Stock markets around the world rallied Friday following an announcement by the Bush administration of what could end up being a trillion-dollar bailout of banks by American taxpayers. Still unknown is whether the financial sector's misery will migrate to energy markets.
Treasury Secretary Henry Paulson offered few details of the bailout plan, but he and congressional leaders were expected to work on the "bold" move over the weekend. Meanwhile, the Securities and Exchange Commission (SEC) placed a temporary halt on short-selling the shares of about 800 financial stocks, which was also credited for the markets' rally.
Paulson was said to be considering the formation of an entity similar to the Resolution Trust Corp., which was established to fix the savings and loan crisis of the late 1980s and early 1990s. Traders saw federal intervention as a means to lift the weight of bad mortgage debt and stop the drain on capital. Word of the intervention Thursday led the Dow Jones industrials to a 409-point surge, the biggest one-day rally in five years.
Friday the Dow Jones industrials zoomed about 370 points, making for a gain of about 780 over Thursday and Friday after a rocky start to the week that investors will remember for a while.
However, it remains to be seen what plan emerges from Washington and whether it will be effective at stanching the flow of red ink on Wall Street. "If a solid plan is put in place, it's definitely going to be a positive in easing the pain," said Stephen Carl, principal and head of equity trading at The Williams Capital Group. He added, though, that "it depends on how it's structured," the Associated Press reported.
Just prior to the bailout news, FERC Chairman Joseph Kelliher predicted that Wall Street's credit influenza would send shivers through the energy patch before long. But he said the Federal Energy Regulatory Commission (FERC) is prepared.
"Many of these [Wall Street] companies are heavily involved in electricity and gas trading, and some of the turmoil these companies are experiencing raises credit and collateral issues," Kelliher warned. "There's a very wide prospect of a number of urgent Section 203 [merger and acquisitions] filings coming before the Commission. That's something we saw earlier in the year with JPMorgan and Bear Stearns and the Commission...[W]e are monitoring the situation and the Commission's ready to act."
Kelliher reminded his listeners at last Thursday's regular FERC meeting of the late 2001 demise of Enron Corp., which "completely disappeared from the scene. And the industry managed that sudden disappearance very well. I think we might have to do some of our quick work we did earlier in the year more than once coming up."
Energy regulators and exchanges moved quickly last Monday to calm fears about the futures markets after Lehman Brothers Holdings Inc. filed for bankruptcy protection and Merrill Lynch & Co. agreed to be sold to Bank of American Corp. for $50 billion. The Lehman bankruptcy roiled Wall Street and financial markets around the world last Monday. The New York Stock Exchange was down 410 points; Dow Jones Industrials was off 504 points (the biggest drop since September 2001); and the S&P 500 lost about 57 points in daily trading.
The Commodity Futures Trading Commission (CFTC), which regulates crude oil and natural gas futures, "is closely monitoring the markets in connection with recent challenges faced by Lehman Brothers Holding...and other market developments. The CFTC has been coordinating closely with other federal and international regulators and self-regulatory organizations to ensure that customers of Lehman's CFTC-regulated futures commission merchant are protected, and to take steps to maintain the stability and orderliness of the commodity futures and options markets," said Acting CFTC Chairman Walter Lukken.
SEC Chairman Christopher Cox said the agency is working with the Treasury Department, Federal Reserve and regulators from the United Kingdom, Germany and Japan to "coordinate our actions in the interest of orderly markets." The SEC will use its "regulatory and supervisory authorities to reduce the potential for dislocations from Lehman's unwinding and to maintain the smooth functioning of the financial markets."
Lehman, which reported a net loss of $4 billion for the third quarter, filed for Chapter 11 bankruptcy with the U.S. Bankruptcy Court for the Southern District of New York after the federal government refused to bail it out. The company said that none of its broker-dealer subsidiaries or other subsidiaries are included in the Chapter 11 filing, and that all of its broker-dealers will continue to operate.
One of Lehman Brothers' key energy assets is energy marketer Eagle Energy Partners. Eagle Energy aggregates physical gas supply, arranges transport and sells to customers throughout the eastern United States. On the power side, it manages generation and offers real-time services for generation and load obligations.
The Wall Street meltdown to which Lehman Brothers succumbed and which sparked a fire sale in Constellation Energy shares ($25.76 as of Friday's close, up 6.45% on the day) and its subsequent takeover by MidAmerican Energy (see related story) was rattling the rafters at Morgan Stanley as a record drop in the venerable firm's share price had hedge funds heading for the exits last week, according to a Bloomberg report. Hedge funds, which account for less than 10% of Morgan's prime-brokerage balances withdrew money or told the firm they planned to, Bloomberg, citing an unnamed source, reported. Morgan was in talks with credit-troubled Wachovia Corp. about a possible merger, the logic of which was being questioned by some. On Friday shares in Morgan closed up more than 20% on the day at $27.21 after trading as high as $33.86.
British bank Barclays last week struck a deal to acquire the bankrupt Lehman's core capital markets business for a mere $1.75 billion, which was far less than what Lehman had hoped to get. The deal could save up to 10,000 Lehman jobs and allow Barclays greater reach in the United States. Lehman's demise will surely mark its departure from the ranks of top gas marketers (see related story).
Meanwhile, the government's $85 billion bailout of insurance giant American International Group Inc. (AIG) was troubling to both Democratic and Republican lawmakers, with some criticizing the decision to put American taxpayer money at risk to bailout private industry. And this was prior to the Paulson announcement of a Wall Street bailout.
"Once again the Fed has put the taxpayers on the hook for billions of dollars to bail out an institution that put greed ahead of responsibility and used their good name to take risky bets that did not pay off," said Sen. Jim Bunning, R-Kentucky, a member of the Senate Banking Committee. However, President Bush defended the bailout of AIG, as well as the earlier bailouts of mortgage giants Freddie Mac and Fannie Mae as "necessary and important" and said "the markets are adjusting to them."
Intelligence Press Inc. All rights reserved. The preceding news report
may not be republished or redistributed, in whole or in part, in any
form, without prior written consent of Intelligence Press, Inc.