We have by no means seen the end to the banking crisis, as we see the UK government increase it’s steak in the Royal Bank of Scotland (RBS) to 70%! RBS has converted the preference dividends into ordinary shares to avoid paying the £600 million a year 12% fixed dividend so as to increase lending.

So the UK is at the point of having its very first nationalised bank, as Gordon Brown prepares for a new bank bail-out package to encourage further lending. Across the Irish see the Irish Government is looking to Nationalise the Anglo Irish Bank, as funding problems continue with this bank. So we are far from out of the woods and I might go as far as to suggest that we might even be still on the way into the woods!

The government also revealed a £20 billion loan guarantee scheme for small and medium businesses this week designed to limit the risk to banks that lend to businesses with a turnover of less than £500 million.

Mixed retail news

Matalan reported this week that its sales in its five weeks to 4 January were up by 5.9% over the same period last year. Matalan has 203 stores across the UK and sells discount clothing. Primark has also reported an increase in its Christmas sales which were up by and incredible 18% over the 16 weeks period to 3 January. In contrast to this Next reported a 7% drop in sales between July 2008 and Christmas and M & S have reported third quarter merchandise sales down by 8.9%.

Good news on the jobs front, as Waitrose is on an expansion push and intends to add 4,000 jobs, as the company prepares to buy 13 stores from the Co-op and open a further 9 stores across the country.

Computers sector in a down-turn

Although less than expected, Intel reported a staggering 90% fall in the last three months of 2008 falling to $234 million (£158 million) from £2.3 billion (£1.58 billion). Sales of computers have dropped as business owners delay spending money on buying new equipment as do domestic users pull back on their own spending on computers.

A change across the pond in America as Barack Obama prepares to take office next week he has pledged to spend $100 billion (£67.5 million) of the remaining bank bail-out fund on tackling the US mortgage crisis. The US senate has already given Mr Obama their approval to spend the balance of this fund, which amounts to $350 billion (£236 billion). The senate has also revealed plans for an $825 billion (£556 billion) package for tax cuts and spending to stimulate the US economy.

This week also saw America’s largest bank knocking on the US governments door yet again, as the Bank of America is to receive a further $20 billion (£14 billion) US government funds and a further $118 billion (£79.6 billion) of guarantees against bad assets. Bank of America had one of the strongest balance sheets of all American banks up to taking over Merrill Lynch, which has posted huge losses and there are reports that allegedly, the takeover by the Bank of America and the due diligence was not done properly.

Which car-makers will survive this crisis?

Third quarter car-sales saw a drop of 20% which led Guenter Verheugen the EU’s Industry Commissioner to warn that there are no guarantees that all European car-makers will survive the economic turn-down. The US carmakers are already having major problems and two of the mains ones, Chrysler and General Motors, would have gone to the wall if the US government had not bailed them out with spent billions of dollars.

End of the week saw:
Stock exchanges:
FTSE 100: 4,147
DOW: 8,281
S&P: 850.12
Nikkei: 8,230

Currencies
UK Sterling £ to US Dollar $ 1.48309
UK Sterling £ to Euro € 1.11306
UK Sterling £ to Japanese Yen 134.980
UK Sterling £ to Aus $ 2.19359
US Dollar $ to Euro € 0.750479
US Dollar $ to Japanese Yen 91.0150

Commodities
Nymex Crude oil – $36.51
Gold – $839.90

Ken Lewis, the chief executive of Bank of America, said yesterday that “I don’t know of a major bank that doesn’t have some significant exposure to AIG”.

So AIG’s need to raise billions in new capital to shore itself up has sent shockwaves through global markets and helped to undermined the share prices of many banks.

But how exactly are banks “exposed” to AIG?

Light is shed by an insightful bit of research by Sandy Chen of Panmure Gordon.

He has found the following paragraph in AIG’s US regulatory filing:

“Approximately $307bn (consisting of corporate loans and prime residential mortgages) of the $441bn in notional exposure of AIGFP’s super senior credit default swap portfolio as of June 30, 2008 represented derivatives written for financial institutions, principally in Europe, for the purpose of providing regulatory capital relief rather than risk mitigation. In exchange for a minimum guaranteed fee, the counterparties receive credit protection with respect to diversified loan portfolios they own, thus improving their regulatory capital position.”

If you managed to read to the end of that, your reaction is probably “you what?”

Well, I’ll tell you what.

AIG is saying here that it has insured $307bn of corporate loans and prime residential mortgages that are on the balance sheets of banks, mostly European banks.

