By Renae Merle
Washington Post Staff Writer
Tuesday, September 16, 2008 4:30 PM
Just a day after filing for bankruptcy, Lehman Brothers is heading into court today to gain approval of the sale of some of its assets.
Lehman, the fourth largest investment bank, has been in discussions with Barclays to sell parts of its business after the British bank backed away from acquisition talks this weekend.
The cash infusion from such a sale of will make the bankruptcy process easier, said Art Hogan, chief market analyst at Jefferies & Company. "It is not good for Lehman shareholders. But in terms of overall, for the market, it makes the unwinding process that much smoother," Hogan said.
The market has been roiled by the demise of Lehman Brothers and the quick sale of Merrill Lynch to Bank of America for about $50 billion this weekend. Both helped send U.S. and global markets plummeting over the past two days.
The Dow Jones industrial average bounced between positive and negative territory today, but closed up about 142 points, or about 1.3 percent. That comes after closing down 504 points yesterday -- the biggest point drop in seven years. The technology-heavy Nasdaq and Standard & Poor's 500-stock index were also up about 1.3 percent and 1.75 percent, respectively.
Despite the market jitters, the Federal Reserve kept its benchmark interest rate steady today. The interest rate will remain at 2 percent, where it landed in April after an aggressive rate cutting campaign over the last year.
"Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending," the Federal Reserve said in a statement. But, the statement said, the Fed expects inflation to "moderate" later this year or next.
By keeping rates the same, the Fed is signaling that it believes the market can work through its problems, said Joseph Brusuelas, chief U.S. economist at California-based Merk Investments. It shows that the Fed understands that "private-sector solutions are the preferable method of working through the current issues and that market discipline remains the best solution."
The possibility of a Fed rate cut seemed unlikely last week but gained support among investors after Lehman's bankruptcy and Bank of America's purchase of Merrill Lynch restructured the financial market. Before that, economists and analysts believed that the Fed had finished cutting rates and might begin raising them next year.
"This was the right move. This helps calm the markets," said Robert MacIntosh, chief economist for Eaton Vance in Boston. "Frankly I don't think more cuts would have done any good."
But much of the attention today is on AIG, the country's largest insurer, which is facing a cash crunch. Worries about its stability have intensified since several ratings agencies lowered the company's rating late yesterday, which could make it more difficult to raise funds.
New York has agreed to allow AIG to use $20 billion from its own insurance subsidiaries to ease a financial crunch. But that does not appear to be enough to calm investor fears.
The company's stock closed down by 21 percent. That follows a 61 percent drop yesterday.
In an CNBC interview, former AIG chief executive Maurice "Hank" Greenberg said the company will go bankrupt without outside help from the U.S. government or other investors. "If the rating agencies don't give them breathing space, then there's no alternative. And that would be a disaster," he said.
Oil prices took another tumble today, falling to about $91.15 a barrel as declining demand and the overall economic turmoil pulled down prices. Also, consumer prices fell 0.1 percent in August, led by a 3.1 percent decline in energy prices, according to Labor Department figures released today.
It was the first monthly consumer prices decline since October 2006 and could be a good future indicator, Kenneth Beauchemin, an U.S. economist for Global Insight, said in a research note yesterday. "With fuel prices remaining subdued into September, we can look forward to another tame consumer price report next month, with perhaps more to follow," he said.
Goldman Sachs, the large investment banker, reported a 70 percent drop in third-quarter net income but still managed to produce a profit. The firm reported net income of $845 million, or $1.81 a share, during the quarter and $6.04 billion in revenue, which was better than analysts expected.
Goldman's shares fell about 2 percent for the day. "They certainly made money in a very difficult market," said Hogan.