Today's Papers

The Nightmare on Wall Street

The New York Times, Washington Post, and Los Angeles Timeslead with, and the Wall Street Journal devotes most of its front-page real estate to, the Sunday that shook up Wall Street. The LAT and WSJ announce the news with banner headlines this morning, and the Journal doesn’t mince words: “Crisis on Wall Street.” The fast-moving story has several parts to it, but here’s the gist: Lehman Bros. will file for bankruptcy, Merrill Lynch agreed to be sold to Bank of America, and insurance giant American International Group could be the next big casualty of the global credit crisis. In an effort to prevent more trouble, the Fed announced it would make it easier for securities firms to borrow money, and 10 big banks agreed to create a $70 billion fund that any of them could access if they find themselves in desperate need of cash. The WP says that the American financial system “faced its gravest crisis in modern times” this weekend.

USA Todayfronts the news out of Wall Street but goes high with the trail of devastation left by Hurricane Ike: It might take months to fix. Millions of people across three states don’t have power, and the state’s largest rescue effort in history is under way. Things could have been much worse, though, as the number of deaths attributed to Ike stood at 21 even though thousands of people chose to ignore the evacuation orders. Meanwhile, pressure on gas prices continued as much of the oil and gas industry along the Gulf Coast continued to be shut down yesterday.

The NYT says Sunday was “one of the most dramatic days in Wall Street’s history” that will “reshape the landscape of American finance.” The WSJ agrees and notes that the “American financial system was shaken to its core” yesterday, an assessment that is easily backed up by all the panicked statements from Wall Street insiders, who are bracing for bad news when the markets open today. “These are the most extraordinary events I’ve ever seen,” said the co-founder of the private equity firm the Blackstone Group. “We are in a hysteria,” a banking analyst tells USAT.  “This is frightening as hell,” another analyst summarizes to the LAT.

The unraveling began when the U.S. government, which only a week ago was announcing the bailout of Fannie Mae and Freddie Mac, made it clear that no taxpayer money would be used to prop up Lehman. Potential buyers then balked at the idea of taking on so much risk and Lehman announced it would be filing for bankruptcy, a move that would force the 158-year-old firm to close its doors. In a separate front-page analysis, the NYT characterizes the events as a high-stakes “game of chicken” in which neither the federal government nor Wall Street backed down.  

After the talks to find a way to save Lehman collapsed, Bank of America announced a $50 billion deal to buy Merrill Lynch at $29 a share, which represents a 70 percent markup on the firm’s Friday closing price. The move instantly made Bank of America the biggest winner of the current crisis, as the nation’s largest retail bank, credit card company, and mortgage lender will now take control of the country’s largest army of stock brokers.

If approved by shareholders, the move would “create a bank of vast reach, involved in nearly every nook and cranny of the financial system,” notes the WSJ. The move is particularly sweet for Bank of America because it has long tried to build up its own investment arm without much luck. And although it does carry a lot of risk, Bank of America “compared the choice to fighting a fire: Executives felt that Merrill Lynch could be saved, but Lehman was lost already.” The WSJ says the Federal Reserve may have been involved in orchestrating the sale.

Meanwhile, executives at American International Group spent the weekend frantically trying to raise cash as the insurance giant faced the prospect of a potentially devastating downgrade in its credit rating “that could spell its doom,” reports the NYT. AIG was seeking to borrow $40 billion from the Federal Reserve, without which the company may not survive past Wednesday. The NYT calls AIG’s efforts to get money directly from the Fed an “extraordinary move” that could motivate other companies to try the same tactic, but it’s far from clear whether the Fed will be willing to play along.

In its analysis, the NYT says there are hopes that the purchase of Merrill Lynch could be enough to reassure investors. But there’s still no getting around the fact that, including the demise of Bear Stearns, by the time the markets open today, “three of the Street’s five major independent brokers could end up disappearing,” as the WSJ points out. And no one thinks this will actually be the end of it. The WP says these were merely “the first steps” in trying to find “a fundamentally new architecture for the financial world.” And, hold on, because the WSJ’s editorial board says that the “only thing anyone knows for certain is that today will be tumultuous for financial markets.”

In other news, the NYT fronts, and everyone notes, Barack Obama’s raising of  $66 million in August, a personal record that included money from half a million people who had never given money to his campaign previously. It amounts to the most money that a presidential candidate has ever raised in one month, but still may not give Obama a clear advantage over his rival because of the huge fundraising success of the Republican National Committee. And while he’s not constrained by the same financial limits as McCain, who accepted public financing, Obama also has to spend much more time fundraising.

The WP notes that despite all the talk about changing the electoral map, the campaigns are devoting most of their energy and resources in the final 50 days to familiar battleground states. As was the case in the last two campaigns, the four states that will receive the most attention from the candidates are Pennsylvania, Michigan, Ohio, and Florida. In addition, Obama hopes to turn five states that voted for President Bush in 2004: Iowa, New Mexico, Colorado, Nevada, and Virginia. For his part, McCain is working on turning two states to his side: Wisconsin and New Hampshire.

Well, that’s a relief … “Will the U.S. financial system collapse today, or maybe over the next few days?” asks the NYT’s Paul Krugman. “I don’t think so—but I’m nowhere near certain.”