The global credit crisis has hit Wall Street hard in the past 24 hours: Lehman Brothers has filed for bankruptcy protection, Merrill Lynch sold itself to Bank of America, and the State of New York has allowed AIG to borrow US$20 billion from its subsidiaries to fund day-to-day operations. The Dow Jones Industrial Average plunged 504.82 points as a result—the sixth-largest point drop ever.
The news also affected markets and companies around the globe, including Canada. The S&P/TSX composite index dropped 515.55 points to close at 12,254.03 as energy, bank and insurance stocks tumbled.
One of those insurance companies, Sun Life Financial, expects to record a third-quarter charge because of its Lehman holdings. The insurer holds $334 million par value of Lehman bond securities and about $15 million net value of Lehman derivative instruments.
Investment banks
Lehman’s fate is currently unknown. The company is exploring the sale of its broker-dealer operations and, as previously announced, is in advanced discussions with a number of potential buyers to sell its investment management division, which includes Neuberger Berman. Some analysts expect Lehman’s assets will be liquidated, meaning that the company will no longer exist in its current form.
The Lehman bankruptcy and the sale of Merrill will likely leave Wall Street with just two large brokerages—Morgan Stanley and Goldman Sachs. Just a few months ago, there were five, including Bear Stearns.
And the big independent U.S. investment banks will cease to exist, the head of CIBC World Markets predicted. Speaking at an investor conference in Toronto on Monday, Richard Nesbitt said: “there isn’t a place for a large investment bank unless they’re part of a commercial bank.”
Most of Canada’s big investment banks disappeared two decades ago when the federal government allowed financial institutions to buy securities firms. Soon after the rule change was announced, Royal Bank bought Dominion Securities, CIBC acquired Wood Gundy, Bank of Montreal purchased Nesbitt Thompson, and Bank of Nova Scotia bought McLeod Young Weir. A decade later, Merrill Lynch reached a deal to buy Midland Walwyn.
Now Merrill is the one being acquired and its purchase by Bank of America will make the combined companies an even bigger investment manager. Bank of America has $589 billion in assets under management and BlackRock, which is 50%-owned by Merrill, has $1.4 trillion in assets under management.
AIG
AIG has also suffered as a result of the credit crisis, reporting losses of $18 billion over the past nine months. Its stock took a beating Monday, dropping nearly 61%.
The insurance firm’s ability to borrow from subsidiaries “is simply giving AIG in effect the ability to provide a bridge loan to itself,” said David Paterson, the governor of New York, at a press conference on Monday. He stressed that the company is financially sound.
Despite that bit of reassurance, The Wall Street Journal reports that the U.S. government has asked Goldman and JPMorgan Chase to make up to $75 billion in loans available to AIG.
AIG needs the money to prevent its credit from being downgraded. Any such action could make it harder for the company to raise capital.
What’s next
The Bank of Canada tried to calm investors’ nerves by issuing a statement: “The bank will provide liquidity as required to support the stability of the Canadian financial system and the functioning of financial markets.”
Henry Paulson, the U.S. treasury secretary also attempted to provide some comfort to the stock market, but warned of more volatility to come.
“I’m committed to working with regulators here and abroad, as well as policy-makers in Congress, to take additional necessary steps to maintain the stability and orderliness of our financial markets,” he said at a White House press briefing. “Until we stem the housing correction, until the biggest part of that is behind us and we have more stability in housing prices, we’re going to continue to have turmoil in financial markets.”
Here’s how some of the key markets/stocks performed on Monday:
| Index | Close | Performance |
| S&P/TSX Composite Index | 12,254.03 | -4.0% |
| Dow Jones Industrial Average | 10,917.51 | -4.4% |
| S&P 500 | 1,192.69 | -4.7% |
| Nasdaq | 2,179.91 | -3.6% |
| Stock | Close | Performance |
| Lehman Brothers | $0.21 | -94.3% |
| American International Group | $4.76 | -60.8% |
| Merrill Lynch | $17.06 | +0.1% |
| Bank of America | $26.55 | -21.3% |
| Sun Life | $39.23 | -3.0% |
| Manulife | $37.00 | -1.0% |
| Great-West Life | $31.71 | -1.0% |
| Bank of Nova Scotia | $46.60 | -1.2% |
| BMO Financial Group | $48.34 | -1.6% |
| CIBC | $61.11 | -4.8% |
| RBC Financial | $48.10 | -2.2% |
| TD Bank | $61.30 | -1.6% |