End of the independent broker dealer?

Bear Stearns = Acquired by JP Morgan ChaseLehman = To be liquidated Merrill = Likely acquired by Bank of America

Roubini says Morgan Stanley and Goldman are also finished as independent entities. Full article here.

I also argued in follow-up pieces that, in a matter of two years, no one of the remaining independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs) would survive as: 1. their business model is now impaired (securitization is semi-dead); 2. they will need to be regulated like banks given the PDCF support and thus have lower leverage, higher liquidity and more capital that will erode their profitability; 3. Their severe maturity mismatch – borrowing very short term and liquid, leveraging a lot and lending and investing in more long term and illiquid ways – makes them very fragile – in the absence of deposit insurance and in the presence of only limited LOLR support by a central bank – to bank like run that are destructive even of illiquid but otherwise solvent institutions. Thus all such broker dealers need to merge with larger financial institutions that have a commercial banking arm and thus access to stable and insured deposits and to true LOLR Fed support. That process of unraveling of independent broker dealers started with Bear Stearns; now it is moved to Lehman; tomorrow Merrill Lynch will be on line; and Morgan Stanley and Goldman Sachs will be next. No one of them can and will survive as independent entities. So, the Fed and Treasury should advise them all to start finding a large international partner (international as almost no domestic partner is now sound to take them over) and merge with such partner before we get another Bear or Lehman disaster.

Frankly the best advice that Bernanke, Geithner and Paulson can give to John Mack of Morgan Stanley and Lloyd Blankfein of Goldman is: "dont wait a single further minute and find a large domestic or international bank you can merge with, a large commercial bank that has a stable base of deposit-insured deposits; otherwise you are bust". This is the end of the Wall Street of independent investment banks; as predicted months ago the collapse of a structurally flawed shadow banking system is now underway in very rapid order.

Posted on September 14, 2008 and filed under Finance.