Whatever reports you may read of Wall Street8217;s death will have been greatly exaggerated.
Written by Theindianexpress
2 min read
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Whatever reports you may read of Wall Street8217;s death will have been greatly exaggerated. Yes, Lehman Brothers8217; 150-year history as a leading investment bank ended with it filing for bankruptcy; another storied investment bank, Merrill Lynch, has sold itself to Bank of America at what is in long-term terms a low price; and attention is focused on the insurer American International Group 8212; most familiar to Indian eyes, perhaps, as the sponsor of Manchester United 8212; and the bank Washington Mutual. Yet in the US government8217;s unwillingness to bail out Lehman or to go the extra mile to help AIG, signs of encouragement can be read.
The first encouraging sign is that the US treasury clearly believes that the fallout of these serial failures is not going to cause a system-wide shutdown, or they would have acted to bail out Lehman as they did Bear Stearns, the private equity firm that they rescued in March this year. After that action, the Federal Reserve set up special lending facilities which gave financial firms the same access to the Fed8217;s money as commercial banks, thus increasing the insulation of other firms from one troubled firm8217;s liquidity problems. This means Lehman8217;s liquidation will be orderly, as well.
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The second encouraging sign is that the system is acting to show that those who have taken risk cannot for ever be insulated from the consequences of that risk. The mortgage market in the United States was overextended, of this there is no doubt; and Lehman and Merrill were among the firms most responsible for that overextension, ploughing excess money into assets that essentially consisted of very risky home loans to borrowers who did not have good histories of credit. They were left with insufficient capital on hand, and with large amounts of 8220;toxic8221; assets that no other financial institution would want to touch. That they are now paying for that risk is hard on their shareholders and on their employees, but is good news otherwise. Wall Street, America, and the global financial system will ride out this crisis; and it will have learnt something from it, as well.
