On Sept. 14, 2008, Merrill Lynch, the nation's largest brokerage firm, announced that it would sell itself to Bank of America in a deal valued at approximately $50 billion. Following the collapse of Lehman Brothers, fear spread on Wall Street that Merrill Lynch, already weakened by $45 billion in mortgage-related losses, might also go under. In order to save itself from possible bankruptcy, Merrill Lynch almost had no choice but to sell itself to Bank of America. Merrill Lynch was founded in 1914 and has since become one of the pillars of Wall Street.
How has a bank that outlasted the Great Depression come to such instability? A lot of this can be answered just by looking at the housing market. Merrill Lynch really has two dimensions. On the one hand, it is a wealth management company with $1.8 trillion in assets. On the other hand, it is a fixed-income operation that is heavily invested in high-risk securities backed by subprime home mortgages.
One of the factors leading to Merrill's decline is that these securities have lost their value as the housing market plummeted. According to The New York Times, "in late October 2007, the company posted a write-down of $8.4 billion to recognize the decline in value of these securities." In an attempt to recover his company, John Thain, Merrill's CEO, sold $31 billion in securities hoping to leave the housing crisis behind. This last desperate attempt to save Merrill Lynch may have succeeded if the news of a bankrupt Lehman Brothers had not disheartened Mr. Thain. Left with no choice, Thain began talks with Bank of America.
What do all these events mean for the students at Queens College and what does the government plan to do about our country's economic crisis? QC students will have a more difficult time borrowing money from banks. This could stem from the bankruptcies that we have been seeing, which lead to job losses and cuts in consumer confidence. Lack of confidence in companies has been a definite part of the problem because no one wants to buy company-owned securities. In addition to this, a lack of consumer confidence has frozen the lending markets that form the basis for capital markets.
However, consumers should not lose hope just yet. According to the Wall Street Journal, "the recent collapse of energy and commodity prices will make it easier for consumers to fill up their gas tanks and heat their homes." This means QC students will hopefully have an easier time when their monthly electricity bill arrives.
As for the government, their agenda is to buy distressed mortgage investments at a discounted price. Hopefully, this will raise consumer confidence a little, but to completely recover from the recent sellouts will be a more difficult task.
According to the Wall Street Journal, "out of the five major independent banks that existed only a year ago, only two - Goldman Sachs Group Inc. and Morgan Stanley - remain standing." This worrying reality leaves the future of Wall Street unclear for investors and we seem to still be on a slippery slope. Hopefully, with the coming of 2009, the market will have hit the bottom so we can begin climbing back up again.
Based on a New York Times article written by Louise Story, a Wall Street Journal article written by Gregory Zuckerman and Karen Damato and a Financial Times article written by Francesco Guerrera.
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