And Then There Were None – High Finance Finagling Knocks Out Top 5 Investment Banks


The first of the top 5 investment banks to fall was Bear Sterns in March 2008. Founded in 1923, the collapse of this Wall Street icon shook the world of high finance. By the end of May, the end of Bear Sterns was over. JP Morgan Chase bought Bear Stearns for a price of $10 per share, a stark contrast to its 52-week high of $133.20 per share. Then came September. Wall Street and the world watched as within days the remaining investment banks on the top 5 list plummeted and the investment banking system was declared down.

Fundamentals of Investment Banking

The largest investment banks are big players in high finance, helping large corporations and government raise funds through means such as trading securities in the stock and bond markets, as well as ‘by offering professional advice on the most complex aspects. of high finance. These include acquisitions and mergers. Investment banks also handle the trading of a variety of financial investment vehicles, including derivatives and commodities.

This type of bank is also involved in mutual funds, hedge funds and pension funds, which is one of the main ways that what happens in the world of high finance is felt by the consumer. medium. The dramatic fall of the remaining major investment banks has affected retirement plans and investments not only in the United States, but also around the world.

The finagling of high finance that brought them down

In an article titled “Too Clever By Half”, published September 22, 2008 by, the Chemical Bank President’s professor of economics at Princeton University and writer Burton G. Malkiel provide an excellent breakdown and easy to follow of what exactly happened. While the catalyst for the current crisis has been the collapse of mortgages and loans and the bursting of the real estate bubble, the roots of this lie in what Malkiel calls the severing of the link between lenders and borrowers.

What he is referring to is the passing of the banking era in which a loan or mortgage was made by a bank or lender and held by that bank or lender. Naturally, since they retained the debt and the associated risk, banks and other lenders were quite cautious about the quality of their loans and carefully assessed the likelihood of repayment or borrower default, against standards that had sense. Banks and lenders have moved away from this model, towards what Malkiel calls an “origin and distribute” model.

Instead of holding mortgages and loans, “mortgage originators (including non-bank institutions) hold loans only until they can be aggregated into a set of complex mortgage-backed securities, divided into different segments or tranches with different priorities in the right to receive payments from the underlying mortgages”, the same model also being applied to other types of loans, such as credit card debt and car loans .

As these debt-backed assets were sold and traded in the investment world, they became increasingly leveraged, with leverage ratios frequently reaching 30 to 1. This rotation and trades have often took place in a shady and unregulated system that has been called shadow banking. As the degree of indebtedness increased, the risk also increased.

With all the money to be made in shadow banking, lenders became less choosy about who they gave loans to because they no longer owned the loans or the risk, but rather sliced ​​and diced them, repackaged them and sold them at a profit. Crazy terms have become popular, no money down, no documents required, etc. Exorbitant exotic loans became popular and lenders scoured the depths of the subprime market for even more loans to make.

Finally, the system almost came to a standstill as house prices plummeted and defaults and foreclosures increased as lenders gave short-term loans to other lenders afraid to lend. to increasingly indebted and illiquid entities. The drop in confidence was reflected in plummeting stock prices as the last of the major investment banks drowned in fragile debt and investor fear.

September saw Lehman Brothers fail, Merrill Lynch chose takeover over collapse, and Goldman Sacs and Morgan Stanley retired to bank holding company status, with potential takeovers on the horizon. Some of these investment banks are almost a century old, and some more, like the 158-year-old Lehman Brothers. A not very glorious end for these historic giants of finance, destroyed by a system of shenanigans and negotiations of high finance, a system which, by collapsing, can even end up dragging down the economy of the whole world.

Source by Sharon Secor

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