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Two years ago this week, the financial world watched in horror as Wall Street imploded, taking much of the global economy with it.
In the past 24 months, the markets have recovered big chunks of their losses. As it turns out, the government bailouts, guarantees, direct investments, and loans prevented a collapse and created the conditions for a market and economic recovery, however shaky.
The conventional wisdom may hold that the banks won while taxpayers and consumers lost. But the Panic of 2008 left behind a legacy: heightened investor skepticism, new regulations, and a shrunken (if not humbled) financial sector. And there were (and are) plenty of losers in the financial world. So far this year, 125 banks have failed, according to the Federal Deposit Insurance Corporation.
Today, the post-bust Wall Street looks more like the final episode of the long-in-the-tooth reality show Survivor, in which even the winner looks haggard.
Winners
 AP Photo/Lawrence Jackson |
| In this April 3, 2008 photo, then JP Morgan Chairman Jamie Dimon, left, and then Bear Stearns president Alan Schwartz testified in D.C. |
J.P. Morgan Chase and its CEO, Jamie Dimon, was the Last Man Standing, as the title of the fine book by Duff McDonald suggests. History teaches you should always bet on the one consolidating after the bust. That's the path followed by J.P. Morgan Chase (NYSE: JPM - News), which avoided the worst of Wall Street's reckless lending and built a strong balance sheet before the deluge.
In March 2008, with help from the Fed, Dimon scooped up Bear Stearns on the cheap; six months later, he nabbed a stricken Washington Mutual. With long-term rival Citi in trouble, J.P. Morgan emerged from the rubble as the biggest, baddest banker in Manhattan — and the country. While earnings have rebounded smartly — $4.8 billion in the second quarter — the stock trades essentially where it did two years ago.
SF-based Wells Fargo followed the J.P. Morgan Chase playbook, albeit on a smaller scale and with a bit of a lag time:
• Expand after the bust (the big October 2008 takeover of ailing Wachovia)
• Raise a big chunk of capital during tough times
• Raise more cash and pay back TARP funds quickly
• Take advantage of cheap money from depositors and the Fed to mint large profits
Wells Fargo shares (NYSE: WFC - News) are still below their September 2008 levels, near $35, but have more than tripled from the March 2009 lows just above $8.
Walking Wounded
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Goldman Sachs, the bank everybody loves to hate, seemed to be one of the winners in the fall of 2008. The government funneled cash into AIG so it could make Goldman whole on credit default swap deals, and Warren Buffett stepped in with a timely vote of confidence (and cash). But the company failed to grasp that humility — not its traditional arrogance — was the order of the day. At around $152, Goldman shares (NYSE: GS - News) are trading above the level of two years ago but are down significantly from the October 2009 highs above $190.
Big bonuses, cringe-inducing statements from CEO Lloyd Blankfein, and the $550 million settlement of an SEC suit accusing it of deceiving customers have tarnished the Goldman name while lower leverage + customer skittishness = lower profits. (Maybe it should be known henceforth as Silver-man, Sachs?)
 AP Photos/Bebeto Matthews |
| In this Sept. 15, 2008 photo, then Merrill Lynch Chairman and CEO John Thain, left, and Bank of America Chairman and CEO Ken Lewis shake hands following a news conference in New York. That day, Bank of America bought Merrill Lynch in a $50 billion deal. |
When Bank of America CEO Kenneth Lewis acquired investment bank Merrill Lynch, in September 2008, the southern banker thought he had got one over on New York's frequently insular financial community. The joke turned out to be on the out-of-towner, though. Merrill was sitting on billions of dollars in losses from funky securities, and Bank of America had to turn to Treasury for extra assistance in the form of an asset guarantee. Lewis wound up losing his job (he was replaced by Brian Moynihan). Still, Bank of America has emerged in decent shape; this isn't a bad time to have a huge retail bank lashed to a still-large investment bank.
Like many of its peers, Bank of America saw its shares fall over 90% from their pre-crisis levels. But the stock (NYSE: BAC - News) has recovered dramatically from the dark days of March 2009.
Warning sign: reports suggest that the markets' spring and summer swoon may lead to a culling of its herd of investment bankers.
Morgan Stanley, the only other big New York-based investment bank to survive the debacle, managed to avoid many of the negative headlines that stuck to its peers. It transformed into a commercial bank, reduced leverage, changed leadership, paid back TARP funds, and has seen its stock (NYSE: MS - News) rise to pre-crisis levels. Now it can focus on what it does best — worrying about how to match Goldman's results.
In Rehab
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During the early phase of the financial crisis, Citigroup occupied its own private island of incompetence. The bank's clueless leadership loaded up on on every type of poorly performing asset — subprime loans, CDOs, private equity loans, off-balance sheet conduits, you name it. While its smaller peers required temporary assistance from the government, Citi has needed intensive care, surgery, and extensive physical therapy.
Two years later, a shrunken Citi is almost walking under its own power. CEO Vikram Pandit has hived off unwanted assets into Citi Holdings, which is holding one of the great garage sales in modern history. And the Treasury Department, which converted $25 billion of assistance into common shares, at $3.25 a pop, is slooooowly selling them off. The good news: Citi's stock has nearly quadrupled from its March 2009 low (NYSE: C - News) The bad news: it would have to quadruple again to regain its pre-Sept. 15, 2008 level.
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AIG may be one of the only three-letter swear words in the English language. Thanks to its habit of selling massive quantities of credit insurance on all sorts of assets without adequate reserves, AIG came out of nowhere to emerge as the bailout king. The Treasury and the Federal Reserve pumped $180 billion into the company — more than $120 billion of which remains outstanding — and the company became the focus of much of America's anti-Wall Street populist rage.
But a funny thing happened on the way to oblivion: AIG's boring, underlying insurance businesses stabilized and its stock became a favorite of the momentum crowd in 2009. The shares (NYSE: AIG - News) have since leveled out. But as I noted this spring, the reflation of financial assets and a healthy dealmaking environment might allow taxpayers to recoup much of their "investment" in AIG.
Comatose — but Still Living Large!
The failure of Lehman Brothers helped set up the cataclysmic events of September 2008. The firm was carved up quickly — Japan's Nomura and the U.K.'s Barclays picked up some of the pieces — and the name brand swiftly sunk. And so Lehman instantly lost the ability to do what Wall Street firms do best — pay high salaries to financial services professionals. But its carcass has proven that it still has some skills in that regard. As Bloomberg reports, Lehman Brothers has paid out more than $900 million to professionals working on the firms' bankruptcy.
The Toxic Twins
We're left (sigh) with Fannie Mae and Freddie Mac — literally. For decades, the two mortgage giants provided immense benefits to Americans. Able to borrow money at low, quasi-government guaranteed rates, Fannie and Freddie passed along tens of billions of dollars in savings to homebuyers. Since the two firms were nationalized in the fall of 2008, Americans have essentially been giving all those gains back to the firms' creditors -- and then some. (The cost: $148 billion and climbing.)
Private companies no longer, Fannie and Freddie have emerged as key players in the government's (so-far fruitless) battle to shore up the housing and mortgage markets. To a large degree, the toxic twins are the mortgage market. Two years after the passage of the TARP, taxpayers continue to bail out the people who lent money to the firms that lent money to homebuyers.
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