Five Days That Shook The Financial World

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Hitler Gets A Margin Call

“Why didn’t I buy google instead? Like Stalin!” –Adolf Hitler

“I should have listened to Dennis Gartman.” –Adolf Hitler

Short Ban: What Does It Mean?

via Aleph Dog: Government Policy Created Too Hastily:

“I have been no fan of naked short selling; I have long argued that the brokers must locate shares before a short sale can be done. Anything less than that is fraud. But I do not support eliminating shorting, even though I almost never do it. What would be the effects of eliminating shorting?

• No more merger arbitrage funds.
• No more statistical arbitrage funds.
• Wait, no more arbitrage?
• 130/30 funds go away.
• Other quant funds go away.
• Barbarian hedge funds that do real research go away.
• Put option implied volatility goes way up. (A lot depends on whether specialists/market-makers can still short…)
• Because of put-call parity, call implied volatility goes up as well.
• Players move to credit default swaps, oh wait, might those get banned as well?
• Those relying on securities lending income lose out.

Eliminating shorting is stupid. Enforcing getting a locate is smart.”

Disgusting Super Spike

I don’t feel like posting today. I feel sick to my stomach.

After this, the markets will absolutely crash… and for the first time in a long time, you’ll see ‘NO BID’ in even the most liquid stocks after this squeeze sorts itself out.

via Slope of Hope: Sorry About All That:

“As I woke up this morning, I realized I owe American an apology.

I'm sorry I put Lehman Brothers out of business. And Fannie Mae. And Freddie Mac. As well as Bear Stearns. Come to think of it, since I've been trading a while, I also want to apologize for the destruction of HealthSouth, WorldCom, and Enron.

I used to think their failure was due to their own wreckless mismanagement by people paid hundreds of millions of dollars. But, assuming we live in a rational world, the cold fact of the matter is that by selling the stock of these companies, and then buying it back at a lower price, I put them out of business.

I hope that Dick from Lehman, Mr. Cox from the SEC, and all the other gentlemen (including the late, great Mr. Lay from Enron) can find it within their little black souls to forgive me. Thank you for your consideration.”

Ridiculous. Just ridiculous.

via MacroMan: You Know It Makes Sense:

“Given that the Russians seem to own most of the UK (or at least London), it makes sense for the British authorities to adopt certain practices of their new uber-lords. And given that the Russkies, upon reaping the harvest of their serial unpleasantness towards foreigners, have simply shut their stock markets down until further notice, you know it makes sense for the FSA to simply ban all short selling of financial stocks for the next eight years.

Pretty soon, the authorities will simply delete the "sell" key off of all electronic and broker trading systems, and appropriate all red paper sell tickets that may have survived from the 1980's. Only one way for stocks to go then, baby.

Yep, all is good with the world. BUY BUY BUY!

Addendum: Apparently the NY attorney general will use the Martin Act to deal with short-sellers, er fraudsters. (Might Macro Man suggest he start with the slippery characters at Lehman NY who drained all the cash out of Lehman London on Friday night, leaving his buddies there with nothing but a pile of stationery and $80 billion worth of turds.)
Big Brother is now truly watching you.

Remember, folks...you heard it here first. ”

Japan v2.0: GLOBAL Liquidity Trap

We are heading for a Liquidity Trap. Believe it. I see Japan v2.0… on a GLOBAL scale.

A quick recap of yesterday’s more important developments.

via NakedCapitalism:

“Three month T-bills finished at a two basis point yield, and may even have traded at negative yields. Signs of ZIRP*.

Gold rose $68 and is still going up in Asia. The dollar fell against the yen, a sign of continued carry trade unwinds.

Credit default swaps on financials blew out, with Morgan Stanley hard hit: Spreads on protection for its bonds rose 220 basis points to over 900.

The TED spread, an indicator of stress in the interbank lending markets, shot upwards to 238 basis points.

CDS spreads on Treasuries rose to 30 basis points. Nine months ago, CDS on Treasuries were an oddity rather than an actively written contract, and the spread was 2 basis points.

Swap spreads widened considerably.

Today's TSLF auction was, as Alea put it, a "disaster" with prices and bid to cover up big time.”

