Tuesday, September 16, 2008

Lehman is history; now the focus is on AIG

When all was said and done on Monday, the Dow Industrial Average had plunged 504 points and again revisited the lowest levels reached in July. AIG plunged 60% and Lehman Brothers shares were rendered nearly worthless after filing for bankruptcy protection. The credit crisis is repeatedly morphing into a crisis in confidence as it seems there is a new financial institution targeted on a daily basis.

The Federal Reserve and the Treasury Department seem to have drawn the line in the sand at using government funds to save the beleaguered financials for now. Bear Stearns, Fannie and Freddie received the government’s assistance, while Lehman and now, AIG, are on their own to find a solution. The Fed and the Treasury are confident that the various initiatives put in place since the Bear Stearns bailout will allow the system to process, in a relatively orderly fashion, the failures when and if they are realized.

The face of Wall Street is changing as the bulge bracket investment banks have been whittled down to two. Goldman Sachs and Morgan Stanley remain as the two remaining major independent investment banks, with Merrill Lynch being acquired by Bank of America and Lehman Brothers filing for bankruptcy protection. Some analysts have offered the opinion that the days of the pure investment bank could be over and that Goldman Sachs and Morgan Stanley will eventually need to latch on to a traditional bank, and their capital, in order to survive.

The market appears to be at yet another inflection point. The high profile bankruptcy and bailouts are typical events that frequently signify market bottoms. Many thought the Bear Stearns collapse could have been the bottom for the stock market, just as we are sure we will hear the same opinion offered this week. The optimists declare a weak market as a good opportunity to make additional investments, while the pessimists offer the opinion that the recent market weakness will likely continue. Both opinions could be correct as the U.S. economy has always come back stronger in the wake of economic crisis.

History will ultimately be the judge of where exactly we are in the economic and equity market cycle. We will offer the obvious opinion that the financial landscape is going through an evolutionary restructuring. The institutions that remain will see many of their business lines permanently diminished, although the reduction in competition will likely provide advantages.

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