DealZone

$87,000 for an area rug?

Would you spend $87,000 on an area rug? Absolutely, if you are John Thain, the former CEO of Merrill Lynch.

Thain refurbished his office at Merrill to tune of $1.22 million in company money, according to a Daily Beast/CNBC report.

Pictures of the rug are as yet unavailable, but in the words of the Big Lebowski, we bet it really tied the room together.

It was a rough day for Thain. Hours after the rug story came out, he was ousted from Bank of America, just three weeks after the Merrill merger closed.

Other extravagant purchases reportedly included:

    A “mahogany pedestal table” ($25,000) A “19th Century Credenza” ($68,000) A “George IV Desk” ($18,000) A chandelier in the private dining room ($13,000) A “parchment waste can” ($1,400)

Size Matters

MARKETS-STOCKS/“Too big to fail” are four words that should fill U.S. policymakers with dread. They imply a necessity for solvency beyond an institution’s ability to make good business decisions. They’re also a badge of achievement that commands a bit more swagger on Wall Street.

So when Bank of America, with $2.7 trillion in assets and 308,000 employees, says it needs more help in the form of billions of dollars from taxpayers, which we have set aside for just this kind of mess (the Troubled Asset Relief Program), you could argue that this is both economic blackmail and reward for a job well done.

What happens when a bank becomes too big to fail? It gets shrunk down to a size more collapsible. The titans of Wall Street know a thing or two about being in hock to the people. Take a look at Citigroup. It’s all well and fine for CEO Vikram Pandit to say the sale of his brokerage business to Morgan Stanley was not mandated by the government, which has lent Citi $45 billion to stave off failure. But it’s hard not to see a wink and a nudge in there somewhere. This was not some non-core, fringe business — it’s more like an arm or a leg.

Chin up, guys, NYSE boss tells other CEOs

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Speaking at his alma mater Goldman Sachs’s Financial Service Conference on Thursday, NYSE Euronext CEO Duncan Niederauer said he was struck by the gloom and doom that seems to have come over other CEOs.

“I was at a dinner hosted by (Bank of America CEO) Ken Lewis,” he said, of a recent soirée that brought together about a dozen or so unidentified CEOs. “Everyone was pessimistic.”

They were pessimistic about the state of the economy, the stock markets, and just about everything else, he said. The last to speak when Lewis went around the table to gauge guests’ feelings about the economy, Niederauer said he was the only optimistic one.

Feeding Frenzy

The German share price index DAX is seen at the Frankfurt stock exchange, October 7, 2008. REUTERS/Kai Pfaffenbach(GERMANY)Banks aren’t lending to each other, but they are buying each other. An interesting by-product of the deals: capital-hungry institutions are raising billions of dollars of fresh capital in a tumbling market.
 
Bank of America said yesterday its tier-one capital ratio would be 7.5 percent in the third quarter, down from 8.25 percent in the second quarter, spurring it to launch a $10 billion share offering and cut its dividend. On a conference call, it said it could raise even more to help manage the purchase of Merrill Lynch. Wells Fargo planned to raise $20 billion to fund its bid for Wachovia, while rival suitor Citigroup aimed to raise $10 billion to buy that bank. Those two are taking a three-day break from a legal battle over who gets what.  
 
If Citigroup loses out on Wachovia, Dan Wilchins points out, it will also miss out on a great chance to raise capital. Citi would likely have a much easier time raising capital to fund its growth than to patch holes on its balance sheet. The bank has raised $50 billion of capital in the last seven months, and its management has consistently said that it has raised more than it expected to need, he reports. But that could all change in a recession, as credit cards, investment banking, and retail brokerage businesses lose customers. 
 
Once the dust settles, ruthlessly diluting shareholders may show itself to have been absolutely necessary, and perhaps even unavoidable. But now with the markets in freefall, it’s more than a little scary. 

Deals of the day:

* Singapore state investor Temasek Holdings kicked off the sale of electricity generator PowerSeraya, in a deal that could fetch around $2.5 billion. To read more, please double click on 

* Icelandic investment firm Exista will sell its near 20 percent stake in Finnish insurer Sampo to reduce liabilities but will keep its other assets, the group said in a statement.

Deal spreads open wide

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Shares of HBOS and Lloyds TSB got a boost this morning in London as it appeared Lloyds was less likely to try to renegotiate its takeover of HBOS. Standard Life Investments, a top investor in Lloyds and HBOS, supports the planned takeover under the original terms, a person close to the investment firm said, and analysts suggested political and regulatory pressure would force the deal through, despite its chunky discount to the indicated offer price.

BBC Business Editor Robert Peston writes:

So if you believe that the terms of the deal won’t and can’t be changed, the current HBOS share price is an opportunity to buy £10 notes for £6.60.

