Wall Street Titans Tottering

Deals For Canada?

Janet Whitman in New York and Eoin Callan in Toronto, Financial Post Published: Saturday, September 13, 2008

Six months after U. S. regulators hoped a bailout of Bear Stearns Cos. would help put an end to the credit crisis, the worst could be yet to come as fresh fears about the viability of financial firms are rocking Wall Street.

Over the past week alone, the United States' two main mortgage-finance firms -- Fannie Mae and Freddie Mac -- were put under government control to avoid collapsing into bankruptcy, while LehmanBrothers Holdings Inc. is being pushed into a possible takeover by a rival bank in a bid to survive.

The stocks of other U. S. financial firms, including savings and loan giant Washington Mutual, Wall Street investment bank Merrill Lynch&Co. and insurance behemoth American International Group Inc. (AIG) have been whipsawed this week as investors fret about further dominos to fall.

"The market is constantly looking for the next victim in this crisis," said John Ryding, who launched RDQ Economics after leaving his job as chief economist at Bear Stearns when the Wall Street securities firm was acquired by JPMorgan Chase & Co.

Now, Lehman Brothers, until recently the fourth-largest securities firm on Wall Street just ahead of Bear Stearns, is facing the same fate.

U. S. regulators are hoping Lehman will reach a deal this weekend to be acquired by Bank of America Corp., a deep-pocketed commercial bank that has already bailed out Countrywide Financial, the largest mortgage lender in the United States, by acquiring it over the summer.

"Unfortunately, there's no reason to believe that if a resolution takes place with Lehman that it will be the end of it any more than Bear Stearns' collapse six months ago was the end then," said Mr. Ryding.

Washington Mutual, the largest savings-and-loan bank in the United States, is reported to be scrambling to find a buyer as it struggles under the weight of huge losses on home mortgages and other loans.

AIG is reported to be holding a conference call on Monday to convince investors it can shore up its balance sheet, possibly through shedding some assets.

Many economists had thought the crisis would abate following the U. S. government-sponsored bailout of Bear Stearns and the opening of a lending window to investment banks by the U. S. Federal Reserve for the first time since the Great Depression.

But now economists are saying it's unclear what will put an end to the crisis at this point, beyond a stabilization in the underlying assets at the heart of the problem: the still-plunging value of U. S. homes and risky mortgages.

Canadian financial firms are generally much more risk-averse than those in the U. S. But they aren't immune to the headwinds south of the border.

CIBC, for instance, continues to have more than $25-billion exposure to credit markets, including bad bets tied to the U. S. mortgage market.

The hope among backers, however, is that this hefty chunk of hard-to-value and hard-to-sell commitments is sufficiently weighted towards corporate borrowers, rather than more high-risk homeowners, and that losses will be limited.

CIBC CEO Gerry Mc-Caughey this week indicated the worst of the company's losses on U. S. home loans are over, with analysts estimating less than US$3-billion in potential losses lingering for the bank.

As CIBC rides out that storm, the bank has seen gains elsewhere, including a nice boost in its share of the lucrative market for advising on mergers and acquisitions.

Royal Bank of Canada is best-positioned to go on the hunt for deals in the United States.

Toronto-Dominion Bank, meanwhile, is perhaps too mired in its struggle to build momentum in its recently beefed-up U. S. retail operations, including the acquisition of Commerce Bank, to prowl for any sizeable deals.

Though still licking its wounds from credit exposures, Bank of Montreal would likely be at the front of the pack if gets a chance to add to its growth-starved retail bank franchise in Chicago thanks to possible branch disposals by the likes of the struggling Washington Mutual.