How are the mighty fallen

No disrespect to the fallen investment banks, but I can’t help saying to myself, “how are the mighty fallen”. What happened to the big guys? How could the geniuses get it wrong? These are companies that wouldn’t employ graduates with less than a second class upper. You had to go to certain schools, or business schools to qualify working for them. A few months ago Bear Sterns had to be bailed out. Over the weekend Merrill Lynch was acquired by Bank of America, while Lehman Brothers filed for Bankruptcy. The unimaginable happened to these guys. These companies were casualties of the subprime mess and the subsequent credit crunch, however their greatest undoing was their irresponsible risk taking. I call it irresponsible because it was excessive and was fed by greed. Nemesis caught up. Goldman Sachs, one of the big investments banks that are still standing had a more conservative policy on risk. They might not have looked like the “shining stars” when other investments banks were taking on the big risk and declaring big profits and bonuses, but the fact that they are still standing, and that there are no doubts about their future is evidence that their responsible risk management is paying off.

The same applies to retail investors. Pigs get slaughtered. It is the one that manage risk properly that stay around for a long time. Time might be a time that we all have to review our risk management practises so we can ensure we stay around for a long time. It’s not the person that makes a £1000 pounds overnight that is the winner, but the person that makes smaller and steadier profits, accompanied with good risk management.

The attached charts show the decline of Merrill Lynch’s share price from $95 to just over $17 and Lehman’s from around $85 to $3.65 before it applied for bankruptcy.





Three down, will there any more?

All the best