Mark Lamb | Wednesday, 17 September 2008

Nightmare on Wall Street

Weekly international investment round up to 16 September 2008

• Lehman Bros Bank files for bankruptcy

• Can this storm finally wash the contamination away?

With 158 years of history and having survived the railroad bankruptcies of the 1800s and the Great Depression of the 1930s America’s fourth-largest investment bank Lehman Brothers shook Wall Street on Monday by filing for bankruptcy.
At the very same time Merrill Lynch, another of America’s oldest financial companies and its largest brokerage firm, was attempting to avoid a similar fate by allowing itself to be acquired by the Bank of America, the country’s largest consumer bank, following its $52 billion losses caused by their exposure to sub-prime contaminated securities.
Wall Street’s foundations were then further rocked by the news that AIG, once the world’s largest insurance group, could also be facing collapse. US stock markets fell like a stone and marked Monday as the worst trading day since 9/11 with banking shares the hardest hit. World markets quickly followed suit as the bubbling toxic waste of the sub-prime disaster finally boiled over.
Much has been said and written about this unprecedented crisis but the human cost is quite staggering. Worldwide, Lehman Brothers Bank alone had 25,000 employees while many of Merrill Lynch’s 62,000 work force will find their jobs are swallowed up by those at the Bank of America and while Wall Street may seem a million miles away the negative ripple effect which will spread outwards to other sectors such as real estate and tourism should not be underestimated. Bond holders across the globe are also looking on anxiously as Lehman also had billions tied up in this particular sector.
Any last minute deal to try and rescue Lehman’s Brothers Bank was scuppered by the US Treasury’s absolute refusal to safeguard its future by using taxpayers’ money. In my column last week which preceded Monday’s momentous events entitled, ‘The beginning of the end’ I highlighted how the American government had bailed out Fannie Mae and Freddie Mac, two companies which account for approximately half of all America’s outstanding mortgage debt. Clearly, the US government took this step as a way of first offering reassurance and security to many ordinary American families and households before only days later sending out a direct message to those huge Wall Street based banks who made stupid decisions that they were not going to rescue them.
With many Americans already feeling the pain of the credit crunch and a Presidential election just around the corner the use of taxpayers money to safeguard a badly run private company is unlikely to go down well with the voters.
Just like at the end of any long, dry and uncomfortably humid spell this storm was expected. The problems caused by the disastrous bets made by some of the planet’s biggest banking and financial instructions have only been compounded further by their inability or unwillingness to disclose the extent of their own exposure to the toxic waste of bad debt. This contamination has dragged on the markets for far too long. At least we can now hope that the hurricane now ripping through Wall Street will finally cleanse the markets of this noxious waste. We just hope that this storm doesn’t last too long.

Mark Lamb is Director of FPC Investment Consultants who are Independent Financial Advisers and regulated by the MFSA to provide investment services under the investment services act 1994. For further details please contact Mark Lamb, by email on [email protected] by phone on 21318008 or through FPC’s website www.fpcmalta.com
This article does not intend to give investment advice and its contents should not be construed as such. Information in this article has been obtained from various public sources and is given by way of information only. Readers are always encouraged to seek independent financial advice before making any investment decision.