No Mo Merrill Lynch By: Mark W Adams

It's another case of when the Big Wigs on Wall Street are meeting over the weekend, it's very bad news.

Merrill Lynch no longer exists.  The fourth largest investment bank is suddenly gone, swallowed by Bank of America at a huge discount just like Countrywide Financial as The Big Shitpile topples one institution after another.  International brokerage firm Lehman Brothers is also all but gone.  It couldn't find a buyer for all it's bad debt willing to unwind all too many complicated transactions to determine their real value in time to keep the wolves at bay-- but it's pretty certain that their ultimate value is ziltch now that they've gone belly-up. 

Lehman's filed for Chapter 11 protection after BoA and Goldman Sachs both took a pass on absorbing yet another cornerstone of the financial industry that survived The Great Depression --  joining Arthur-Anderson as a former fixture as the banking industry is transformed before our eyes under the current administration.   I think it's fair to say that the system can no longer handle the laissez faire Greedonomics of the Reagan/Bush unregulated trickle-down (read: piss on you) voodoo the last few decades championed.  When something this big this falls apart you must understand that it took a long time to reach the tipping point.

And that's not all.  89 year old AIG, the world's largest insurer, the folks who bought the rights to run US Ports from Dubai looks like it's the next domino, after posting a loss for the third straight (unprecedented) quarter totalling $18 Billion, it's looking for a $40 billion credit line from the Fed like it offered the brokerage houses.  The European giant UBS also suffered billions in losses, and may have to write down (off) $5 Billion on mortgage backed securities.

Along with Bear Stearns being devoured by J.P.Morgan with an assist from the Treasury and the Fed backing up Freddy and Fannie, the question is not when it will end, or when will we start regulating Wall Street, but who will survive and what the financial system will look like in the future.  As of now, the market is doing it's best to regulate itself right out of business in its own Darwinian way.  I'd say there have been too many firms lining the pocket of too many suits who add nothing to the overall economy for far too long.

One thing is clear.  The era of deregulation is over with the collapse of the pyramid scheme the banking industry wrote into our consumer credit and bankruptcy laws.  Not that we're suddenly going to get some oversight out of Washington that should have been in place to prevent this in the first place.  There just won't be that much to regulate when it's over, the survivors opting for self-preservation over more high risk investments -- and that will be the long term legacy.  Less cash to use for less things that create less jobs.

What did they think was going to happen when the industry was based on pyramid scheme resellings of the only type of loan industry-favored regulation lets people walk away from anymore, their home loans?

Something had to give. People started mailing in their house keys instead of their mortgage payments. The glorified crap shoot of hedge fund real estate portfolios, 'safe' paper that all the major institutions are relying on either to guarantee accounts payable or that accounts receivable can pay, came to a squishy halt. Lenders kept insisting that the real estate market had nowhere to go but up, reality had other ideas.

On an individual basis, securing a loan with reposessable real estate would seem to guarantee the value of the mortgage paper.  But that paper is only as good as the sales price which has nowhere to go but down when thousands and thousands of homes hit the market at once.  It's even worse when so many of them are hitting the discounted auction bloc in a foreclosure sale.

Not long ago Atrios noted a band aide Merrill tried to use to stem the bleeding.  But even fancy accounting tricks couldn't stop the hemorrhaging.

Basically, the regulators said that these institutions should actually report what their assets are worth - market value - rather than some fantasy made up "model" number. So they said fine, but we want to do the same for our liabilities! So if Merill owes $100 million, but that debt is currently trading at $80 million because of fears that Merill will default on the debt, Merill gets to say "yay! We only owe $80 million." Of course that isn't true. They owe $100 million, and they have to either pay or default, but the fact that people are worried they'll default means they get to pretend they owe less than they do.

That may have satisfied what passes for regulators nowadays, but it didn't change the reality that it's debts were far more than it couldn't handle as the red on its balance sheets kept growing. 
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Of the ones left standing (so far) they're all on shaky ground.  The problem is there simply is no safe place to park capital right now, all investments look riskier than they usually would.  The market is taking care of itself, acting as draconian on the way down as it was irresponsible on the way up, shutting down access to credit that keeps not only the financial markets afloat but all industry in general growing as sources of investment cash dry up. 

Maybe this will put it in perspective: of the six largest securities firms in the US, one (Merrill) disappeared last night, another (Lehman) went bankrupt today, a third (UBS) that already had $42 Billion sucked out of it in the subprime mess is swallowing $5 Billion more in losses this week.  Two others are due to show a billion or two in quarterly write downs on Tuesday and Wednesday (Goldman Sachs and Morgan Stanley) that only look good in comparison because they're still in the black (barely) and everybody else is tanking worse.

The last of the six, Credit Suisse First of Boston has been ordered by their Swiss parent to hold more capital against their assets (strangling their cash flow in the process), and has been snatching up analysts and brokers walking the streets, wondering why they accepted pay packages that included stock in their old jobs at Lehman and Bear Sterns.  In less tumultuous times, the big story on Wall Street would be two of their two brokers being indicted for fraud in selling a billion dollars worth of sub-prime securities while telling clients they were government backed student loans.  That's hardly a blip now.

Times Online has a decent summary of the Wall Street meltdown timeline.  If you want to know just how big Lehman, Merrill and AIG are, understand that they control trillions of dollars.  Ten years ago the major Wall Street firms acted together to back up LTCM to avoid a chain reaction when the company holding $129 billion in assets was on the brink of collapse.  Bear Stearns had triple the assets and liabilites six months ago with more than twice the amount of derivative exposure than LTCM, enough for the Fed to step in and perform their shotgun wedding with JP Morgan.  Lehman Brothers was over 60% bigger than Stearns and was just left to flounder by all concerned because Merrill is even bigger at $966 billion in assets / $931 billion in liabilities.  Merrill also holds $1.4 Trillion in derivative trades -- put/call options, hedges and over-marginalized deals.

AIG is probably looking at huge payouts once the damage in the Huston area is assessed in the wake of Hurricane Ike -- which isn't even considered part of the investment arm that holds One Trillion in assets and nearly as much in liabilities and underwriting $4.2 Trillion in derivative paper.

A lot of capital is simply going to flee from America and the Dollar as we witness a fundamental restructuring of the global financial system, not according to any sort of plan but a crisis driven series of scrambling reactions.  As AIG's troubles indicate it has grown beyond just the financial industry.  Until US housing prices stabilize, there's no telling where the bottom will be, when things will level off, nor who will remain standing.  To be sure there will be fewer players left and they will be playing under brand new rules.