*ZIRP = Zero Interest Rate Policy

Japan v2.0

Central Banks Offer Extra Funds to Calm Money Markets (Update5): “The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the 1920s.

The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion “to address the continued elevated pressures in U.S. dollar short-term funding markets.” The Bank of England, the Bank of Canada and the Swiss National Bank also participated.”

Wow. Just amazing. The futures popped early in the morning on the news… then started drifting down again. While still positive, the futures look and feel limp.

Basically this action is like taking the defibrillator to a patient and just ‘giving her’… and declaring that this will ‘heal’ the twitching patient… Unfortunately the patient is long dead, and the twitching will stop when the current from the defibrillator stops.

You can’t bring back the dead with a defibrillator.

You can’t bring back dead banks with more liquidity.

We are heading for Japan v2.0.

Think ZERO percent interest rates and think DEFLATION. Think LOST DECADE. Think DEPRESSION. Now make all that GLOBAL.

That is what we have to look forward to.

Morgan Stanely: We Need Partner, Or Not Going To Make It

"We need a merger partner or we’re not going to make it." -John Mack, CEO of Morgan Stanley

As Fears Grow, Wall St. Titans See Shares Fall: "Even Morgan Stanley and Goldman Sachs, the two last titans left standing on Wall Street, are no longer immune.

To the surprise of executives within those firms, and their rivals, the stocks of these powerful companies were drawn into the crisis of investor confidence on Wednesday. Morgan Stanley, whose stock fell almost 25 percent, was considering a merger with Wachovia or another bank to help shore up its finances. Goldman Sachs’s stock fell almost 14 percent, and it had to rebuff rumors that it was seeking a capital infusion."

I said it in this morning's post Financials: Stay Short: Morgan Stanley Next Domino.

This looks serious and this looks DESPERATE.

"“We need a merger partner or we’re not going to make it,” Mr. Mack told Mr. Pandit, according to two people briefed on the talks. Mr. Pandit, a former senior investment banker at Morgan Stanley, said Citigroup was not interested. It is thinking of deals it can strike with consumer banks, like buying the struggling Washington Mutual out of bankruptcy if its reported efforts to auction itself should fail, that would provide it with cheaper deposit funding. A Citigroup spokeswoman declined to comment.

Having failed at that, Mr. Mack entered into discussions on Wednesday with Wachovia and several other banks, people briefed on those discussions said. The talks with Wachovia are preliminary and a deal may not emerge. The banks declined to comment."

First of all Citigroup (C) can't afford to acquire anybody. Citigroup is dead. They have the kind of balance sheet that makes you vomit. You see, C is the king of Level 3 assets. How much does C have in Level 3 assets? Just THE MOST.

See Bulltrap: ABCP and Level 3 Bombs to see how much.
See Level 3 Rules to better understand the scam.

Second, the banks might as well wait and collect the same assets for pennies on the dollar AFTER a bankruptcy. Much like Barcley's just did with Lehman...

Honestly, this is what probably happened: C had two options. The first was to insult Morgan Stanley (MS) by saying the don't want to merge. The second was to openly acknowledge they cannot afford to buy them because they are about to die themselves. They took the path of least resistance.

C is the third largest component in the UltraShort ProShares Financials ETF (SKF).

People, especially the talking heads on Bubble Vision (CNBC) keep blaming these mythical short seller ninjas for these disasters...

I have one simple question for all the clowns that blame short sellers: "Isn't that a bit like blaming the flies for the shit?"

Explain to me why the Bulltards can't just absolutely smash the evil shorts in these stocks? Hmmmm? If these companies are so fine, why won't the 'smart money' swoop in and just eat the shorts? Just squeeze them until they squeal like little girls?

You know EXACTLY why. The flies are there because they smell nothing but SHIT.

End of story.

Treasury to Bail out Fed: Dumb, Docile Taxpayers Don't Care

The Fed is fast running out of money… and knows it.

Time for the Treasury to bail out the Fed.

Increase that balance sheet! Rape those dumb, docile taxpayers. Rape em all! They don’t seem to care anyways…

Treasury to Sell Bills to Bolster Fed Balance Sheet (Update1): “The U.S. Treasury said it will sell bills to allow the Federal Reserve to expand its balance sheet, a day after the government agreed to take over American International Group Inc.

