Monday, September 15, 2008

Merrill Lynch

Another day, another famous Wall Street firm to eulogize. Merrill Lynch is no more, or at least no longer is an independent company, having decided to be incorporated into Bank of America before it went the route of Lehman Brothers. Merrill Lynch was probably the best-known of Wall Street’s giant investment banks, by dint of its extensive advertising campaigns over the years. Unlike the other big investment banks, Merrill Lynch got its start as a brokerage, essentially a seller of stocks on a retail basis, rather than as an underwriter. This was second-class citizenship on Wall Street, where underwriters, who arranged stock and bond financing for large corporate clients, always had the prestige, and tended to look down on brokerage firms as dull and plebian. But for Merrill, having a network of thousands of retail brokers had its compensations, and in time Merrill Lynch was able to play with the big boys, in large part through its remarkable selling job in the 1940s and 1950s, convincing skittish would-be investors in the millions, with the great depression firmly implanted in their memories, that putting their money in the stock market was a safe, long term investment.

If the market hasn’t crashed the way it did in 1929 or in 1987, though it had a terrible day today, I don’t think that even during the great depression there has ever been such a massacre of top Wall Street firms in such a short time; leaving aside the conservatorship for Fannie Mae and Freddy Mac, Bear Stearns, Lehman Brothers and Merrill Lynch have left the building at 11 Wall within six months. And I read that the vultures are beginning to circle around the two remaining investment giants, Goldman Sachs and Morgan Stanley, scrutinizing their balance sheets, and waiting for their ripe fruit to fall from their debt-laden trees (a badly mixed metaphor, that.)

Anyway, the question is why is this happening , and I don’t presume to have the answers, though I can point to the usual suspects; real estate securities investments gone bad; unregulated financial markets of utter opacity; and the night riding of Wall Street’s four horsemen of the apocalypse; fear, frenzy, illiquidity, and short selling. It seems that the age of the giant investment bank, which only emerged in the early 1970s when they became publicly traded companies, might be over. I have seen more than one pundit suggest that, like Merrill, Goldman and Morgan might need to seek protection in the form of a giant commercial bank that has FDIC protection and easier access to Fed credit. The rise of the mega-investment banks coincided with the era of under-regulated markets, and perhaps this is the final irony of the abrogation of Glass-Steagal in the 1990s, a return to the situation, that existed between the early 1930s and 1970s, when the giant commercial banks, like Chase and City, and not investment banks, dominated the financial scene. But of course the situation is vastly changed, and the underlying situation remains bleak.

Let me just say this, if this crisis can’t get Obama and Biden to get the conversation in the presidential campaign off pigs, lipstick, and how likable the Republican vice presidential candidate is, the Democrats are beyond help or hope. And with Merrill Lynch gone, let me make it official. I am very bearish on America.


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