Those that went down

“Changes that usually take place over years are happening in
weeks and days,” said Craig Wright, chief economist at the Royal
Bank of Canada.

In the spring of 2008, the news of the near collapse and
forced takeover of Bear Stearns took me totally by surprise.  I
read the article relating to its demise twice; I wanted to
properly understand how such an institution could fail.  Little
did I know that this was the beginning of a serious crisis.  By
the time it was over (assuming it is), I was reminded of the
biblical expression:  “How have the mighty fallen!”

By September 2008, two financial giants found themselves on
their deathbeds.  Lehman Brothers, founded 158 years ago, filed
for Chapter 11 bankruptcy protection after failing to find a
buyer.  Merrill Lynch, a storied institution for the last 94
years, sold itself to Bank of America for $50 billion in a rush
deal hashed out on a Sunday.

A week before, the U.S. Treasury placed mortgage companies
Fannie May and Freddie Mac into conservatorship (they guaranteed
their liabilities while all but erasing their equity value).

American International Group (AIC), once the world’s largest
insurer, is struggling financially and is attempting to raise
cash.

The survivors:  Goldman Sachs and Morgan Stanley.  They are
now deposit-taking and lending institutions (i.e. they are no
longer investment banks).  With the extinction of the dealmaking
banks, an adventurous era has come to an end.

Those that are struggling

The largest and third-largest U.S. banks by assets,
Citigroup and Bank of America, have been badly affected by the
credit crisis.  They have now taken $45 billion from the
taxpayer-funded $700 billion Troubled Assets Relief Program.

British lender Barclays PLC has seen the value of its shares
sliding on concern it might not have enough capital to cover
writedowns.  There has been some recovery in the share price
after the bank announced that pretax profit would exceed
expectations.

Ireland nationalized Anglo Irish Bank.

Government intervention

After years of parenting, there comes a time when our
children are grown up.  Our responsibilities towards them,
however, never really ends.  If they are in trouble, we, out of
love, do our best to help out.

The government is sometimes forced to play the same role.
It is not for nothing that the expression “The Nanny State” has
been coined.  There are two differences between parents and
government:  First, the government doesn’t do it out of love!
They only intervene when it becomes absolutely necessary.
Second, unlike parents, they are sure to be called upon to clean
numerous messes, big and small.

To say that Congress needed to have its arm twisted to
provide a bailout is to understate the case.  A bailout of $700
billion was requested; not surprisingly, Congress balked.  It was
first voted down.  However, when representatives and senators
were apprised of the consequences, they very reluctantly
relented.  There was a carrot for the American taxpayers who were
advancing huge amounts to an ailing banking system; they were
investing in these banks and could make money down the road.
People in the know have great doubts that this venture will one
day turn into a profitable deal.

When the executives of the three Detroit automakers came to
Washington for a bailout in their private jets, they were turned
down by Congress.  The Bush administration advanced them funds
(to avoid another catastrophe) out of the original $700 billion.

President Obama is talking of a deficit exceeding $1
trillion.  An amount ordinary mortals cannot grasp.  How much is
the National Debt of the U.S.?  How much will it be after this
deficit?  I could find out if I wanted, but I prefer to remain
ignorant!

Canada has not been as badly affected since its banks are
well-regulated.  Nevertheless, the credit crunch has not passed
them by.  The banks are reluctant to lend money.  The government
has advanced them money to allow them to loosen their purse
strings.  The final amount to address this crisis is difficult to pin down; it’s continually shifting.

Sources

Ottawa Citizen, Business & Technology section:

1) September 16, 2008
Storied firms victims of “tectonic shift”
By Christine Harper

2) September 16, 2008
Wall’s Street’s turning point
By Jacqueline Thorpe

3) September 23, 2008
The gilded age of Wall Street comes to a dead end
by Jay Bryan

4) September 23, 2008
Concerns mount over U.S. bailout plan
By Mark Egan

5) January 17, 2009
Bank of America, Citigroup post losses in billions
by Jonathan Stempel and Dan Wilchins

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