With the demise of Goldman Sux and Morgan Stanley Cleveland Steamer as Investment Banks (“IB”)- seemingly overnight- their model all but invalidated, it might be interesting to go back to a time when a seemingly innocuous decision was made that manifested their eventual ruin just yesterday.
Before the government stepped in last week, the bodies of financial institutions—Lehman Brothers, Merrill Lynch, and A.I.G., with Washington Mutual and even Morgan Stanley threatening to be next—were piling up so fast it seemed possible that Wall Street might simply cease to exist. The list of blunders that led to the carnage is by now familiar: firms succumbed to the frenzy of the housing bubble; relied on dubious mathematical models to manage risk; and leveraged bad bets with suicidal amounts of borrowed money. But the impact of these mistakes was made worse by a seemingly harmless decision that these companies made many years ago: the decision to go public. Doing so put the firms at the mercy of the stock market, and last week that mercy evaporated.