And then there weren’t any more – high finance finagling brings down the top 5 investment banks

The first of the top five investment banks to fall was Bear Sterns in March 2008. The collapse of this Wall Street icon, founded in 1923, rocked the world of high finance. By the end of May, the end of Bear Sterns was complete. JP Morgan Chase bought Bear Stearns at $10 per share, a stark contrast to its 52-week high of $133.20 per share. Then September came. Wall Street and the world watched as, in just a few days, the remaining investment banks on the top five list fell and the investment banking system was declared broken.

Investment Banking Basics

The largest investment banks are major players in high finance, helping large corporations and governments to raise money, for example by trading securities in both the stock and bond markets and offering professional advice on more complex aspects of high finance. These include, for example, acquisitions and mergers. Investment banks also undertake trading in a variety of financial investment vehicles, including derivatives and commodities.

This type of bank also has interests in mutual funds, hedge funds, and pension funds, which is one of the main ways the average consumer feels about what’s going on in the world of high finance. The dramatic decline of the top remaining investment banks impacted pension plans and investing not just in the United States but around the world.

The high finance finage that brought her down

In an article titled “Too Clever By Half,” published by Forbes.com on September 22, 2008, Princeton University Chemical Bank economics professor and writer Burton G. Malkiel provides an excellent and easy-to-understand breakdown of, what exactly happens. While the collapse of mortgage and lending and the bursting of the housing bubble were the catalyst for the current crisis, the roots lie in what Malkiel calls the breaking of the bond between lenders and borrowers.

What he is referring to is moving away from the banking age, in which a loan or mortgage was made by a bank or lender and held by that bank or lender. Of course, by meeting the debt and the risk involved, banks and other lenders were quite careful about the quality of their loans, carefully weighing the likelihood of repayment or default by the borrower against reasonable standards. Banks and lenders moved away from this model to what Malkiel calls an “originate and distribute” model.

Instead of holding mortgages and loans, “mortgage lenders (including non-banks) would only hold loans until they could be packaged into a series of complex mortgage-backed securities that could be broken down into different segments, or tranches, with different priorities in the legal payments from the underlying.” mortgages,” with the same model being applied to other types of lending, such as credit card debt and auto loans.

As these debt-backed assets were sold and traded in the investment world, they became increasingly leveraged, with debt-to-equity ratios often reaching as high as 30-to-1. This spinning and trading often took place in a shady and unregulated system known as shadow banking. As leverage increased, so did risk.

With all the money that could be made in the shadow banking system, lenders became less choosy about who to lend to, as they no longer held the credit or risk, but rather chopped it up, repackaged it, and sold it for a profit. Crazy terms became popular, no money up front, no documents required and the like. Exorbitant exotic loans became popular and lenders dug the depths of the subprime market to lend even more.

Eventually, as house prices fell and loan defaults and foreclosures increased, the system almost ground to a halt, with lenders providing short-term loans to other lenders afraid to lend to such increasingly leveraged and illiquid companies. The slump in confidence was evident in falling stock prices as the last of the top investment banks drowned in shaky debt and investor anxiety.

In September, Lehman Brothers failed, Merrill Lynch chose takeover rather than collapse, and Goldman Sacs and Morgan Stanley retired to bank holding company status with potential takeovers looming. Some of these investment banks are almost a century old, others longer, such as 158-year-old Lehman Brothers. A rather inglorious end for these historical financial giants, destroyed by a system of high finance and shady machinations, a system which, if it falls apart, could even end up wreaking havoc on the entire world economy.