“The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve,” the department said in a statement today. “The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program.”

Yesterday the Fed announced an $85 billion loan to AIG, in exchange for a 79.9 percent government stake in the largest U.S. insurer. The Fed also has set up several other emergency lending programs to provide Wall Street firms with ready access to funding.

The new bill program “will provide cash for use in the Federal Reserve initiatives,” the Treasury said.

The Treasury said it will sell the new bills using its existing auction procedures, giving “as much advance notification as possible.” The bills will not have a uniform fixed term, giving the Treasury the same duration flexibility that it has with cash-management bills.”

Gold has noticed. Pop! Largest gain in a long time.

Russia: Smashed Again, Halted Indefinately

On Tuesday Russia got pwned in One of the BRICs Just Bricked.
Yesterday it happened again. 10% down on top of a 17% decline the previous day.

This time markets were halted indefinitely…

Russian Exchanges Halt Trading for Second Day; VTB Declines: “Russia's Micex Stock Exchange and RTS Exchange halted trading for a second day as the Finance Ministry rushed to provide loans to the country's banking system and a Moscow brokerage sought to sell a stake to meet its financial commitments.

The Micex stopped trading indefinitely at 12:10 p.m. Moscow time, according to spokesman Alexei Gerasyuk. The RTS also halted trading on all stocks at 12:10 p.m. at the request of the Federal Financial Markets Service, it said in a statement. Regulators are looking for “stabilization measures” by 5 p.m. before any decision on resuming trading is made, RIA Novosti reported.”

How bad is it? The lack of liquidity spiked the overnight interbank lending rate… (Why does that seem familiar? Wait, don’t tell… Oh right: Fed Definitely Losing Control. Fed Funds Hits 6% and Losing Control? Fed Funds Climb to 6%)

“The Finance Ministry today pledged to lend 1.13 trillion rubles ($44 billion) for more than three months to boost liquidity in the banking system. The Mosprime rate, a measure of overnight interbank lending rates in Russia, jumped to a record high of 11.1 percent today from 5.7 percent a month earlier.”

These events will absolutely crater the Russian economy. I’m talking about the REAL economy here. Entire enterprises will get destroyed in this liquidity crunch, idling both machines and labor. This won’t become evident for months. But the damage has been done. Believe it.

Now, Russia hasn’t done anything completely stupid yet. Judging by what Pakistan and India have done, you just can’t rule out a giant brain fart:

India: Also Has Dumbest Idea, No More Commodity Futures
Pakistan: Has Dumbest Idea, Sets Floor for Stocks

Financials: Stay Short, Morgan Stanely Next Domino

I last covered these charts in Financials: Where Will the Rally Stop?: “With a little more time, a confluence of resistance put a lid on prices around the $75.00 area. The declining 200 day EMA (green line) and the declining trend line (black) will converge upon resistance around $75.00 (horizontal red).

For any of this to come into play, BKX must first break out of the current trading range of about $71.00.”

That was on September 4th and that is exactly what happened. Resistance around $75 held and prices dropped back “into the box”. Expect prices to test the lowers bounds around $60, before collapsing to the lows around $45.

“Regional Banks (KRX) bounced 60% from about $44.00 to about $71.00. The declining 200 day EMA (green line) acted as resistance. As long as the recent high of $71 holds, expect an eventual test of the lows around $45.00.”

That did NOT work out. Prices broke UP and OUT above $71 and are now well postured on SUPPORT. The slope of the 200 day EMA (green line) has actually turned up.

Personally, I’m not convinced yet that this is “real”. This may be forced hedge fund liquidation of short positions. For example, the failure of Lehman and AIG has resulted in the pulling of credit lines from some hedgies.

That being said, I’m willing to entertain the idea that as certain large institutions wobble, deposits and business may be rushing into smaller regional banks. For example, as Washington Mutual (WM) circles the drain, retail and corporate accounts may be fleeing to smaller regional banks.

