|
Today
marked one of the most sensational days on Wall Street as
investors face the news that two of Wall Street’s most storied
banks are no more. Lehman Brothers (a company founded in 1850)
was forced to file for bankruptcy yesterday after finding no
buyers and no help from the US government. Today, Merrill Lynch
(founded in 1914) convinced that it could be the next to fall,
ran to the arms of Bank of America.
The fall
of these two Wall Street giants are just the latest chapter in
the most incredible year ever seen by America’s financial
institutions. At the beginning of the year, Lehman shares traded
at over $64 per share, this morning you can buy over 300 shares
of Lehman stock for the price you would have paid for a single
share back in January. And Merrill Lynch, which had a market cap
of $80 billion at the beginning of the year, has now accepted a
rather generous buyout offer from Bank of America which values
the company at $50 billion (a 70% premium over Friday’s closing
price).
Today’s
incredible headlines follow on the earlier demise of Bear
Stearns (a company once valued at $25 billion) and Countrywide
Financial. Unfortunately, most analysts predict that more bad
news is imminent. In a CNBC interview, Wilbur Ross, chairman and
CEO of WL Ross & Co., says he sees possibly as many as a
thousand bank closures in the coming months.
Pessimism
is certainly the prevailing mood on Wall Street today, as
traders speculate on who will be the next to fall. American
International Group, the world’s largest insurance company, is
asking the Fed for additional capital. Their shares are down
over 50% in mid-morning trading.
Looking
back on the rapid demise of Lehman, investors and employees
alike must be greatly disappointed with the ineptness of the
senior management team. While Wall Street and most of America
realized that Lehman was on the brink of catastrophe, the
management team seemed in no hurry to address the crisis. This
haughtiness and resulting inertia left Lehman investors with
nothing in the end. Even Bear Stearns was able to get $10/share
for their investors at the 11th hour.
For
investors, it has always been difficult to value Financial
Services companies. Bank balance sheets are notoriously
misleading, due to the fact that they are totally dependent on
how the individual companies value complex securities. Now these
companies that bet so heavily on real estate and the mortgage
sector aren’t worth anywhere near what their balance sheet
indicates making it extremely difficult to assess their worth.
Even
declining oil prices have failed to stimulate the economy in
recent weeks. That’s due to the fact that our current economic
conditions were brought on by a bursting housing bubble. Home
prices have continued to fall and foreclosures have continued to
rise. The ensuing mortgage crisis has had far-reaching effects
as banks make fewer loans and consumers cut back on their
spending. Until these trends can reverse, it’s unrealistic to
expect the economy to improve.
The
compounding of these recent events is starting to lead to even
more concerning reports. For the first time (possibly since the
Great Depression), average Americans are starting to be
concerned about the financial stability of our banking system.
The fall of Bear Stearns, Lehman Brothers and Merrill Lynch has
revealed just how much our financial systems are built on a
house of cards. It’s possible that we may even experience bank
runs in the coming months if things continue to deteriorate.
This
financial crisis is far from over. While economists argue over
whether or not we will experience a true recession, maybe they
should be more concerned over whether we are going to experience
a true depression. Regardless, the financial landscape has been
changed forever as the old names of yesteryear are sunk by their
poor decisions and a handful of new giants will emerge to prove
that they will not make the same mistakes.
At the time this article was
published, the author did not have a financial position in any
of the stocks mentioned in this article.
Read Disclosure Policy |
