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.

Repaired?

I was asked today if I thought that parts of the financial system, greased by petrodollars, hadn't recapitalized and repaired themselves fairly effectively and were working down the backlog in syndicating LBO debt etc. This was my response.

1/ If "repair" is code for "write off amounts exceeding the fee revenue earned from 'financial innovation' in said lines of businesses over the last 3-4 years, blow your capital ratios, panic and raise capital from the Gulf and China that dilutes current shareholders from 10% to 30%, wipe the 5th largest US i-bank off the face of the earth and watch the 4th largest teeter on the brink, stick the Fed, the ECB and the Bank of England with all types of bullshit assets that will ultimately be eaten by the tax-payers (e.g. privatized gains and socialized losses for the least worthy interest group of all time). all the while not clawing back any bonuses that were paid along the way" then I agree that that those businesses have been "repaired". And some of them (Citi, Wachovia, etc) still have more pain coming.

But I am not sure why as a shareholder or taxpayer or US citizen that might not consider selling off chunks of our economy to be a good idea, why this isn't grounds for public flogging as opposed to being impressed by how "quickly" it was repaired

2/ Check out the 5 year stock charts

Morgan Lehman Citi Merrill

Goldman JP Morgan

Morgan, Lehman, Merrill, Citi = Flat or down; Only JP and Goldman are up and even then the CAGRs are pathetic. In no other industry do employees get so rich at the expense of shareholders. Actually hedge funds are even worse but the data is not publicly visible.

3/ Lest we forget, Americans are cumulatively 50% poorer against much of the rest of world since we have had to take sensible monetary policy to the woodshed to help with these repairs and the dollar is flirting with a run on the currency. Incredible for the global superpower and world's reserve currency.

USD-Euro Ratio

Another socialization of loss.

Plus huge reduction in strategic scope of action against competitors like China with their huge reserves locking up natural resources and with the ability to send the dollar falling to the floor if they ever started selling. Sure it would hurt them too, but that does not mean that the leverage is not there

4/ And anyway, Round 2 is still to come. And that is the slowdown in the real economy which will swing around and punch everyone in the nose again. We are not done yet.

5/ also note that the mortgage market outside of conforming is basically closed for business as are large parts of the student loan market and increasing amounts of home equity (and car loan is next)

Jeremy Gratham Latest Quarterly Letter

If you have even the slightest interest in markets and monetary policy, just read Jeremy Gratham's latest GMO Quarterly Letter. There is very little that I could possibly add.

From www.gmo.com

$2/share

As predicted yesterday, JPM bails out Bear Stearns at a price approximating bankruptcy under heavy pressure on both parties by the Fed which, rightly, did not want to see how Bear defaulting against (hundreds/thousands?) of counterparties would play out. The remarkable part of the transaction: Fed is guaranteeing against losses of $30B of Bear MBS so the taxpayer will ultimately take a hit here.