From The Deal Breaker (H/T Marginal Revolution) ….

$$$ Bank of America is buying Merrill, the WSJ reports. The deal values the company at $44 billion, or $29 per share, a significant premium from Friday’s market price. Everyone is perplexed by the premium. But if it is, as some have reported, an all stock deal and BofA shares take a significant hit in the wake of the news, the final price and the premium could be much lower.

Update: CNBC’s Charlie Gasparino says the government forced Merrill to sell itself.

$$$ On CNBC they are saying that AIG has asked the Federal Reserve for some kind of emergency bridge loans. Can the Fed lend to an insurance company?

$$$ Federal Reserve is dramatically expanding its emergency lending program. It’s now going to take all sorts of collateral, including equity.

From the Oil Drum….

Where is our gasoline and diesel supply headed? Even before Ike hit, quite a few areas of the US were starting to see gasoline shortages. The impact of Ike can only make shortages worse. Most likely, it will take refineries at least a week or two to get production back to normal levels after a storm of this type, considering the impacts of electrical outages and flooding. In this article, I will examine some of the issues that seem to be involved. Based on my analysis, fuel supply shortages are likely to last well into October, and are likely to get considerably worse before they get better.

It’s to early to be sure what the effects are going to be yet. But the south is already seeing shortages. As this piece from the AP says….

Fears of supply shortages, and actual fuel-production disruptions, resulting from Ike’s lashing of vital energy infrastructure led to pump price disparities of as much as $1 a gallon in some states, and even on some blocks.

Late Saturday the U.S. Minerals Management Service said there were two confirmed reports of drilling rigs adrift in the central Gulf of Mexico.

Compounding the jitters and higher costs for gasoline retailers was the fact that some big refineries along the Gulf Coast had been shut for nearly two weeks following Hurricane Gustav. Power outages caused by Ike threatened to keep millions of gallons of gasoline output idled for at least several days.

The price of regular gasoline soared as high as $4.99 a gallon in Knoxville, Tenn. on Saturday, up from $3.66 a day earlier.

In Florida, the attorney general’s office reported prices as high as $5.50 a gallon in Tallahassee and said it had received 186 gouging complaints.

This article from the Houston Chronicle suggest that things may be better then the Oil Drum fears.

I was going to write a post that laid out the size of the big banks that are rumored to be nearing death. But Nemo beat me to it.

From the New York Times….

But Mr. Paulson and Mr. Geithner made it clear to the company, its potential suitors and to the meeting participants on Friday that the government has no plans to put taxpayer money on the line. The government is deeply worried that its actions have created a moral hazard and the Federal Reserve does not want to reach deeper into its coffers. Instead, Mr. Paulson and Mr. Geithner insist that Wall Street needs to come up with an industry solution to try to stabilize Lehman Brothers and calm the markets.

Still, some of the other Wall Street banks, facing billions of dollars in losses themselves, have resisted this approach. They argue that Lehman Brothers overreached and brought its current troubles on itself. If there are no bidders for Lehman Brothers, these banks say they can collect their collateral and liquidate the troubled firm’s assets. In this high-stake game, they may also be trying to call the government’s bluff, knowing that if push came to shove, it would provide financial support.

I wish that Mr. Paulson and Mr. Geithner would let Lehman’s Brothers fail. But their past performance does not give me hope.

When their lips are moving, they are lying. This from RIA Novosti…

Russian President Dmitry Medvedev dismissed speculation on Friday that his country would not have enough natural gas for European consumers and pledged to launch new fields if the market grows.

“It is amusing to hear statements that Russia will not have enough gas for supplies to Europe…This is not so,” Medvedev told a Valdai International Discussion Club meeting.

Medvedev also said that the country’s plans to develop energy cooperation with Asian states would not adversely affect energy supplies to Europe.

Talk is cheap. The investment needed to secure future gas production is not. So far, their is no sign that the Russians are spending the necessary money to keep their exports from going down.

I have not been writing much about Washington Mutual because I did not have any good way of explaining why it was important. But Nemo provides good explanation of why this is not just another bank failure in the making.

From AFP….

According to the local state agriculture organisation, the drought had inflicted losses of more than two billion dollars by July.

“The problem is that in autumn there will be no water for next year,” said Mansour Rashidi, a provincial ministry of agriculture expert.

“The underground water table will not be replenished. We will be hit with the lowest amount of water ever because we have used up all the reserves.”

Tehran has allocated nearly five billion dollars to fight the drought nationally. Even arch-foe the United States, often referred to in Iran as the Great Satan, is helping out.

To cover demand, Iran needs to import five million tonnes of wheat to make up for this year’s drought-induced shortfall.

According to a recent US Department of Agriculture report, Tehran has bought 1.18 million tonnes of American hard wheat, commonly used in breads and pasta, since the 2008-2009 crop season began in June.

From the San Francisco Chronicle

Pension spiking (e.g., retroactive increases in pension benefits or pre-retirement promotions that qualify workers for bigger pension benefits), has been a major trend in California since our dot-com boom. It has saddled state and local governments with serious fiscal problems ever since (e.g., Orange County has a $2.7 billion pension deficit, and a 2005 review of California’s biggest government agencies found pension, health care and workers’ comp commitments more than $100 billion under-funded), even leading to bankruptcy by the city of Vallejo.

100 billion dollar short fall in one state. That is not pocket change.

From the Daily Express….

Britain is “quite simply running out of power” and blackouts are almost inevitable within the next few years.

This is the stark warning from the head of an energy think-tank who believes power cuts could be serious enough to spark civil disorder.

You might be thinking “Sure you can find a head of a think-tank who will say just about anything. But there is little more to this then hot air. From latter on in the same article….

Only last Thursday, National Grid issued an urgent call for power after a series of power station breakdowns. Suppliers were asked to bring all their available generating capacity online, including costly oil-fired stations.

In May, hundreds of thousands of people in Cleveland, Cheshire, Lincolnshire and London suffered blackouts when seven power stations were closed.

The electricity industry estimates it needs to spend £100billion on new stations to ensure supplies.

The “retirement” of a string of nuclear and coal-fired power stations will see 37 per cent of the UK’s generation disappear by 2015, partly because of EU environmental directives.

That last part is the real kicker. But it also might not happen.

I suspect that the UK government may just ignore EU directives when it comes time to take 37 percent of their power off line. Still, they are having problems without EU intervention and I suspect those problems will just get worse.

Infrastructures costs is one of those hidden bombs in modern society. We built it in the past for far cheaper then we can build it today, even accounting for inflation. And when we pay for it to be rebuilt we will also have to be dealing with all the cost associated with an aging demographic.

From the Knowledge Problem…..

According to the US Department of Energy, “The Strategic Petroleum Reserve exists, first and foremost, as an emergency response tool the President can use should the United States be confronted with an economically-threatening disruption in oil supplies.”

In response to disruptions caused by Hurricane Gustav, the DOE has indicated a willingness to release reserves from the SPR. Unfortunately, due to a continuing power outage – also caused by Hurricane Gustav – the DOE is unable to pump oil from storage.

The original rational for the strategic petroleum reserves was the fear of limited war that disrupted oil supplies. So it does not surprise be that the SPR can’t operate without power. Its still kind of funny though.