The banks have bought this insurance to protect themselves against the risk that these loans would go bad, that borrowers would default.

Their motive for doing so was to reassure their respective regulators – such as the FSA for UK banks – that these loans are of minimal risk.

And the benefit of doing that was that they could lend considerably more relative to their capital resources.

But if AIG is in trouble, then doubts arise about whether it would be able to honour the financial commitments it has made through these insurance contracts (which, for those of you who like to learn the lingo, are called super senior credit default swaps).

In fact, in a wholly mechanistic way, the downgrades of AIG’s credit rating that we saw last night automatically increased the perceived riskiness of loans made by banks that have insured credit with AIG.

Which means those banks’ balance sheets become weaker – and that could mean that they’ll be forced by their regulators to raise additional capital.

So there’s a widespread view among bankers that the US Treasury and the Federal Reserve simply can’t allow AIG to fail, in the way that they felt that they could allow Lehman to collapse into insolvency.

If AIG went down, a number of banks’ balance sheets would be mullered – there would a dangerous risk to the stability of the global financial system.

Or to put it another way, AIG is so pivotal in the global financial system, it can’t be consigned to the dustbin of history in a precipitous way.

PS. For those of you who currently have the willies about HBOS, its exposure to AIG is not life threatening.

What’s currently doing for HBOS’s share price is blindingly obvious: it provides 20% of all UK residential mortgages; the UK housing market is the major vulnerability of the UK economy; if there’s a sharp rise in the number of homeowners defaulting on their mortgages, HBOS would incur significant losses, especially on self-cert, buy-to-let and loans with a high loan-to-value ratio.

But HBOS has recently raised £4bn of new capital to cushion itself against the impact of just such a debacle.

So there is more fear than reason underlying the success of the short-sellers in driving down HBOS’s share price – although the short-sellers will claim a modest victory in the decision by Standard & Poors to lower HBOS’s credit ratings by a smidgeon.

But HBOS’s ratings remain pretty strong. And the rating cuts shouldn’t lead to a sharp increase in the cost of its finance or to an exodus of those who provide that finance.

UPDATE 19:25

I suspect that Sandy Chen has found only a part of AIG’s credit protection business, since I am told that US banks are more exposed to AIG than are European banks (which is not what the regulatory filing spotted by Chen shows).

And here’s a compelling wrinkle. AIG writes its credit default swaps contracts (its loan insurance business) through a French banking subsidiary.

Even so, the possible collapse of AIG isn’t a French problem. What AIG needs to obtain is financial support from the American taxpayer at the top holding company level in the US – and it would then use these funds to recapitalise the French bank it owns.

What this shows is the fearful complexity of AIG’s corporate structure, which just adds to the difficulty in negotiating a rescue.

News reported by The BBC

US consumer prices fell in August for the first time in nearly two years due to lower energy costs, data shows.

Labor Department figures showed the Consumer Price Index (CPI) was 0.1% lower month-on-month, and followed July’s 0.8% increase.

However on a yearly basis, prices were 5.4% higher.

The news comes as the US central bank meets to decide on interest rates, with some analysts saying the drop could make a rate cut more likely.

“If the Fed is thinking of cutting interest rates this afternoon, this gives them a little more freedom to do that,” said Robert McIntosh, lead economist at Eaton Vance.

It had been widely expected that the Federal Reserve would opt to leave interest rates on hold at 2%.

But in light of significant turmoil in the financial markets, and uncertainty over the health of the world’s largest economy, there are expectations that the central bank could lower rates.

The demise of Lehman Brothers and uncertainty over the future of insurance giant AIG, as well as the acquisition of Merrill Lynch by Bank of America have all added to market jitters.

News reported by The BBC

Bank of America is to buy Merrill Lynch in a deal worth $50bn (£28bn) that will create a new financial giant.

The deal came amid a hectic weekend on Wall Street, with Lehman Brothers announcing that it would file for bankruptcy protection.

There were worries that Merrill would be the next bank to lose the confidence of investors as it has been hit hard by bad mortgage debt.

Merrill has written down more than $40bn of assets in the past year.

Under the terms of the deal, Bank of America will pay about $29 for each Merrill share.

While that represents a 70% premium to the closing share price on Friday, Merrill’s share price stood at $50 in May and was above $90 at the start of 2007.

‘Great opportunity’

“Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders,” said Bank of America chairman and chief executive Ken Lewis said in a statement.

“Together, our companies are more valuable because of the synergies in our businesses.”

