The news in the financial sector is going from very bad to absolutely disastrous. Though it seemed likely last week that Lehman was not going survive, actually seeing the headlines that they are going to declare bankruptcy on Monday morning is breathtaking. Further it seems likely that Merrill Lynch is not going to remain in independent investment bank, and the rumor is that Bank of America is going to buy the am. I have to say I don’t understand that one. It does not make sense to me that B of A is strong enough to take on ML’s balance sheet. The price also does not make sense to me as ML closed at around $17 and yet B of A is buying them at $29? Further, AIG is looking to the Fed to bail them out as they cannot find an investor to give them money at levels that they think make sense for them. How can the FED bail out an insurance company? First Bear Stearns, then open up the discount window, then Fannie and Freddie, sorry to Lehman, but now they are going to help AIG? If that is not enough the pundits are saying tonight that Goldman and Morgan better find buyers, now, or they too will be toast. Business models are crumbling before our eyes.
How is all of this is going to play out in the markets? I think this bodes poorly for equities in general, financials in particular, and the US dollar. The world has to be losing faith in the stability of the US Financial system. Major institutions are basically disappearing overnight and they have huge, complex, balance sheets. As for the US Government’s or the FEd’s balance sheet? Don’t get me started.
The days of massive leverage are over – both at the consumer and the institutional levels. The Investment Banks are waking up to this reality as are all the other financial players that rely on high leverage to make their business work. This is not good for hedge funds, not good.
I started writing this BLOG at the beginning of the year because I thought it was going to be a historic time in the financial markets but if someone would have told me that Bear and Lehman would both be history by the third quarter, I never would have believed them.