Wall Street Reshuffle Continues

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Continuing with the extraordinary restructuring taking place on Wall Street, such as has not been seen since the Great Depression, the Federal Reserve confirmed on Sunday 21 September that it has approved the request received from the country’s remaining two major investment banks, Morgan Stanley and Goldman Sachs, to change their status to that of “bank holding companies”. Moreover, Barclays PLC has been given the go-ahead by a bankruptcy judge to acquire Lehman Brothers’ investment banking and trading business.

The change in status for Goldman Sachs and Morgan Stanley will allow them to operate as commercial banks, including the taking of deposits, thereby augmenting their resources. Despite the fact that both these financial institutions have remained profitable during 2008, their shares came under pressure as investors reacted to the bankruptcy filing of Lehman Brothers and the sale of Merrill Lynch to Bank of America. Investors will no doubt be relieved that this step has been taken, as the general consensus has been that neither Goldman Sachs nor Morgan Stanley would be able to survive in their current form, and speculation has been rife that they would both be bought out by commercial banks. To assist both Goldman Sachs and Morgan Stanley through their transition period, the Federal Reserve Bank of New York will provide funding in the form of short-term loans against agreed upon collateral.

It seems that some employees at Lehman Brothers may be thrown a life-line, as Barclays steps in to buy part of the Lehman Brothers business, which reportedly employs around 9,000 people in the United States. It is believed that the primary reason for Barclays buying Lehman is to strengthen its presence in North America and, therefore, the large-scale laying-off of staff is unlikely. Barclays will buy $47.4 billion in securities, while taking on $45.5 billion in liabilities. The deal includes Lehman’s Midtown Manhattan office tower at a price of $960 million. Barclays will also being taking over Lehman Brothers Canada as well as the two Lehman Brothers entities based in Uruguay and Argentina.

With the Bush administration’s proposal of a $700 billion bailout plan, which includes buying mortgage-related debt from financial institutions, parties involved in the bankruptcy filing, and subsequent sale of assets to Barclays, may be left wondering if things would have been a whole lot different for Lehman Brothers if they had held on for just another week.

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