AAA-rated Reserve Primary Money Fund, managed by Reserve Management Corp. in New York, held over $780 million in Lehman Brothers debt, spearheading the fund’s two-day 60% plunge to a value of $23 billion.

The only other money market fund to break the buck was Community Bankers Mutual Fund in Denver, which failed due to derivatives in 1994.

Reserve Primary, which had assets valued at over $64 billion as recently as May 31, halted redemptions as of 3 p.m. Tuesday, September 16, 2008.

For more on Money Markets and “Breaking the Buck,” see the FDIC website:
http://www.fdic.gov/bank/analytical/fyi/2004/051904fyi.html

For the details on Reserve Primary
http://www.bloomberg.com/apps/news?pid=20601087&sid=aycQDd9pEdCA&refer=home
http://money.cnn.com/news/newsfeeds/articles/djf500/200809161914DOWJONESDJONLINE000750_FORTUNE5.htm

It has been reported that federal regulators have agreed to take control of AIG, in exchange for an $85 billion two-year term loan. The loan will allow AIG to continue operations as assets are sold off in order to meet the obligations of the firm.

AIG, a Dow Jones Induatrial Average component since May of 2004, is the first component of the index to fail in many years. Currently against the ropes due to an estimated 28-to-1 leveraging, GE is the Dow’s oldest component, and may be the next to require capital assistance.

The Federal Reserve has posted its press release:

For release at 9:00 p.m. EDT
The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

Source

http://www.bloomberg.com/apps/news?pid=20601087&sid=aeQ3Rjc3twg0&refer=home

http://www.reuters.com/article/newsOne/idUSHKG1567720080917

On Sunday Bank of America agreed to purchase Merrill Lynch for .8595 shares of BAC for each share of MER.

Investors, wary of regulatory and due diligence hurdles before the deal is finalized, largely stayed on the sidelines, leaving quite a spread between BAC and MER share prices until Monday’s close. Merrill was up about 15%, while Bank of America shares fell 20% on the day.

Bank of America, still digesting it’s $4 billion appetizer, Countrywide, seems to be at risk of overeating, at least until the full weight of Countrywide’s debt has been revealed.

The deal will be dilutive of Bank of America stock, which explains CEO Kenneth Lewis’ elation.

With bankruptcy of Lehman Brothers and the JP Morgan purchase of Bear Stearns, only Goldman Sachs and Morgan Stanley remain among the U.S. five top independent brokers.

158-year old brokerage Lehman Brothers Filed for Chapter 11 bankruptcy protection Monday, the largest such filing in U.S. history.

With som $600 billion in outstanding debt, Lehman is unable to meet its obligations, but is in talks to sell off its profitable assets.

Shares plummeted to under $0.20 per share early Monday.

As of June 30, 2008, Legg Mason Partners Aggressive Growth Fund (SHRAX) was the largest mutual fund holder of Lehman stock.

The Treasury announced a plan to bring Fannie Mae and Freddie Mac under the Federal Housing Finance Agency.

With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.

Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.

Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses.

The full affect of this on the markets will take weeks to months to bear out, but common shareholders are going to get the worst of it, followed by the owners of preferred shares.

Here is the Treasury’s statement on the action taken.

The agreement issues to the Treasury “…warrants representing an ownership stake of 79.9% in each GSE going forward.”

Here is the treasury’s fact sheet on the preferred stock issuance.

As of June 30, top holders are big guns:

http://finance.yahoo.com/q/mh?s=FRE

Legg Mason Value Trust is run by one of the most respected managers in the business, Bill Miller.

http://finance.yahoo.com/q/mh?s=FNM

Another highly regarded mutual fund house Dodge and Cox is up there with 5% of Fannie.

If they unloaded after 6/30, they took a huge loss, but not as big as if they’d held it.

D&C has already issued a statement, looks like their stock fund was 1% (about $500m) Fannie as of Friday:
https://www.dodgeandcox.com/pdf/FNMA_comment_20080907_final.pdf

Alcoa announced that its profits were 37 cents per share, down from 75 cents per share in the year-ago period. Analysts expected profits at 48 cents per share. Revenues were $7.4 billion, versus $7.9 billion during last year’s first quarter.
Officials cited the higher cost of energy and raw materials as well as the downtrend in the US Dollar for the decline in profits.
Alcoa is traditionally the first major company to announce its quarterly earnings, and is seen as an indicator of how the season’s reports will unwind.  Be careful how much you read into this stuff, though, as it’s often laden with hazy rhetoric. Consider the following conclusion from Marketwatch:
Alcoa’s report is seen as ushering in another rough period for corporate results, with earnings for S&P 500 companies seen declining 10.9% from the year-ago period, according to Wall Street targets. Still, that’s an improvement from the showing they made in the fourth quarter when earnings fell 25.1%, the worse quarterly performance since at least 1991.

Analyst estimates were that Alcoa’s profits would be down 36%; in reality they were down 50%. Analyst estimates are that S&P 500 earnings will be down 10.9%, and they will likely be lower in reality, possibly lower than last quarter’s -25.1%.

Financial journalists always have a way of making things seem better than they really are. I expect a bumpy ride this earnings season, and aim for capital preservation and risk aversion.

The Federal Reserve released its consumer credit figures from January. Analysts were expecting an increase of $5.5 billion, while the increase actually came in at $5.1 billion.

Looking at the release, though, the numbers aren’t so rosy. The December figure was revised higher by $7 billion to $2.524 trillion. January’s figure was revised up $17 billion to $2.535 trillion, a 0.6% increase over January’s original reported figure.

February’s projected consumer credit is at $2.5397 trillion. Expect an upward revision next month.

Visa’s (V) IPO at $44 per share raised almost $18 billion dollars for the banks that own the transaction processor, makiong it the largest IPO in history. Within minutes it was trading at $59, up over a third.
According to Marketwatch, JP Morgan, National City, Bank of America, Citigroup, US Bancorp, and Wells Fargo own 58% of Visa, and the IPO will provide them with cash for their balance sheets and to offset the costs Visa’s recent legal trouble with American Express.

The Federal Reserve lowered its key Funds Rate by 0.75%. Most had expected a full 1% cut, but markets rallied, with the Dow posting a 420-point gain on the day.

The Fed has been very busy lately. In addition to backing JP Morgan’s buyout of Bear Stearns, the central bank has allowed securities broker dealers to access Federal Reserve lending through the discount rate. Traditionally reserved for banks only, the move is an unprecedented attempt to prevent what happened at Bear Stearns from happening with other brokers.

What happened at Bear Stearns, according to CEO Alan Schwarz, was similar to a classic bank run. The firm simply did not have the cash to continue honoring redemptions and withdrawals at the rate they were happening.
The Fed’s move to back brokers in similar straits is a risky one for the central bank, as it’s putting up its own assets and, should there be a run on banks, it might be a run on the Fed.

Bear Stearns’ investor relations page says it all:

“Never an unprofitable year—Bear Stearns’ primary emphasis is on creating long-term value for shareholders.”

“83 Years of Profitability.”

All it took was one bad year for the house of cards to collapse.

It will likely be years before we know how deeply the sub-prime crisis affected Bear’s balance sheet. Exactly how devalued are its derivative holdings, and what, if anything other than a very established and reputable brand, is JP Morgan buying?

One thing is certain: giants are falling, and it’s best to get out of the way when that’s happening.

Disclosure: sold SKF (ProShares Ultrashort Financials) Friday 3/14. Oops.