Column The wall crumbles

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: Wall Street suffered its most torrid weekend in recent memory, witnessing the demise of two of its oldest and biggest investment banks—the stricken Lehman Brothers has finally filed for bankruptcy protection while Merrill Lynch has been bought over by Bank of America at half the price it was worth last year. As if this wasn’t enough of bad news, the insurance giant, AIG, is also looking for emergency funding of $40 billion or a possible suitor to stem a Lehman like collapse expected within a few days if neither of the rescue options works out.

The direct fallout is, of course, on employees and shareholders. Bank of America is unlikely to retain all of Merrill’s 60,000 employees while almost all of Lehman’s 25,000 employees can expect a lay-off once the process to liquidate the firm and its assets begins—America’s bankruptcy laws allow some breathing space for an orderly liquidation. A successful capitalist system must, of course, allow ‘bad eggs’ to exit the market.

So far, Lehman’s lucrative investment management arm is not part of the firm which has filed for bankruptcy. Still, an attempt by the firm to sell off this arm, and other profitable assets, in an attempt to reassure markets following record losses amounting to over $7 billion, including $3.9 billion in the last quarter, failed, as did attempts to arrange a sale of the whole firm to another bank—the Korean Development Bank, Barclays and Bank of America found the proposition too risky after extensive talks. The fact is that Lehman Brothers, like may other struggling Wall Street firms, has far too many ‘toxic’ mortgage-based securities in its portfolio which are basically of junk value after the collapse of the housing and mortgage market. The nationalisation of Fannie Mae and Freddie Mac just recently confirmed the extent of the subprime crisis and the impact it was going to have on financial companies, which were heavily invested in the mortgage market.