[Marxism] `Tectonic' Shift on Wall Street as Lehman Fails, Merrill Sold

["Sky Keyes-Vogt" <skeyesvogt@xxxxxxxxx>]

"In the biggest reshaping of the financial industry since the Great
Depression, two of Wall Street's most storied firms, Merrill Lynch &
Co<http://www.bloomberg.com/apps/quote?ticker=MER%3AUS>.
and Lehman Brothers Holdings
Inc.,<http://www.bloomberg.com/apps/quote?ticker=LEH%3AUS>headed
toward extinction."

`Tectonic' Shift on Wall Street as Lehman Fails, Merrill Sold

http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=abVpg8xJDMWk


Sept. 15 (Bloomberg) -- In the biggest reshaping of the financial industry
since the Great Depression, two of Wall Street's most storied firms, Merrill
Lynch & Co <http://www.bloomberg.com/apps/quote?ticker=MER%3AUS>. and Lehman
Brothers Holdings
Inc.,<http://www.bloomberg.com/apps/quote?ticker=LEH%3AUS>headed
toward extinction.

New York-based Lehman, founded 158 years ago, said early today that it filed
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 tectonic plates beneath the world financial system are shifting, and
there is going to be a new financial world order that will be born of
this,'' said Peter
Kenny<http://search.bloomberg.com/search?q=Peter+Kenny&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
managing director at Knight Capital Group Inc., the Jersey City, New
Jersey-based brokerage that handles about $1 trillion worth of stock
transactions a quarter. ``It's an ugly and painful process.''

The engines that powered record
growth<http://www.bloomberg.com/apps/quote?ticker=XBD%3AIND>in the
financial industry over the last decade -- cheap credit and surging
property values -- have been thrust into reverse. Companies that once
thrived on making real estate loans and holding assets bought with borrowed
money are now under siege, giving the upper hand to those less reliant on
leverage and holding the fewest assets tied to property.

The industry convulsions that started last year have already eliminated Bear
Stearns Cos., forced into a cut-price sale to JPMorgan Chase &
Co.<http://www.bloomberg.com/apps/quote?ticker=JPM%3AUS>with
government support in March. A week ago, the U.S. Treasury placed
mortgage companies Fannie
Mae<http://www.bloomberg.com/apps/quote?ticker=FNM%3AUS>and Freddie
Mac into conservatorship, guaranteeing their widely held debt
securities while all but erasing their equity value.

American International Group Inc., once the world's largest insurer, is
struggling to raise cash to avoid a credit-rating downgrade that could
cripple its business.

>From Five to Two

The five New York-based securities firms that dominated Wall Street have
been reduced to two: Goldman Sachs Group
Inc.<http://www.bloomberg.com/apps/quote?ticker=GS%3AUS>and Morgan
Stanley <http://www.bloomberg.com/apps/quote?ticker=MS%3AUS>. 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.

``I think highly of Morgan
Stanley<http://www.bloomberg.com/apps/quote?ticker=MS%3AUS>and Goldman
Sachs <http://www.bloomberg.com/apps/quote?ticker=GS%3AUS>, so I expect them
to ride this out,'' Evercore Partners Inc. Chief Executive Officer and
Former Deputy Treasury Secretary Roger
Altman<http://search.bloomberg.com/search?q=Roger+Altman&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>said
in an interview on CNBC. ``But as to whether we've seen the last of
this crisis, I think the answer to that is clearly no. And exactly where it
goes from here and how it unfolds, I'm unsure.''

Lehman, which employed 25,935 people at the end of August in 61 offices
around the world, had a balance sheet totaling $786 billion as recently as
February. Merrill Lynch, with 60,000 employees, is known for its
``thundering herd'' of financial advisers that brought Wall Street financial
products to Main Street investors.

`Vaporized'

``I've been on Wall Street for many years, and I've never seen a weekend
like this one,'' said Michael
Holland<http://search.bloomberg.com/search?q=Michael+Holland&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
64, chairman and founder of New York-based Holland & Co. ``We are unwinding
what has been years of silliness in the financial markets, and the silliness
is being vaporized as we speak, unfortunately with the stock price of a
number of companies involved in it.''

To help cushion the fallout, 10 banks created a $70 billion fund to lend to
firms that are having trouble financing their assets in the markets. The
Federal Reserve also said it will be willing to lend money in return for a
wider array of collateral including stocks.

Still, the repercussions may be widespread.

Meredith 
Whitney<http://search.bloomberg.com/search?q=Meredith+Whitney&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
an analyst at Oppenheimer & Co., wrote in a note to investors that sales of
Lehman's assets will push down the value of securities, forcing other firms
to write down their own holdings.

`Fundamentally Flawed'

Nouriel 
Roubini<http://search.bloomberg.com/search?q=Nouriel+Roubini&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
an economics professor at New York University, said the independent securities
firm <http://www.bloomberg.com/apps/quote?ticker=MER%3AUS> model is
``fundamentally flawed'' and that every securities firm will need to combine
with a bank to gain a deposit base and greater access to loans from the
Federal Reserve.

