Things Have Changed On Wall Street
Published in El Diario Exterior
(Spain) on 16 September 2008
by Gonzalo Toca (link to original)
(Spain) on 16 September 2008
by Gonzalo Toca (link to original)
Translated from
by Talisa Anderson.
Edited by .
Bear, Merrill, Lehman, Freddie Mac, Fannie Mae
The scene on Wall Street has been blown into the air after just thirteen months of crises
The skyscrapers of Manhattan, which have always induced vertigo and the admiration of the finance industry, are now viewed as cemeteries consisting of hundreds of floors. In a little over a year, investment banks that were taking refuge or are being passed off to other corporations are going bankrupt.
In just over a year, three of the five principle investment banks have disappeared (Lehman Brothers, Merrill Lynch and Bear Sterns), the two largest mortgage companies in the United States have had to nationalize (Fannie Mae and Freddie Mac), and the executives of the largest financial entities have been dismissed. The scene on Wall Street has changed.
The sector, which began its clean up 13 months ago, when it seemed that the burst of the subprime bubble was short-lived, was faced with the fall and disappearance of its principle exponents. Yesterday it was announced that Merrill Lynch would be purchased by Bank of America a few months after its executives rejected the deal because the price offered was too low.
Also yesterday, Lehman Brothers, another icon for the most sophisticated brokers throughout the world, finally declared bankruptcy becoming the largest suspension of payments in the last thirty years. The potential buyers preferred the following day not to face a similar situation to that of Bank of America with Merrill, a drop in stock greater than 20% in the mergers value.
After only a few weeks, Freddie Mac and Fannie Mae, the entities which guarantee 40% of mortgages in the United States and, above all, those that may pose the highest risk, since one of their objectives is to facilitate the financing of individuals which have limited resources, have been seized by the government, which may have to pay as much as $2.5 billion to keep them operating.
This past March, Bear Stearns, another large investment bank, was initially seized by the Federal Reserve for a few days and later sold under favorable conditions, backed by public money, to JP Morgan. The shareholders were shocked by the price and, after a substantial increase, they left it in the hands of the one of the worlds largest banks.
Institutional response
The Federal Reserve has strengthened its role as mediator between financial entities. It intervened in the sale of Bear Stearns, which prevented its bankruptcy, and it appears to have intervened with Merrill Lynch with similar results. On the other hand, it has created a fund of 70 billion dollars between the largest banks in the world to face the wave of Lehmans suspension of payments, as well as to attain a part of its profitable assets, between its hedge funds and real estate.
For the majority of analysts, and among them, Mauro Gillén, a professor at Wharton, more regulation is necessary in these types of markets. This is the idea behind the policy of the Federal Reserve, which is transferring the assets that had the least amount of regulation to the hands of a sector that is stringently supervised, which is the case with depository banks such as JP Morgan and Bank of America.
On the other hand, the Secretary of the Treasury has intervened in the two largest mortgage companies making an exception, because until now it has only expressed interest that depository entities do not fail such as in the crash of 1929. The aim was to guarantee 40% of loans, above all for the middle and lower class so that the commercial entities will not be affected.
The scene on Wall Street has been blown into the air after just thirteen months of crises
The skyscrapers of Manhattan, which have always induced vertigo and the admiration of the finance industry, are now viewed as cemeteries consisting of hundreds of floors. In a little over a year, investment banks that were taking refuge or are being passed off to other corporations are going bankrupt.
In just over a year, three of the five principle investment banks have disappeared (Lehman Brothers, Merrill Lynch and Bear Sterns), the two largest mortgage companies in the United States have had to nationalize (Fannie Mae and Freddie Mac), and the executives of the largest financial entities have been dismissed. The scene on Wall Street has changed.
The sector, which began its clean up 13 months ago, when it seemed that the burst of the subprime bubble was short-lived, was faced with the fall and disappearance of its principle exponents. Yesterday it was announced that Merrill Lynch would be purchased by Bank of America a few months after its executives rejected the deal because the price offered was too low.
Also yesterday, Lehman Brothers, another icon for the most sophisticated brokers throughout the world, finally declared bankruptcy becoming the largest suspension of payments in the last thirty years. The potential buyers preferred the following day not to face a similar situation to that of Bank of America with Merrill, a drop in stock greater than 20% in the mergers value.
After only a few weeks, Freddie Mac and Fannie Mae, the entities which guarantee 40% of mortgages in the United States and, above all, those that may pose the highest risk, since one of their objectives is to facilitate the financing of individuals which have limited resources, have been seized by the government, which may have to pay as much as $2.5 billion to keep them operating.
This past March, Bear Stearns, another large investment bank, was initially seized by the Federal Reserve for a few days and later sold under favorable conditions, backed by public money, to JP Morgan. The shareholders were shocked by the price and, after a substantial increase, they left it in the hands of the one of the worlds largest banks.
Institutional response
The Federal Reserve has strengthened its role as mediator between financial entities. It intervened in the sale of Bear Stearns, which prevented its bankruptcy, and it appears to have intervened with Merrill Lynch with similar results. On the other hand, it has created a fund of 70 billion dollars between the largest banks in the world to face the wave of Lehmans suspension of payments, as well as to attain a part of its profitable assets, between its hedge funds and real estate.
For the majority of analysts, and among them, Mauro Gillén, a professor at Wharton, more regulation is necessary in these types of markets. This is the idea behind the policy of the Federal Reserve, which is transferring the assets that had the least amount of regulation to the hands of a sector that is stringently supervised, which is the case with depository banks such as JP Morgan and Bank of America.
On the other hand, the Secretary of the Treasury has intervened in the two largest mortgage companies making an exception, because until now it has only expressed interest that depository entities do not fail such as in the crash of 1929. The aim was to guarantee 40% of loans, above all for the middle and lower class so that the commercial entities will not be affected.