Crisis on Wall Street – The Investment Banking Giants Are No More
by Erin Abrams (New York City)
This Glass Hammer financial reporter went on vacation last week, and returned to find the financial landscape in New York utterly transformed into something practically unrecognizable. Walking down Wall Street this morning, I felt like an astronaut doing a moon landing. Sure, the buildings physically looked the same, but the financial terrain seemed alien in light of the recent news on the Street.
A brief recap of the incredible news on Wall Street in the last week or so. Lehman Brothers, the 158-year old investment bank, filed for bankruptcy on Monday, September 15, 2008, after furiously and futilely searching for a buyer over the weekend for their increasingly distressed assets, and being told that a Bear Stearns-style government bailout was not in the works for them. Barclay’s, who had originally expressed interest in the firm’s assets but pulled out of a deal that would have enabled the troubled firm to avoid bankruptcy, predictably stepped in to pick up the firm’s capital markets assets for a post-bankruptcy fire-sale price of about $1.75 billion.
Rumors of Lehman’s demise had been swirling for a week or so, but it still caught most investors by surprise. Earlier this year, it seemed that Lehman would weather the credit crisis in better shape than its competitors. At a meeting of shareholders earlier this year, former Lehman CFO Erin Callan was asked about why Lehman wasn’t raising more capital in response to the credit crisis. According to observers, she said that Lehman didn’t need more money, as it had yet to post a loss during the credit crisis. The company had industry veterans in the executive suite who had perfected the science of risk management, she said.
“This company’s leadership has been here so long that they know the strengths and weaknesses,” participants recalled her saying. “We know when we need to be worried, and when we don’t.” In hindsight, it looks like they needed to be worried.
Hours later last Monday, Merrill Lynch announced that it would be bought by Bank of America for $50 billion in order to save itself from a similar fate. In response to the historic demise of these two great banking institutions, following on the heels of Bear Stearns’ government-sponsored rescue by JP Morgan, the market plummeted, hitting its lowest point since 9/11. In response, 10 major banks agreed to create an emergency fund of $70 billion to $100 billion that financial institutions could use to protect themselves from the fallout of these unprecedented financial firm failures.
On September 17, the Federal Reserve announced that it would take control of the struggling insurance giant AIG, lending it $85 billion in order to stay afloat. A committee of state insurance regulators is being formed to oversee the break-up of the company’s far-flung empire of assets. This bailout followed the federal government-assisted rescue of mortgage lenders Fannie Mae and Freddie Mac, which received an infusion of billions of dollars of tax payer funds to avoid closing their doors.
The landscape of Wall Street was starting to look unrecognizable. Three of the five investment banking titans of old, Bear Stearns, Merrill Lynch and Lehman Bros., no longer existed, and the two left standing, Goldman Sachs and Morgan Stanley, had lost significant value and faced constraints on borrowing.
Then, this Monday, September 22, 2008, the final two giants fell. Goldman Sachs and Morgan Stanley, announced that they had sought and received permission from the federal government to be classified as bank holding companies. The move would subject them to far greater federal regulation and would sharply limit the amount of money that can be borrowed in proportion to capital reserves. However, this move will also enable the two former investment banks to acquire commercial banks and accept retail deposits, which will provide them with much needed cash reserves. In the wake of this news, Morgan Stanley announced its intent to sell 20% of itself to Japanese banking giant Mitsubishi UFJ Financial Group.
All five former investment banking giants have been laid low by the capital markets crisis stemming from exposure to sub-prime mortgage debt and the complex securities backed by it. It was the end of an era on Wall Street.
Some financial journalists and economic experts say that the demise of these financial institutions was hastened by short sellers at hedge funds. Short sellers borrow the stock of a company that they perceive to be overvalued, and then wait for that stock to decline in value. Then they buy the stock on the open market at a lower price and return it to the lender, pocketing the difference. These investors are sometimes highly vocal about their investments, pointing out the flaws in the company that they have “sold short” to the media and other investors. David Einhorn, of Greenlight Capital, was one such vocal holder of a short position in Lehman Bros. He likely made a handsome profit from the company’s demise.
Some say that these hedge funders are just pointing out inefficiencies, flaws and corruption in companies whose stock would eventually go down anyways, and making an honest profit. Others say that these short sellers are placing downward pressure on the stocks that they short, in some cases creating a panic in the market that leads to a sell off and collapse that may not have occurred as quickly or at all absent the short sellers efforts. These critics are calling on the SEC to regulate hedge funds more closely. They call for reforms, such as restrictions on practices such as naked short selling and seek requirements that hedge funds disclose their short positions.
Now, the news is all about the federal government’s proposed bailout package, which would involve using $700 billion in taxpayer money to buy up the distressed debt of struggling banks and enable them to clear it off of their balance sheets, in the hopes of freeing up capital and decreasing investors’ resistance to lending. Stocks continue to plunge, and the market today closed over 370 points down over investor anxiety over the proposed bailout. Here, a handy primer from the New York Times answers some basic questions about the bailout package.
Of course, all of this bad news more jobs are on the chopping block. Most of Lehman’s 25,000 employees cleaned out their desks and were left wondering about how long they would continue to receive paychecks and benefits for. With Merrill’s absorption into Bank of America and Goldman and Morgan Stanley’s restructuring, even deeper job cuts on Wall Street likely remain ahead. Resumes are flooding the Street, but there are few jobs to be found.
Organizations dedicated to the advancement of women on Wall Street have been reaching out to help, but there’s little they can do. 85 Broads, the network of women in finance formed by Goldman Sachs alums, send out an appeal to its members last week in the wake of Lehman’s bankruptcy. As Lehman was the organization’s largest financial backer, it appealed for donations to keep the group going. But it also appealed to its members to network with women who had lost their jobs in the financial meltdown, and help them get back on their feet quickly, noting that many women in finance are the breadwinners for their families.
The Glass Hammer is interested to hear from our readers about how the crisis on Wall Street is affecting you. Are women around you losing their jobs or afraid that they will soon? Do any women you know think that this time of market upheaval might be a good time to take a break from work and spend more time with family? Or, on the other hand, do you know any women who have been working flex-time or planning to on-ramp after taking time off who now feel more vulnerable because of the economic crisis? Let us know!