That looks too good to be true. And the normal investing rule is that if it looks too good to be true, then don’t touch it even if you’re in a radiation-proof suit.

Sympathy for the devil’s banker

After a couple weeks of just trying to keep up with developments in the financial crisis, reporters and bloggers are taking halting steps toward describing the mythos of the investment banker.

It’s been a while since Tom Wolfe and Bret Easton Ellis popularized the bespoke-suited arrogance commonly associated with the financial world’s anointed — the easy millions, the casual disdain for the rubes and the marks in the lower classes and the single-minded pursuit of money. Depicting the carnivore in his or her habitat is beginning to come back into vogue as taxpayers who may soon be on the hook to bail out their social betters in the investment banking world wonder why they’re getting stuck with a bill they didn’t incur.

New York magazine ran a story called, “The Rage of the Previously Rich: A Lehman trader copes with the sudden onset of income shrinkage,” featuring this choice nugget:

Not a day for a car show at World Financial Center

Motorexpo New YorkThe timing could have been better for the luxury car show at the World Financial Center in New York, home to Merrill Lynch & Co.

The Motorexpo opened on Monday — the morning after Merrill employees were shocked to hear their company was being bought by Bank of America, marking the end of the storied name in American finance.

Nikki Gold, a promoter for the Motorexpo, handing out brochures at the entrance to Merrill’s headquarters, said “A lot of people are in a really sour mood — the people you expect to take the brochures aren’t taking them.”

Merrill Lynch: The Village People connection

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Unearthed in today’s exhaustive Merrill Lynch coverage: According to the company’s website, Charles Merrill and Edmund Lynch made their fortuitous acquaintance at Manhattan’s 23rd St YMCA in 1907.

Charles E Merrill & Co. opened its doors in January 1914, and the company changed its name to Merrill, Lynch & Co a year later.

The lyrics of the Village People’s anthem, written in 1978, apply just as well to the 22-year-olds Merrill and Lynch as they do today, especially for some of the bank’s employees who seem certain to lose their jobs as Bank of America acquires the firm:

Who’s next and how?

A worker carries a box out of the U.S. investment bank Lehman Brothers in LondonLehman‘s most valuable assets, primarily Neuberger Berman, are still on the block, but becoming less valuable by the hour with the bank having filed for bankruptcy protection. And with Merrill Lynch now heading for the relative safety of Bank of America‘s $50 billion embrace, it’s time ask “Who is next and how?” Most attention is squarely focused on insurer AIG and investment bank Morgan Stanley.

AIG’s shares lost a third of their value in pre-market Monday action. Warren Buffett would be a natural candidate for AIG assets, given it’s a business he knows (and part of being a successful oracle is knowing your businesses).

On Sunday AIG is reported by the New York Times to have approached the Fed seeking $40 billion in short-term financing. An investor call is expected later today.
The Fed might be more willing to play a role in getting AIG sorted out as well, if it sensed a systemic risk to another strut of the financial markets.

Signs of sovereign life

ubs.jpgSovereign wealth funds were thought to be nearly extinct sources of capital for the crumbling western banks. But life finds a way. The Government of Singapore Investment Corp, one of the world’s biggest sovereign wealth funds, said it would subscribe to UBS‘s rights issue. A GIC spokeswoman declined to provide the value for the transaction but said it currently owns 0.4 percent in UBS common stock. It controls 9.54 percent of the voting rights in UBS. The fund invested 11 billion Swiss francs ($11 billion) in mandatory convertible notes in UBS last December, after the bank’s U.S. housing crisis losses. In January, GIC invested $6.88 billion in Citigroup. Its sister fund Temasek Holdings pumped $5 billion into Merrill Lynch. GIC says on its website that it manages well above $100 billion but some analysts estimate the figure is closer to $300 billion.

The U.S. Federal Reserve Board approved Bank of America Corp‘s acquisition of Countrywide Financial Corp, the nation’s largest mortgage lender. Bank of America agreed in January to pay $4 billion for Countrywide, a California-based firm that helped fuel a multi-year housing boom that went bust when risky loans to shaky borrowers began to fail. In a statement, the federal regulator said it considered many comments for and against the bank buyout and “has considered carefully the financial factors of the proposal.” The Fed also said that it vetted about 770 individual comments on the proposed takeover and the views of many other stakeholders.

Applied Materials has approached beleaguered Dutch semiconductor equipment maker ASM International to buy a significant part of its business for $400 million to $500 million. Shares in ASMI jumped as much as 23 percent to an eight-month high after the company said its U.S. rival had expressed interest in two of its businesses that make machines to deposit thin films of materials on silicon wafers. ASMI, which is locked in a dispute with activist investors who are trying to sack its chief executive, said a divestment would have major implications for its strategy.