Buldge-bracket Wall Street I-banks lose their 'I'

So finally, the last two I-banks left standing after the dust settled down on Wall Street have also bitten the dust. Not being able to garner enough funds from the equity market, and not having access to the cheap current and savings deposits that their more 'plain-Jane' commercial banking cousins have access to, Goldman Sachs and Morgan Stanley have also decided to become commercial banks. The turn of events brought about by the Glass Stegal Act in the 1930s has finally turned full circle.

As my last blog on the fall of Lehman Brothers has said, the basic problem was three-fold: poor lending practices by commercial banks, including NINJA loans (loans to people with no jobs, no income and no assets)---these were packaged off into murky colateralised pools by I-banks and securitized debt issued backed by these pools, often inadequately rated and tracked by the credit rating agencies; poor judgement shown by sophisticated financial intermediaries in investing in assets which had little or no value if house prices fell (as they started doing from the latter half of 2007) and there were foreclosures; and inadequate risk management i.e. over-leverage, in a bid to shore up profits, but not leaving enough capital if there were Mark to Market (MTM) losses (underestiating of VaR and Economic capital).

Of course, as soon as these annoncements were made, both thse banks saw some investor interest: the venerable Warren Buffet decided to buy a substantial equity stake in Goldman Sachs, a firm he had aparently once visited as a starry-eyed child. Morgan Stanley too got an offer for much-needed equity infusion from MUFJ Japan.

America's most respected stand-alone I-Bank was being bailed out by a largely individual investor; It's second greatest I-Bank was being kept afloat by a Japanese bank; and its third great I-Bank, perhaps the cockiest of 'em all--- Lehman Brothers, had gone belly up. Merrill had already sold out to Bank of America.

The Cookie Crumbles
I had been fascinated by the glamorous world of I-bankers - complex financial structuring, fat bonuses, credit spreads, derivatives trading and apparently sophisicated risk management. Now I see that for all the fancy talk, it was plain old greed, allowed to go reckless in the pursuit of quarterly targets. And like children hurt in a melee, the fat cats of Wall Street are now lamely standing by, expecting big brother Henry Paulson and Fed Chairman Unca' Ben to bail them out and tend to their injuries.