During the financial crisis it really baffled me why some firms were bailed out and others were allowed to thrive. Bear Stearns – sold for pocket change to JP Morgan, Lehman – complete failure (best assets sold to Barclays for pocket change), Merrill Lynch – B of A pays hefty, above market price, Countrywide – B of A pays stupid price for future litigation liabilities, Washington Mutal – assets sold to JP Morgan at firesale price (ex-liabilities).
So in summary, JP Morgan picked up solid businesses for pocket change and government backing while B of A bought messy businesses, both assets and liabilities, at seemingly above market prices. I can only assume that JP Morgan got the sweetheart deals because of connections and political clout.
The only two big US investment banks that were allowed to survive were Goldman Sachs and Morgan Stanley. With the new information released, it turns out that Morgan Stanley borrowed massive amounts of money from the federal reserve that peaked at $107 billion as of September 2008. This is a sobering number that was 750% of the market capitalization of Morgan Stanley at the time of the loan.
I am not sure how the winners were picked in the 08/09 crisis, but Felix Simon’s point is that our federal reserve was committed towards stopping a complete financial meltdown, even if it required lending 7.5x the market cap of a company. This might suggest that similar measures would be required of Europe to take certain countries off the firing line.
Lender of Last Resort
