Monthly Archives: September 2008
In view of the current Wall Street crisis, America’s credibility as a bastion of free markets has come under the radar. The Fed’s recent bailout of AIG, Fannie and Freddie are perceived by many as a free market detour.
The government’s latest bailout news involves a plan to make the biggest intervention in the financial markets since the 1930s. Central to this plan would be a mechanism to bad assets off the balance sheets of financial companies or instead perhaps to create a federal insurance for investors in the money market funds. Additionally, the Securities and Exchange Commission is getting ready to propose a temporary ban on short selling financial stocks.
In view of the current financial crisis, it is hard to grasp the fact that overnight investment banks once regarded the kings of Wall Street, are teetering on the edge of stability. The bankruptcy of Lehman Brothers has threatened the survival of Morgan Stanley in spite of the fact that it has just declared great earnings. All eyes are on Morgan and Goldman Sachs, the two big I-banks left standing. Will they go next? What will this mean for corporate social responsibility in the investment banking sector?
Asia is watching in shock and wondering why if the problems are in the US, are the markets here selling off more dramatically.
It is back to fear tactics which immediately offset the fight or flight syndrome. In this case it is definitely all about flight. Asia in particular appears to be more volatile than other markets. It is based on sentiment according to Dan Parr, the Asia-Pacific head for BrandRapport, a consulting firm. Morgan Stanley might have released very positive third quarter earnings but nobody wants to believe that this is any indicator of their health. It is like withdrawing your bet from the fastest runner in the race because everybody else tells you that he’s surviving on steroids. Morgan and Goldman stock has come under such selling assault that their share price has gone down drastically. Investors are instead snapping up three-month Treasury bills with virtually no yield pushing gold to its biggest one-day gain in nearly 10 years. The only truly happy person must be the Indian housewife who has become rich overnight by virtue of her stridhan (gold jewelery inherited by an Indian woman at the time of her wedding).
Investment banks have financed themselves for the good times rather than bad. So they depend excessively on short-term funding and high leverage. While this might have generated high returns in good times (supporting large payouts for employees and shareholders), in bad times this kind of capital structure has come back to haunt the firms. Given Lehman’s collapse, the only choice for the remaining investment banks might just be acquisition by commercial banks with large, stable deposit bases. 2008 has seen it happen with Bear Sterns-J.P.Morgan, Merrill Lynch-Bank of America and now with Lehman Brothers-Barclays. All three deals create universal banks that are better positioned to weather market turmoil. Will this be the way for Morgan and Goldman? Or will they change their strategies to actually weather the storm of the credit crunch?
Yesterday we struggled to stay afloat a sinking ship in the bloody seas of the Wall Street crisis. Despite our superior-than-average swimming skills, we did not have much hope for survival. Any internal gossip indicating that an acquisition deal might be done had the caveat ‘perhaps,’ a word that did not have much standing given that Lehman Brothers had fallen down on every hope and promise in the last few days. It was no consolation when a colleague called us last evening, upset that the head of M&A at Lehman was out drinking rather than trying to get the Barclays deal done.
The blogsphere has labeled today the mother of all Mondays. As I roll out of bed this morning still in a twilight zone from severe lack of sleep over the last 72 hours, a hopeful voice from somewhere inside of me still cries out maybe it was all just a terrible dream. Indeed. Maybe today will be like any other Monday where I can go to work with my morning french roast having dropped the kids off at school.