The real economy hasn’t completely unraveled yet. It will. Believe it. Until then, I’m out of regional banks and I’ll wait until the charts scream “Get Short”.

While the UltraShort Financials ETF (SKF) certainly is volatile, prices only briefly violated a key support level. Since this is a derivative of a derivative, technical analysis doesn’t nearly have the same relevance on SKF. Because I have a diversified portfolio, I was able to ignore the spike down in price to $96.40 (it was pre-market after all) below my ‘stop out’ area of $106.45. I liked the price action so much over the course of the day, and other important positions of mine (DUG, SMN) moved so much in my favor, that I elected to keep the position. (As a discretionary trader I remain flexible. However, this can be a dangerous game to play.)

Now that one finance firm after another is getting whacked, I expect the three largest components of SKF (JPM, BAC and C) to fall significantly over the next few months.

“BAC is going to come up against a confluence of resistance around $34.00 where outright resistance (horizontal red line), the declining trend line (black line) and the declining 200 day EMA will all meet up. With prices now overbought, and up volume still anemic, it is probable that resistance will hold.”

These levels held and violently rejected prices. BAC fell back “into the box” and then dropped through support around $28 before closing above that key level. BAC is run by executives blinded by greed. Countrywide Financial was not a bargain. Merril Lynch (MER) is not a bargain. They are giant, undefined liabilities. To expand like this in a credit crisis is border line retarded. BAC shareholders will eventually realize this…

Heads up. Morgan Stanely (MS) appears to be the next domino targeted for the fall…

Pre-market MS is down 15%...

Lehman, Constellation Energy...

First the serious stuff:

Constellation Energy shares drop 18 percent on debt fears: “Shares in utility operator Constellation Energy Group Inc (CEG.N: Quote, Profile, Research, Stock Buzz) fell 18 percent on Tuesday on fears that banks may pull its credit lines.

The stock fall, following an 18 percent drop on Monday, came despite Constellation saying the Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) bankruptcy would not have a material adverse effect on the company or its subsidiaries.

In a research note, Citigroup Gobal Markets said Constellation's stock fall was exacerbated by the Lehman bankruptcy. And Credit Suisse cited "worries that the $2 billion credit facility from UBS/RBS (Royal Bank of Scotland) could be pulled."

"Investing in Constellation is tough," said Credit Suisse.

The cost to insure Constellation's debt soared 60 percent Tuesday to a record high. Credit default swaps jumped to 478 basis points, or $478,000 per year, to insure $10 million in debt for five years, from 304 basis points on Monday, according to Markit Intraday.

Constellation stock was down $8.76 at $39.25 on the New York Stock Exchange.”

The Lehman (LEH) bankruptcy does have consequences…

Now for the funny stuff:

Watch the two guys right behind the reporter.

Awesome Wall Street Prank - Watch more free videos

Bernanke and Paulson

All I did was say, "Good morning. How you doing?" and they both went absolutely mental on me...

Paulson flipped his lid.
Bernanke didn't say a word. He just cried softly...

Russia: One of the BRICs Just Bricked...

“It's panic. There are problems with liquidity on the market. People are having problems with refinancing their positions so they started selling.” -Oleg Vorotnitsky, Uralsib Financial Corp.

One of the BRIC’s* just bricked…

Eventually they will all get rinsed like this. Hot money moves fast… and hot money is ‘weak’ money. Expect forced liquidation and repatriation in size.

Russia's Micex Index Falls Most Ever After Dollar Rates Double: “Russia's Micex Index fell the most since Bloomberg began tracking the measure in May 2001, losing 14 percent, after the cost of borrowing in dollars overnight more than doubled and as oil prices tumbled.

OAO Sberbank and OAO VTB Group, Russia's two biggest banks, led the decline in Moscow, falling 14 percent and 16 percent respectively. Financial stocks worldwide slid after American International Group Inc., the biggest U.S. insurer, had its credit ratings downgraded. OAO Rosneft, the government-controlled oil producer, lost 10 percent.

The ruble-denominated Micex plunged 14 percent to 919.24 at 4:11 p.m. in Moscow, the lowest level in almost three years. The dollar-denominated RTS Index dropped 10 percent to 1,151.16, a 54 percent retreat from its highest close of 2,487.92, on May 19.”

