
Lehman going bankrupt. Bank of America buying Merrill Lynch - furiouslol
http://dealbook.blogs.nytimes.com/2008/09/14/bank-of-america-in-talks-to-buy-merrill-lynch/
======
ctkrohn
The scary thing is that by the end of the year or so, we could be left without
any of the former big five investment banks. The only remaining titans would
be the commercial banks -- Citi, BofA, JPMorgan. I'd expect new market leaders
to emerge from the current cohort of smaller regional dealers, boutique
special-purpose investment banks, hedge funds, etc., but it will be a while
before all this is sorted out. Even Goldman is endangered... anyone without a
significant deposit base who is forced to rely on borrowed money can be struck
down at any time.

This afternoon, the cost of insuring Goldman and Morgan Stanley's debt via
credit default swaps went through the roof. We'll see how things play out.

~~~
tptacek
What'd you think of the comment comparing BlackRock's fate to ML's? Are
BlackRock and Citadel and places like that the new ML's and Lehmans?

~~~
ctkrohn
Citadel, definitely. They already have started doing certain things once the
domain of investment banks -- they make markets in stocks and options, for
example. Recently they've hired a number of prominent fixed income traders,
e.g. the head of JPMorgan's mortgage trading department. I think they're well
on their way to becoming a leading securities firm. They're certainly big
enough to purchase a smaller boutique to bring in expertise in mergers, IPOs,
debt offerings, etc. The only problem is regulatory, given that they're a
hedge fund, but I imagine this eventually could be resolved -- after all, Citi
and JPMorgan all have large internal hedge fund arms.

Blackrock is a very different company. They manage more than a trillion
dollars worth of assets, making Citadel seem paltry at ~$25bn. They haven't
really shown much interest in branching away from their area of expertise:
fixed income asset management.

~~~
tptacek
Peripheral question: what do you think ML looks like 18 months from now? Is
there still an ML? I watched BofA buy ABN up close, and they were pretty
aggressive.

~~~
rwebb
BofA already cleaned house in their banking group earlier this year. doubt the
need more bankers.

------
furiouslol
It's confirmed. Lehman to File for Bankruptcy Protection

[http://dealbook.blogs.nytimes.com/2008/09/14/lehman-to-
file-...](http://dealbook.blogs.nytimes.com/2008/09/14/lehman-to-file-for-
bankruptcy-protection/)

------
raheemm
Unfortunately the demise of these financial institutions is a symptom of
American financial decay that has plagued every level of society - from the
government, to companies to every day people - we are all spoiled on easy
credit.

Our hardwork and innovation are the things that still makes the American
economy unstoppable. But if we don't live within our means and stop borrowing
like there is no tomorrow, we are simply paving the way for a long and sad
decline.

~~~
ars
And if we do live within our means, and stop borrowing, we'll cause a
recession.

No, I don't have answers.

~~~
jcromartie
I've come to think that maybe there isn't anything wrong with a recession.
There's no way to make a major correction without discomfort. Discipline
hurts.

~~~
ars
Why though? What's the gain?

Discipline for it's own sake?

------
hugh
And to think that less than a year ago I was thinking "I'm sick of this
physics thing, I'm going to go and become one of those overpaid finance guys"

I'm so glad I didn't. Otherwise I'd probably be unemployed in New York City
right now, with a $3000 a month lease.

~~~
mtw
the finance industry has a very short-term memory though...

in less than 5 years, you will see them again inventing all sorts of financial
schemes and create billions of wealth magically out of nowhere

~~~
j2d2
Probably based on health insurance.

~~~
rrival
mm, overfunded health insurance funds

------
Prrometheus
Good thing for Merrill that the Glass-Steagall Act has been repealed. If the
credit crisis had happened before 1999, Merrill would simply have to declare
bankruptcy if it couldn't find a non-bank buyer. A lot of leftist politicians
have been calling to reinstate the restrictions on depository institutions and
Investment Banks being owned by the same entity. However, when you restrict
the capital flows in an industry you reduce the possibilities for
restructuring in times of crisis, thereby making it more likely that some
firms will fail.

It's no coincidence that the US had some of the most restrictive banking laws
in the world in the 1930s and it also had the most bank failures during the
depression. This deal shows the advantages of deregulation.

~~~
raheemm
I would beg to differ - recent bank failures are a result of the free market
running amuck on easy credit and dumb investments (home loans without income
verifications). The 30s were a lot less regulated and the great depression was
a result of a free market moving without any government oversight or
interference (Hoover responded to the crash by proposing to let the free
market sort itself out, which in turn lead to a vicious run on banks.)

There is a fine balance between free-market economics and regulatory
oversight. Bubbles will take place regardless of the level of regulation. Too
much regulation can make small business life a pain, but regulation and
oversight prevent swings and spectacular failures like the ones we are
witnessing.

~~~
kingkongrevenge
The 30s were more regulated than today in many ways. It was illegal to own
gold. What and how much to farm was ordered by the federal government. Labor
laws and interventions were extreme. If you traveled back in time to the 30s
to participate in the economy it would seem almost fascist/socialist. This is
why the depression lasted so long and got so severe in America. Other
countries suffered similar initial setbacks as the US, but recovered far more
quickly.

