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Merrill’s no longer quite so bullish about America

September 15th, 2008

Merrill Lynch; image courtesy of Times Online

It has been eclipsed by news of the Lehman Brothers collapse but the sale of Merrill Lynch to the Bank of America for the knockdown price of $50bn is no less extraordinary.

The transaction was born out of Merrill CEO John Thain’s realisation that he could not rely on taxpayer handouts to sustain his now discredited institution. The deal runs counter to the spirit of the now repealed Glass-Steagal Act, and therefore does not suggest we’re going to see any radical reinvention of the investment banking model – riddled as it is with scope for conflicts of interest – any time soon.

The irresponsibility of financial institutions, which has played a huge part in getting us into the current mess, was possible thanks to the failure of successive US governments to replace Glass-Steagall (which was enacted in 1933 in the wake of the first Wall Street Crash and barred clearing banks and investment banks from having common ownership) with any alternative regulatory structures.

Instead, successive US administrations seemed happy to allow a crazy financial free-for-all which ended in the sub-prime mess and is set to poison the global economic and financial system for years to come.

Nowadays, the consensus is that investment banks – also referred to as “broker-dealers” – have no future unless they have a big deposit-taking franchise attached. Of the five big independent investment banks that existed six months ago, only two (Goldman Sachs and Morgan Stanley) today survive. This in and of itself speaks volumes about the urgent need the creation of a new regulatory framework.

Short URL: https://www.ianfraser.org/?p=624

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