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With the Federal Reserve and federal government calling the shots (and putting in money, but not too much), two of Wall Street's historic firms are being wiped away. Bank of America is buying Merrill Lynch for $50 billion or $29 a share. If there was any good news today, Merrill closed at $17.50 a share Friday, so B of A is paying a premium. Lehman Brothers will file for bankruptcy tomorrow (Sept. 15). Several rescue plans (such as that it would be bought by B of A, or London's Barclay's, or would separate into a good bank and bad bank with the latter taken over by other firms) failed. It is expected that part of Lehman will go into Chapter 7 bankruptcy (liquidation), and part into Chapter 11 reorganization. Meanwhile, AIG, the big insurer, desperately short of capital, is expected to shed assets so that it can shore up its reserves. Rumors are that JP Morgan Chase will buy the deposits and branches of ailing Washington Mutual. Dow Jones Industrial Average futures contracts are down 285 and Standard & Poor's down 38 at 6:50 Pacific time. This may or may not presage a much lower opening Monday morning. Optimists are saying that as a result of these dramatic, cataclysmic moves, Wall Street is wiping out its problems quickly, and the market may reach a bottom, and is therefore possibly a bargain. Realists, however, note that Wall Street's woes are self-inflicted. For example, in 2004, the government lifted regulatory bars that kept investment banks from taking on too much debt. It was thought that new, computerized models permitted the firms to take on more debt. They became leveraged anywhere from 25 to 1 to 35 to 1, sometimes much higher. Since the 1980s, the U.S. economy has grown well because debt was billowing significantly more every year than the economy was. Now governments, consumers, corporations and particularly financial institutions are far too deep in debt. Informed people are talking about the coming "deleveraging" of the economy. Unfortunately, this means slower growth (if any), more financial consolidations, possible failure of at least 150 banks -- all in the context of "deleveraging," or shedding debt. The U.S. must get rid of its excess debts. This cannot be done without consequences that could be severe. In particular, the derivatives must be wound down. (See my column coming online Wednesday and in the print edition Thursday.)
With the Federal Reserve and federal government calling the shots (and putting in money, but not too much), two of Wall Street's historic firms are being wiped away. Bank of America is buying Merrill Lynch for $50 billion or $29 a share. If there was any good news today, Merrill closed at $17.50 a share Friday, so B of A is paying a premium. Lehman Brothers will file for bankruptcy tomorrow (Sept. 15). Several rescue plans (such as that it would be bought by B of A, or London's Barclay's, or would separate into a good bank and bad bank with the latter taken over by other firms) failed. It is expected that part of Lehman will go into Chapter 7 bankruptcy (liquidation), and part into Chapter 11 reorganization. Meanwhile, AIG, the big insurer, desperately short of capital, is expected to shed assets so that it can shore up its reserves. Rumors are that JP Morgan Chase will buy the deposits and branches of ailing Washington Mutual. Dow Jones Industrial Average futures contracts are down 285 and Standard & Poor's down 38 at 6:50 Pacific time. This may or may not presage a much lower opening Monday morning. Optimists are saying that as a result of these dramatic, cataclysmic moves, Wall Street is wiping out its problems quickly, and the market may reach a bottom, and is therefore possibly a bargain. Realists, however, note that Wall Street's woes are self-inflicted. For example, in 2004, the government lifted regulatory bars that kept investment banks from taking on too much debt. It was thought that new, computerized models permitted the firms to take on more debt. They became leveraged anywhere from 25 to 1 to 35 to 1, sometimes much higher. Since the 1980s, the U.S. economy has grown well because debt was billowing significantly more every year than the economy was. Now governments, consumers, corporations and particularly financial institutions are far too deep in debt. Informed people are talking about the coming "deleveraging" of the economy. Unfortunately, this means slower growth (if any), more financial consolidations, possible failure of at least 150 banks -- all in the context of "deleveraging," or shedding debt. The U.S. must get rid of its excess debts. This cannot be done without consequences that could be severe. In particular, the derivatives must be wound down. (See my column coming online Wednesday and in the print edition Thursday.)