It is a ridiculous myth that Hoover was laissez faire. He intervened massively
in the economy and FDR merely continued his policies. There's little FDR did
in his first year that hadn't been drawn up by Hoover.

> regulation and oversight prevent swings

The housing crisis is the direct result of a deliberately orchestrated policy
to subsidize housing.

The root cause of bubbles is monetary policy, anyway, not regulation.

~~~
baha_man
'It was illegal to own gold.'

From <http://www.coin-newbies.com/articles/gold_never_illegal.html>:

'Presidential Executive Order 6102, April 5, 1933, made it illegal to "hoard"
gold. The order exempted anyone whose "usual and customary" business required
gold. (Dentists and jewelers come to mind. Electronic fabricators would come
under this once electronics was invented.) Anyone could own up to $100 in gold
coin. In 1933, $100 was two or three months wages for the average worker,
about $6000 to $10,000 in today's money.'

------
furiouslol
Ok. Deal is done. Acquisition sealed.

[http://online.wsj.com/article/SB122142278543033525.html?mod=...](http://online.wsj.com/article/SB122142278543033525.html?mod=special_coverage)

------
mrtron
Almost everyone in the financial industry has known about this for a while.

It seems your average investor who unknowingly owns some of these companies
considered 'stable' and 'recession proof' traditionally that are falling
apart. Usually after average investors get really burned it results in a
lengthy downturn in the market.

However, the good news is that the clusterfuck of credit debt may finally be
ending with some major institutions going under.

------
furiouslol
Nouriel Roubini, aka Dr Doom:

If Lehman collapses expect a run on all of the other broker dealers and the
collapse of the shadow banking system

Sep 13, 2008

It is now clear that we are again – as we were in mid- March at the time of
the Bear Stearns collapse – an epsilon away from a generalized run on most of
the shadow banking system, especially the other major independent broker
dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does
not find a buyer over the weekend and the counterparties of Lehman withdraw
their credit lines on Monday (as they all will in the absence of a deal) you
will have not only a collapse of Lehman but also the beginning of a run on the
other independent broker dealers (Merrill Lynch first but also in sequence
Goldman Sachs and Morgan Stanley and possibly even those broker dealers that
are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this
run would lead to a massive systemic meltdown of the financial system. That is
the reason why the Fed has convened in emergency meetings the heads of all
major Wall Street firms on Friday and again today to convince them not to pull
the plug on Lehman and maintain their exposure to this distressed broker
dealer.

------
fallentimes
Black Rock is going to be able to pick off a ridiculous amount of talent.
Their internal "alerts" for a mortgage crisis went off ~2 years ago so their
exposure is minimal. At least that's what their employees tell me...

Heard it all before right?

~~~
ctkrohn
Well, it will be interesting to see how it works out, since Merrill owns 49%
of BlackRock.

~~~
fallentimes
Good catch - I completely forgot about that. I believe PNC bank also has a
significant interest in Blackrock.

------
nickb
Is tomorrow gonna be the second Black Monday? Latest pre-market figures are
showing DOW down 300 pts.

<http://money.cnn.com/data/premarket/>

------
mtw
and we'll see a wave of laid off finance guys going early to MBA programs or
law school this year.

~~~
daniel-cussen
Or trying to learn to hack.

~~~
dcurtis
Really? What makes you think they would do that?

~~~
mixmax
because that's where the money is.

------
rwebb
there are maybe 3 people posting in this thread who have any idea what they
are talking about.

------
mtw
Wamu (washington mutual) is also feared to be next

~~~
smakz
wamu smartly raised private capital to the tune of 7$ billion to ride this
wave out (before all the other guys failed). Wamu might fail, but I'd bet AIG
fails first.

------
umangjaipuria
"In letting Lehman fail the federal government puts a fine point on an obvious
question: Why didn't they let Bear Stearns go, too? This business about the
markets having time to adjust to Lehman's problems is baloney. The markets
didn't adjust to Bear Stearns collapse; the markets looked at what the Fed had
done for Bear Stearns and assumed they'd do it for Lehman."

From
[http://www.bloomberg.com/apps/news?pid=20601039&sid=ai1w...](http://www.bloomberg.com/apps/news?pid=20601039&sid=ai1w0bUy9iNA&refer=home)

------
brentr
Next on the chopping block is AIG followed immediately afterwards by
Washington Mutual. AIG was desparately trying to raise money this weekend and
WaMu has been hurting for some time.

If you look at the parallels between the progression of events at Bear Stearns
and the progression of events at Lehman, you can draw many similarities to the
events now ocurring at AIG.

------
sown
This all reminds me of a book by historian Paul Kennedy. "The Rise and Fall of
Great Powers." Y'all should read it.

------
zandorg
But who's on the other side of all this loss? I bet someone's got tricks up
their sleeve.

~~~
robak
Asian banks who has been crediting this whole mess for the last 20 years and
now started asking for the pay back.

The day foreigners realize creditworthness of this nation, it will be so much
done.

