Should I-Banks Trade Publicly?

This year we have witnessed the fall of three major investment banks – Bear Stearns (BSC), Lehman Brothers (LEH) and Merrill Lynch (MER). These stalwarts of Wall Street had been in business for decades and even centuries. Each had weathered bear markets, economic recessions, bank runs and even depressions. However, in the current turbulent markets they seemed to fall like dominoes with seemingly no stability to hold them up whatsoever.

Lehman had been in business since 1850, while Merrill Lynch and Bear Stearns were two of the most respected names on Wall Street. Even the thought of these three giants vanishing seemed utterly ridiculous a mere 12 months ago. 

So how did we come to this? Could the fall of these powerful investment banks have anything to do with the fact that they opened themselves up to the public markets? Many market experts have opined that the demise of these companies was due more to manipulation by hedge funds than an actual deterioration in the companies themselves.

Bear Stearns had operated for 63 years before going public in 1986. Lehman Brothers had been doing business for 144 years before taking their company public in 1994. Had these companies remained private, would they still be in business today?

 It seems that the goal of every hot new business is to be able to take the company public some day and to stand on the New York Stock Exchange floor and watch in awe as the first day of trading begins. However, one of the lessons of 2008 should be for companies (young and old) to recognize the inherent risk of being publicly traded. A few poor decisions can open your stock up to incessant short selling by hedge funds which could fuel a panic as in the case of Bearn Stearns and Lehman. 

Disclosure: At the time of writing, the author did not have a financial position in any of the stocks mentioned in this article.

Comments

[myxoma:]

Ralph Nader predicted all this nonsense in the US but no one took him seriously:
www.thenation.com/blog...


More recently, Ralph issued a warning letter to congress for which he was mocked. Then, it turns out Ralph was right again.
votenader.org/blog/200.../


The Nader campaign has been trying to get Ralph put on the air in economic discussions as a consumer advocate and expert. His worth as an expert guest is shown by his correct predictions on the catastrophe we are dealing with. But STILL he is denied media coverage despite his proven wisdom.

The national media is not fulfilling its duty to the public and is in fact doing the public a disservice by blockading experts who can show some real insight to our problems.

Something is seriously wrong when a man with a history of consumer advocacy and a record of wisdom on financial issues is blocked from the public discourse.

2008 Sep 18 06:51 AM