Just five months ago, Lehman Brothers Chief Executive Officer Richard
Fuld<http://search.bloomberg.com/search?q=Richard+Fuld&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
62, was telling shareholders that ``the worst is behind us'' in the credit
contraction. As concerns escalated about the value of Lehman's assets tied
to residential and commercial real estate, Fuld replaced Chief Financial
Officer Erin 
Callan<http://search.bloomberg.com/search?q=Erin+Callan&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>and
President Joseph
Gregory<http://search.bloomberg.com/search?q=Joseph+Gregory&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>in
June.

Deteriorating markets
<http://www.bloomberg.com/apps/quote?ticker=LEH%3AUS>put more pressure
on the value of Lehman's assets and the firm, unable to
negotiate an investment from the Korea Development
Bank<http://www.bloomberg.com/apps/quote?ticker=KDBZ%3AKS>,
instead tried to reassure investors last week by revealing third-quarter
results early and unveiling a plan to sell part of its fund management unit
and create a separate unit for its real estate holdings.

Fuld's Efforts Undermined

Fuld's efforts were undermined on Sept. 10, when Moody's Investors Service
put Lehman's credit rating on review for downgrade, noting that the firm
needed a ``strategic transaction with a stronger financial partner'' to help
support its rating.

Lehman's stock fell 50 percent on Thursday, Sept. 11 and Friday, Sept. 12
and the collapse spread to Merrill, which has reported four consecutive
quarters of losses and was expected to lose money again this quarter.

New York Federal Reserve President Timothy
Geithner<http://search.bloomberg.com/search?q=Timothy+Geithner&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>called
a meeting of Wall Street's top firms starting at the Fed's downtown
headquarters that began at 6 p.m. on Friday, with a goal of helping ease a
sale of Lehman, according to people familiar with the situation.

Suitors Walk Away

The two banks most interested in Lehman, London-based Barclays Plc and
Charlotte, North Carolina-based Bank of America, balked at a deal unless the
government would protect it from any losses on some of the hardest-to-value
assets. The government, already shaken by criticism of its actions to
support Bear Stearns, Fannie Mae and Freddie Mac, refused to budge and tried
to persuade the CEOs of the biggest Wall Street firms to pitch in instead.

The talks lasted through the weekend, with groups of executives breaking off
into smaller groups to discuss options and teams of traders examining
positions at every major firm. Yesterday, Barclays, the U.K.'s third-biggest
bank, dropped out, deciding it couldn't agree on a deal so quickly without
some type of protection from losses.

As hopes dimmed for salvaging Lehman, attention turned to the future of
Merrill, Lehman's bigger rival. That business, with its 16,690 financial
advisers and nearly half of fund manager BlackRock
Inc<http://www.bloomberg.com/apps/quote?ticker=BLK%3AUS>.,
was more attractive to Bank of America than Lehman could be. Merrill CEO
John Thain, persuaded by the weekend's events that a deal was necessary to
avoid a loss of confidence and a fate similar to Lehman's, entered into
negotiations with Bank of America's Ken
Lewis<http://search.bloomberg.com/search?q=Ken%0ALewis&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>.


The liquidation of Lehman, last year's top underwriter of bonds backed by
mortgages, is an amplified version of investment bank Drexel Burnham Lambert
Inc., which filed for bankruptcy in 1990. Drexel made its name financing
corporate takeovers in the 1980s using junk bonds pushed by Michael
Milken<http://search.bloomberg.com/search?q=Michael+Milken&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>.


Keeping the Talent

Maintaining the confidence of the markets is only one of the challenges for
an investment bank -- the other is retaining employees, recalled Fred
Joseph<http://search.bloomberg.com/search?q=Fred+Joseph&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
Drexel's CEO from 1985 to 1990.

``It's an awfully good business, but the assets go down in the elevator
every night,'' said Joseph, 71. ``Despite the tough times, the Street's so
small, everybody wants the really good guys.''

A key difference with Drexel is Lehman's central role in the
over-the-counter derivatives markets, which have ballooned to $454 trillion
since Drexel was in business. A default by Lehman on its obligations in that
market could cause chain reactions throughout the markets that have never
before seen a major financial counterparty fail to honor its obligations.

``The implications of one of the `too big to fail' institutions being
allowed to fail is incredibly difficult to grasp, but suffice to say that a
huge number of firms and securities are going to get affected,'' said Michael
Auyeung<http://search.bloomberg.com/search?q=Michael+Auyeung&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
who manages about $500 million as chief executive officer at Pacific Mutual
Fund Bhd. in Petaling Jaya, Malaysia. ``The reach of the carnage will be
global and system-wide.''

Lehman's collapse wipes out a company that had a market value of $45.5
billion in February 2007. Merrill's sale to Bank of America for $29 a share,
while about a 70 percent premium to Merrill's value on Friday, compares with
the company's $86 billion market capitalization in January 2007.

``It's breathtaking that we've gone from five standalone firms to two very
quickly,'' said Roy
Smith<http://search.bloomberg.com/search?q=Roy+Smith&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
a finance professor at New York University's Stern School of Business and a
former partner at Goldman Sachs. ``It's certainly going to cause Wall Street
to rethink the strategy.''
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