Treasury, Fed Said to Call on Wall Street Chiefs to Back Lehman

NONE of the above.

dco, perhaps we're alone, but as I said months ago, this is the demise of the independent investment bank. Two are left - Merrill, Morgan Stanley - of which one - Merrill - is teetering, and both of them are more than investment banks; they are large brokerage firms funded from commissions.

Bear Stearns is dead, Lehman is dead, leaving Lazard as the next largest investment bank. Raymond James has a market cap greater than Lehman's right now.

There will be no more excessive risk-taking, which is what all those bonuses were predicated on. Merrill and Morgan Stanley will have a tough time competing against JPM and BAC, which are funded through cheap deposits. If not during this administration then during the next, the uptick rule will be reinstated and naked shorting rules will be vigorously enforced. So there goes the short-selling strategy of certain hedge funds.

Sure, investment bankers are ingenious at inventing bubbles, profiting from them, and abandoning them. We've seen a few in the past decade. But what we've seen in the past 5 years that has caused Manhattan real estate to double in price is over - and the bubble is slowly deflating, the champagne going flat.

"Lehman Brothers alone could be the source of as much as $100 million in annual income tax in the city, estimated Marcia Van Wagner, a deputy city comptroller."

http://www.nytimes.com/2008/09/13/nyregion/13rivalry.html?ref=business

I think you inadvertently left out Goldman. They're independent. (And presumably among the strongest and smartest.)

You're right, Topper - my bad. They will survive, at least for the time being.

I think there's another option - sold to one player, not piecemeal(i.e., BofA with private equity or Barclays). At this point, it seems less likely than sold piecemeal but still a possibility. Anyways, sold piecemeal seems like the solution with the fewest layoffs and therefore the best for nyc real estate. The reason being that if you break it up and sell units to those who really want them, they will keep a greater portion of their respective businesses than any of the other outcomes.

Unwinding would be wholesale chaos and loss of jobs. Bankruptcy is bad too. Chapter 11 in other situations could preserve a lot of jobs. In an ibank, you file for 11 and I can not imagine a single customer keeping their assets with you or trading with you. Even the advisory businesses are so dependent on financing (which would for all intents and purposes be shut down in an 11) that they would likewise grind to a halt. So large loss of jobs - not to mention the negative market impact of the uncertainty overhang on counterparty exposure across the Street. Chapter 7 is at its best the same as selling piecemeal and at its worst, not unlike unwinding.

Either way, I'd say you're looking at large scale layoffs. The question is whether it 5k or 15k.

stevejhx- I agree, how are these firms going to be profitable in the short term (1-3 years). Until housing stops falling, this is going to be a nightmare. It's a catch 22, if they are unable to make money, they can't lend. And if they can't lend money today, they can't make money tomorrow. It's a very difficult situation.

However, what really troubles me more is the economy, yes I know these institutions are extremely important, but my concern is the growth of the economy.

I have a question that perhaps some may ponder. As we know all this lending over the last several years, was to people who were unqualified, in the first place. These people and millions more used their homes and CC's as piggy banks. They spent billions, if not trillion, on products they purchased over the years with credit. Now that credit is gone and consumer spending faces huge obstacles (ie. rising unemployment and diminishing net worth)how is it possible to show GDP growth, for the next several years.

Do you see the dilemma. If all this spending, which was responsible for this growth, not just domestically but globally as well, was artificially inflated by credit, how is it going to look when you remove that influence from the economy going forward. Not to mention, that much of the past sales will never see payment in the future. In essence GDP (Growth) over the last several years was BS. Making much of the corporatre profits also BS. They actually never grew at the rates they posted.

I think that the impact on Manhattan real estate will be devastating. Transactions will grind to a halt and inventory will pile up at the exact time when the city's economy is shedding jobs and those with jobs are terribly uncertain. As for Merrill, it seems as if they do have some valuable assets, e.g. blackrock, do you think they will find a strategic partner this week or just allow themselves to got the way of Bear and Lehman. I always thought that Thain was a smart guy, so I would be shocked if Merrill did not do something big at the beginning part of this week.

"not just domestically but globally as well"

Not true, dco. International growth has been fueled for the most part by the internal growth of the countries in question - mostly BRIC, which has taken a severe beating recently (and cost me a ton) because of the perception that a) they are commodity plays; and b) they are export-driven.

To some extent that is true, but not for the most part. Look at the populations of BRIC countries - they have enough people to grow organically and most - save Russia - have implemented domestic growth-oriented economic policies. Brazil is the shiniest example of this, followed by India, each having their own advantages / disadvantages. Inflation is now under control, growth in China has "fallen" to 9%, in Brazil it is 6.1%.

So beyond our shores things are reasonable. Just as I attribute the economic mess in Argentina to the Argentine psyche - you can have your cake and eat it, too - I attribute our economic mess to our psyche: credit. We want things that we can't afford and we want them now, so let's just charge them.

