Merrill Lynch, one of Wall Street?s (and global investing banking?s) biggest brands, is no more. As of January 1, 2009, it belongs to the Bank of America, which earlier bought the ailing investment bank late last year. Merrill Lynch, which got a symbolic ?clap-off? from its employees at the close of the NYSE on December 31, didn?t make it to its centenary?it ended seven years short?and its passing away marks the end of a long era of investing banking as we knew it. Remember, Merrill and even Lehman had survived the Great Depression of the 1930s but didn?t make it past this financial crisis. Merrill lost an estimated $19.2 billion between July 2007 and July 2008. Even a sale of stake to Singapore?s Temasek in 2007 to get a capital injection did not help the sinking bank. Merrill?s cup of woes was not dissimilar to other I-banks?they basically had huge unhedged portfolios of toxic mortgage assets in the form of collateralised debt obligations. Ultimately, the market lost faith in the solvency of Merrill, and the only way the situation could be salvaged was through a sale.
The highly leveraged, high risk-high return model of investment banks now stands dead and buried. The world is back to being dominated by more staid commercial banks which have the safety of deposits to back their investing divisions. In any case, commercial banks will be expected to take on less risk than I-banks did. And commercial banks are subject to much more regulation than investment banks ever were. Even Goldman Sachs, which reported losses for the first time in its history in the last quarter, is now a committed commercial bank. Expect some lifestyle changes in 2009 for the youthful formerly high-flying investment bankers now grounded (especially in terms of salaries and bonuses) with a rude shock. The other big change after the death of investment banks will be the return of old-fashioned merchant banks, which will act as advisors to various M&A deals. Given the slowdown, they may have to wait a while for business to pick up. This year will be a new era in banking and for (investment) bankers, after a two-decade run of high achievement, which finally ended last year.