The Ides of September

Yesterday was a rough day. I know because for the first time this year, I heard panic in some voices. I am not talking about clients, but sophisticated investment professionals who sounded like rank amateurs. This is not to dismiss the magnitude of what has occurred this year or even over the weekend, but typical of Wall Street, the focus was so misplaced that it made me nuts. Let’s start with some important points.

1) What does this mean to the average investor? Many investors are wondering whether they should pull out of their investment accounts and wait until the storm passes. The answer for most of them is NO. This is one of the most difficult concepts to grasp, but assuming that you are a long-term investor and do not need to access your money for 5-10 years, you should guard against the emotional pull of the mattress. Going through bear markets is the price you pay for being a long-term investor. If you pull out, you risk not participating in the recovery and although the current situation is difficult, it is good to remember that the economy and markets move in cycles—for every “down” cycle, there has been a subsequent “up” cycle. In fact, the most dangerous part of going to cash is that rarely do investors have the wherewithal to get back in. As an example, if you bailed out in October 2002, you probably missed 2003-2007, when stocks returned 12.8% annually. If you are using a retirement plan, you are buying stocks at a 20% discount to where they were almost a year ago.

2) Yesterday I discussed Securities Investor Protection Corporation (SIPC), but today I want to speak to those folks who have accounts at Merrill Lynch. The purchase of Merrill by Bank of America should not affect you financially. There is likely to be a re-branding of ML into “Merrill Lynch Wealth Management” and down the line, Merrill customers may actually have increased access to BOA banking functions. If your ML broker is smart, he or she will stay put, because there are not too many jobs on Wall Street right now!

3) Will this affect the broader economy? Until this point, the non-financial part of the US economy has been pretty resilient. The pullback in energy prices should continue to help and the nationalization of Fannie and Freddie have already helped mortgage rates drop, which in turn should help stabilize housing. While nobody knows what the future will bring, I am hopeful that this dramatic weekend will come to symbolize the point of maximum fear. After which we can repair the frayed nerves of investors and the economy as a whole.

Finally, a note to my friends on Wall Street: as usual, you believe that the world revolves around you. There is more to the US economy than the financial sector and although I am sorry to see anyone lose a job, why is a job at Lehman Brothers more precious than one at Ford or GM? It’s time to recognize that when you party too hard, the hangover is going to be substantial. Get out your Tylenol and prepare for a serious headache.

Sunday Headlines

I waited all weekend to write this article. I thought that I might report about a complicated transaction, where Lehman Brothers would be split into a “good bank-bad bank” structure. I would be able to discuss how interesting it was that Barclays, a UK institution ended up with the good stuff, while all of the large US players ended up with the crud. At 7:30 pm, there is no deal to save Lehman Brothers, but there is another mega-merger on the table as well as a potential shake up at a large insurer.

Starting with the 158-year-old Lehman, we went from too many suitors to too few. BOA and JC Flowers/CITIC bowed out, leaving Barclays as the sole contender on Sunday morning. But according to the Wall Street Journal, Barclays stepped aside when it became clear that the government was not willing to be involved in a transaction. This left a dark path for Lehman—an “orderly” liquidation, managed by the law firm Weil, Gotshal & Manges LLP, which was engaged to prepare a potential bankruptcy filing.
According to the WSJ, “if Lehman files, the firm's brokerage units would have to enter a Chapter 7 liquidation, in which a court-appointed trustee would take over, liquidate the firm's assets and get Lehman customers back their money. In general, securities that a customer holds at a brokerage firm are legally the investor's property and aren't exposed to the claims of the firm's creditors.” If you are a customer of Lehman, it is likely you will start to hear about Securities Investor Protection Corporation (SIPC). If sufficient funds are not available in the firm’s customer accounts to satisfy claims within specific limits, the reserve funds of SIPC are used to supplement the distribution, up to a ceiling of $500,000 per customer, including a maximum of $100,000 for cash claims. Additional funds may be available to satisfy the remainder of customer claims after the cost of liquidating the brokerage firm is taken into account.
A funny thing happened on the way to Lehman’s demise…two other firms started courting one another. I found out about this while at a wedding shower—a friend checked his Blackberry at 4pm and announced, “The wedding of Barclays and Lehman is off, but there could be one for Bank of America and Merrill Lynch!” WHAT? After looking hard at Lehman, BOA brass thought that a better match might be found in Merrill. The information was sketchy and maybe the whole deal will fall apart, but according to a variety of sources, Merrill's board was reportedly meeting to approve an offer at $29 a share, which would value the firm above $40 billion, a nice premium to Friday’s close of $17.
Finally, another financial company made the Sunday headlines glow. Again, according to the WSJ, AIG plans to disclose a comprehensive restructuring today that is “likely to include the disposal of major assets including its aircraft-leasing business and other holdings, according to people familiar with the matter…the moves follow a 31% drop in AIG's stock price on Friday amid concern that its capital base isn't sufficient to cover its obligations.” Boy, who ever said that Sunday was a day of rest? Stay tuned!