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Hard landing / What happened? All the answers By Eytan Avriel Tags: economy, Israel  Lehman Brothers has fallen, Merrill Lynch has been sold and American International Group - better known as AIG - is desperately scrambling for cash after being downgraded. Of the five great independent Wall Street banks, only two remain: Goldman Sachs and Morgan Stanley. What went wrong? How will the meltdown affect you personally? And why did Washington decide to stop rescuing the banks? First of all, how will the crisis affect us? There won't be many winners from this crisis. The losses will be practically across the board. Savers and households around the world and in Israel too lost a great deal of money on Monday as world stock markets tanked. And anybody directly holding securities of some sort, whether stocks or bonds, issued by Lehman Brothers, AIG - or in fact many of the big banks worldwide - lost even more. Advertisement Bank Hapoalim said its exposure to Lehman Brothers is $109 million, which doesn't mean it has to write off that entire sum, but it does mean pain lies ahead and anybody owning Hapoalim stock will share that pain. And that, dear reader, is just the first wave of losses. The collapse of Lehman Brothers and the desperation at AIG, which after the downgrade has to raise $14.5 billion to cover its obligations, are likely to make the credit crisis even worse. As the cost of borrowing rises, companies around the world will suffer. Share and bond prices will drop hard. Leveraged companies - companies that borrowed heavily - and credit companies will be the first to suffer, and then it will probably be the turn of industrial and service companies. In the worst-case scenario, the credit crisis will drag the American and global economy into full-blown recession, and then everybody will lose, including each of us here in Israel, through the shrinking value of our assets, securities, homes and worse - through cutbacks and layoffs. Is my money safe? No, it isn't. None of us are sheltered. The value of our securities will fall - securities we hold at the bank, or holdings in provident and mutual funds, in study funds (kranot hishtalmut) and insurance companies. On Monday alone Israeli households lost thousands of shekels on paper, as their savings in mutual funds and pension funds shrank. Money placed in structured deposits at the banks isn't safe either. The longer the crisis lasts the more that money is likely to erode in value, and I don't mean just "earn nothing" - I mean actual losses. The value of the principal will drop. What about cash? That will only drop in value if the Bank of Israel stumbles into difficulty, a scenario that looks very far-fetched today. But not, apparently, impossible. What exactly happened on Sunday night? Throughout last weekend, the chiefs of the U.S. Federal Reserve huddled together, trying to engineer a deal that would rescue Lehman Brothers. It didn't work. Why would they even try? For one thing, Lehman was a truly international bank with branches all over the world and 26,000 employees, including 25 in Israel. For another, Lehman has a host of assets linked to the real estate market, which are shedding value by the day. The market lost its faith in Lehman (before its demise), forcing it to boost its liquidity. Throughout that tense weekend, the top people at America's giant banks clustered at the Federal Reserve's offices. Representatives of Britain's Barclays Bank and Bank of America considered a Lehman takeover, but neither bit. Even suggestions of somehow separating Lehman's "toxic assets" from its better ones didn't tempt, and at the end of the day, nobody wanted to buy the 158-year-old bank. And thus Lehman Brothers filed on Monday for Chapter 11 protection in the biggest bankruptcy filing ever (in terms of assets held). Why actually didn't Barclays or anybody else want to buy Lehman? Because they feared making a bad deal. Barclays withdrew its bid because the U.S. Federal Reserve refused to guarantee Lehman's bad assets, which would have put a cap on potential losses. In other words, Lehman had lots of assets, some perfectly good ones (like its asset management division) and others likely to lead to more losses. But nobody would buy the beast without a promise that they could only lose so much on the bad assets, and no more. The bad assets were securities linked to the