Huge firms fall hard

The Star-Ledger, September 16th, 2008

The Star-Ledger Archive COPYRIGHT © The Star-Ledger 2008

Date: 2008/09/16 Tuesday Page: 045 Section: BUSINESS Edition: FINAL Size: 914 words


Huge firms fall hard

Attention turns to Wall Street's next moves By SAM ALI STAR-LEDGER STAFF

Lehman Bros. has failed. Merrill Lynch – one of the most storied names on Wall Street is being sold – and AIG could be the next financial giant to tumble.

They will join the ranks of Bear Stearns, Countrywide, Fannie Mae and Freddie Mac, and IndyMac as casualties from the credit/housing crisis.

"We can at least say that we've gone through the first half of the alphabet," said Sam Stovall, chief investment strategist at Standard and Poor's.

Is the second half next?

Based on recommendations by equity analysts to sell shares of companies such as National City, Washington Mutual and Zions Bancorp, investors probably shouldn't wait around to find out, he said.

But on a day when the global financial system seemed on the edge of collapse, deeper questions lingered than the effect of a 504-point decline in the Dow Jones industrial average, or which stock to buy or sell. When will the carnage stop, for example? And what will Wall Street look like when the dust finally settles?

Ultimately, the effect will be felt across the region – from the trading floor at the New York Stock Exchange to the towers of Midtown Manhattan and the gleaming buildings of Jersey City, which in its own way has earned the nickname Wall Street West. Now, in a sign of the times, Merrill Lynch, the nation's largest retail brokerage, will be owned by a company based in Charlotte, N.C.

"This is the middle of the hurricane," said Richard Yamarone, director of Economic Research at Argus Research. "I don't know if anyone can come up with an answer but we are in the throes of the biggest financial crisis since the Great Depression."

Yamarone said the word credit comes from the Latin word credere, which means to believe or to trust.

And it is this very lack of trust that has turned what was once a squall of reckless lending into arguably the worst financial tsunami in nearly a century.

"This is a crisis of confidence," Yamarone said. "The banks don't trust each other. They don't know what they have on their balance sheets and they don't know how to value those assets. It's distrust. If you don't have trust, then you don't have much of a credit market."

Still, the thunderous cries and howls describing yesterday's sequence of events as "unprecedented" and "apocalyptic" are a bit over the top, said Anthony Sabino, professor of Law and Business at St. John's University.

Drexel Burnham Lambert collapsed in 1990, he said. Kidder Peabody fell in 1994, and Long Term Capital Management went down in 1998. Investors stopped listening to E.F. Hutton a while ago. And PaineWebber is long dead and gone.

In fact, the Wall Street graveyard is brimming with investment houses and banks once considered too big or important to fail, Sabino said.

"When Drexel went down the tubes, a lot of people got hurt, but it wasn't the end of Wall Street or the end of the American financial system. We weathered the storm of Drexel, and we will weather the storm of Lehman."

Stovall likened this financial crisis and the ensuing demise of venerable firms like Lehman and Merrill to a forest fire that clears dead wood from the forest floor and kick-starts regeneration.

"Some of the big trees are saved but some are not. Some of the ground growth gets taken away but the fire ultimately keeps the forest thriving and creates opportunities for new growth. . . . You need to get rid of a lot of dead wood from time to time."

Sabino praised the Fed for not coming to Lehman's rescue this go-round, like they did when Bear Stearns collapsed and Fannie and Freddie Mac began hemorrhaging.

As the old adage goes, capitalism without failure is like religion without sin – it doesn't work.

"Let's get back to being American and let's remember that being a free market means free to succeed and free to fail," he said. "I question whether the government should bail out anybody, but if they had done it again, the question becomes where do you draw the line? Who do you bail out next?"

Gibran Nicholas, chairman of the CMPS Institute (cmps, an organization that certifies and trains mortgage bankers and brokers, calls the unprecedented series of events of this past year, including the collapse of Bear, the government's takeover of Fannie Mae and Freddie Mac, the Lehman bankruptcy and the shotgun wedding between Merrill and Bank of America, the "Great Unwind."

"It's like a coil that has to be unwound and we have certainly have not seen the end," he said. "I don't think we will see the end until sometime next year. Things will not stabilize until the real estate markets stabilize and the real estate market won't stabilize until 2009. These firms have to know what their mortgage assets are worth."

Still, Nicholas said the "Great Unwind" is occurring in a much more organized fashion than many would have expected.

"When Bear Stearns collapsed in March, it took the markets by surprise and the Fed stepped in to prevent total chaos," he said. "But now, the market has had time to figure out how to deal with these things and the federal regulators have gotten a bit of an education themselves. So, it's more likely that when a financial firm fails today, it will happen in a much more orderly fashion."

Sam Ali may be reached at

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