The Financial Crisis

The last 12 months has seen a decimation of the financial services industry. It started with the failure of some very big mortgage companies and people felt that would have been the end of it. Unfortunately the toxins that caused the failure of these companies have also doomed many on Wall Street. Lehman Brothers a company that has been around for over 150 years, filed for bankruptcy today . Merrill Lynch one of the stalwarts of Wall Street sold itself to Bank of America.
AIG one of the giants of the insurance industry might also fail. New York State is promising it access to $20 billion dollars but they need $40 billion.

Today in a meeting with Merrill Lynch employees and analysts, John Thain said that he was left with very few options. When the discussions with the Feds for a rescue plan for Lehman brothers failed, he realized that Merrill might be next. In 24 hrs the deal to sell Merrill to BOA was crafted and approved by the 2 boards.

Why did this happen so quickly? Two very unrelated events. The hedge funds.

They have made a bet that these companies had a lot more going on than they were willing to disclose. So they shorted the stocks driving down the share prices. The 2nd component is the rating agencies. The Moody's and S&P's of the world. They tie the company's credit rating to their stock prices. The stock price falls then the company receives a ratings downgrade. This makes the cost of raising capital higher or difficult. When these companies can't raise capital they can't continue to function.

A very stupid dynamic, a company's stock price has nothing to do with the ability of the company to continue to pay its bills or run its operations.

The Merrill BOA merger will create a super entity. BOA get the largest retail brokerage on the street and Merrill gets a deep pocketed parent.

What is next? Banks?

The Fed has to take some drastic steps to save the banks or it may be the end of the US as a world economic power.

Stay tuned.