Spontaneous Thoughts on Recent Events: Investment Banking as We’ve Known It

What’s going on? Is investment banking dead? What's going on???



I thought of a great idea how to make a fortune quickly. I can’t believe I haven’t thought of it before. It’s really a three step program:

1. Raise money from other people (a.k.a OPM or Other People’s Money).
2. Take huge risks and leverage like crazy.
3. Share only the upside!

I really can’t fail, can’t I? The question is who in their right mind would hand me their money in the first place? Well, no one would give The Personal Financier any of their money to invest but if what if I was named Lehman Brothers? or Merrilll Lynch maybe? Bear Sterns?

There’s really very little comfort in the recent demise of investment banking as we’ve known it. Lehman Brothers went bankrupt leaving behind over $600 billion in debts which will echo through out the worlds’ capital markets.

Each and every one of us will feel the impact of the historical events taking place on Wall-Street these days, whether directly or indirectly.

Screens all over the world are painted in ominous red promising further chaos and uncertainty. It seems the ripples across the financial ocean are only now starting to spread, contrary to the optimistic views heard recently.

On average each recession has taken from 0.5-2 years to recover from. These events are of epic proportions and can’t really be compared to any crisis I’m familiar with aside from the great depression of course.

The dollar had just started resurfacing only to be wacke again by the hammers of Lehman Brothers and AIG. It’s amazing how quickly the Bank of America changed his mind and went fro Merrill Lynch instead of Lehman Brothers. I never knew $50 billion dollar deals were made so quickly. Even if they were considering buying Merrill Lynch a long while back how can any bank, even as big as the Bank of America, conduct two ultra complicated negotiations and research in the same time?

Merrill Lynch was actually bought at a 70% premium of Friday’s stock price which is quite astounding. The market showed it’s disbelieve as Merrill Lynch’s stock didn't rise to meet the premium.

Much like hurricanes Gustav and Ike we must secure our houses and head for shelter. I’d double check my emergency fund and hope for the best. Hopefully we will wither the storm and the worst is over (though I highly doubt it).

Apparently Lehman Brothers’ executives failed to recognize the full gravity of the situation even as late as October 2007 as they went on and purchased a real-estate company for the legendary sum of $22 billion dollars. It’s always easy to be smart in retrospect but during October 2007 we were quite educated already.

The Fed’s decision to leave Lehman Brothers hanging dry is interesting and promising. Bailing out Bear Sterns delayed Lehman Brothers’ bankruptcy and prevented mass hysteria. Bailing out Freddie Mac and Fannie Mae was necessary to preserve the economy, or what’s left of it.

Goldman Sachs and J.P Morgan appear to be stable enough and Merrill Lynch was just purchased. Someone had to pay the full price for their carelessness.

We will learn to trust investment bankers again. It might take a while but thank to the short term memory of most us they will thrive once more.

Meanwhile AIG dangles between life and death waiting for its knight in shining armor. Warren Buffet declined to feel the role and various ideas are tossed in the air faster than any skilled juggler. “They” won’t let AIG fall. Much like recent bailouts too much is at stake contrary to the Lehman case.

Another thought comes too mind…. With massive bailout paid for by US citizens wouldn’t it have been easier to bailout all the Americans who defaulted on their mortgage payments in the first place?

Image by: squilla.dave