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Lehman Brothers files for Chapter 11/Bank of America buys Merill Lynch

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Well, it appears that during the time I was away, Wall Street was working over the weekend and I was shocked to see a major Wall Street investment bank/brokerage firm (Lehman Brothers, NYSE: LEH) created in the 1840’s go down under. Such is the impact of the credit crunch caused due to the CDO crises that surfaced just over an year ago.

On a side note, Bank of America is all set to buy Merill Lynch, NYSE: MER (another top Wall Street brokerage firm) for under $50 billion (~44 billion in an all-stock transaction)! This is not really a bail-out similar to the buyout of Bear Stearns by JPMorgan (with backing from the Fed) as Merill’s financial situation is stronger than what Bear Stearns was. The root cause is the same – asset backed securities that have lost a huge chunk of their value and their portfolio of CDO’s.

Again, this points to the Warren Buffet adage:

Derivatives are financial weapons of mass destruction.

http://www.berkshirehathaway.com/2002ar/2002ar.pdf

Its just 6 months since JPMorgan Chase bailed out Bear Stearns – https://ecofin.wordpress.com/2008/03/18/derivatives-the-sub-prime-mess-us-recession-bear-stearns-bailout-by-the-fedjpmchase/

 

https://ecofin.wordpress.com/2007/08/12/the-us-subprime-crisis-increasing-chance-of-a-us-recessionburst-of-the-us-housing-bubble/

When I founded Eco_Fin – the peer networking group, about 5 years ago in 2003, we had people from these firms as members and they had enriched the group knowledge in Finance back then with their valuable advice. Its saddening that such behemoths would buckle under the weight of the massive credit crunch that is still showing no signs of abating.

The Government bailed out Freddie Mac and Fannie Mae a week ago.

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Written by Naveen Athresh

September 15, 2008 at 3:30 pm

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