Excessively smart, or just plain stupidity?
The past few days saw the near/collapse of many top financial institutions. Well, actually not many, because the actual number is only three. Add that to the previous Bear Stearns collapse a few months back, and the number increases by one. Still, that's only Four altogether. So what's the big deal?
Considering that those are three out of 5 top investment banks on Wall Street, the word 'many' is not totally misused. Bearn Stearns was taken over by JPMorgan in a move orchestrated by the Fed (which basically guranteed JPMorgan would suffer no losses whatsoever if the assets plunged dramatically in value), Lehman Brothers could not find any loans after its latest round of losses and announced bankruptcy faster than you could spell one of the TWO common words in the financial world (the other one commonly used on Wall Street these days being 'liquidation'), and Merrill Lynch, terrified of being the next victim, basically just sold itself away to BoA, albeit at a 70% premium over the market price, a rarity for any financial firms right now.
Right now, Lehman Brothers ranks as the top casualty in the subprime crisis, which totally dwarfs the previous record by 10 times in market value. The question is, isn't Wall Street supposed to be staffed with the cream of the crops of the financial world, the supposedly 'Ivy Leaguers' of the world? Are those people really as competent as they're made out to be, or are they just merely designing exotic financial items to pick up more fees than ever without considering the safety of its well-heeled clients?
If it is as per described above, then I guess they can be classified excessively and needlessly too smart for their own good, which brought them to their current collapse. It is also a case of plain stupidity, and this is for being totally absorbed in a case that can almost be classified as a scam. Subprime crisis should have been predicted a long time ago when cheap credit are made to people who have no way of affording it, and sooner or later the housing bubble is going to collapse and negate all the equities that people have taken out of their mortgage.
The same people that are handling your portfolio could be the ones who are blinded by the fees they are getting when they sell those toxic assets to unknowing investors, therefore the conflict of interest arises. If they haven't seen the danger coming, then they are not fit to become a financial consultant. Either way, they are still responsible for the mess created and basically shouldn't be trusted. Pity those that are sticking to their job descriptions and still end up getting the sack when their company is taken over, which in these days virtually means 'I'd better start packing my stuff' for many of the employees.
Goldman Sachs and JPMorgan are the only 2 largest surviving investment banks on Wall Street. They have lived on due to their CEOs' foresights to cut the subprime exposure to the minimum when the crisis loomed, and BoA has cemented its position as the largest bank now, having taken over Merrill Lynch to extend its reach to the investment banking, which it has traditionally been weak in. I do have to correct my previous statement on how the top bankers on Wall Street are not that 'super' after all, as most of them work at Goldman, one firm that's definitely not afraid of paying big bucks to attract top talents.
Anyway, considering that these 5 top investment banks have dealings with many banks around the world, be it consumer or other investment banks, the collapse of any of those would have repercussion effect throughout. In fact, it is predicted that 1000 smaller regional banks in USA might be in serious trouble after the latest problem on Wall Street, as they would have taken a serious hit to the valuation of their assets which are similar to those that the investment banks own. Domino effect is likely to continue, and once it is fully played out, only those at the front of the rows are still standing strong to gobble up whatever prime assets there are after all the subprimes are cleared.
In the case of AIG, the largest insurance group in the world, its collapse would bring about the largest financial catastrophy in the history, far surpassing the collapse of Lehman Brothers. Other than insurance, it also dabbles in swaps and hedging, and in fact one prominent analyst pointed out that:
'AIG may have more say over the oil price than the Saudis do'
Since Maurice Greenberg vacated the AIG hotseat a few years ago, it has taken a change of direction under the new boss, and did much worse than ever. This year alone the stock plunged 92%, and after the latest Fed's USD 80 billion bailout in exchange for 80% equity, the equity for the existing shareholders is almost non-existent.
As Warren Buffett once said of the exotic derivatives:
'in our view, derivatives are weapon of mass destruction, carrying dangers that, while now latent, are potentially lethal'
The Sage of Omaha has again been proven correct in this instance, and would no doubt be laughing all the way to the bank as he seeks to pick up precious scraps of large firms while inspecting the financial ruins on Wall Street now, which is most likely going to spread all over USA soon.
