And Then There Were None – High Finance Finagling Takes Down the Top 5…
The first of the top 5 investment edges to fall was Bear Sterns, in March of 2008. established in 1923, the collapse of this Wall Street icon shook the world of high finance. By the end of May, the end of Bear Sterns was complete. JP Morgan Chase purchased Bear Stearns for a price of $10 per proportion, a stark contrast to its 52 week high of $133.20 per proportion. Then, came September. Wall Street, and the world, watched while, in just a handful of days, the remaining investment edges on the top 5 list tumbled and the investment banking system was declared broken.
Investment Bank Basics
The largest of the investment edges are big players in the vicinity of high finance, helping big business and government raise money by such method as dealing in securities in both the equity and bond markets, in addition as by offering specialized advice on the more complicate aspects of high finance. Among these are such things as acquisitions and mergers. Investment edges also manager the trading of a variety of financial investment vehicles, including derivatives and commodities.
This kind of bank also has involvement in mutual funds, hedge funds, and pension funds, which is one of the main ways in which what happens in the world of high finance is felt by the average consumer. The emotional falling of the remaining top investment edges affected retirement plans and investments not just in the United States, but also throughout the world.
The High Finance Finagling That Brought Them Down
In an article titled “Too Clever By Half”, published on September 22, 2008, by Forbes.com, the Chemical Bank chairman’s professor of economics at Princeton University and writer Burton G. Malkiel provides an excellent and easy to follow breakdown of what exactly happened. While the catalyst for the current crisis was the mortgage and lending meltdown and the bursting of the housing bubble, the roots of it lie in what Malkiel calls the breaking of the bond between lenders and borrowers.
What he is referring to is the shift from the banking era in which a loan or mortgage was made by a bank or lender and held by that bank or lender. Naturally, since they held onto the debt and its associated risk, edges and other lenders were fairly careful about the quality of their loans and weighed the probability of repayment or default by the borrower carefully, against standards that made sense. edges and lenders moved away from that form, towards what Malkiel calls an “originate and spread” form.
Instead of holding mortgages and loans, “mortgage originators (including non-bank institutions) would keep up loans only until they could be packaged into a set of complicate mortgage-backed securities, broken up into different segments or tranches having different priorities in the right to receive payments from the inner mortgages,” with the same form also being applied other types of lending, such as to credit card debt and car loans.
As these debt-backed assets were sold and traded in investment world, they became increasingly leveraged, with debt to equity ratios frequently reaching as high as 30-to-1. This wheeling and dealing often took place in a shady and unregulated system that came to be called the shadow banking system. As the degree of leverage increased, so too did the risk.
With all the money to be made in the shadow banking system, lenders became less choosy about who they gave loans to, as they were no longer holding the loans or the risk, but rather slicing and dicing them, repackaging them and selling them off at a profit. Crazy terms became popular, no money down, no docs required, and the like. expensive exotic loans became popular and lenders trolled the depths of the sub-chief market for nevertheless more loans to make.
Finally, the system grinded almost to a stop with the fall of housing prices and increased loan defaults and foreclosures, with lenders making short term loans to other lenders being afraid of making loans to such increasingly leveraged and illiquid entities. The decreased confidence could be seen in the dropping proportion prices as the last of the top investment edges drowned in shaky debt and investor fear.
September saw Lehman Brothers fail, Merrill Lynch choose takeover over collapse, and Goldman Sacs and Morgan Stanley retreat to the position of bank holding companies, with possible buyouts on the horizon. Some of these investment edges dated back nearly a century, and others longer, such as the 158-year old Lehman Brothers. Quite an inglorious end for these historic giants of finance, destroyed by a system of high finance finagling and shady dealings, a system that, as it falls apart, may already end up dragging down the economy of the complete world.