We have noted in an earlier post that the Bear Stearns acquisition illustrates a phenomena set into motion in the 1990s with the repeal of Glass Steagall. With banks allowed to expand into the securities business, they will sooner or later dominate the area and the independent investment banking firms will all disappear. The result will be long term harm to the US capital markets. This is explored more comprehensively in "The Great Fall": The Consequences of Repealling Glass Steagall.
In that regard, there is an article in the New Yorker this week about Stan O'Neall at Merrill (Subprime Suspect), an interesting profile of an African-American CEO. Among the many nuggets in the article is the disclosure that when the subprime problems broke in a serious way at Merrill, O'Neal considered a merger with Wachovia. As the article describes:
- On Sunday evening, October 21st, Merrill's full board met over dinner with O'Neal and other senior executives. They discussed the revised earnings estimates for the third quarter. After a write-down of $8.4 billion, of which $7.9 billion was related to mortgage securities, the firm had a net loss of $2.3 billion, or two dollars and eighty-five cents a share. O'Neal described the options for plugging the gap in Merrill's balance sheet, including selling assets and issuing additional shares. Then he talked about his overture to Wachovia. He made it clear that he believed that merging with a big bank was the most attractive option.
In other words, had Stan O'Neal had his way, Merrill Lynch would today be a subsidiary of Wachovia. It's an obvious place to go when the investment banking firms find themselves in financial trouble. Banks will eventually acquire all of them. In the current crisis, Bear Stearns will disappear, becoming a subsidiary of JP Morgan Chase. Merrill Lynch almost suffered the same fate. It didn't happen this time, barely. Its only a question of time.