The financial industry has been transformed to a degree that few thought
possible only a few weeks before. But this is all a sideshow to the real story
of change as it relates to the economy and deciding how Main Street will fare in
the months and years ahead.
Still, it's hard not to gawk at the spectacle that is Wall Street. First
observation: Wall Street as it existed just a few weeks ago is gone. The news
that Morgan Stanley and Goldman Sachs--the last two large, independent
investment banks standing--will transform their businesses into bank holding
companies, a decision that completes the decimation of the old investment
banking model. The boys had a good run. Unfortunately, they blew up the industry
and now all that's left is a bunch of humbled Citigroup wannabes.
That's not so bad, if only because Citigroup, sprawling and unwieldy as it
is, didn't self-destruct. Neither did J.P. Morgan or Bank of America. One
reason: those three, as bank holding companies, operate under a tighter, more
constricting regulatory framework, and so by law they were forced to operate
more conservatively compared to Bear Stearns and Lehmans of the world. No
problem: some of our favorite institutions are plain old banks and the world
will probably survive just fine now that they're ascended the throne.
But let's not get too giddy. Keep in mind that there are still a lot of
little Lehmans and Bear Stearns in the world, otherwise known as hedge funds.
Collectively, this gang runs a lot of money, much of it leveraged, and some of
it--perhaps most of it--is managed unintelligently. We don't really know, of
course, but given what's transpired in recent weeks we're inclined to
wonder.
Overall, there are still a lot of financial bodies buried in the rubble, and
quite a bit more that are ailing. It's unclear how much price-cutting will be
necessary in the various assets held by banks, hedge funds and other
institutions. Unknown or not, the unwinding rolls on. And there are still lots
of dicey securities sitting on balance sheets the world over. Meanwhile,
reassessing their value, and the resulting impact on companies and economies, is
still in its infancy.
It's tempting to think that now that Wall Street as we knew is effectively
gone we can all breath a sigh of relief. Indeed, the U.S. government, we read,
seems likely to buy up a fair chunk of the toxic securities that caused so much
pain. Assuming the bailout plan arrives, the government-sponsored buying will
help drain some of the poison from the system.
Even under the best-case scenario of a quick government action that's focused
on purchasing what no one else wants, there's plenty of heavy lifting to be done
on the economy generally.