real estate market, and derivatives. Potential buyers were afraid to throw good money after bad, and Washington refused to help. The Fed had rescued Fannie Mae and Freddie Mac, rescuing holders of the two mortgage giants' bonds. It had tried to help put together a deal that would save Lehman, without, however, pouring taxpayer money into the mission. But that didn't work and it decided to let Lehman fall. Why did the Fed reverse course, saving Fannie and Freddie but letting Lehman fall? Apparently, because America's economic leaders decided that Lehman Brothers could be allowed to fail and it wouldn't bring down the whole system. Also, Washington was worried about the howls of protest from taxpayers if it engineered a rescue of fat-cat investment bankers using the public's money. Washington needed to prove that it wouldn't rescue everybody and Lehman was the first victim. What will happen to Lehman? Lehman has 26,000 employees in 61 branches around the world and a balance sheet of $786 billion. It has filed for Chapter 11 protection against creditors. The courts will appoint a receiver/liquidator who will try to sell off Lehman's divisions and assets. The bank's shares will probably be delisted. Once good assets are sold, bondholders will probably get back some of their money. They might get about 60 cents on each dollar they invested. But unless somebody decides to buy the bank's goodwill, the venerable name of Lehman Brothers, a bank launched by a Jewish family 158 years ago, will be gone forever. What exactly happened with Merrill Lynch? If Lehman Brothers was the fourth-biggest investment bank in America, Merrill Lynch was the third. With Lehman down, Merrill seemed to be next in line to collapse. As last week ended its share price tanked and speculators scurried to make hay while the bears roared. But Merrill Lynch's management slammed on the brakes. In a move that took the market by surprise, they sold the bank to Bank of America (which had been known to be in talks to buy Lehman Brothers) for $50 billion. Merrill Lynch's shareholders will get shares in Bank of America, at a handsome 70% premium at that (based on Friday's closing price) - they're getting $29 per Merrill Lynch share. Sheltered under the wing of a much bigger bank, the sudden sale will probably ensure that the name of Merrill Lynch will continue to exist. What do the markets hold in store? As always, that's the million-dollar question. Merrill Lynch's snowball may have stopped rolling but the bigger one, of the world's capital markets, has not. Even the knowledge that the Fed won't step in to save just any bank is weighing on the markets. Bookmark to del.icio.us   Unexpected guest Clinton cancels spot at Jewish groups' anti-Iran rally over Palin invite. Critique served cold Ex-IDF chief Ya'alon says the air force failed in the Second Lebanon War.   1.   It is called greed 18:50  |  jc 17/09/08

Read & React U.S. Jews outraged over phone campaign alleging 'Obama gave money to PLO' Responses: 172 Clinton cancels spot at Jewish groups' anti-Iran rally over Palin invite Responses: 115 Settlers: IDF backed down from plan to evacuate West Bank outpost Responses: 115 IAEA shows photos alleging Iran nuclear missile works Responses: 60 Ex-IDF chief Ya'alon: Air force failed in Second Lebanon War Responses: 44 More Headlines 01:29 Livni sweeps Kadima race; Olmert pledges cooperation 01:57 Shas: If Livni wants a coalition, she must fulfill our demands 23:44 Kadima primary: Key facts about Foreign Minister Tzipi Livni 23:23 Kadima leadership race: What happens next 01:26 Olmert: Stepping down is painful, but I feel no bitterness 20:35 Israeli bank stocks, bonds hit further by U.S. banking crisis 02:14 Germany makes list of Nazi-era Jews for archives 18:43 Clinton cancels spot at Jewish groups' anti-Iran rally over Palin invite 01:52 Baha'is buy military base to unblock view of Baji compound in Acre 23:53 Survey: Anti-Semitic, anti-Muslim feelings growing across Europe, world 01:23 U.S.: Strike on Yemen embassy was attempt to breach its walls 21:07 Hamas: West Bank militants must forcefully resist PA police 23:08 Paris prosecutors: No anti-Semitic motive in attack on 3 Jewish youths 01:36 Rose Pizem's body to be flown to France for burial Previous Editions Select Day 17 sep 16 sep 15 sep 14 sep 12 sep 11 sep 10 sep 09 sep 08 sep 07 sep 05 sep 04 sep

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