Major firms in US financial crisis

[Naveed Yaseen]

WASHINGTON, Sept 26: Here are the major companies to fail or undergo major changes resulting from the US financial crisis this year.

Countrywide Financial: The largest US mortgage lender, California-based Countrywide suffered heavy losses as loan delinquencies began to rise. In January, Bank of America agreed to pay $4 billion in shares for Countrywide. The value of the deal fell to $2.5 billion based on share prices at the closing in July.

Bear Stearns: The first big Wall Street investment firm to fall victim to the crisis, Bear Stearns saw its finances ravaged by vast losses tied to mortgage-backed securities and its share price plunged when it lost access to credit.

A deal engineered by US authorities on March 16 allowed JPMorgan Chase to take over Bear Stearns for around $1 billion, with $29 billion in Bear Stearns assets guaranteed by the Federal Reserve.

Fannie Mae/Freddie Mac: Two government-chartered, shareholder-owned mortgage finance giants which owned or guaranteed more than five trillion dollars in home loans, were in danger of collapse from the troubles in the housing sector.

A law passed by Congress in July authorised a special government line of credit to the two firms, and allowed them access to Federal Reserve loans. But a meltdown in their share prices prompted the government to step in and nationalize the firms in a conservatorship with new management.

Lehman Brothers: Another major Wall Street investment bank, Lehman Brothers faced a crisis of confidence because of its exposure to risky real estate assets. A weekend of crisis talks in September involving the Federal Reserve and US Treasury failed to find a buyer, and Lehman filed for bankruptcy protection September 15.

After the filing, British-based Barclays agreed to buy some of its US operations while Japan’s Nomura Holdings bought Lehman operations in Asia, Europe and the Middle East.

Merrill Lynch: As Lehman Brothers appeared on the verge of collapse, its Wall Street rival Merrill Lynch struck a deal on September 15 to sell itself to Bank of America for around $50 billion in shares. Merrill had already written off $52 billion in losses in the subprime mortgage crisis and seen a precipitous drop in its share price.

AIG: American International Group, which had been the world’s biggest insurer, had major exposure to financial instruments called credit default swaps (CDS), a form of market insurance against the risks of bond default, placing the company at risk when the US real estate market soured.

Facing a cash squeeze and potential collapse with global implications, the US Federal Reserve agreed September 16 to an 85-billion-dollar loan, in exchange for a 79.9 per cent equity stake in the company.

Goldman Sachs and Morgan Stanley: After the upheaval since March, Goldan Sachs and Morgan Stanley remained the last two major independent Wall Street investment banks, but their shares were under pressure because of their exposure to real estate and difficult credit conditions.

On September 21, they received Federal Reserve approval to convert to commercial banks, which have greater access to central bank lending but also tougher capital requirements and stricter regulation.

Goldman Sachs subsequently got an equity investment of $5 billion from the holding company of US billionaire Warren Buffett. Morgan Stanley sold a 20 per cent stake to Japanese bank Mitsubishi UFJ Financial Group.

Washington Mutual: Washington Mutual, a large savings and loan based in Seattle, Washington state, had been under pressure because of real estate losses. On September 25, US regulators took over the thrift, in the largest bank failure in US history, but also brokered a deal giving its banking assets to JPMorgan Chase for $1.9 billion. —AFP

http://www.dawn.com/2008/09/27/ebr7.htm