*BRIC = Brazil, Russia, India and China

Fed Definately Losing Control. Fed Funds Hits 6%

Money-Market Rates More Than Double Amid Global Credit Seizure: “The cost of borrowing in dollars overnight more than doubled as banks hoarded cash amid speculation more financial institutions will fail.

The overnight dollar rate soared 333 basis points to 6.44 percent today, its biggest jump, according to the British Bankers' Association. Rates climbed yesterday after Lehman Brothers Holdings Inc. succumbed to mounting credit-market losses and filed for bankruptcy.”

I mentioned this yesterday in Losing Control? Fed Funds Climb to 6%. It looks like we have follow through this morning.

The markets now face the very real possibility of a disorderly liquidation. (That’s just a fancy way of saying MELTDOWN.)

“The European Central Bank, Bank of England and Swiss National Bank offered financial institutions emergency cash for a second day today as the credit rout threatened to derail markets.

The Frankfurt-based ECB offered 70 billion euros ($100 billion) in a one-day refinancing operation. Fifty-six banks bid for a total of 102.5 billion euros. The Bank of England injected 20 billion pounds ($36 billion). The SNB also said it will offer overnight cash.”

The ECB and BOE are all scrambling to inject record amounts of liquidity.

Losing Control? Fed Funds Climb to 6%

“If the fed funds rate closes high today, I would be really worried as it would mean that there really is no money out there to be lent.” –Stan Jonas, Axiom Management Partners

The Fed may be losing control here. They’ve flooded the banking system with $70 billion in temporary reserves and that only took the rate for overnight loans between banks down to 4% from a high of 6%. The target is 2%...

Fed Funds Climbs the Most Over Target Rate in Decade (Update1): “The rate for overnight loans between banks soared to its greatest margin over the Federal Reserve's target rate in at least a decade as banks hoard cash after Lehman Brothers Holdings Inc.'s bankruptcy.

Fed funds traded as high as 6 percent, or 4 percentage points above the target rate, according to ICAP Plc, the world's largest inter-dealer broker. The difference is the greatest since Bloomberg began tracking the data in 1998. The rate dropped to 4 percent after the central bank added a total o of $70 billion in temporary reserves to the banking system.

The central bank uses repurchase agreements, or repos, to buy or sell Treasury, mortgage-backed and so-called agency debt for a set period, to help maintain enough money in the system to keep overnight interest rates close to the target. They don't signal a policy shift. Futures show traders boosted odds to 68 percent that the Fed will cut rates when policy makers meet tomorrow to offset financial market turmoil.”

Why equities aren’t in a death spiral is beyond me. My guess is they will be soon enough…

“The Fed widened the collateral it accepts yesterday for loans to securities firms in an effort to help Wall Street weather Lehman's bankruptcy.

The Fed added $50 billion in temporary reserves to the banking system when it arranged overnight repurchase agreements, or repos, at 11:50 a.m., after providing $20 billion earlier.

When the Fed added the reserves at 9:40 a.m., federal funds, the overnight lending rate between U.S. banks, traded at 4.25 percent, above the central bank's target rate, according to ICAP. The rate was 6 percent at the time of the second open market operation. Fed funds opened at 3.5 percent today.”

Bill Gross: Gets Caught on Lehman Bankruptcy

Finally. Bill Gross gets caught balls out…

Don’t get me wrong, I’m definitely not happy that real losers will be the pension funds that invest with Pimco and by extension innocent retirees… BUT, Bill Gross has been playing with fire. His recent bets have been MASSIVE, very CONCENTRATED and rely exclusively on TAXPAYER FUNDED BAILOUTS to work out.

I wrote about this is Bill Gross: Big Bet, Big Fail? He got made whole on the Fannie Mae and Freddie Mac bailout.

Not this time. The bankruptcy of Lehman (LEH) sticks Billy with $143 billion of bonds that are expected to result in about $86 billion in losses.

Pimco, Vanguard Are Biggest Bond Fund Losers in Lehman Collapse: “Pimco Advisors LP, Vanguard Group Inc. and Franklin Advisers Inc. are among the investment companies that will face losses of at least $86 billion stemming from the collapse of Lehman Brothers Holdings Inc., the biggest bankruptcy in history.

