Tuesday, September 16, 2008

Needless Panic Over Normal Capitalism

Yesterday evening, I saw a few minutes of an almost unbelievably misleading exchange between two anchors on CNBC.

Brian Williams, who is apparently NBC's nightly news anchor, was doing, or had done his broadcast from the CNBC studios. As he discussed this with a CNBC anchor, he began to wax, misty-eyed, at what a serious and faith-shaking event was the sale of Merrill Lynch to BofA.

Launching into his own personal story, Williams talked of his boyhood on the New Jersey shore, where 'the wealthy people' in the community would trust the broker in the 'storefront Merrill Lynch office.' That, of course, Brian's family wasn't one of them, but clearly, some people 'trusted that image of the bull.'

The 'thundering herd.'

Yes, Brian, those were the days. People probably drove DeSotos, watched Zenith or RCA televisions, if they could afford one, and drank regular, unbranded coffee, when they weren't brewing Maxwell House or Folgers at home.

News Flash to Brian Williams: it's 2008! GM is almost dead! Merrill Lynch wasn't your father's retail wire house anymore!

Honestly, to hear the media yesterday, not to mention political candidates, you'd swear Herbert Hoover was in office, and the Great Depression was starting.

At least two networks had on-air talking heads breathlessly promising an evening program to 'tell you where to invest to keep your money safe!'

Let's all calm down and take a deep breath. It's not the Depression. There will be no bank holiday.

Per my prior post regarding John Gutfreund's comments, Lehman had to file for bankruptcy because CEO Dick Fuld's ego caused him to wait long past the point at which he could have sold the investment bank at a decent price. By misleading analysts and investors earlier this year, especially by dangling attractive female and then-CFO Erin Callahan in front of analysts to voice Fuld's deliberately vague assertions of asset values, Fuld merely dug Lehman's hole deeper.

Gutfreund is right. Lehman's collapse did not have to happen this way. Fuld chose it. It's not a retail bank. Nobody's deposits were at risk. It's merely another badly-managed, weakly-capitalized, over-leveraged investment bank in a sector with over-capacity.

Merrill Lynch? It hasn't been the nation's cherished large, retail 'wire house' for decades. Ever since Walter Wriston's era, the brokerage firm has diversified into other investment banking businesses, though rarely with very much success. It has never been more than an also-ran underwriter. The retail, full-service brokerage business is dying, and has been for years. Due to its size and public ownership, Merrill never attracted the same quality of trading and risk management talent that other investment banks did.

The firm whose departure Brian Williams bemoans hasn't existed for at least twenty years.

What puzzles me is why everyone references the Great Depression, which saw integrated commercial/investment banks stuff their customers' investment portfolios with questionable securities underwritten by the banks themselves.

What this financial sector upheaval reminds me of much more is the end of the famed 'Go Go' '60s mutual fund era. Why is nobody mentioning this?

Bernie Cornfeld, of IOS infamy, and Bob Vesco ran afoul of securities regulations. Many smaller brokerages and analysts shops shuttered in the wake of the decline in prices of the "Nifty Fifty."

In fact, when I went to work at EF Hutton in 1981, I remarked to a friend, on a lunchtime walk around the streets of lower Manhattan, how you could see brickwork patterns on many buildings indicating another had once existed next to it, cheek by jowl. My older colleague, with years of industry experience, explained that those were the remaining evidence of the many buildings pulled down which had once housed myriad small brokerages. They went bust in the wake of the 1960s market crash.

My point is, Wall Street has lost firms before. Retail broker and investment bank ranks have been thinned before. Technology, poor risk management and market cycles have been the cause of many institutional deaths in this sector over nearly 100 years.

What is not happening now is a loss of retail commercial bank deposits of the general American public.

This is really much ado about what is, in fact, normal, Schumpeterian dynamics. Weak businesses fail, excess capacity leads to predatory pricing, excessive risk-taking, and, eventually, removal of the capacity.

That's what we are seeing this week with Lehman and Merrill Lynch. These are not so much systemic problems as failures of management. Something that routinely happens in our capitalistic system.

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