a consolidation which most people in the business thought needed to happen to get out of the malaise that we are in,” says Dave Jones, president and CEO of Castle Oaks Securities (No. 9 on the B.E. 100s Investment Banking list with $66 Billion in Co-Managed Issues.) He called the forced consolidation a good thing. “With three players out of the market place (Lehman, Merrill Lynch and Bear Stearns) that means increased business for us. Their models might be different but we’re talking to the same client.”
The deal comes as many banks have had difficulties amid the sub-prime credit meltdown. Just last week the Treasury Department took control of mortgage giants Freddie Mac and Fannie Mae in an attempt to shore up the nation’s weakened housing market.
Who Is to Blame?
Benn Steil, a senior fellow and director of international economics at the Council on Foreign Relations, suggests that many of the problems banks have experienced are a result of overleveraging due to a lack of over-the-counter derivative regulation.
“Lehman Brothers’ central position in the OTC credit derivatives market emphasizes the critical importance of improving risk management in large OTC markets,” he said. He suggests that a well-capitalized central party, called a Clearinghouse, would protect markets and also renew the emergence of derivatives on exchanges.
However, not all economists agree with that point of view.
“The idea that the lack of regulation is to blame for what’s gone wrong is suspect,” said Sebastian Mallaby, director of the Maurice R. Greenberg Center for Geoeconomics and senior fellow for international economics at CFR. “On the one hand Fannie and Freddie were highly regulated and they still needed a bailout. Regulated banks such as Citigroup lost huge amounts of money. Meanwhile, rather lightly regulated hedge funds have had some trouble but less than the more regulated parts of the financial system.”
Last October, Lehman brothers entered into a groundbreaking corporate-academic partnership with Spelman College to establish and develop the Lehman Brothers Center for Global Finance and Economic Development. Lehman Brothers committed $10 million which would go towards the development of an interdisciplinary curriculum and courses, the creation of a new scholarship program, and the recruitment of new faculty. Neither Spelman College or Lehman Brothers will comment as to whether this partnership will continue or if the money still needs to be distributed.
Adding to the uncertainty in the markets, American International Group Inc., the world’s largest insurance provider, received special permission to transfer some assets to access about $20 billion in cash for short-term liquidity, a move that was approved by the New York Insurance Department. Additionally, Gov. David Paterson sent Insurance Superintendent Eric Dinallo to work with the Federal Reserve on a plan to help AIG.
“Wall Street’s continuing problems should serve as a stark reminder that this recession is far from over. New York State has taken the first step towards helping to stabilize AIG, which is otherwise a very healthy company,” said Paterson. “On a state level, we were able to reach a market-based solution that will