Mutual fund companies' filings show they hold more than $143 billion of bonds, led by Newport Beach, California-based Pacific Investment Management Co., manager of the world's biggest bond fund, and Valley Forge, Pennsylvania-based Vanguard, according to data compiled by Bloomberg as of June 30.

While bond investors will recover different amounts based on their ranking in Lehman's capital structure, models of credit default swaps assume lenders will recoup 40 percent of their loans overall in a bankruptcy. Investors may receive less than that, based on prices for Lehman's senior bonds of as little as 35 cents on the dollar from market reporting system Trace.

Pimco holds Lehman bonds in at least 12 of its funds, including the $134 billion Total Return Fund. Bill Gross, manager of the fund and co-chief investment officer of Pimco, was buying Lehman bonds as recently as June, Bloomberg data show.”

FDIC Can't Afford Washington Mutual Failure

Read that:

“Washington Mutual had $143bn in insured deposits on June 30 - about three times the size of the deposit insurance fund, but less than half of its $307bn assets.”

Read it again. Think about it.

Washington Mutual (WM) will probably be dead by Friday. How will that work?

Deposit insurance system may face WaMu test: “Attention has focused on the danger presented by the failure of Lehman Brothers. But the failure of a commercial bank such as Washington Mutual can have systemic consequences if it threatens a run on other weak banks.

Washington Mutual - the sixth largest bank in the US - has lost more than a third of its market value recently as investors fear it lacks liquidity and capital to survive the credit crisis.

The failure of a bank its size would test the strength of the US deposit insurance system and its ability to maintain the confidence of the nation's savers.

The US Federal Insurance Deposit Corporation covers the first $100,000 in deposits held by each individual in a given bank. As of June 30, 64 per cent of the total $7,000bn deposits were insured in the US - a much larger proportion than in the UK at the time when Northern Rock. the commercial bank, failed.

Nonetheless, this still leaves $2,500bn in uninsured deposits. If a high-profile failure causes these uninsured deposits to shift abruptly in a flight to safety, it could be highly destabilising for the banking system.

The US could be forced to adopt a de facto blanket guarantee on all bank deposits, as the UK did on a temporary basis during the Northern Rock crisis.

There are other precedents. At the start of the Asian financial crisis in the 1990s, the International Monetary Fund opposed extending deposit guarantees. But the IMF soon changed tack and told crisis-hit countries to issue full guarantees.

A formal blanket guarantee in the US would require legislation. But under a 1991 law, the FDIC could seek a systemic risk exemption to cover all the deposits of a failing institution, subject to the approval of its board, a supermajority of the Federal Reserve governors, and the Treasury secretary in consultation with the president.

The FDIC has no desire to invoke this authority - which has never been used; would be unpopular with taxpayers; and would carry a cost in terms of moral hazard.

The FDIC is respected for its operational effectiveness. But its $45bn deposit insurance fund is underfunded according to its own guidelines, at 1.01 per cent of insured deposits.

The FDIC is preparing a capital replenishment plan that would involve raising premiums paid by banks.

But analysts fear it may have to draw on its $70bn Treasury credit lines. Alan Avery, a partner at Arnold and Porter, said a single failure - if big enough - "would cause the FDIC to immediately draw on the Treasury credit".

Washington Mutual had $143bn in insured deposits on June 30 - about three times the size of the deposit insurance fund, but less than half of its $307bn assets.”

Kaboom...

The headlines this morning aren’t good. It’ll take a while to catch up…

Lehman Files for Biggest Bankruptcy as Suitors Balk (Update2): “Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, succumbed to the subprime mortgage crisis it helped create in the biggest bankruptcy filing in history.

The 158-year-old firm, which survived railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management a decade ago, filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The collapse of Lehman, which listed more than $613 billion of debt, dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990.”

Wow. Just wow. On Friday I said Lehman: Will Get Sacrificed, No Bailout:

“Lehman doesn’t stand a chance here.

