So, by the time Monday's rays of red begin to dawn on Wall Street, what was recently the fourth-largest investment bank will likely have filed for liquidation, under Chapter 11 of the federal bankruptcy statutes (only a few months after the federal government claimed it had to subsidize another weekend emergency bail-out/buy-out, by JP Morgan Chase -- of Bear Stearns). . . .
And, after a history-making Sunday two-hour trading session -- to net exposures in derivatives trades and positions in which Lehman is/was a counter-party (thus decreasing those counter-parties' collective exposures to a Chapter 7 liquidation), Wall Street was again rocked by distressed transaction news, late Sunday afternoon -- Merrill had apparently agreed to sell itself, at $29 a share, in a hurried (shot-gun?) marriage to B of A -- to avert a wider credit crisis. . . .
And THEN -- we read that AIG is scrambling to find financing, to avoid a similar fate, on Monday morning. . . yes, these are truly historic (or, notorious?) times -- down at Wall and Broad.
So, we have insurance companies looking for liquidity, formerly pure investment banks selling themselves to commercial banks, and commercial banks declining to buy a brokerage in the midst of a liquidity crisis -- unless, of course the fed would again agree to backstop some parts of the proposed-deal.
I personally think the above whirlwind of a weekend financial markets nightmare is Exhibit A -- for the proposition that perhaps the Glass-Steagall Act may not have been such a bad idea, afterall.
Glass-Steagall -- enacted in the years following the market crash of 1929 (and the beginning of the Great Depression) -- generally prohibited commercial banks from owning investment banks, and vice-versa (more history on Glass Steagall, from PBS-Frontline, under that link). A later, and similar firewall-type law, the Bank Holding Company Act, kept both kinds of banks out of the business of underwriting insurance. All of these firewalls were effectively eliminated by incremental rule-makings, over the years 1989 to 1998, and then repealed entirely, in 1999.
I think it is time to admit that it was largely wishful thinking -- to believe that the investment and commercial banks (and insurers) would self-police sufficiently to avoid another 1929 credit crisis.
To be clear, I do not expect a 1929-style melt-down tomorrow, or any day soon -- but I am deeply troubled that the fed "threw in" to solve the Bear Stearns crunch, and was here unable to broker a deal. I was also particularly troubled to read that B of A conditioned its offer for Lehman on federal financial backing of some sort.
It may be time to revisit the idea of hard, enacted firewalls. . . .
Sunday, September 14, 2008
Posted by condor at 10:29 PM