The Day Wall Street Stood Still

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It seemed like a normal enough Sunday in New York, if way too muggy for September. There was the Book Festival in downtown Brooklyn, the Feast of San Gennaro in Little Italy, International Pickle Day on the Lower East Side, the Ice Cream Run in the Village.

And way downtown at the Federal Reserve Bank of New York, a few blocks behind those buildings on the right side of the photo above (which I took today while walking across the Brooklyn Bridge), they were celebrating the Day that Wall Street Stood Still. Or Black Sunday. Or whatever the heck this will come to be called.

We’ll learn much more about the exact chain of events over the coming days and weeks and months, but the basics go something like this: New York Fed boss Tim Geithner (and his pals from Washington) tried to figure out some way to avert the failure of Lehman Brothers without offering any kind of federal guarantee. But nobody wanted to buy Lehman without help from Uncle Sam, so it looks like Lehman will go under. Which meant Merrill Lynch would take over Lehman’s spot as Most Obviously Troubled Investment Bank. So Merrill sold out to Bank of America at $29 a share ($44 billion total). Which is an awful lot less than the $97 a share Merrill was selling for a year-and-a-half ago, but also a lot more than nothing.

So on Monday we’ll get to see what the failure of an investment bank with $600 billion in assets looks like. And more important, we’ll get to see if the obviously deeply flawed American financial system will be able to retain the confidence of the foreign lenders and investors who keep it going.

One crucial thing to remember in all of this is that none of the experts on Wall Street have any real idea of what they’re dealing with. What has worked for the past quarter century or so has stopped working. And nobody knows what American financial institutions are going to look like going forward. Probably a lot more like the universal banks of Continental Europe. But anybody who says they know for sure is lying.

Update: So now Lehman has announced (pdf!) it’s filing for bankruptcy, and the NYT is reporting that AIG, the world’s biggest insurer, may only have 48 to 72 hours to live. Most major Asian markets were closed for holidays Monday, but European stock markets were down 3%-4% to start. Big drops–but not a crash.