The events of this past weekend – coming six months after Bear Stearns was thrust into the arms of JPMorgan – leave America’s financial system in tatters, but not without hope for the emergence of a new order on Wall Street, that will once again return to its main purpose of efficiently allocating capital on a global basis.
While the demise of Lehman could have been foreseen in the wake of Bear’s departure, the truly shocking development of the weekend was the decision by John Thain, CEO of Merrill Lynch, to sell the brokerage and investment banking behemeth to Bank of America.
Thain must have concluded that with Lehman gone, the sharks would turn their attention to his firm, which remained vulnerable despite raising billions in capital through sales of equity and key assets. Rather than test the proposition that his former boss at Goldman Sachs – Treasury Secretary Hank Paulson – would provide financial support to a buyer of Merrill should its prospects continue to deteriorate, Thain cleverly took the bull by the horns – so to speak – and found a buyer while the firm was still viable.
No doubt he and Ken Lewis, CEO of Bank of America, were nudged into this marriage by an increasingly wary Paulson.
After the dust settles from all this turmoil, the only sensible conclusion must be that in the long run this is just the sort of “creative destruction”, in the memorable words of economist Joseph Schumpeter, that the system needed.
The only thing that was consistently underpriced in this last credit bubble was risk. The flushing of Bear Stearns, Lehman, and Merrill Lynch as we once knew it, will not prove to be deleterious in the long run. What will emerge from the rubble are a handful of global firms – some part of banks, some not – that will have learned once and for all how to price credit and risk.
If the survivors fail to heed that lesson of this crisis – as seems to be the wont of short-term-thinking Wall Street bankers – we might as well start now preparing ourselves for the next blow-up and for a world very different from the one we live in today.
William Cohan is author of The Last Tycoons, winner of the 2007 Financial Times/Goldman Sachs Business Book of the Year Award.