Considering that those are three out of 5 top investment banks on Wall Street, the word 'many' is not totally misused. Bearn Stearns was taken over by JPMorgan in a move orchestrated by the Fed (which basically guranteed JPMorgan would suffer no losses whatsoever if the assets plunged dramatically in value), Lehman Brothers could not find any loans after its latest round of losses and announced bankruptcy faster than you could spell one of the TWO common words in the financial world (the other one commonly used on Wall Street these days being 'liquidation'), and Merrill Lynch, terrified of being the next victim, basically just sold itself away to BoA, albeit at a 70% premium over the market price, a rarity for any financial firms right now.
Right now, Lehman Brothers ranks as the top casualty in the subprime crisis, which totally dwarfs the previous record by 10 times in market value. The question is, isn't Wall Street supposed to be staffed with the cream of the crops of the financial world, the supposedly 'Ivy Leaguers' of the world? Are those people really as competent as they're made out to be, or are they just merely designing exotic financial items to pick up more fees than ever without considering the safety of its well-heeled clients?
If it is as per described above, then I guess they can be classified excessively and needlessly too smart for their own good, which brought them to their current collapse. It is also a case of plain stupidity, and this is for being totally absorbed in a case that can almost be classified as a scam. Subprime crisis should have been predicted a long time ago when cheap credit are made to people who have no way of affording it, and sooner or later the housing bubble is going to collapse and negate all the equities that people have taken out of their mortgage.
The same people that are handling your portfolio could be the ones who are blinded by the fees they are getting when they sell those toxic assets to unknowing investors, therefore the conflict of interest arises. If they haven't seen the danger coming, then they are not fit to become a financial consultant. Either way, they are still responsible for the mess created and basically shouldn't be trusted. Pity those that are sticking to their job descriptions and still end up getting the sack when their company is taken over, which in these days virtually means 'I'd better start packing my stuff' for many of the employees.
Goldman Sachs and JPMorgan are the only 2 largest surviving investment banks on Wall Street. They have lived on due to their CEOs' foresights to cut the subprime exposure to the minimum when the crisis loomed, and BoA has cemented its position as the largest bank now, having taken over Merrill Lynch to extend its reach to the investment banking, which it has traditionally been weak in. I do have to correct my previous statement on how the top bankers on Wall Street are not that 'super' after all, as most of them work at Goldman, one firm that's definitely not afraid of paying big bucks to attract top talents.
Anyway, considering that these 5 top investment banks have dealings with many banks around the world, be it consumer or other investment banks, the collapse of any of those would have repercussion effect throughout. In fact, it is predicted that 1000 smaller regional banks in USA might be in serious trouble after the latest problem on Wall Street, as they would have taken a serious hit to the valuation of their assets which are similar to those that the investment banks own. Domino effect is likely to continue, and once it is fully played out, only those at the front of the rows are still standing strong to gobble up whatever prime assets there are after all the subprimes are cleared.
In the case of AIG, the largest insurance group in the world, its collapse would bring about the largest financial catastrophy in the history, far surpassing the collapse of Lehman Brothers. Other than insurance, it also dabbles in swaps and hedging, and in fact one prominent analyst pointed out that:
'AIG may have more say over the oil price than the Saudis do'
Since Maurice Greenberg vacated the AIG hotseat a few years ago, it has taken a change of direction under the new boss, and did much worse than ever. This year alone the stock plunged 92%, and after the latest Fed's USD 80 billion bailout in exchange for 80% equity, the equity for the existing shareholders is almost non-existent.
As Warren Buffett once said of the exotic derivatives:
'in our view, derivatives are weapon of mass destruction, carrying dangers that, while now latent, are potentially lethal'
The Sage of Omaha has again been proven correct in this instance, and would no doubt be laughing all the way to the bank as he seeks to pick up precious scraps of large firms while inspecting the financial ruins on Wall Street now, which is most likely going to spread all over USA soon.
posted by leonhart @ 3:47 PM
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