the 2007 2009 financial crisis and the demise of large free standing investment bank 638320

The 2007–2009 Financial Crisis and the Demise of Large, Free Standing Investment Banks

Although the move toward bringing financial service activities into larger, complex banking organizations was inevitable after the demise of Glass Steagall, no one expected it to occur as rapidly as it did in 2008. Over a six month period from March to September of 2008, all five of the largest, free standing investment banks ceased to exist in their old form. When Bear Stearns, the fifth largest investment bank, revealed its large losses from investments in subprime mortgage securities, it had to be bailed out by the Fed in March 2008; the price it paid was a forced sale to J.P. Morgan for less than one tenth what it had been worth only a year or so before. The Bear Stearns bailout made it clear that the government safety net had been extended to investment banks. The trade off is that investment banks will be subject to more regulation, along the lines of commercial banks, in the future. Next to go was Lehman Brothers, the fourth largest investment bank, which declared bankruptcy on September 15. Only one day before, Merrill Lynch, the third largest investment bank, which also suffered large losses on its holdings of subprime securities, announced its sale to Bank of America for less than half of its year earlier price. Within a week Goldman Sachs and Morgan Stanley, the first and second largest investment banks, both of whom had smaller exposure to subprime securities, nevertheless saw the writing on the wall. They realized that they would soon become regulated on a similar basis and decided to become bank holding companies so they could access insured deposits, a more stable funding base. It was the end of an era. Large, free standing investment banking firms are now a thing of the past.