Can you imagine this country without credit. Not only easy credit, but without
access to credit at all. And mountains of debt to pay off before anyone will
even think about buying another T-bill.

Capitalism: system in which you save to raise capital to fund investment
(production).

Definitely not one where you spend on credit that you hope to never pay back
living from credited bubble to credited bubble.

~~~
mynameishere
_The day foreigners realize creditworthness of this nation..._

They realize it. But they have a dilemma...

<http://en.wikipedia.org/wiki/Prisoner's_dilemma>

~~~
robak
Well, they do, but here is the thing they are afraid of: Before WW2 the US
economy was doing poorly. The war brought a lot of war manufacturing business
and huge boom in the US occurred thanks to the war production.

Economist at the time were afraid that the end of war will kill the boom
because there will be no more war production needed. Well, once the war was
over big US companies just switched their production capacity to civilian
markets: cars manufacturing, appliances, houses construction... there was no
contraction after the war. Opposite: 50s were the time of enormous economic
boom.

Now, you are mistaken with setting "Prisoner dilemma" as the problem
foreigners have. They may also look at their situation from the same
perspective as Americans did during WW2. That is: If we stop producing for the
export to the US (war effort) - there will be crisis. Who will buy our stuff
but the American consumer. Well, no fear. Just switch production to your
domestic markets as US did by switching industrial production to its domestic
market after WW2. Nothing bad will happen with China the day "war" will be
over and China will stop exporting production to the US. They will just
realize that they have huge 1.3 billion consumer market at home and no need to
export to the US. They will just switch production.

Therefore, Prisoner's dilemma has nothing to do with the fear of losing market
based on false predictions. Nothing happened to the US market once the war was
over. Nothing will happen to China once its main customer goes bankrupt.

~~~
cturner
This idea of the war as a creator of strong economies doesn't stand up.

If it was then we could create wealth by wandering down the road and throwing
bricks through people's windows and smashing up their cars.

Wars cause a sudden drop in population, which causes labour to become more
valuable (historically something that tended to happen after major plagues),
so there are individual stories of improved circumstance. Wars also require
people to make sacrifices in their standard of living and succeed in achieving
this more easily than under other circumstances.

Regardless of all of that - you can't demonstrate that the US in the 50s had a
stronger economic situation than it would have done had it been allowed to
continue along its course without a war.

> Nothing will happen to China once its main customer > goes bankrupt.

If we see a major downturn in consumption as a result of the things that are
unfolding now, I'll be expecting massive upheaval in China. People have seem
general improvement with the party's policies to date but will become less
accommodating when the state continues to take a share of a shrinking pie.

------
kul
Taleb vindicated again.

------
tortilla
None of the banks wanted to touch Lehman and even if they did, their own
balance sheets are almost as bad.

~~~
tptacek
... so instead they go and buy Merrill? Not sure I agree with you a hundred
percent on your police work there, Lou.

~~~
caudicus
Well, I don't know the internals but Merrill might have a better balance sheet
than Lehman. Also, BOA might be trying the whole "get too big to fail" thing -
riding the wave of moral hazard and hoping for a government bail out if they
ever hit the rocks hard.

~~~
incomethax
So they're trying to replicate Bear? If they were, then paying $25-$30/share
for Merill would be teh FAIL. Merrill most definitely has a better balance
sheet (given the stockholder's equity section) than Lehman, and also less
exposure to the types of risky securities that are failing.

I for one wouldn't want to be in ownership of any financial in this market.

On a side note, money seems to be going through almost a daily rotation of
sectors. One day tech's up while everything else is down, the next day its
biotech, commodities etc.. Tomorrow is going to be a down day for financials,
which has meant an up day for techs in recent days. I guess we'll just have to
wait and see.

------
vaksel
I wonder if the MBA programs will get flooded with all these ex-bankers

~~~
ardit33
so once they graduate, they go and ruin other companies. MBA = useless. Unless
something like finance, where it teaches hard skills, MBAs are pretty much BS.
I have been reading "Ahead of the Curve", by one of the Telegraph's editors,
that went to HBS to get his MBA. Very interesting, but at the end the real
goal of an MBA is pure greediness, to make the students rich.

For many professions, get a master's degree, might mean maybe going to
research, and do something good. Especially in hard sciences. For MBAs the
degree is only used to make more money, the rest doesn't matter.

Just a warning, to those people that are hiring, to really be careful to hire
somebody with a shiny degree from a top MBA school.

------
mroman
At the risk of being downmodded, I must ask: why is this article on a site for
HACKERS? Seriously, this article is SUIT NEWS all the way . . .

~~~
sd
Higher interest rates = less credit & financing = fewer startups

~~~
mroman
Your conclusion assumes that startups are an intrinsic aspect of hacking,
hackers, and the hacker condition.

I disagree.

Even if it were so, outside funding (credit and financing) is most definitely
not an indispensable requisite to starting a startup.

~~~
DougBTX
> Your conclusion assumes that startups are an intrinsic aspect

This place used to be called Startup News...

~~~
mroman
Correct.

USED to be.

