The fact that companies which are staying afloat and have announced their arrangements for survival are there one day and gone the next is confounding. Lehman Brothers is a firm operating from the year 1850. The firm survived various traumas related to economic conditions including the Great Depression before it suddenly announced bankruptcy now after just announcing it will survive yet another crisis with the liquidity it apparently has. The same weekend saw another confusing event. Bank of America bought over Merill Lynch which had just shored up its balance sheet by arranging $15 billion.
Last week saw none other than the government bailing out Freddie Mac and Fannie Mae. This week it is the turn of Washington Mutual and American International Group. With only two investment banks operating independently left namely Morgan Stanley and Goldman Sachs, the developments are absolutely confusing.
Looking deep into the derivatives, which is what it is all about, our initial shock actually leads to the all familiar denial syndrome. Along the same lines as the home loan borrowers who borrowed with confidence on the assumption that home prices can only go up, Wall street firms went on to bet billions of dollars on subprime mortgage.
Home owners dropped prices in this time of depression though not according to the realistic situation even as they are going through the denial phase. Wall Street firms too are stuck with worthless securities they thought to be triple A rated and backed by mortgage which is in fact finishing them off.