Lehman a cleansing maelstrom
Some good will come of the maelstrom that hit Wall Street over the weekend like a Category 5 hurricane. But for now, the Street’s denizens are numbed by how their world has abruptly changed. A crippled Merrill Lynch & Co., which pioneered Main Street investing, has been rushed into the arms of Bank of America Corp.
The venerable Lehman Brothers Holdings Inc., America’s fourth-largest brokerage, has filed for Chapter 11 bankruptcy protection. New York-based American International Group, among the world’s biggest insurers, has secured a $20 billion lifeline. Washington Mutual Inc., America’s largest thrift, or savings and loan, is hanging by a thread.
The current disaster is without precedent in the modern history of the markets. Previous crises such as the 1980s insolvency of brokerage Drexel Burnham Lambert and the 1998 rescue of Long-Term Capital Management were isolated events. Today’s damage is so widespread that the stock market value of the U.S.’s largest banks and brokerages – even the ones that appear most sound – has plummeted as much as 80 per cent.
It isn’t so much fear that grips the denizens of Lower Manhattan today as self-doubt and mourning. The masters of the universe, as Tom Wolfe called them, believed themselves to be geniuses as they promoted and profited enormously from the record U.S. housing boom of the mid-decade. These financial engineers are now clueless about how many subprime, effectively junk mortgages, are on their balance sheets.
The bonus-fuelled exuberance of these stewards of the financial system has culminated in their exposure as incompetents – and they know it absolutely free credit report. If it keeps up like this much longer the grief counsellors will have to be called in. Wall Street firms already have shed some 85,000 employees, even before the weekend’s traumatic events. And with this hollowing out of the Street’s greatest institutions, New York is in danger of losing its status as the world’s financial capital to London, which already leads Gotham by several measures.
All this, of course, after Washington’s $200 billion bailout just last weekend of the gigantic mortgage lenders Fannie Mae and Freddie Mac and the Feds’ forced merger earlier this year of brokerage Bear Stearns Cos. into J.P. Morgan Chase Co. with a guarantee that Uncle Sam will backstop $29 billion worth of Bear’s irrevocably lost "assets."
But here’s the real, hopeful story.
There were no bank runs by retail or institutional clients. A consortium of global banks has pledged $70 billion to a bailout fund for banks in trouble.
And, most important, with Lehman the Feds drew a line in the sand by letting it fail, signalling that from here out the survivors who authored this crisis will have to find their own way out of it or, like Lehman and its wiped-out shareholders, pay the ultimate price for failure.
Flushing the system of dubious assets and failed managers and practices that have caused the biggest U.S. financial crisis since the Great Depression is a necessary curative. The end-game will see the emergence of fewer but stronger financial players, more scrupulously monitored by regulators. That’s why capitalism, as Americans conduct it, is called "creative destruction."