Forbes.com: Lehman = Pan Am

Not to sound harsh, but Lehman Brothers reminds me of Pan Am Airlines. No one (well, beyond their employees) is going to miss them. There are plenty of others to take their place.

In the '70s and '80s, a deregulated airline industry grew beyond its means, was stuck with bad assets, prices dropped and consolidation became inevitable. Pan Am was an early innovator, flying seaplanes into previously unreachable Caribbean Islands. They eventually flew everywhere, competed with everyone, stretched their balance sheet so it was as inedible as the mystery meat they served on flights and then one day went ... Poof!

The true money-makers on Wall Street all find jobs elsewhere. The worker bees in the middle tier see disruption, but are eventually absorbed. The bottom tier goes to work at Foot Locker

Analogies only go so far, but Wall Street got caught in the same wringer. Deregulated since 1975, balance sheets grew and grew as money got thrown at the profitable business of trading stocks and bonds, investment banking and money management. In the cheap-money period of 2002 to 2007, Wall Street’s thirst for capital saw no limits.

Inevitably, too many players and a bit of technology in the form of electronic trading squeezed the profitability of Wall Streets bread-and-butter businesses.

Wall Street will always be in the compensation game. Half of revenues are set aside for employee salaries and bonuses. But at the end of the day, Wall Street is like every other business: It has to generate a return on capital. With profits fading in baseline businesses, firms discovered the trick of using their huge capital to borrow short term cheaply and lend long in the form of subprime mortgages.

Traditional banks can get away with this because they borrow short term from their depositors, who are usually loyal and lazy, happy to keep their money in the bank, under-earning, in exchange for perks like free checking and ubiquitous ATM machines.

Investment banks have no such luxury of stupid people to borrow from. Instead, they borrow from one another and from institutional investors: all short-term paper. When the subprime "easy money" loans turned toxic, the short-term facilities fled for safer ground. Hence the flushing sound you are hearing all over Wall Street.

So now Wall Street consolidates. Should you care? Not even for an instant. I spent 20+ years on Wall Street, competing against scores and scores of firms, always wondering what they all really did. E.F. Hutton. Shearson, Drexel. Heck, I even worked for PaineWebber in my early days (daze?) on the Street. All gone. And nobody misses them.

The true money-makers all find jobs elsewhere. The worker bees in the middle tier see disruption, but are eventually absorbed into the reconstructed Wall Street. The bottom tier goes to work at Foot Locker.

So no crocodile tears for Lehman or Bear Stearns or anyone else. It's just a name on the door. Wall Street will soon (hurry up, dammit!) rid themselves of the mad-cow-infested subprime loans and won't dabble in mortgages ever again or in five years, whichever comes first.

And finally, Wall Street will go back to basics, helping allocate capital to growth industries around the world and charging un-modest fees for services rendered, keeping half for themselves. And someone else will take Pan Am's ... I mean Lehman's ... slots.

Comments

[Chris]

Gosh, I wish McCain's advisors read this column and it's companion back in January, 2008.

[Kurt Hinz jr]

Couldn't agree more Andy!

Unfotunately, people will question the "free-market" even more. Wall Street definitely begs for more regulation & state. So be it.

BTW, Richard "Dick" Fuld -CEO of Lehman- some time ago threatened to break the legs of any partner(!) caught shorting Lehman stock...
How symptomatic, the boss of the oldest investment-firm spoke.
As if shorts or speculators in general were somehow magically be able to alter the company's, i.e. LEH's balance-sheet.
Well, Dick of course knows how the game is being played as an investment-banker, hence the thread, but obviously has no clue about economics, and he's probably not the only one.

So, now it's AIG, hours ago biggest insurer on the planet (hmmm maybe besides Berkshire Hathaway). Proud member of the mighty Dow-30 industrial avg.

And here one sees the difference(s), it's all about individuals: Golfcourse-CEOs -vs- WE Buffett & C Munger.

Ergo: back to the "free-market"-model: lets just hope the Warrens & Charlies prevail!! THEY know and focus and act much better, smarter and efficient in their businessfield as any leviathan ever could!

I wonder!
If pros in the US act so poorly, that is professional bankers screwing it up so royally, what the hell is going on in more remote thingies...
But this is part of the job.

Keep it up, Andy. Back to work, gems are out there.

[John Davidson]

You suggest, "Inevitably, too many players and a bit of technology in the form of electronic trading squeezed the profitability of Wall Streets bread-and-butter businesses."

I certainly agree that events squeezed the profits out of Wall Street's bread and butter business, but if some one is able to get a true read from the data I would be surprised if the culprit was found to be a lack of demand for basic investment banking services caused by several factors, of which the primary one is globalization. There is, I would argue, little need for capital in a country undergoing rapid deindustrialization via globalization.

[John Davidson]

should read "not be surprised"

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Lehman borrowed significant amounts to fund its investing in the years leading to its bankruptcy in 2008, a process known as leveraging or gearing. A significant portion of this investing was in housing-related assets, making it vulnerable to a downturn in that market.