More challenges ahead

During these last few days, the US financial market was in turmoil again.

15th Sep 2008, Monday, saw fall of 2 world-reknown financial institutions. The 101 year old Merrill Lynch announced it was being bought over by Bank of America and the 164 year old Lehman Brothers Holdings Inc formally filed Chapter 11, declaration of bankruptcy. ("Lehman Files for Bankruptcy; Merrill Is Sold" by Andrew Ross Sorkin, The New York Times, 14 Sep 2008)

16 Sep 2008, Tuesday, AIG announced it was receiving US$85 billion worth of loans from the Federal Reserve as it could not raise the amount in the capital markets. It was facing rating downgrades from Moodys and Standard & Poor due to its falling stock price. With its stock price losing 94% of its value, it could not raise the cash needed through a sale of stock. ("Fed in an $85 Billion Rescue of an Insurer Near Failure" by Edmund L. Andrews, The New York Times, 17 Sep 2008)

What does this show about the financial situation in the US now, petaining to the subprime crisis incident. As I had mentioned previously in my previous post, "Possible Spillover of Sub-prime Mortgage Crisis" on 2 Sep 2007, it seems that situation 2 is being acted out in the financial market:

"2) Subprime Crisis > Mortgage borrowers fail to pay up > CDOs worthless > Balance sheets of financial institutions get impacted (depending on impact, some may close, others face a huge profit write off) > Markets may get shocked > Investors seek liquidity > Pull of from markets > Markets fall, herd behaviour occurs > Market falls further > Investors lose confidence > Govts step in > Stability may occur slow or fast depending on the speed and actions taken by govts."

The Federal Reserve and the US Treasury have been quick to enter the financial market and make the critical decision on which companies to help and which companies should not be. It will be years of discussion on whether the actions of the 2 have been proper and just. But at the present moment in time, the fire has not been put out.

The financial market is still in turmoil. With the folding of Merrill Lynch and Lehman Brothers; the falling share prices of AIG and various other companies, financial institutions and other companies which are holding these stocks in their portfolio will be facing unrealized revaluation losses. Being the month of Sep, companies are reporting their earnings for the earlier quarter. However, as the failures of Lehman Brothers, Merrill Lynch and AIG are occurring in the month of Sep, the financial results being reported for the quarter should be considered as over-valuing the company at this point in time.

It means that the financial reports are too historical, even though they are being mark-to-market. Companies should provide interim financial results that indicate the impact of Merrill Lynch, Lehman Brothers and AIG. At least investors would be well informed as to the contagion effect and this should prevent another shock to the market when another quarterly reporting occurs.