Posts Tagged ‘Merrill Lynch’

Why the Demise of Lehman Brothers (& Merrill Lynch) Is a Big Blow to the Tech Industry

September 15, 2008

This Friday, as I sat in my office on the 43rd floor of 1221 6th ave., just around the corner from the fancy new headquarters of Lehman Brothers, I was hit by a combination of shock and sadness.

I know some observers have been suggesting for several months that Lehman Brothers was in big trouble, and that CEO Richard Fuld has always been one step behind the curve of the unraveling credit crisis. But it’s just mind-blowing that the bank appears headed for oblivion.

And then, the unbelievable news came Sunday night that Bank of America reached a deal to buy Merrill Lynch for about $50 billion–about two-thirds of its value of one year ago, and half its all-time peak value of early 2007.

Lehman and Merrill survived the Great Depression and several world wars. But they could not survive the credit crunch of 2008. This is a historic, tragic and disturbing day, as former Deputy Treasury Sec. Roger Altman said on CNBC tonight.

The fall of Lehman and Merrill is horrible news for many reasons. First, losing two of the nation’s largest investment banks overnight is gigantic and historic blow to the U.S. financial industry that will undoubtedly reverberate for months if not years–even if bankers are already saying on CNBC that this is “good for the market.” Credit will tighten further.

If Lehman can fall, and Merrill can be bought for a song, who else could be next when fear and panic rule day? Insurance giant AIG looks like it could the next domino to fall. Where does this leave the two surviving banks–Goldman Sachs and Morgan Stanley?

Second, it’s awful news for the nearly 100,000 people who work for these two giants. It’s the worst-case scenario for Lehman’s 25,000 employees, many of whom had a lot of their net worth tied up in the company stock. Who knows how many of Merrill’s 60,000 employees will survive a merger with Bank of America. Third, the fall of these two American icons is an enormous loss for New York City, and the Big Apple’s reputation, wealth and tax base.

And finally, it’s a big blow to the U.S. technology industry, when you think about it. Besides being one of the oldest investment banks, Lehman was one of the most innovative banks of the last 150 years. Under chairman Robert Lehman in the 1950s and 1960s, it played a critical role in bankrolling many businesses in new industries, including high technology companies.

In 1960, Lehman underwrote a stock offering for American Research & Development, the first venture capital firm to sell stock on the public market (and the subject of my book Creative Capital).

Then, in perhaps the most important story I tell in my book, I show how Lehman Brothers had the courage and foresight in 1966 to take public a little technology company, Digital Equipment Corporation. That IPO, I argue, showed for the first time that people could make a lot of money by investing in and nurturing the growth of a tech startup. It was the first home run of the venture capital industry and the innovation-led economy of the U.S.

Since the 1960s, Lehman helped hundreds of other tech companies raise money. And its success has inspired other banks to follow suit.

Now, with three of Wall Street’s biggest banks either bankrupt or subsumed by a larger entity, that means there are three fewer outlets that can help tech companies raise capital. That means innovation and new business are going to take a hit.

The capital markets crisis in the U.S. tech industry just got a lot worse. And we probably haven’t seen the end of this horror show, based on the velocity of this weekend’s historic events. Fasten your seatbelts, people.