Lehman’s demise shows Wall Street’s strength
The banking crisis has reached a healthy phase: it is now safe to let a bank go bust. Until now the state has feared one insolvency would cause others.
The UK government could not afford to let Northern Rock go under when the credit crunch started squeezing in 2007. Not only would thousands of people (voters) lose their savings, the domino effect would have led to runs on a many other banks. There would have been queues to make withdrawals from Bradford and Bingley, Alliance & Leicester and quite likely Barclays and other major banks.
The US regulators similarly thought the risk of Bear Stearns going bust too much to contemplate and gave JP Morgan soft loans as an incentive to rescue it. With Fannie Mae and Freddie Mac they went for a full Northern Rock-style nationalisation rather than let them collapse, taking the rest of the American finance system with them.
So the fact Lehman can be allowed to fail shows that the market and regulators now feel one bank can go without causing a wider catastrophe. That is serious progress.
And while Merrill Lynch’s takeover may be a rescue before the next domino teeters, it is being bought by Bank of America at a premium to its (admittedly depleted) stock market price. It loses its independence but it remains in business: there is no loss of competition because its business does not overlap with its new parent’s.
Merrill was built out of mergers – its old name of Merrill Lynch Pierce Fenner & Smith reminds us of that, not to mention its takeovers of Mercury Asset Management and Smith Brothers in the UK plus White Weld. Being merged is the business that Merrill understands.
These may seem like extraordinary times on Wall Street but really, this is business as usual – a merger and a collapse that spreads no further. That a big name bank can collapse shows the banking crisis has reached a mature stage.