These guys are going to get sacrificed…”

Bank of America to Acquire Merrill as Crisis Deepens (Update1): “Bank of America Corp., the biggest U.S. consumer bank, agreed to acquire Merrill Lynch & Co. for about $50 billion as the credit crisis claimed another of America's oldest financial companies.

Bank of America will pay $29 a share for New York-based Merrill in stock, 70 percent more than the Sept. 12 closing price, the company said in a statement today. Merrill, battered by $52.2 billion in losses and writedowns from subprime-mortgage- contaminated securities, has plunged more than 80 percent from its peak of $97.53 at the start of last year.”

Wow. Well, this stops the second domino from falling as the first goes up in flames…
Merril Lynch (MER) clearly knew they’d be next and cut what probably amounts to the fastest deal ever. The poor bastards at Bank of America (BAC) probably haven’t slept in weeks.

The largest component of the Financials UltraShort ETF (SKF) is BAC. I highlighted the three largest components in the post Time to Go Ultra Short Again.

China Cuts Rates as U.S. Turmoil Adds to Global Risks (Update2): “China cut interest rates for the first time in six years and allowed most banks to set aside smaller reserves as worsening credit-market turmoil and weakening export demand dim the outlook for economic growth.

The People's Bank of China reduced the one-year lending rate to 7.20 percent from 7.47 percent, effective tomorrow, and lowered the reserve ratio at the nation's smaller banks by 1 percentage point. The changes were in a statement on the central bank's Web site today.”

China will feel the pain too. Remember, they produce to export.

Stocks Drop Worldwide as Treasuries Surge on Lehman Bankruptcy: “Stocks tumbled worldwide, the dollar fell and U.S. Treasuries surged after the bankruptcy of Lehman Brothers Holdings Inc. drove investors to the safety of government debt.

Equities dropped in Europe and Asia, led by a 36 percent tumble in HBOS Plc and a 10 percent decline in Macquarie Group Ltd. Futures on the Standard & Poor's 500 Index fell 4 percent as American International Group Inc. sank 46 percent. Russia's Micex Index declined 5.3 percent, leading a retreat in emerging markets.”

ECB, BOE Join Fed in Soothing Markets After Lehman (Update1): “The European Central Bank and the Bank of England joined the Federal Reserve in taking action to soothe financial markets spooked by Lehman Brothers Holdings Inc.'s bankruptcy filing.

The ECB said it awarded banks 30 billion euros ($43 billion) in a one-day money-market auction that was more than three times oversubscribed. The Bank of England loaned banks 5 billion pounds ($9 billion) for three days. Earlier, the Federal Reserve widened the collateral it accepts for loans to securities firms.”

Oil Falls More Than $7 as Lehman Fails, Ike Spares Refineries: “Crude oil fell more than $7 to a seven-month low as Lehman Brothers Holdings Inc. filed for bankruptcy and refineries along the Gulf of Mexico escaped major damage from Hurricane Ike.

Futures dropped on speculation turmoil on Wall Street and the worsening credit crisis may slow the global economy, cutting energy demand. ICE Futures, the exchange for Brent oil, suspended Lehman's access. Refiners said preparations are under way to restart plants in the Houston area, home to more than 20 percent of U.S. refining capacity.”

Credit-Default Risk Soars After Lehman Files for Bankruptcy: “Concern the $62 trillion credit derivatives market will unravel increased after Lehman Brothers Holdings Inc. filed for bankruptcy.

Benchmark gauges of corporate credit risk rose by a record in Europe, and traded at an all-time high in North America, after an emergency trading session in New York yesterday where investment banks sought to minimize losses from Lehman's collapse. U.S. two-year Treasuries climbed, pushing yields below 2 percent for the first time since April, as investors sought the relative safety of government debt.

Lehman, the fourth-largest securities firm until last week, has been one of the 10 largest counterparties in the market for credit-default swaps, according to a 2007 report by Fitch Ratings. The market, which is unregulated and has no central exchange where prices are disclosed, has been the fastest-growing part of so-called over-the-counter derivatives, according to the Bank for International Settlements.”

I’m not gonna lie. I’m sitting pretty today. I’m short the entire financial AND commodities complex.

For high frequency, short term traders such as myself, today is going to be a wild party.