Wall Street Stunned

The other major casualty of the September weekend was Lehman Brothers Holdings, which after a desperate search aided by the government was not as fortunate in finding a suitor willing to assume its risks, leading the company to announce Sep. 15 that it will file for Chapter 11 bankruptcy protection, “in order to protect its assets and maximize value.” The company said all its broker/dealers will continue to operate, as will its asset management arm, Neuberger Berman, though it said that it “exploring” the sale of both those operations. The SEC quickly announced Sep. 15 that retail customers of Lehman Brothers will be protected during the winding down, protection that includes “segregation of customer securities and cash” as well as SIPC insurance, and that SEC staff will oversee the “orderly transfer of customer assets to one or more SIPC-insured brokerage firms.”

Meanwhile, the Federal Reserve had announced on Sep. 14 that it will accept additional, broader types of collateral in its Primary Dealer Credit Facility (PDCF) Term Securities Lending Facility (TSLF) programs, and is quadrupling the number of Schedule 2 TSLF auctions–to twice a week from once every two weeks.

A Change in the Model?

What will this mean for the shrinking number of Wall Street brokerage firms? Jefferson Harralson, a research analyst who covers banks at Keefe, Bruyette & Woods, believes the broker/dealer model “is going towards where a large balance sheet and core funding is crucial; we’ve seen that, now, twice. We’re the only country in the world that has the broker/dealer separate from the larger bank. The volatility we’re experiencing is proving to be too much for the broker/dealer model–at least in two instances. These large banks [that] have been very poorly positioned to compete before are now going to have an opportunity to compete better.”

So will there be more acquisitions for Bank of America? Harralson argues that “after buying Countrywide and now following up so quickly with the Merrill Lynch deal, [Bank of America] will retrench now for a period of time, they will make sure that their capital levels are adequate, make sure that they integrate Countrywide and Merrill Lynch the best they can, but I don’t see any more deals coming out of them for some time.” So then, are there other banks that might be in a position to do more deals? Harralson demurs, “Very, very few. Most banks have their own issues with credit and most banks are relatively thin on capital. You have a JPMorgan out there that’s positioned relatively well but it has already bought Bear Stearns. Most banks will look at deals where they might get a stressed price in their favor, but most banks are looking after their own problems right now.”

Additional reporting by Kathleen M. McBride, Melanie Waddell, and Kara P. Stapleton