The deal will also see three Merrill Lynch directors join the board of Bank of America.

“Merrill Lynch is a great global franchise and I look forward to working with Ken Lewis and our senior management teams to create what will be the leading financial institution in the world with the combination of these two firms,” said John Thain, Merrill’s chairman and chief executive.

The deal – which is expected to be completed early next year – has been approved by directors of both companies, but now will need the approval of shareholders and regulators.

News reported by The BBC

The fourth-largest investment bank in the US, Lehman Brothers, has said it will file for bankruptcy protection, amid a growing global financial crisis.

Lehman had incurred losses of billions of dollars in the US mortgage market.

The move threatens to deal a further blow to the global financial system, as banks unwind their deals with Lehman.

Merrill Lynch, also stung by the credit crunch, has agreed to be taken over by Bank of America in a dramatic weekend of events for Wall Street.

Stock markets in Europe and Asia dropped sharply and the dollar tumbled against the euro and the yen as Lehman’s failure raised fears about the strength of the global financial system.

“The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence” Robert Peston, BBC business editor

The FTSE 100 index of leading UK shares was down 160 points, almost 3%, at 5256.50 in early exchanges.

Wall Street is also expected to open lower in what is likely to be a tense day of trading.

The Bank of England and the European Central Bank said they were monitoring money markets and stood ready to intervene if necessary.

Talks collapse

The chance that Lehman Brothers could collapse increased sharply after the strongest potential buyers pulled out at the weekend.

Barclays and Bank of America had been in talks to rescue the bank but negotiations faltered when it became clear that the US Treasury was strongly opposed to using government money to help clinch a deal.

Greg Wood, the BBC’s North America business correspondent, said that police had cordoned off the bank’s headquarters in New York and staff were leaving with cardboard boxes as onlookers gathered to watch the bank’s demise.

“I think the whole history – 150 years of effort and hard work – that’s the most saddening part for me,” said one Lehman employee as she left the building.

The bank, which employs about 25,000 staff worldwide, including 5,000 in the UK, was founded in 1850 by three brothers.

‘Extraordinary 24 hours’

Lehman Brothers said it intended to file for Chapter 11 bankruptcy protection, which allows a company time to reorganise and devise a plan to pay creditors over time.

It said that its broker-dealer division and asset management division Neuberger Berman Holdings would not be included in the filing.

The accounting firm PriceWaterhouseCoopers said the UK operations of Lehman Brothers have been placed under administration, and the business would be wound down in an orderly fashion.

Bank of America said it had agreed to buy investment bank Merrill Lynch for $50bn (£28bn), in a deal that will create the world’s largest financial services company.

Three of the top five US investment banks have now fallen victim to the credit crunch. Lehman and Merrill join Bear Stearns, which was sold to JP Morgan for a knockdown price in March.

The BBC’s business editor, Robert Peston, said that it had been Wall Street’s most extraordinary 24 hours since the late 1920s.

He said that Merrill’s sale was almost as shocking as Lehman’s demise.

“The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence,” he said.

Insurer in trouble

In addition to Lehman and Merrill Lynch, problems at AIG, once the world’s largest insurer, are also mounting.

Reeling from losses on its exposure to real estate, AIG has sought $40bn from the Federal Reserve to shore up its finances, the New York Times has reported.

To help prevent panic on financial markets, the Federal Reserve said for the first time it will accept stocks owned by banks as collateral for short-term cash loans, broadening its emergency lending programme.

Also 10 of the world’s biggest banks on Sunday agreed to establish a $70bn emergency fund, with any one of the banks able to able to tap up to a third of it should they face any liquidity problems.

News reported by The BBC

Executives at Lehman Brothers are racing to meet a deadline of Sunday night to find a new owner for the troubled bank, the BBC has learned.

The BBC’s business editor Robert Peston says that Bank of America is the main candidate to buy Lehman but Barclays may also play a role in the rescue.

Bankers close to Lehman warned that failure to conclude a deal by then would be devastating for firm.

Investors sent Lehman shares tumbling again in New York trading.

“If a solution isn’t found by the time Asia opens for business on Monday, well the consequences would be disastrous,” a senior banker told the BBC.

Our correspondent says that the US Treasury is working assiduously behind the scenes to facilitate a takeover of the bank.

He says that Barclays is taking part in the negotiations to buy all or part of Lehman but a US solution, led by Bank of America, is still the most likely outcome.

Lehman’s fund management business, which is in relatively good shape, may be sold separately, he adds.

