Silver lining appears as financial dominos topple

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Published September 16, 2008

US FINANCIAL CRISIS

Silver lining appears as financial dominos topple

Lehman's liquidation could accelerate necessary Wall St reforms: economist


(NEW YORK) Lehman Brothers in bankruptcy, Merrill Lynch saved at the bell by a Bank of America rescue, the US Federal Reserve holding the breach with as much money as it can muster - what next as the US financial system faces meltdown?

Lehman Brothers was the fourth-biggest US investment bank, dating back to 1850 with a staff of some 27,000 people but that counted for nought after writedowns of US$13.8 billion on the US sub-prime or higher risk home loan crisis.

Under steadily mounting pressure, especially after rival Bear Stearns was bailed out earlier in the year, Lehman Brothers tried to find a saviour too but a quarterly loss of US$3.9 billion and planned radical asset sales made buyers reluctant to step in without US government backing.

Over the past 12 months, its share price tumbled away to nothing, leaving it valued at a mere US$2.49 billion.

The US government, having supported the Bear Stearns' rescue and then backed mortgage finance giants Fannie Mae and Freddie Mac - which combined back nearly 50 per cent or some US$5 trillion of US mortgages - refused to use any more public funds to help troubled banks.

That left Lehman Brothers with no escape route, opting for bankruptcy first thing on Monday while Merrill Lynch, another Wall Street giant, had to fall into the arms of Bank of America to avoid a similar fate.

These dramatic events, which sent shockwaves through global financial markets on Monday, leave the US banking industry radically transformed - business as usual can no longer be business as usual, analysts said.

The liquidation of Lehman Brothers 'could accelerate the necessary reforms on Wall Street,' said Peter Morici, economist at the University of Maryland.

Once enough dominos have fallen and financial market practices have been cleaned up, 'only then will the credit crisis be resolved and the economy will have proper basis for recovery,' Mr Morici said.

US Treasury Secretary Henry Paulson vowed on Monday to take steps to maintain stability in US and global financial markets following Lehman Brother's failure.

'I am committed to working with regulators and policymakers ... to take necessary and appropriate steps to maintain the stability and orderliness of our financial markets,' Mr Paulson said in a statement.

'I will engage with regulators and policymakers around the world to that end. 'I am confident in the resilience of our capital markets and in the commitment of US regulators and market participants to work together through this difficult period,' he said.

For some, the current turmoil is the 'creative destruction' at the heart of the capitalist system whereby failing companies have to go to the wall so as to clear the dead wood from the system and allow it to regenerate.

'Once the storm passes, the reconsolidation (of the financial sector) could be seen as the start of a recovery and the end of the moral hazard that has affected the industry,' analysts at CM-CIC Securities said in a note. In the short-term, however, 'the knock-on effects are unknown and could bring about the failure of (another) major action in the system,' they said. -- AFP