From The
Times
September 15,
2008
Lehman Brothers and Merrill Lynch's lost
weekend
Gerard Baker, US Editor
To lose one major investment bank in the course
of a weekend, to paraphrase Oscar Wilde, might be considered a
misfortune. To lose two looks dangerously like a
catastrophe.
By Sunday night, after a
tumultuous weekend of round-the-clock negotiations orchestrated by
the US Federal Reserve and the Treasury, it looked likely that
Lehman Brothers and Merrill Lynch, two of America’s most famous
financial names, would cease to operate as independent institutions
at the opening of business this morning.
That would mean Wall Street may have just had
its most extraordinary weekend in at least the last 50 years, with
the worry that even worse may still be to come.
How did we get here? There are two answers to
this basic question
The immediate explanation is that the US
government decided that it simply could not afford - in the
interests of prudential supervision - to rescue yet another bank.
Someone had to be shown to be not too big to fail, and it looks
like it was Lehman.
In March, the Federal Reserve helped JP Morgan
acquire Bear Stearns, a controversial decision that could cost the
authorities almost $30bn. The Fed defended the move as essential to
saving the whole US financial system from going
down.
But having dipped its hands in the blood of the
financial markets the Fed decided it simply could not do so again
without in effect committing itself to a completely open-ended
guarantee of every financial institution that found itself in
trouble.
The second, deeper explanation, is that this is
merely the most dramatic symptom yet of the disease that continues
to ravage the US financial system.
The balance sheets of too many US banks are
awash in toxic assets. Most of them can be traced back to wildly
negligent investment decisions made during the boom in house prices
and other assets in the last five years. In the last eighteen
months US house prices have fallen by more than at any time in the
last 70 years and a whole host of assets that were backed by that
market have become worthless.
This may be more than just another catastrophic
end to another financial cycle, however. It could be the end of a
whole financial model - investment banking
itself.
“It’s probably no exaggeration to say we are
witnessing the end of an era’ said one seasoned financial executive
watching events unfold at the weekend.
A fool (Temasek) and
his money is easily parted.
