20 years of investment banking as an independent activity came to an end on Wall Street last night. Bear Stearns was the first to go in March, rescued by JPMorgan. Last week Lehman failed, and Merrill Lynch sold itself to Bank of America. Now the two remaining survivors, Morgan Stanley and Goldman Sachs, have thrown in the towel and successfully applied to become traditional deposit-taking banks.
A further stage in the brutal process of deleveraging is now underway in financial markets. According to the New York Times, Goldman operated with average leverage of $22:$1, and MS with $30:$1, more than double Bank of America at $11:$1. This led to massive bonuses in the good times, with Goldman’s CEO and 2 co-presidents each being paid more than $67m last year. But it meant they couldn’t survive a downturn.
The chemical industry will surely be affected as Wall Street’s risk appetite continues to decline. Traditional debt-to-equity ratios of c35% will now become the norm once more, as investors suddenly remember that high leverage means high risk, in whichever industry you operate. (Those who are interested in better understanding the maths behind the risks, may like to revisit the posting from August last year.)