Monday, September 15, 2008

Lehman Brothers' bankruptcy to change the face of banking

LONDON: In what is being described as the Mother of all Mondays, the fabled Wall Street will never be the same again. Financial commentators are talking about a tectonic shift that will change the face of the world's banking sector as we know it. Markets world wide are reeling from the after effects of the triple shock of Lehman Brothers going into bankruptcy, Merrill Lynch being sold to BofA in a distress sale for $ 50 billion, and AIG asking the Fed for a $ 40 billion bailout. The FTSE dropped 200 points, or around 3% in early trades.

Former US Fed governor Alan Greenspan describes it as a 'once in a century' event, and the 'worst' he's seen in his career. Lehman Brothers, which has survived over 150 years, finally went into Chapter 11 late Sunday night, putting tens of thousands of jobs at risk all over the world. Merrill Lynch, the other Wall Street major, narrowly avoided Lehman's fate by agreeing to be bought by BofA for USD 50 billion – again raising the spectre of an uncertain future for its thousands of global employees.

The US government, which bailed out Fannie Mae, Freddie Mac, and Bear Sterns, put its foot down with Lehman, and last minute potential buyers like Barclays walked out late Sunday night. At Lehman's US offices, television channels captured scenes of employees leaving the building with cardboard boxes, while at its European headquarters in Canary Wharf, where the bank is estimated to employ around 4000 people, the mood was sombre as employees were told to turn up for work, but not to do any business.
Market participants are responding by running away from risk, as well they should. That is the stuff out of which great crashes are made. The bouncing-ball pattern of declining stock markets was marked by bear market rallies each time the American and other governments stepped in to bail out the latest victim. The US government’s ability to influence events, however, seems exhausted. The Treasury and Federal Reserve can’t bail out everyone. After Lehman, the insurer AIG and Washington Mutual may be next to fail, followed by several regional banks. I see no solution except to allow American households to begin the painful process of rebuilding their balance sheets, which implies a slowing economy for the next two years. It is too late to stop the Great Crash of 2008. The question remaining is how best to pick up the pieces.

1 comment:

brianna said...

For achieving something good you have to face risk. Now a days when there is cut-thought of competition we should change unfavorable condition into favorable one. Bankruptcy is legal opportunities to resolve all credits.