorgan, Bank of America and Wells Fargo soaked up $25 billion a piece; and Goldman Sachs (GS) and Morgan Stanley (MS) added $10 billion each.
While the big banks appear to be bouncing bank, some of their smaller counterparts have not been so fortunate. Many banks of all sizes have seen their balance sheets and, therefore, their lending weighed down by soured real estate loans, but bigger banks have an easier time raising capital to overcome the bad loans. Smaller banks, meanwhile, collapse. Ninety-one banks have been shut down by federal regulators so far this year. In all of 2008, there were only 25 bank failures.
Despite recent improvements, the consensus forecast is that the country's economic recovery will take time. Numerous stumbling blocks stand in the way. Small businesses are the biggest creator of new jobs, but they are struggling to get loans from banks that have tightened up credit. Residential real estate might be showing some signs of improvement, but commercial real estate is seen by many as a huge problem in the near future.
Financial stocks are well above their March lows and Goldman Sachs presents a nice opportunity for a put spread trade. Since its lows in March, the stock has consistently found support above its 20-day moving average, which is currently held above the $165 level. The technicals are bullish with an upward trend with support above $170.
For a hedged trade on GS, consider the October 155/150 Bull Put spread for a 35 cent credit. That works out to a 7.5% return and the stock has to fall over 14% to cause a problem.
The stock market can be a volatile friend, bringing riches to some and poverty to others. Be certain any trade you enter fits into your personal risk and reward profile before you put any money at risk. The health of your portfolio is your responsibility. Do your homework, stay informed and have some fun.
If you have any additional thoughts, ideas or ways to see tomorrow's closing prices today, please e-mail me at vwisemann@InvestorsObserver.com.
FREE for 90 days: Get the InvestorsKeyhole Service and our other premium investor services. Plus Over $1,000 In FREE Bonuses! CLICK HERE to begin your 90 DAYS FREE. We can make this 90 day FREE offer because we are confident you will find our service an essential part of your investing toolkit and stay a subscriber for many years to come. Our biggest risk is that we do find people cancel their subscriptions when they move to their own private islands without internet access. |