Ever since the sub-prime crisis last year, the financial turmoil has claimed several victims, ranging from US financial institutions Freddie Mac and Fannie Mae to global investments firms such as Merrill Lynch and American International Group (AIG). Spooked by the continuing downturn and the severe credit crunch in the financial markets, US Treasury Secretary Henry Paulson and Fed chief Ben Bernanke discussed less than 24 hours after the US$85b bailout of AIG to plug the root of the financial problems through a US$700b plan.

FALL OF THE TITANS

No one would have imagined that the credit crunch in global markets would have caused such havoc, demolishing titan after titan. Bear Stearns was the first casualty, sold to JP Morgan Chase for US$10 per share. Lehman Brothers (Lehman), with its 158 years of history collapsed with US$600b of debt, courtesy of its exposure to risky loans and financial instruments. Merrill Lynch was sold to Bank of America (BoA) for US$50b within 48 hours when its CEO John Thain realized that Merrill Lynch would file for bankruptcy like Lehman if it did not act soon.

The downgrade of AIG’s debt ratings forced the cash-strapped firm to raise another US$14.5b to cover its obligations. Leading banks would not lend to each other out of fear that the loans would not be repaid. This was the main reason why the Fed had to bailout AIG as banks and funds refused to rescue the insurance giant due to its deep deficit. Also, AIG was deeply rooted to corporations and ordinary people throughout the world through its insurance businesses and the failure of AIG would cause repercussions around the world.

THE GREAT BANK SALE

Barclays’ CEO Robert Diamonds called his acquisition of Lehman’s New York headquarters and two data centres in New Jersey a “once in a lifetime opportunity”. The firm had waited for Lehman to file for bankruptcy so that it could purchase only the parts of Lehman that it wanted. BoA’s acquisition of Merrill Lynch will make BoA the largest US brokerage and more investment banking exposure although BoA could have saved an additional US$15b if it had waited one more day as Merrill Lynch’s share price slid. British bank Lloyds TSB rescued its distressed rival HBOS in a US$22b takeover deal whereas Morgan Stanley are said to be looking at potential mergers and further injection of funds.

MOPPING UP FAILED ASSETS

The Bush administration’s proposal to save the US economy involves not just a mind-boggling US$700b but also the vast powers conferred on Paulson. Paulson would have the authority to buy home loans, mortgage-related securities and other assets deemed necessary to stabilize the financial markets. The purchases would be paid with taxpayers money and would raise the US’s debt ceiling from US$10.6t to US$11.3t. Assets would be purchased through reverse-auctions issued on or before 17 September 2008. The US hoped that the package would allow the US economy to recover and these assets could be sold for a profit, so taxpayers, who are ultimately paying for the bailout, will get some money back.

WILL THE CRISIS END?

Investors around the world are hoping that the latest salvo by the US government would finally hit the nail in the coffin on the financial crisis. However, the US is looking at a bigger deficit after this rescue and there is no guarantee that the proposal could revive the economy. As banks and financial institutions merge, they would provide a bigger headache if they fail in the future as they control astronomical amounts in the financial markets. Investors are advised to wait for confirmation of the US proposal before jumping in