"They spent billions, if not trillion, on products they purchased over the years with credit. Now that credit is gone and consumer spending faces huge obstacles (ie. rising unemployment and diminishing net worth)how is it possible to show GDP growth, for the next several years. "

The housing ATM argument is pretty well understood and I've heard it argued many times. Here's the rub though, last I checked i think the aggregate loan to value of US housing stock was around 56%, implying on average, about 44% equity. Now that was a few months ago and with prices dropping I'm sure the equity value has fallen somewhat. But that would certainly NOT indicate the housing ATM is shut off for many. Now, if you bought in 05/06/07, you are facing negative to little equity (assuming you had low down payment %). For those, I completely agree, no more housing ATM. And the impact of that alone could be enough to be a drag for a while I suppose. Another thing you have to remember though is that when people stop paying their mortgage in default (for example when they realize like Jose Canseco that they have neg equity) - unless they loss their job, they have a lot more discretionary spend b/c they are living rent free for up to 9-12 months!

sorry "unless they lose their job" - it's sat morning and I had a long night last night....

Not so fast stevejhx. September 11 front page headline in International Herald Tribune is "Real estate markets plunging in China". Their economy depends on us buying the stuff they make and that has slowed sharply, according to the article. It is a global economy we live in. We all depend on each other. No one is going to escape this mess. We are all inextricably linked.

NYREN - Not so fast.

http://www.nytimes.com/2008/09/11/business/worldbusiness/11yuan.html?scp=1&sq=real%20estate%20china&st=cse

The rate of increase has fallen. A good thing. Inflation had to be tamed. It was. Banks have something like a 17.5% reserve ratio - that should be lowered to 15% by next year.

"We are all inextricably linked."

Undoubtedly, but there is domestic demand.

Stevehx - your comments on the american psyche are insightful and so true - in it's most reduced form, that is what is underlying this whole debacle. The inability of the "overseeers" to stand up and put the brakes on is disturbing to even me and I am in the industry.

stealth1, are you old enough to remember the first credit card: the BankAmeriCard? There is an episode of the Flintstones where Wilma and Betty get the credit bug: "Charge!" It's hilarious.

I'm kind of embarrassed being a Baby Boomer - the most selfish generation ever, from the excesses of the 60's and 70's - sexual revolution, drugs - to the excesses of the 80's, 90's, 00's: spendthrift. It all comes down to the same thing: the "Me First" Generation.

Unfortunately, somebody someday is going to have to pay down all this credit. It will be up to our great-grandchildren.

Credit is a wonderful thing, when used wisely: to pay for a long-term capital project. When used to pay for operating expenses, it will bring you to ruin.

I agree with the bears, but I will just throw this out: while it's true that the i-banks are going to fall into a great big sinkhole, there will continue to be some high-yield risk takers in the market.

They will mostly structure themselves as funds. Lots of private capital is organizing itself into funds to become mortgage lenders to commercial borrowers. This is not residential stuff but rather the big players like Tishman, Vornado, etc., who need to borrow but can't because of the freeze up in the debt markets.

They used to get the capital they needed from Lehman, Bear, etc.

Soon, however, the funds are going to start writing senior loans to these guys, but they're not going to charge conservative-debt interest rates -- they're really going to sock it to the borrowers and charge the kind of interest rates that used to paid on risky mezzanine debt -- 17% to 25%.

These funds believe they are going to make zillions doing this because there will be lots of needy borrowers who will have existing mortgages coming due and nowhere else to turn for the capital.

Do I think this business plan succeed? I have no idea, I am not in the game. I am just an observer on the sidelines.

But I am telling you that there are many people gearing up to profit from all the misery that looms. As is always the case.

Perhaps some will succeed and some won't.

GG - "But I am telling you that there are many people gearing up to profit from all the misery that looms. As is always the case." I totally agree with you.

"there will continue to be some high-yield risk takers in the market."

As long as they're not publicly traded companies / partnerships that have to mark-to-market, they can do whatever they please.

mark to market is a short-sighted view of the world. It was considered a remedy to other accounting ills and is a problem in and of itself.

As far as the people on this discussion topic, chicken little would be an apt description.

Markets may decline, they may be due for a decline, consumer and market psychology may be in decline too, but we aren't reverting to 1945 before the baby boomers were born.

Also, this death of investment banking is absurd.
Investment banks are full of smart people, that is their main asset.
If they don't exist in their current form, the smart people will reform what they need to.

Many people here seem like a bunch of anarchists.

Mark-to-market is good for instruments held for trading. For long-term instruments, the discounted cash-flow method is more appropriate. These new rules must change, as must the uptick rule be reinstituted, and the naked shorting rules enforced.

This is mostly accounting, a good portion economic. I've said it for months.