Commentary

What’s happening on Wall Street

Already being referred to as Black Sunday, yesterday’s events will have a significant impact on the financial landscape of Wall Street. So what’s going on in Manhattan’s financial district? Essentially, two of the top investment banks reached a financial point of crisis at the same time. Lehman Brothers and Merrill Lynch both had stock in a freefall coming into the weekend, and both were engaged in high-level discussions with the federal government and various other financial institutions over what their fate would be. Everything came to a head this weekend. Ultimately, all the potential financial saviors left the table except Bank of America. On Friday they were widely rumored to be in an agreement to buy Lehman Bros. and save it from bankruptcy. Over the weekend, however, BOA decided Merrill was the better buy, and closed a sale late Sunday night (see post “Wall Street gets Merrill bailout right”). This left Lehman Bros. with no financial backstop and little choice but to close down. Even the federal government has decided to let the market take a natural course–a decision we could have expected them to make a year ago, but give the recent candy-like distribution of bailouts, was a matter for concern. Stocks dropped sharply this morning when the market opened, losing over 200 points in a roller coaster of trading by the noon hour. Some analysts believe the Merrill sale has off set short-term fears that might have stemmed from the Lehman bankruptcy. Lehman Bros. as an investment bank is suffering from the subprime mortgage market collapse. They simply do not have enough capital to back up their risky investments, and no one is willing to provide them with a financial infusion to keep them afloat. Presidential candidate Obama didn’t let the bank collapse slip by without using the opportunity to attack Republicans saying “Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans.” Whether or not that statement is true, it actually has little bearing in this case, and the statement actually does show Washington’s incapability of understanding market realities. Lehman currently has more than $613 billion of debt. The irony is this really hurts the wealthy, and may only indirectly hurt middle-class American in a trickle down effect. Lehman owes $157 billion of that debt to just 10 unsecured creditors, most of whom hold Lehman bonds and may only get 60 cents on the dollar returned with Lehman begins to liquidate its assets. Tokyo-based Aozora Bank is unlikely to get back all of the $463 million they loaned Lehamn. Mizuho Corporate Bank is owed $382 million and Citigroup Inc. is owed $275 million. As the fourth-largest U.S. investment bank, Lehman’s collapse is being rendered the “highest-profile” casualty of the “credit crisis” sweeping the country. When it files for Chapter 11 bankruptcy today it will be the largest in U.S. history. The 158-year-old firm survived the 19th century railroad bankruptcies and the Great Depression. As Lehman Bros. disappears from Wall Street and Merrill is absorbed by Bank of America, this radically changes the financial structure of Wall Street. It’s baseball equivalent would be if the LA Dodgers went bankrupt and folded, while at the same time the NY Yankees were bought out by the Boston Red Sox.