Losses mount

Lehman announced the biggest loss in its history on Wednesday and investors remain unconvinced by the bank’s plans to strengthen its finances.

Lehman shares fell 13.5% to close at $3.65 in New York after falling around 40% on Thursday.

“Lehman will be lucky to end the day as an independent bank” Robert Peston, BBC business editor

The company has lost 80% of its market value since Monday. Six months ago the stock was trading at $48.65.

The Financial Times reported that Bank of America is considering a joint bid for Lehman with with private equity firm JC Flowers and China Investment Co, the Chinese sovereign wealth fund.

Concerns over the fate of Lehman follow the bail-out on Sunday of mortgage giants Freddie Mac and Fannie Mae. The lenders were thrown into financial difficulty after the collapse of the US sub-prime mortgage market.

Our correspondent says that Wall Street has lost confidence in Lehman’s capacity to survive as an independent entity.

But he questions whether any company would take the plunge and take over Lehman without some government support.

“The US Treasury may… have to provide some backstop underwriting for Lehman, so that an orderly resolution of Lehman’s woes can be achieved,” our correspondent says.

“When confidence in a bank erodes, it ebbs at first and then is gone in a great whoosh. Lehman will be lucky to end the day as independent bank.”

White House spokesman Tony Fratto said the US Treasury “is closely monitoring the markets and they stay in contact with market participants”.

News reported by The BBC

NEW YORK, July 21 (Reuters) – Bank of America Corp, the largest U.S. retail bank, on Monday posted lower but better-than-expected quarterly results, offsetting a surge in bad debts tied to falling home prices and a slowing economy.

While the 41 percent drop in second-quarter profit was the fourth straight quarterly decline, Bank of America was the latest big U.S. bank to exceed analysts’ forecasts.
The bank also said its July 1 acquisition of Countrywide Financial Corp, once the nation’s largest mortgage lender, will add to profit faster and result in deeper cost cuts than previously estimated.
Bank of America shares rose $2.40, or 8.7 percent, to $29.89 in premarket electronic trading.
Second-quarter net income for the Charlotte, North Carolina-based bank fell to $3.41 billion, or 72 cents per share, from $5.76 billion, or $1.28 per share, a year earlier.
Results included $212 million of merger and restructuring costs. Net revenue increased 4 percent to $20.32 billion.
Analysts on average had expected profit of 48 cents per share on revenue of $18.26 billion, according to Reuters Estimates.
Chief Executive Kenneth Lewis said the bank had “solid results in a difficult financial environment,” with good results in virtually all businesses not tied to real estate.
Write-downs tied to disrupted capital markets totaled $1.22 billion, down from the first quarter’s $2.81 billion.
Results excluded a $2.33 billion loss at Countrywide — acquired the day after the second quarter ended — which reflected just under $4 billion of credit-related losses.
Bank of America expects the $2.5 billion merger to add to profit in 2008, after previously saying that it would not affect earnings per share for the year. It also said it has significantly increased estimated cost savings from the original $670 million.
Bank of America is the nation’s second-largest bank by assets, including the Countrywide acquisition.
Among other lenders, JPMorgan Chase & Co and Wells Fargo & Co reported smaller-than-expected second-quarter profit declines, while Citigroup Inc had a milder-than-expected $2.5 billion loss.
BAD LOANS SOAR
Bank of America more than tripled the amount it set aside for bad loans to $5.83 billion, largely for consumer and commercial portfolios directly tied to the housing market, including home equity, residential mortgages and homebuilding.
The provision was nearly as large as the first quarter’s $6.01 billion. Net charge-offs, or loans the bank doesn’t expect to be paid back, more than doubled to $3.62 billion from $1.5 billion.
Bank of America’s Tier-1 capital ratio, a measure of its ability to cover losses, rose to 8.25 percent from the first quarter’s 7.51 percent. Regulators say 6 percent signals a “well-capitalized” bank.
Profit in consumer and small business banking fell 66 percent to $812 million. The corporate and investment bank saw profit rise 3 percent to $1.75 billion. In wealth and investment management, profit fell 1 percent to $573 million.
Bank of America ended the quarter with 6,131 branches in the United States and $1.72 trillion of assets. Through Friday, the bank’s shares had fallen 33 percent this year, compared with a 29 percent decline in the KBW Bank Index .BKX>. (Reporting by Jonathan Stempel; Editing by Derek Caney and Gerald E. McCormick)

News reported by The Guardian