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This year
we have witnessed the fall of 3 major investment banks – Bear
Stearns, Lehman Brothers and Merrill Lynch. These stalwarts of
Wall Street had been in business for decades and even centuries.
They had weathered bear markets, economic recessions, bank runs
and even depressions. However, in the current turbulent markets
they seemed to fall like dominoes with seemingly no stability to
hold them up whatsoever.
Lehman had
been in business since 1850m while Merrill Lynch and Bear
Stearns were two of the most respected names on Wall Street.
Even the thought of these 3 giants vanishing seemed utterly
ridiculous a mere 12 months ago.
So how did
we come to this?
Could the
fall of these powerful investment banks have anything to do with
the fact that they opened themselves up to the public markets?
Many market experts have opined that the demise of these
companies was due more to manipulation by hedge funds than an
actual deterioration in the companies themselves.
Bear
Stearns had operated for 63 years before going public in 1986.
Lehman Brothers had been doing business for 144 years before
taking their company public in 1994. Had these companies
remained private, would they still be in business today?
It seems
that the goal of every hot new business is to be able to take
the company public some day and to stand on the New York Stock
Exchange floor and watch in awe as the first day of trading
begins. However, one of the lessons of 2008 should be for
companies (young and old) to recognize the inherent risk of
being publicly traded. A few poor decisions can open your stock
up to incessant short selling by hedge funds which could fuel a
panic as in the case of Bearn Stearns and Lehman.
At the time this article was
published, the author did not have a financial position in any
of the stocks mentioned in this article.
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