Daily Israel Report

Financial Crisis in America Threatens Israel's Stability

The financial woes of two major Wall Street firms and the shaky status of an American insurance giant threaten to shake the shekel in Israel.
By Hana Levi Julian
First Publish: 9/15/2008, 12:42 PM / Last Update: 9/15/2008, 1:52 PM

Israel News Photo: (file)

The venerable securities firm of Lehman Brothers Holdings Inc. announced early Monday morning on its website it will file for Chapter 11 bankruptcy protection, stunning Wall Street and rattling financial markets around the world. Not least among them was the Tel Aviv Stock Exchange, which opened with sharp losses as it echoed the news.

 

Lehman was one of the first international investment banks to open its doors in the State of Israel, and businesses across the country are going to be affected by what is taking place on Wall Street.

 

Lehman has invested in numerous institutions in Israel, among them Bank Leumi, Psagot, the Clal group, Menorah and Harel Financial Services. All told, Lehman Brothers Inc. has invested more than NIS 850 million in Israeli institutions.

 

The company’s stock, which provides investment banking services to corporations, institutions, high-net worth individuals, municipalities and governments around the world, dropped by 93.88 percent since the beginning of this year, trading at $3.65 per share at the end of the day on Friday.

 

Although one of the smallest of Wall Street’s major players, with only 25,000 employees, Lehman Brothers has been a heavy hitter in the mortgage market.

 

The renowned investment bank began its most recent descent in the morass of the mortgage market crisis in the summer of 2007.

 

Lehman Brothers reported in June a second-quarter loss of $2.8 billion, far greater than had been expected by analysts and the harbinger of a general malaise in the market.

 

In September, the US government announced its takeover of the Fannie Mae and Freddie Mac mortgage finance companies, and two days later, Lehman Brothers announced its next expected loss of $3.9 billion,.It said it spinning off its commercial real estate holdings into a new public company.

 

Not far behind Monday’s morning’s blues was the gloom predicted by financial experts who eyed the next possible crash, that of major US insurance company, American International Group A.I.G.

 

The New York Times reported Monday that the insurance giant has asked for a $40 billion loan from the Federal Reserve to pull it through the current crisis; without that crucial support, the newspaper reports, the company might not survive.

 

A.I.G. provides insurance products – including general and life insurance as well as retirement services, financial services and asset management to individuals and businesses throughout the United States and abroad.

 

As with Lehman, the government has refused to provide a financial guarantee for purchases of subsidiaries of the firm by other companies, thus making the deal much less attractive to potential bidders.  Ratings agencies have threatened to downgrade the insurance giant’s credit score on Monday if it does not raise the $40 billion by the end of the day.

 

A.I.G. maintains a large presence in the State of Israel, offering mutual funds, retirement services and a wide array of insurance products for individuals and businesses.  The company’s common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.

 

A.I.G. officials in Israel said its operations would not be directly affected because it operates relatively independent of the parent company. Nonetheless, the shakiness of the political situation has raised eyebrows at the Standard & Poor financial assessment firm, which is studying whether to downgrade Israel's debt rating as fears of a recession continue to mount.

 

Another major New York securities firm, Merrill Lynch agreed Sunday to sell itself to the Bank of America for approximately $50 billion in a last-ditch attempt to save itself from the same kind of financial crisis that just sank its competitor.

 

Merrill Lynch, with 60,000 employees, is actually comprised of two companies, a wealth management company and a bond trading firm. It is one of the largest firms in the financial services industry, run by some 17,000 brokers who manage the portfolios of its hundreds of thousands of high-net clients.

 

As with Lehman Brothers, the crash of the housing market and the rise in foreclosures has taken its toll, eating away at the value in high-risk, high-return securities backed by subprime home mortgages. 

 

However, unlike Lehman, Merrill Lynch is also a household name in smaller markets across America as well, making it a more likely candidate to be tossed a lifeline by the Bank of America.  Most of Lehman’s clients were major institutions.

 

The new conglomerate formed by the marriage of Bank of America’s “wealth advisers” and Merrill Lynch’s brokers will be called Merrill Lynch Wealth Management. The deal brings the bank to the top of the brokerage houses and consumer banking franchises.

 

For Lehman Brothers, the end came when the government refused to absorb any of its losses on some of its trouble real estate assets, as it had in the past with other firms that went belly-up. The law firm of Weil, Gotshal & Manges has been retained to manage the bankruptcy proceedings and liquidation, an ignominious end for so prestigious a firm.