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The first bear out of the top 5 investment banks in March of 2008 was Bear Stern. Founded in 1923, the fall of this Wall Street icon shook the world of high finance. By the end of May, the end of Bear Stern was complete. JPMorgan Chase bought Bear Stearns at a price of $10 per share, as opposed to its 52-week high of $133.20 per share. Then, September came. Wall Street and the world watched as, within days, the remaining investment banks on the top 5 list collapsed and the investment banking system was declared bankrupt.
investment bank basics
The largest investment banks are major players in the field of high finance, helping large business and government raise funds through such means as dealing in securities in the equity and bond markets, as well as providing professional advice on more complex aspects. of finance. These include things like acquisitions and mergers. Investment banks also handle the trading of a variety of financial investment vehicles, including derivatives and commodities.
This type of bank also has involvement in mutual funds, hedge funds, and pension funds, which is one of the main ways the world of high finance is perceived by the average consumer. The dramatic collapse of the remaining top investment banks affected retirement planning and investments not only in the United States, but throughout the world.
high finance amortization that brought them down
In an article titled “Too Clever by Half” published by Forbes.com on September 22, 2008, Chemical Bank President, Professor of Economics at Princeton University, and author Burton G. Malkiel provides an excellent and easy-to-understand breakdown of what exactly happened. While the catalyst for the current crisis was the mortgage and lending meltdown and the bursting of the housing bubble, its roots trace back to the breaking of the bond between lenders and borrowers.
What he is referring to is a change from the banking era in which a loan or mortgage was created by a bank or lender and held by that bank or lender. Naturally, since they hinged on the loan and its associated risk, banks and other lenders were quite careful about the quality of their loans and carefully measured the likelihood of repayment or default by the borrower, which was understandable. . Banks and lenders moved away from what Malkiel calls the “generate and distribute” model.
Instead of holding mortgages and loans, “mortgage originators (including non-bank institutions) will only hold loans until they can be packaged into a set of complex mortgage-backed securities, divided into separate tranches.” Or the lien may have different priorities. Receive payment from the underlying mortgage,” with the same model being applied to other types of debt, such as credit card debt and car loans.
As these debt-backed assets were sold and traded in the investment world, they became increasingly leveraged, with debt to equity ratios often reaching 30 to 1. This wheeling and dealing often took place in a shadowy and unregulated system that came to be known as the shadow banking system. As the amount of leverage increased, so did the risk.
With all the money being made in the shadow banking system, lenders became less selective about who they loaned to, as they were no longer taking the loan or the risk, but slicing and dicing them, re-packaging them were doing and selling them. a benefit. Crazy words became popular, no money, no documents required, and so on. Extreme overseas loans became popular and lenders trolled the depths of the sub-prime market to take out yet more loans.
Eventually, the system nearly ground to a halt as housing prices declined and loan defaults and foreclosures increased, with lenders making short-term loans to other lenders fearful of lending to such increasingly leveraged and illiquid entities. Decreased confidence can be seen in falling share prices as the last of the top investment banks plunged into unsustainable debt and investor fear.
September saw Lehman Brothers fail, Merrill Lynch opt out of acquisitions when it collapsed, and Goldman Sachs and Morgan Stanley revert to bank holding companies status, with possible buyouts on the horizon. Some of these investment banks are nearly a century old, and others for much longer, such as the 158-year-old Lehman Brothers. A very shameful end for these historical giants of finance, destroyed by a system of high finance and shady dealings, a system that, if torn apart, could drag down the entire world economy as well.
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