Merrill Lynch local operations await sale outcome

Wayne Swan

The news overnight that Lehman Brothers, the US’ fourth largest investment bank, has filed for bankruptcy and that Bank of America has acquired Merrill Lynch has stunned the investment community.

With the events taking place at great speed over recent days, it remains to be seen what the outcome will be for Merrill Lynch’s local operation.

Merrill Lynch is yet to comment on the record as the company awaits the results of the sale.

In a statement to the Australian Securities Exchange, Merrill Lynch indicated that the transaction is expected to close in the first quarter of 2009. Under the agreement, three directors of Merrill Lynch will join the Bank of America board of directors.

Under the terms of the transaction, Bank of America will exchange .8595 shares of Bank of America common stock for each share of Merrill Lynch common stock.

Merrill Lynch’s shares were not overly affected by its news, with the share price edging less than 0.1 per cent higher at the close of yesterday’s trading on the New York Stock Exchange, Shaw Stockbroking reports. Bank of America’s shares, however, fell 21.3 per cent.

Meanwhile, there is speculation that job losses could be imminent for Lehman Brothers Australia, with the possibility of up to 150 positions at risk. Bank of America was initially in discussions with Lehman Brothers regarding a buyout, but pulled out of the acquisition, as did Barclays.

According to Shaw Stockbroking, Lehman Brothers’ losses year to date total 99.7 per cent. Last week Lehman Brothers announced a US$3.9 billion quarterly loss, driven by souring mortgage debts, the stockbroking firm said. The firm’s shares shed more than 94 per cent yesterday.

The Commonwealth Bank of Australia has indicated to the market that its exposure to the Lehman group companies is in the realm of $150 million. The bank said it would “continue to work with the relevant parties in regard to its position”. Westpac has also come to market stating that its exposure to the Lehman companies is less than $10 million.

Locally, Federal Treasurer Wayne Swan has moved to allay fears about the effect of the global banking sector’s woes on the wider Australian economy.

“We can’t defy gravity forever. But if there’s one country in the world that you want to be in, it’s Australia. We do have strong fundamentals going our way, and one of those big positives is the strength of our financial sector,” Swan said.

But former US Federal Reserve chairman Alan Greenspan has warned that the US has a more than 50 per cent chance of recession, and believes that other “major financial firms” will follow in Lehman Brothers’ footsteps.

Greenspan does believe the fallout will have an impact on the global economy.

“I can’t believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring,” he said.

A consortium of 10 domestic and foreign banks, including Goldman Sachs, Citigroup, Barclays and JPMorgan have agreed to create a US$70 billion fund to lend to embattled financial firms, while the Federal Reserve has announced plans to loosen its lending restrictions to the banking industry.

Today the US Federal Reserve is holding a meeting that could lead to cuts in short-term interest rates.