Monday, September 15, 2008

How The Mighty Fall

Well, you've heard this story today, but careful readers of this blog have known this was coming for a very long time:

It's the end of an era for Merrill Lynch, the brokerage firm that brought Wall Street to Main Street.

Merrill, which has lost more than $45 billion on its mortgage investments, agreed to sell itself to Bank of America for $50.3 billion in stock, according to people briefed on the negotiations.

It is a remarkable fall from grace for the 94-year-old Merrill, whose corporate logo — a bull — has long symbolized the fundamental optimism of Wall Street. After a frantic weekend of talks between Wall Street executives and federal officials over the fate of the teetering Lehman Brothers, fear spread on Sunday that Merrill, staggered by losses, might also falter. The merger would combine Bank of America's banking and lending strength with Merrill Lynch's wealth management expertise.

Lehman, it should be noted, has since announced its intentions to file bankruptcy as early as today and has let 25,000 employees go.
How the mighty have fallen. From the heyday of the 80s and 90s, when brokerages and investment banks could do no wrong, and Americans across the nation profited from the opening of the capital markets to the small sucker, I mean, investor, to this recent chapter (apparently, number eleven) which has seen three huge names in the brokerage field-- Bear Stearns, Lehman Brothers, and Merrill Lynch-- tumble into oblivion.
Who's left? Prudential Bache? Salamon Smith Barney?
Well, SSB is owned by Citigroup, which in turn owns Citibank. We can likely say buh-bye to Salomon in the near future, as Citibank's losses mount in the mortgage and credit markets.
Prudential Bache has managed to stay out of trouble, but more because the parent company, Prudential Insurance, has managed to squeeze clients for 12% more in commissions, and 6% more in fees, through the first half of 2008 than in 2007. Operations have shown a 17% reduction in revenues.
So they've made money the old fashioned way: gouging their customers!
Already, indications are for a market collapse unlike any other we have seen in our history, and there's not a lot of "there" there to begin to prop things up. Remember, it was the Treasury Department that negotiated the Bear Stearns sale to JP Morgan Chase Bank earlier this year, and no doubt helped sweeten Bank of America's deal with Merrill, as well as last week's almost-mandated bailout of Fannie Mae and Freddie Mac.
But you get the sense that Lehman was left twisting in the wind because the cubbard's gone bare (if there was ever a time for tortured metaphors, this is it!). Institutional investors, the guys who really play the market, have already gotten out, quietly. Futures for the NYSE were down a whopping 260 points (meaning that the second the market opens, it would drop by that much), and that was hours before Bank Of America, who had been rumoured in talks with Lehman, bailed out and bought Merrill instead, hours before the 25,000 layoffs at Lehman were announced, hours before the public declaration of bankruptcy.
This bodes ill for insurance giant AIG, who apparently could not gouge their clients. AIG has asked the Fed for a $40 billion bailout.
There's a book to be written about last night, to be sure.
I should of course point out that if the government had been as generous with the mortgagors and debtors who are in perilous financial straits due to no fault of their own-- medical bills, divorce, job loss-- likely this current consumer debt crisis would not be half as bad as it has been, or will get, for that matter. I don't think we've seen the worst, but the worst is nearly upon us. After all, $75 billion dollars, roughly the Fed kick in on the Bear, Merrill and Fannie/Freddie deals, would go a long way, and would be spread out across many troubled markets and into paying down debt at many troubled banks and financial institutions.
But I digress...
We are no longer looking at ripples from a few stones sliding down the riverbank and into the creek, we're looking at a flash flood of raging torrents wiping clean the banks of the river.