What a busy weekend! As CNBC's anchors chortled last night, publicly-held US investment banks shrunk in number from five in January of this year to just two today- Goldman Sachs and an ailing Morgan Stanley.
Over the weekend, Lehman filed for bankruptcy, while John Thain unexpectedly sold Merrill Lynch to Ken Lewis' BofA.
What to make of all this turmoil and change?
First, I'm thankful that Lehman is finally pulling the plug and dissolving itself. It's way past time to do so.
Second, I bet John Thain wishes he'd stayed at the NYSE and never been tempted by the wreckage Stan O'Neal left behind. Too much damage, not enough time. Who'd have guessed that Thain would be out of a job before Vikram Pandit at Citigroup?
I understand why Merrill needed to be sold, albeit with pressure from the Fed. Thain was continually finding more writedowns each quarter, consuming more and more capital, while new investors were understandably reluctant to be his latest pigeons.
What I don't believe is that Ken Lewis is any more able to handle merging the Merrill wreckage with BofA than he has been with Countrywide. In case nobody's noticed, retail brokerage is a dying business. Merrill Lynch's investment banking, via mortgage underwriting, sunk the firm.
What's left that is truly worth having now? Didn't he just finish firing a bunch of his own investment bankers earlier this year?
So, let me get this straight. He was long investment banking, then shortened his exposure, but has now lengthened it again by purchasing the wreckage of one of the Street's worst-run risk-management operations?
Ken Lewis just bought a crippled player in a game whose Schumpeterian dynamics have decreed that excess capacity is now to be eliminated. I wouldn't be a buyer of BofA equity anytime soon. Not with Lewis at the helm, and this new jetsam aboard.
And isn't that how this all came about? If there wasn't excess underwriting and trading capacity, would Lehman, Bear Stearns, Merrill Lynch, Morgan Stanley and Goldman have leveraged themselves up above 25 times equity?
As I've noted in prior posts, all of these firms now exist at the pleasure of some commercial bank's broker loan division.
You won't catch me weeping over any of these corporate departures. Lehman, Bear Stearns and Merrill Lynch all exhibited horrifically bad risk management in a sea of financial excess and excess capacity. That's why capital was leveraged up so highly- to offset razor-thin margins. Guess what those margins, even on higher capital turnover, could not offset?
Risk.
Now the investment bank version of musical chairs has two players left, and, ostensibly, one chair.
I doubt Goldman Sachs is worried. Their risk managers are the best in the publicly-held financial services sector.
Do you think John Mack is worried today?
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