Clock's Ticking for AIG, WaMu

As news of Lehman Brothers' (NYSE: LEH  ) bankruptcy and Merrill Lynch's (NYSE: MER  ) last-minute sale to Bank of America (NYSE: BAC  ) spread throughout markets over the weekend, an uncomfortable amount of silence and looming questions still remains over two other financial punching bags, AIG (NYSE: AIG  ) and Washington Mutual (NYSE: WM  ) .

AIG fell more than 50% at one point Monday morning on news it had rebuffed an offer from a group of private-equity funds that would have injected capital, but that could have left the insurer vulnerable to an all-out fire sale. Running out of options, AIG appears to have gone knocking on the Federal Reserve's door, looking to borrow around $40 billion to keep its books in working order. Without raising enough cash, some fear bankruptcy could be around the corner.

We've been here before
Let's break down the madness of this deal: AIG needs to raise $40 billion. It can't do it in the private or public market – a single-digit share price won't allow it to raise anything significant. Besides borrowing from the Fed, its other options include slowly selling off its still-healthy assets (which, importantly, AIG has plenty of). Does any of this sound familiar?

It should. Last week, Lehman Brothers announced its pending deal to raise money from a Korean bank went up in smoke. Reacting to the bad news, it announced plans to sell off some of its still-healthy assets. Amid a barrage of rumors, many pointed to the fact that Lehman could still borrow from the Fed's discount window if need be. It didn't work, mainly because investors were tired of the never-ending game of "Don't worry, we have plans in the works, everything is just fine" without ever seeing results.

Meanwhile, Washington Mutual's rumored plans to be bought out by JPMorgan Chase (NYSE: JPM  ) are still a mystery. Investors didn't get any official word on where (or if) those talks stand, leaving many to wonder if WaMu could be the next big bank to go belly up. With shares down another 20% at one point this morning, WaMu needs to do something quickly.

Speak now or forever hold your peace
Without any firm news coming out of these two, investors are bound to assume nothing but the worst. It isn't necessarily that we know how bad they are, it's that we basically know nothing at all. If either of these companies comes out with a detailed announcement of something that's done -- not one that's just being planned -- both could see a huge rebound. Alas, until then, both are bound to remain in the black-hole death trap they've put themselves in.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 15, 2008, at 2:15 PM, Miketherealist wrote:

    It is amazing to see the ridiculous amount of speculations moving towards companies that are financially stable that can weather the storm.

    Comments made by The Motley Fool are not including the facts of companies such as WaMu. (The Largest Thrift bank in the nation) CNBC reported on Friday that WaMU has 3 times the amount of reserves on hand than the FDIC insurance. WaMu also reported almost 50 Billion in reserves. Sure if all consumer confidence goes out the window and clients of WaMu make a rush on the bank it may be in financial difficulty. But that would take a heck of a lot of money to put this National Thrift bank under. The media is pushing consumer confidence in the toilet as it will only continue and push the nation into a frenzie. As I see it the media will dig its own grave and cause a epidemic like we had in the 1930's. Be cautious but not an alarmist, study up on what companies are doing to weather the storm. (That was pointed at you Motley Fool) Shame on you for reporting such inconsistant information

  • Report this Comment On September 16, 2008, at 10:06 AM, boysmakegoodpets wrote:

    while my research has not been comprehensive, TMF's view of Washington Mutual does seem to be consistent with the rest of what i'm hearing out there. Pat Dorsey at Morningstar, for example, refers to WM as one of the "zombies" of the banking industry, saying something that will save the company "could happen," but indicating a clear belief that the chance is slim.

    enterprises such as TMF and Morningstar have their credibility to think about - without that, they're irrelevant. thus they're unlikely to broadcast any crackpot idea that may come into one of their writers' heads.

    further, having recently extracted myself from Washington Mutual's customer base, i know firsthand that when it comes to consumer banking, they really kinda suck. banking with Washington Mutual is an exercise in frustration, and that can't be helping them to thrive.

  • Report this Comment On September 16, 2008, at 10:33 PM, colleencyn wrote:

    I'm tired of the media doom and gloom, I also know this will too pass. The circle of those holding the control of money,create debacles as part of their plan. When their goal is achieved its over. 1909,1929. J P Morgan a common thread..You do the research. I just went crazy and bought up shares of AIG. Better than a crap shoot I think. Entertaining and if it goes up, my pay for having to listen to all bull go bulls....

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