Tumultous Weekend - Merrill Lynch Sold to Bank of America; Lehman Close to Bankruptcy

There was more than the second week of NFL Football going on this weekend. While Ike battered the Texas coast and Houston, a different type of hurricane was hitting Wall Street, inflicting further damage and forever altering the landscape of the street. In the blink of an eye, two icons of Wall Street look like they may cease to exist as independent companies. In a surprise move, Bank of America looks set to purchase Merrill Lynch. After scrambling unsuccessfully to find a buyer, Lehman Brothers is preparing to file for bankruptcy.

In the span of a few short months, some of the largest financial institutions in the United States have gone under or been absorbed by other entities - Bear Stearns, Fannie and Freddie, Countrywide, Lehman, Merrill Lynch.

Unfortunately, none of this comes as a surprise. Much of Wall Street's wealth over the last ten years has been built on securities whose value flowed from the real estate market. A quasi ponzi-scheme was created where infusions of capital into the real estate market lifted home prices, attracting more dollars, lifting prices more, etc., etc. etc. Investment banks made billions packaging and reselling mortgage related debt and then betting on the markets themselves. When markets went up, the money made was astronomical. But when things went bad, the engines of wealth generation clicked into reverse and the wealth destruction was equally as obscene.

I've written before that what we are seeing is less the demise of individual financial institutions, but more the demise of a financial system. All of the pillars of the real-estate related financial system have been hit - the lenders (Countrywide), the loan guarantors and packagers (Fannie and Freddie), the bond insurers, the derivative gurus and investment bankers, etc.

It's clear that the old-fashioned way of raising capital via depositors and originating and holding loans is still the superior model. Over the last couple of years, it does appear that the tortoise has beat the hare.