Skip to main content

The end of the broker-dealers?

First it was Bear Stearns that went under, sold at the last moment in a fire-sale deal to JPMorgan Chase back in March.

Then it was Lehman Brothers, who filed for bankruptcy early Monday after unsuccessfully attempting to strike a quick takeover/rescue deal this past weekend.

Now Merrill Lynch has announced it will be taken over by Bank of America in an all stock deal valuing Merrill at $50 billion. The deal was arranged quickly over the weekend, as fears of a possible Lehman failure were starting to spread to other major investment banks.

Bloomberg reports on the "'Tectonic' shift on Wall Street as Lehman Fails, Merrill Sold":

"In the biggest reshaping of the financial industry since the Great Depression, two of Wall Street's most storied firms, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., headed toward extinction.

New York-based Lehman, founded 158 years ago, said early today that it plans to file for Chapter 11 bankruptcy protection after failing to find a buyer. Merrill Lynch, 94 years old and also based in New York, agreed to sell itself to Bank of America Corp. for $50 billion in an emergency deal hashed out yesterday...

...The five New York-based securities firms that dominated Wall Street have been reduced to two: Goldman Sachs Group Inc. and Morgan Stanley. While both firms are scheduled to report a drop in third-quarter earnings this year, their business has remained profitable throughout 2008 -- unlike Lehman and Merrill. "

Interesting to see that Merrill Lynch is being acquired at a nice premium ($29 a share) to its closing price of $17.05 on Friday. Especially when you consider that this deal was quickly cobbled together in what had to be a desperate attempt by Merrill to avoid Lehman's fate.

Marc Faber had a few things to say about that, and other aspects of the Lehman and Merrill news, in this latest Bloomberg interview.

So now that Bear, Lehman, and Merrill have been swallowed up or gone bust, what will become of the remaining "big five" broker-dealers? Is their business model fatally flawed? Will a similar fate befall Goldman Sachs and Morgan Stanley?

Here's what Nouriel Roubini had to say back in July:

"The broker/dealer business model is "inherently unstable" and the four remaining major firms will not be independent in a few years, says Nouriel Roubini, economics professor at NYU's Stern School and chairman of RGE Monitor.Embattled Lehman Brothers is likely to seek a buyer "within months," Roubini says.

Lehman Brothers ceasing to be independent is not such a shocking outcome, but Roubini ultimately sees a similar outcome for Goldman, Merrill Lynch, and Morgan Stanley.The problem, he says, is that broker/dealers use the same model as banks -- borrow short and lend long -- only they borrow on even shorter timeframes, use more leverage, and don't have the kind of government backstop banks enjoy."

We are not rooting for the failure of any of these firms, but it seems this weekend's developments have really shined a light on the remaining independent US investment banks.

As the financial crisis rolls on, and losses from the credit crisis steadily rise, some venerable US financial institutions are now having to face the music as sentiment regarding government-backed bailouts has turned.

Popular posts from this blog

Clean Money - John Rubino: Book review

Clean Money by John Rubino 274 pages. Hoboken, New Jersey John Wiley & Sons. 2009. 1st Edition. The bouyant stock market environment of the past several years is gone, and the financial wreckage of 2008 is still sharp in our minds as a new year starts to unfold. Given the recent across-the-board-declines in global stock markets (and most asset classes) that have left many investors shell-shocked, you might wonder if there is any good reason to consider the merits of a hot new investment theme, such as clean energy. However, we shouldn't be too hasty to write off all future stock investments. After all, the market declines of 2008 may continue into 2009, but they may also leave interesting investment opportunities in their wake. Which brings us to the subject of this review. John Rubino, author and editor of GreenStockInvesting.com , recently released a new book on renewable energy and clean-tech investing entitled, Clean Money: Picking Winners in the Green Tech Boom . In Clean ...

Slate profiles Victor Niederhoffer

Slate's recent profile of writer/speculator, Vic Niederhoffer has been getting some attention from traders and finance types in recent days. I thought we'd take a look at it here too, to offer up some possible educational value from Vic's experiences with trading and loss. Here's an excerpt from Slate's profile of Victor Niederhoffer : " I've enjoyed getting your e-mails. It sounds like you've thought a lot about being wrong. Well, the reason you contacted me, to call a spade a spade, is that I'm sort of infamous for having made a big, notorious, terrible error not once but twice in my market career. Let's talk about those errors. The first was your investment in the Thai baht, which pretty much wiped you out when the Thai stock market crashed in 1997. I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in li...

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4. ...