Investment Markets » Banking and Finance
The Fall Of Lehman Brothers
Does the once-almighty investment bank's collapse mark the end of Wall Street as we know it?
They called him The Gorilla – the brawler known as the scariest man on Wall Street, but Lehman chief Dick Fuld's efforts to save the bank were too little too late. He refused, at first, to acknowledge that Lehman was in difficulty; and when a series of interested buyers surfaced, he wouldn't countenance the prices offered. Had he acted sooner, he would have been able to avoid bankruptcy.
In its 158-year history, Lehman has survived numerous financial crises, but not this one. There was a feeling in the US Treasury that at least one major bank had to be allowed to go under... pour encourager les autres, but this bonfire of vanities may have changed the banking industry forever.
If this is the death of Wall Street as we know it, the tombstone will read: "killed by complexity". Derivatives have proved the weapons of mass destruction that Warren Buffett predicted they would become, and leverage (borrowing to invest) is now a dirty word. Both were at the heart of the investment bank model.
For decades, firms such as Lehman, Merrill Lynch and Bear Stearns took big risks and made fat profits, but in the wake of their disastrous foray into financial wizardry, a new order is asserting itself. Banks are going back to their roots: chasing customer deposits and building branch networks.
It is the fuddy-duddies who are now in charge. The new thinking is that investment banks only have a future within large financial institutions or universal banks such as Bank of America and HSBC. The alpha dogs have essentially had it.
Even Goldman Sachs and Morgan Stanley – the only two of these former titans left standing – are under pressure to explain how they will survive on their own. The regulators have had all the fun they can handle from investment banks and may well impose strict limits on leverage.
But that doesn't mean they can't survive without a funding daddy. Bear Stearns and Lehman went to the wall because they bet on rising house prices and lost, but there will always be a place for investment banks to make money by sitting in the middle of financial flows, or by taking riskier decisions even if they are forced to restructure to the much smaller, specialist institutions like the merchant banks of old.
It is sad that a great tradition should end in this way, but this Wall Street crash marks the last gasp of the independent investment bank, and there's no use denying it. Goodbye to all that.
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