The banking industry in the United States is undergoing a period of the most drastic change, as the deteriorating subprime crisis has turned into the "financial hurricane of the century" that is wreaking havoc on the Wall Street.
The third largest investment bank in U.S., Merrill Lynch, reached a deal on Monday to sell itself to the Bank of America (BOA); the Wall Street's fourth largest investment bank, the 158-year-old Lehman Brothers Holding Inc. (LEH) filed for bankruptcy on Sunday; the US government has agreed to provide an emergency loan of 85 billion US dollars to rescue the huge insurer American International Group (AIG); and Morgan Stanley, the second-biggest U.S. securities firm by market value, also held initial merger talks with Citigroup on Wednesday. In addition, JP Morgan Chase purchased and took over Wall Street's fifth largest investment bank Bear Stearns half a year ago.
To date, the US subprime crisis of 2007 has brought down three of the Wall Street's top five investment banks. And Morgan Stanley and Goldman Sachs, the last two remaining independent broker dealers on the Wall Street, saw their shares slide further on Thursday amid growing pressure to find merger, and plummeted to multi-year low.
World stock markets, already reeling from concern over an expanding global financial crisis, have plummeted and slid for days, and financial shares led the fall, as people have widely expected. Public opinions hold that investors are left with a very uneasy feeling about the impact that could derive from the bankruptcy of the Lehman Brothers International.
Nevertheless, the U.S. government has been tough and very hard on the Lehman Brothers since it has its own careful considerations: First of all, every move the U.S. government has taken since early this year reminds people of the gravity of the banking issue that could lead quickly to the resurgence of panic sentiments about it.
Besides, the dilemma the Lehman Brothers is facing has not come as a surprise as the impasse Bear Stearns had been let in, and it is also not as vital and important as the crisis facing leading mortgage lenders Freddie Mac and Fannie Mae because they are "too big to let die". So, the U.S. government threw down 200 billion dollars to rescue the two leading mortgage lenders. In case of the Lehman Brothers, it has been in a predicament for some time, and is still possible for its business partners to have time to work out measures to help dissolve the risk it is facing.
Last but not the least, as the head of the firefighting team, the U.S. government has limited financial capacity to cope with banking issues, because of worries over ethical risks and depleted treasury reserves.
At a time when some of the largest US financial institutions are faced with persistent uncertainty, more could go bankrupt in the near future, former FED Chairman Alan Greenspan said, adding that the U.S. stands a less than 50 percent chance of avoiding an economic recession.
"Those best efforts are not achieving the fair and just goal," Greenspan noted, as the rescue action has to draw on the already depleted bank saving deposits, and this would eventually impair economic growth and lead to economic stagnation.
Hence, the U.S. government's non-interference policy can be said to bet that the bankruptcy of Lehman Brothers will not produce a catastrophic outcome. US financial supervisory institutions or the Wall Street, however, are concerned about the possibility for a chain reaction from the bankruptcy of Lehman Brothers. Owing to such concerns, the US Fed Committee has announced a package of measures to extend a variety of emergency loans while keeping itself off rescue efforts.
Meanwhile, thanks to an intervention by the U.S. government, 10 cross-national banks and securities companies on the Wall Street have formed a new, stability fund of 70 billion dollars for the financial markets as well as providing a safety net for financial institutions threatened by bankruptcy and ensuring market liquidity.
As a move taken in mutual coordination with the U.S. government, the European Central Bank (ECB) and the UK's central bank launched a market rescue plan worth billion of euros. The ECB injected 30 billion euros (or 43 billion US dollars) into leading European banks through one-day refinancing operations, whereas the Bank of England provided short-term loans worth about 9 billion dollars to several banks valid for three days.
According to a statement issued by the US Fed Committee on September 18, the Fed increased the amount of dollars available under the agreement reached with the ECB and the central banks of Japan, Britain, Switzerland and Canada by 180 billion dollars to 247 billion dollars to ease the market liquidity shortage. Leading global banking institutions have join hands for emergency measures to set off the further spread of a domino effect of the U.S. banking crisis throughout financial markets worldwide that could have a negative impact on the global banking system, acknowledged financial analysts.
If the outcome of the Lehman Brothers' bankruptcy still evolves a lot of uncertainties, the BOA's purchase of Merrill Lynch, nevertheless, has so far widely been regarded as glad tidings for the financial market, as people hope that the purchase will hopefully play a role of consoling investors. At the same time, analysts also noted that the purchase of Merrill Lynch imply that there are also good opportunities of investment for those buyers with solid, stroung financial strength at the time when the subprime crisis is inflicting huge, grievous losses to so many financial institutions worldwide.
By People's Daily Online, and its author is PD resident reporter in U.S. Ma Xiaoning
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