The New Nation - Internet Edition

Maswood Alam Khan

A young man while studying in Kellogg in USA or in Rotman in Canada---two famous schools of business management in North America---knits a cocoon of dreams to work in prestigious investment banks like J P Morgan Chase & Co. or Merrill Lynch.

But, with 158 year old Lehman Brothers, one of the world's biggest investment banks, filing for bankruptcy, Bank of America buying Merrill Lynch, another giant of investment banking and American International Group (AIG), the world's largest insurance company, panting to be shored up a student of commerce will now hesitate to knock at the door of a finance house for a job.

These three events centring three giants---Lehman Brothers, Merrill Lynch and AIG---are, without exaggeration, the biggest Wall Street headlines in a decade.

Bank of America, the second-largest U.S. bank, with Merrill in its possession would now turn out to be the top US bank and would likely put 24,000 of Merrill's 60,000 non-broker employees worldwide out of work. That combined with Lehman's approximately 26,000 workers out of job will send major shockwaves through the job markets. Global outplacement firm Challenger, Gray & Christmas said on Monday the U.S. financial sector has shed nearly 103,000 jobs this year, and could now surpass the record 153,105 job cuts announced in 2007.

Just the other day Hurricane Ike pounded Texas, leaving behind floods, power outage and large scale damages to lives, homes and properties. The hurricane, according to some naysayers, seems to portend that things are not going to be well in America and the rest of the world. An air of gloom and despondency seems to have been haunting the whole financial world.

Lehman Brothers' filing for bankruptcy is one of the worst banking collapses in history. Allan Greenspan, the former chairman of the US Federal Reserve, expressed his premonition that this is a once in a half century, probably once in a century type of event. He added another chill in his presentiment: "We will see other major firms fail." David Paterson, New York Governor predicted Wall Street might lay off 30,000 workers in a worst-case scenario with problems at big financial firms that began with subprime mortgages.

Lehman is the latest financial butterfly to flap its wings, and its sudden fall will have ripple effects throughout the entire world of finance. Lehman's bankruptcy filing is the latest symptom of how sick the financial institutions in America are and illustrates just how intertwined the global economy actually is.

Financial commentators are blaming Lehman Brothers CEO Richard Fuld's hubris with a big dose of bad luck responsible for the institution's fall from grace.

Until June, it had never even reported a quarterly loss as a public company. In 2007 the bank's net profit had risen 5 percent to a record $ 4.2 billion.

For years this bank had been doing roaring business in originating mortgages, repackaging them and selling them onto other investors. But as the US housing market went from boom to bust the bank was too heavy with toxic housing loans to unload.

The greatest blunder Fuld committed was when he missed in last August a chance to sell a 25 percent stake in the bank for $ 4 billion to $ 6 billion to Korean Development Bank.

What started as the admirable goal of helping people own their own homes ended up as housing bubble that encouraged financial institutions---big and small---to take on unprecedented amounts of risk---a fragile process that has now been felling towering and venerable financial institutions to the ground boding a bleak future for the whole world.

The year 2008 has witnessed several high-profile failures or near-failures in USA: Bear Stearns, Indy Mac, Freddie Mac, and now Lehman Brothers.

The Federal Deposit Insurance Corporation (FDIC)---an institution that provides deposit insurance guaranteeing safety of checking and savings deposits in member banks---increased its "problem bank" list by 30 percent last quarter. There are now 117 banks on that list, totalling US$ 78 billion in assets.

The U.S. Federal Reserve and major banks have already announced steps to mitigate market volatility and financial gurus are eagerly waiting to hear what the US Central bank, in other words the US Federal Reserve, announces on Tuesday. A cut in interest rate may be a measure the Fed may take to perk up confidence of the puzzled and confused stakeholders.

The world is face to face with a great turning point in the next few days as three major brokers of the world have now disappeared from the scene. There would be winners and losers and only those who are fittest and trustworthy will ultimately survive as the US government can't and won't bail every sick institution as it did with Bear Stearns.

If the Hurricane Ike's latest lash on American coast and Lehman Brothers' sad demise in the latest financial tsunami hitting the Wall Street augur badly that a recession is going to hit the world anytime soon it is time for all of us to be braced for cataclysmic events like the ones that once hit the world in 1930s.