Calling today Black Monday would be somewhat unoriginal. The day, which promises to be a pivotal one in US economic history, has only just begun. So far, it’s looking like a Funeral Monday, with the fates of three major Wall Street players–Lehman Bros. (bankrupt), Merrill Lynch (bought by Bank of America), and insurance company AIG (floundering)–hanging in the balance.
From the Wall Street Journal:
Lehman, a 158-year-old firm that started as an Alabama cotton brokerage, and Merrill, with its trademark bull logo, have been pillars of Wall Street for much of the past century. With the demise of Bear Stearns, three of the Street’s five major independent brokers could end up disappearing, leaving only Goldman Sachs Group Inc. and Morgan Stanley.
“We have never seen anything like this,” said analyst Glenn Schorr, who covers the investment banks for UBS AG. “There have been tough situations like Long-Term Capital Management and the crash of 1987, but the problem here is there is leverage in the securities under the microscope and in the banks that own them. And to try and unwind it all at once creates a one-way market where there are only sellers, and no buyers.”
The US government refused to bail out these three the way it did Bear Stearns and Frannie. So they’re left to collapse, or sell out, and thousands of Wall Street bankers are out of a job. This time around, the Feds ran out of bailout money, which means the system will have to rebuild itself somehow, barring another New Deal.
The BBC’s Paul Mason, in a must-read commentary on the crisis, says that
It’s hard to see how this would precipitate a retail banking crisis (although the American retail banks are quite exposed to Fannie/Freddie). However there is a psychological moment of realisation that the government is not going to bail out everyone; nor are the Soveriegn Wealth Funds; nor are the other Wall Street Banks.
Lehman and Co. may be the biggest fallout yet, but they’re not the last in the row of banking dominos. People say Washington Mutual is next in line, followed by a host of others.
I’m interested to see how a crisis created by a derivative market so complex that even its sellers couldn’t understand it will affect the general population. This election year, Joe Q. Public is expressing the usual rhetoric. Don’t tax us! Give us cheaper gas! Give us more jobs!
But if Joe Q., no matter how free-market oriented he is, distrusts his bank to the point where he pulls all his cash out, we’re all in deep water. If Joe Q. sacrifices’ his kids college dreams or even food because he can’t afford it, he’s going to rail against the government or other people, or steal.
That’s what they really mean by “tip of the iceberg.” In light of this development, I would urge voters to ignore smear language (lipsticks, pigs, and bulldogs come to mind) and think from the perspective of someone who’s already lost their house and can’t afford their dreams anymore. Then, make sure your candidate can really help you.