$4.2 trillion was the sum dollar value of all assets on the balance sheet of the five largest brokerage firms in their 2007 annual 10k report.
When measured against the idea that those five firms, Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns, are only five among hundreds of US financial firms, and among thousands of publicly traded US companies, the number appears conceivably small, relative to the aggregate.
However in context with the following statistics, the demise of the five “bulging bracket” firms in their old form, and the end of the independent investment banking model sheds more light on the weight of our current situation.
Total 2007 Assets for GS: $1.12 trillion (Source: GS 2007 10K)
Total 2007 Assets for MS: $1.05 trillion (Source: MS 2007 10K)
Total 2007 Assets for MER: $1.02 trillion [Source: MER 2007 10K]
Total 2007 Assets for LEHMQ.PK: $691 billion [Source: LEH 2007 10K]
Total 2007 Assets for BS: $395 billion [Source: BS 2007 10K]
Total Assets for the “Big Five” Investment Banks in 2007: $4.27 trillion
2008 National Debt as of September: $9.875 trillion (current dollars) [Source: Treasure Direct]
National Debt Ceiling with proposed $700 billion bailout: $11.3 trillion [Source: NYT]
2008 September proposed financial bailout: $700 billion
2007 US GDP: $13.8 trillion (current dollars) [Source: BEA]
Estimated average gross leverage ratios of major investment banks (conservative estimates): 20x – 30x
Underlying equity of five largest investment banks supporting $4.2 trillion in assets (average gross leverage ratio of 25 from prior): $170.8 billion
Simply put, these five firms have been supporting $4.2 trillion in assets equal to roughly half of the US national debt, one third of GDP, or seven times the proposed bailout figure of $700 billion with equity of only 1/25th that size, or approximately $170 billion. These figures do not include other failed institutions who have been or are going to be forced into either bankruptcy or acquisition. This is going to put pressure on more fire sales of other massively large asset bases.
There is no hiding from the fact that all financial firms, even the more modestly leveraged, are going to have to bring down their their leverage ratios and asset bases moving forward. And of course with the equity base of most major financial firms wiped out or seriously depleted the gross leverage ratios, if measured today, would just be goofy.
That said, contextualizing a future with ubiquitous commercial banking standards, and more conservative leverage regulations by the government, one must consider where the trillions of dollars will come from to support the old asset base of our failed financial industry. As an aside, does concentrating these assets into fewer and larger firms really make the most long-tern sense?
$700 billion is just the tip of the iceberg. With help from sovereign wealth funds, international investors, and piles of cash being built up by savvy institutional investors around the world, the “bailout” of Wall Street is going to stretch from Pennsylvania Avenue, to 211 Corniche in the UAE, the listed address for the Abu Dhabi Investment Authority. If throwing money at the problem was the only solution, the amount of money needed to support asset prices at any reasonable level is going to be staggering. This speaks volumes to the importance of moderating the current urgency with real thought as to what solutions must follow the $700 billion, which is more than like to fall short by a wide margin.
While we are coming out of a recent period of massive inflation in consumer prices over the last 12 months, the real concern ahead may in fact be the implosion of asset values, the destruction of wealth, and ultimately massive deflation. Home prices have already come off 50% or more in some parts of the country. Many financial assets today cannot get a “bid” (an offer to buy), which at least temporarily, renders them worthless.
In the long run this will all work itself out, and as our grandparents did, we will work through it. However as John Maynard Keynes said: “In the long run we are all dead.”
Lehman Brothers Holdings, Inc. (Public, OTC:LEHMQ)
Lehman Brothers, Accessed October 1, 2008
Bear Stearns, Accessed October 1, 2008
Summary Schedules of Federal Debt – Daily, Unaudited
U.S. Department of the Treasury, Bureau of the Public Debt, Accessed September 29, 2008
Administration Is Seeking $700 Billion for Wall Street
David M. Herszenhorn, New York Times, September 20, 2008