Wall Street Stunned

Wall Street is not what it used to be, for good or ill. Culminating (at least for the moment) a months-long period of market volatility and uncertainty spawned by the credit/housing crisis and punctuated by a Federal government-engineered bailout of Bear Stearns at the end of March and a Federal takeover of Fannie Mae and Freddie Mac on September 7, on September 15 two marquee names in financial services ceased to exist. Following a busy weekend in New York in which various government and corporate enterprises worked to shore up multiple corporate linchpins in the American financial system, Bank of America announced on Monday, September 15 that it would acquire Merrill Lynch & Co. for $50 billion in stock, a deal that would create the largest brokerage firm in the world, with some 20,000 brokers (assuming they all have jobs once the transaction closes in the first quarter of 2009), and $2.5 trillion in client assets. The acquisition includes Merrill’s 50% stake in BlackRock.

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 Sept. 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 September 15 that retail customers of Lehman Brothers will be protected during the winding down, and that SEC staff will oversee the “orderly transfer of customer assets to one or more SIPC-insured brokerage firms.”

What Does It Mean for Clients?

Harold Evensky, chairman of the wealth management firm Evensky & Katz in Coral Gables, Florida, admitted that the turn of events was “unique in that we haven’t seen failures like this, but we’ve been through some other terrible experiences in the past,” particularly the 1973-74 market downturn and the savings and loan failures of the 1980s.

“To the extent there is a silver lining, the markets have been driven by uncertainty [as of late], so this is going to wash a lot of it out.” In the case of Lehman, the Fed and other large financial institutions had the resources to step in but they decided to pass, notes Evensky, which means they didn’t perceive its failure as something that would devastate the markets. Evensky believes that the turmoil in the market “still all comes down to subprime and the credit [crisis] and to leverage.” He says there is still “a huge amount of leverage in the credit markets and this is an unwinding.”

As for the danger to clients, “in the short term it’s not a risk for investors,” but “I think we’re going to continue to see some volatility.”