A Bleak Day For Investment Banking
The investment banking sector has never been a large fraternity and today we saw two of those members fall by the wayside. Lehman Brothers declared Chapter 11 bankruptcy this morning followed soon after by the announcement that Merrill Lynch was to be bought out by Bank of America.
Lehman was thought of as “too big to fail” but last Friday the Treasury stated in no uncertain terms that their would be no government bailout like there was for Bear Stearns. Lehman, a major player in the subprime market, sought out buyers with strong balance sheets that could absorb the losses it would probably incur in the upcoming quarters but when talks broke down they had little choice left to them.
Merrill Lynch on the other hand, tried to take steps to reduce their exposure to the residential mortgage market but the writing was on the wall. Their stock was going to keep falling through the end of the year, so they sold out now at a price of $29 a share, which the most they were going to get until financial markets recovered.
Bank of America was in talks with both companies but Merrill was clearly the more attractive buy of the two. The big question is whether Bank of America is strong enough to withstand the additional losses Merrill will bring to the table.
This new financial crisis is having many traders feeling that the Federal Reserve could lower interest rates tomorrow during it’s regularly scheduled meeting. With oil falling below $100 a barrel there is lessening pressure from inflation and the need to raise rates.
Is this finally the bottom? Or is there still worse to come? We could see credit markets tighten up further because it’s apparent that the housing market is not getting any better, so there are losses still to come.
