It all began on Monday when one of the best known US investment bank Lehman Brothers filed for bankruptcy and Merrill Lynch was taken over by Bank of America to save itself. Global equity markets shook as the Mecca of capitalism finally decided that state intervention was necessary save the citadel of capitalism.
During its 158-year run, Lehman Brothers had survived the World Wars and the Great Depression of the 1920, but it couldn’t survive the turmoil in the financial world.
"I think it's just the whole history, one hundred and fifty eight years of efforts and hard work. That's the most saddening part for me right now," said Gulperi Furtun, Associate VP, Lehman Brothers.
“When Bear Stearns was bailed out, it drew a line under that level of firm, implying that anything that was larger than that firm was capable of getting federal assistance. Now if you generalise that, it is very clear that that is an unsustainable situation in the financial markets,” said Alan Greenspan, former Chairman, Federal Reserve.
Six months after the US government bailed out Bear Stearns, Lehman was desperate to get a similar treatment from the government. But with the crisis deepening, some thought it was time for the government to draw a line because Merrill Lynch was also seeing the writing on the wall.
Faced with a situation that was a choice between either facing bankruptcy or merging with a rival, Merrill chose the latter and was gobbled by Bank of America in a $44 billion deal. Bank of America will pay $29 a share for Merrill Lynch and expects the deal to be completed by the first quarter of the next calendar year.
“The expectation for the difficulties in the marketplace following the Lehman bankruptcy really led us to start to think about what types of transactions might make sense for us and although this will sound very short – actually the first conversations began Saturday morning,” said John Thain, CEO, Merrill Lynch.
“The fact that we could put this transaction together basically in forty-eight hours, I think is a great statement on the strengths of both of our teams but also the great strategic fit, which, from the instant we talked was very, very clear that this transaction made a lot of sense,” added Thain.
But that was not the end of the problem. The world's largest insurance company, AIG, was soon facing a liquidity problem and questions began to be raised about its ability to tide over the problem. At first, Fed refused to bail out. But by now, the damage had been done and, and in Singapore, people began to queue up outside the AIG office to withdraw their money.
When it became clear that the impact of AIG's failure would cause widespread damage to the economy, the government stepped in and injected liquidity into the company, giving it a fresh lease of life.
“I have directed our superintendent of insurance to provide the authorisation such that AIG can access $20 billion of its assets through it's subsidiaries for the purpose of posting these assets as collateral to provide liquid cash in order to run the day-to-day operations of the parent company,” said David Paterson, Governor, New York.
The repercussions of the upheavals in the US financial markets was being felt across the globe too. In a series of coordinated action, central banks across US, Europe and Asia pumped in billions of dollars in the financial system.
US government put in $85 billion into AIG and along with other central banks poured in $180 billion in all. Russian central bank added another $44 billion into the system even as HBOS in UK found a buyer in rival Lloyds Bank and got $22 billion.
Before the week ended there were a series of steps like banning short sales in US and UK that bought some calm in the markets, which finally showed signs of life. US Treasury Secretary followed up with a grand rescue plan to revive faith in financial services.
President Bush said that it was a time when there were extraordinary challenges being faced by the financial system that needed immediate attention. He made it clear that more action would follow if the government thought it was needed.
The week may have been one of the most challenging for the global equity markets through the week. With two legendary names disappearing from Wall Street, its face may have changed forever. Global markets will now look up to Wall Street even more closely for further direction for their own market.