A week, they say, is a long time in politics. We now know that a week can be an eternity in the financial markets, especially when it starts with Lehman Brothers going bust and ends with Goldman Sachs and Morgan Stanley becoming licensed deposit takers so that they can snuggle closer to the Federal Reserve. Oh, and in between, you had the rescue of the largest US insurance company, AIG and the proposed Stalinization of US capitalism financed by the Land of the Free’s taxpayers.
Most people can remember what they were doing when John F Kennedy was shot or Princess Diana died. Will it be the same with that sombre September 13 weekend when investment banking died? Seasoned professionals were stunned at how quickly the world unravelled. It suddenly became apparent that those in charge were making policy on the hoof and bushfires of pandemonium snaked through the markets. Would it be too cruel to claim that Hank Paulson reminds me of the character called Baldrick in the Blackadder comedy series? Baldrick’s constant refrain is: "I have a cunning plan" as he struggles to improvize a solution, any solution, to the crisis at hand.
It was hard to keep a cool head especially as, for those at the top, sleep was considered an optional extra. On the Friday when Lehman was spiralling out of business, a mole heavily involved in the derivatives market recalls working from home clad only in her pyjamas, hair unwashed and ankles swollen as one conference call merged with another. Suddenly, a request arrived that she should make her way to the Fed and deal with the braying press pack. "There is no way I can physically be present at the Fed," mole emailed trenchantly.
On balance, we are lucky to have Hank Paulson as US Treasury secretary. A caterpillar crawls down my spine when I contemplate these events happening on the watch of the previous Treasury secretary, John Snow. I was feeling sorry for Hank – numerous weekends cloistered with boring Bernanke, propping up one pillar of the financial establishment after another, dealing with surly politicians and all on a public servant’s salary. But then a source reminded me that before taking up his post, Paulson had to sell all his Goldman Sachs stock (in mid-2006 when it was trading at around $150) and the sale was free of capital gains tax.
I intend to take total credit for getting one thing right in this typhoon of turmoil – the demise of investment banks. In my August column, discussing Merrill Lynch, I wrote: "But ultimately, can an independent investment bank survive in this new era of less leverage, greater regulation, high volatility and mediocre returns on equity?" I also stated: "I don’t rule out the possibility that Bank of America may buy Merrill." Excuse me while I gloat.
However, it still leaves a bad taste in the mouth that Lehman collapsed and Merrill survived. I noted that in the last round of capital-raising that Merrill undertook, in late July, its chief executive, John Thain, bought stock at $22.50. Therefore a $29 offer from Bank of America looked reasonable: a 29% return in less than two months is not to be sniffed at. Of course if you had held on to Merrill stock since its $97 peak last January, the Bank of America offer might look a bit measly.
Oh and don’t let’s forget that previous Merrill Lynch chief executive Stan O’Neal was fired last October apparently, in part, for trying to negotiate a merger with Wachovia when Merrill’s stock price was at around $66. At the time, Dan Tully, a retired chief executive of Merrill, was quoted by a reputable newspaper as stating that Merrill’s predicament was sickening. He said: "I’ve been in touch with many of our fellow employees and ex-employees and they’re sick, everyone is sick about it, as I am too. It’s awful." One year later, I wonder how Tully is feeling. The problem with being a drama queen is that you must make your big entrance at the right moment, not two acts too early. Of course, we now know that Wachovia had significant balance-sheet problems of its own. But then hindsight is always 20/20 vision.
Bank of America’s chairman and chief executive, Ken Lewis, is said to be elated by his capture of Merrill. Some sources question why he needed to pay $29 a share for the floundering investment bank when following Lehman’s demise and with short-sellers on the rampage, Merrill’s shares would probably have opened on Monday morning at $10. ‘Ken likes to do the right thing,’ a mole murmurs. I also hear, though, that during the halcyon bull market, Ken had contemplated buying Merrill for $90 a share. So maybe he thinks he’s got a bargain. Given the problems at Citi, which appears too big to manage, it is counterintuitive that the model of sprawling universal bank is the one to imitate. In the short term, this deal was a solution for Merrill shareholders. In the long term, it might not be a fabulous transaction for Bank of America shareholders, especially as Lewis has not yet fully digested the controversial Countrywide acquisition.
If indeed it is possible to look forward more than a week in these "I don’t believe it" days, what does the future for Merrill look like under the Bank of America logo? I imagine that the retail brokerage division will be left alone. Distribution and US brand recognition must be key attractions for Lewis. The benefits of traditional investment banking are more questionable. Lewis is on record as saying, last October, after significant third-quarter trading losses in Bank of America’s investment-banking unit (where net income fell 93% to $100 million): "I never say never, but I’ve had all the fun I can stand in investment banking at the moment." Bank of America does not have investment bankers of the calibre of Greg Fleming and Andrea Orcel (or if it does, I’ve never met any of them), so it makes sense to try to keep the investment banking team together. Ken will be helped here by the fact that in today’s horrible new world, capital is king, so Bank of America might be a sensible place to shelter in for a few years. In fact, never has the adage seemed more true: "Your bonus is your job."