Feds put their foot down

Our view: Lehman Brothers, Merrill Lynch won't be the last financial giants to find they have to look to sources other than the U.S. Treasury to stay afloat

September 16, 2008

Wall Street responded to the forced bankruptcy of a 158-year-old investment leader and the self-initiated sale of a household name in the brokerage business with predictable pessimism - the Dow plunged big-time yesterday. But it's not as though the fates of Lehman Brothers and Merrill Lynch came as a surprise. Rather, their predicaments reinforced the latest fallout of the ongoing U.S. financial crisis: More institutions are likely to falter, and they can't all expect the federal government to come to their rescue.

That neither the U.S. Treasury nor the Federal Reserve was willing to put up taxpayer dollars to support the purchase of troubled Lehman Brothers by some Wall Street firms should provide a reality check for other problem-plagued financial institutions - look for ways to dig yourselves out of the hole.

That's basically what happened with Merrill Lynch, the nearly century-old firm with 60,000 employees that took the bull as its corporate symbol. Brought to their knees by the housing market crash and heavy investments in risky subprime mortgages, Merrill Lynch executives negotiated to sell the firm to behemoth Bank of America over the weekend after realizing it was their best option to protect the business from further decline.

The sale enables Merrill Lynch, which has been forced to lay off 4,000 workers since last year because of its financial troubles, and which saw the value of its shares plummet, to keep operating. The deal gave Bank of America a bargain, even at $50 billion, and entre into the brokerage business to which it long had aspired.

After propping up the sale of investment firm Bear Stearns in March and assuming control of mortgage giants Freddie Mac and Fannie Mae, federal officials had committed U.S. taxpayers to providing billions to stave off a credit crisis and protect the housing market from tanking further. At some point, they were going to have to draw the line; the bailouts couldn't go on indefinitely.

This weekend, Treasury Secretary Henry M. Paulson Jr., New York Federal Reserve chief Timothy F. Geithner, Fed Chairman Ben S. Bernake and others made their stand and let Lehman Brothers fend for itself. Without the U.S. government backing the investment house, its attempts to sell off some of its assets fell apart. That federal officials were willing to take a calculated risk the markets could handle a Lehman Brothers failure should send a powerful message to other troubled Wall Street firms that the federal treasury isn't a bottomless pit.

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