Fear and Loathing on Wall Street
Lehman Bros is filing for bankruptcy. Merrill Lynch is being bought. Denied the comfort of rock bottom, Wall Street continues its descent into the deeper layers of a financial Dante’s Inferno.
The announcements came late on Sunday, after a weekend of nervous meetings between the Federal Reserve, Henry Paulson and the country’s top bankers. Paulson and Bernanke had already made it clear that they had reached their quota on bailouts. Despite the Wall Street heads’ agreement on an emergency fund, the fate of both firms was sealed. Merrill Lynch, the more fortunate of the two, is being bought by Bank of America for $50 billion. Lehman Bros, already $60 billion in the hole for the first time in 158 years, failed to close any buyers.
All this a mere week after the fall of Fannie and Freddie makes for a situation that the country hasn’t seen in decades, according to Peter G. Peterson and a certain Alan Greenspan on ABC news. Greenspan referred to the bailout of Bear Stearns alone as a “once in a half century, probably once in a century type of event.”
While Bernanke and Paulson are not bailing out Lehman, they are relaxing some regulations to calm the wild-eyed hordes of frightened investors. For instance, the purchase of Merrill drops Bank of America below minimum required funds – a condition the Fed is planning to overlook. The Fed may also start taking junk bonds and other previously unacceptable assets as collateral.
Predictably, thousands of workers were laid off during the process. Right now is the worst time on Wall Street to be unemployed.
Are we scared? Perhaps we ought to be. AIG’s stock went down 30 percent and Washington Mutual is allegedly teetering on the brink of failure. With the federal government already balancing the fate of the country’s biggest mortgage lenders on the heads of the taxpayers, no one knows which firm will implode next. Ironically, a major factor in keeping the players alive, is our confidence as consumers.
Update: Washington Mutual has $143 billion in insured deposits according to Financial Times. The FDIC – the corporation responsible for giving citizens their money if the banks fail has just about $45.2 billion. If Washington Mutual fails, it can drain the FDIC or force a redirection of funds from the treasury.