Monday, September 15, 2008

Good-bye Lehman, good-bye Merrill

Lehman Brothers declared bankruptcy last night, and Merrill Lynch, feeling that it would be the next to be attacked by speculators, has agreed to be acquired by Bank of America.

With Lehman’s bankruptcy proceedings expected to unleash a torrent of asset sales, many smaller investment banks and hedge funds holding similar assets will likely be toppled over by the riptide, even the 2 remaining independent bulge bracket investment banks, Goldman and Morgan, are likely going to be severely affected.

Insurance giant AIG is also on watch as it is today the biggest threat to the market. If it does a Lehman, the riptide of asset sales might even be big enough to sweep Goldman and Morgan.

Welcome to the nadir of the US financial market perfect storm.

When this is all over, there could be only 5 global one-stop banking powerhouses remaining and viable, while the rest will be reduced to becoming niche players. It was meant to happen this way anyway. After all, it was too many firms chasing after too few good deals that got these firms taking on undue risk and closing deals that did not make sense anymore.

By allowing Lehman to fail, the US Fed finally indicated that it has had enough of bailouts. Market forces will be taking it from here in resolving the crisis. It won’t be pretty, but at least, we know how it will end. Only the strongest and most viable will remain.

Update: Calculated Risk has a running thread covering news on this front as it breaks, if you're interested.

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