dow closes down 500 points, page-33

Bionic

actually I only got it slightly wrong.... here's an edited text of the article I got from CNN Money....



Lehman's fall reflects Wall Street's flaws - Sep. 15, 2008

The lights are still on at Lehman HQ, but they're going out both for the
158-year old firm and for the Wall Street business model that it represents.
Now that Lehman has declared bankruptcy, and Bank of America is buying Merrill
Lynch for $50 billion, the ranks of Wall Street survivors have shrunk in the
space of six months from five to two, Goldman Sachs and Morgan Stanley.
With Merrill, and Bear Stearns before it, being acquired by giant commercial
banks, we're witnessing the triumph of the diversified, universal banking model
over the Wall Street one that focused on trading securities and advising
corporate clients.

Eventually, the trend will probably capture Morgan Stanley and Goldman as well.
Even if they skirt the fate of their former peers, their time is past.
The demise of old Wall Street isn't just about bad bets on mortgages or the
hubris of Dick Fuld. It's the failure of an antiquated, risky strategy that
depended on macroeconomic luck and that grossly overcompensated employees for
being in the right place at the right time.


Debt and more debt

The game Wall Street played relied on leveraging up the cash provided by
shareholders to enormous levels and using all the debt to accumulate a giant
portfolio of securities.
As long as interest rates trend downward, the value of that portfolio swells,
yielding gigantic returns on a slim equity base. And, with the exception of a
few scary blips caused by the Asian currency crisis and the tech meltdown,
that's what happened for most of Lehman's existence since it was spun off by
American Express (AXP, Fortune 500) in 1994.
Based on a huge surge in profits, the employees arrange to take compensation in
amounts unheard of outside of sports and Hollywood.


Exorbitant pay

The Wall Street playbook calls for taking home the highest pay possible when
times are good and giving none of it back when times are tough.
Since the securities business is cyclical, it would make sense for firms to bank
their bonuses forward so that if profits are plentiful one year but disappear
the next, part of the compensation is returned to shareholders.
But that's not how the Street works. The pay practices at Lehman are highly
instructive. When it came to granting stock to employees, Lehman was incredibly
extravagant.

Before Lehman raised equity capital this year, grants of options and restricted
stock left 30% of shares in employees' hands. To be sure, employees have lost
billions in recent months. But they took out plenty over the years.
Fuld, for example, has cashed out almost $500 million worth of stock in his 14
years as CEO, according to Fortune's Allan Sloan; that's four times Lehman's
stock market capitalization as of Monday morning.

In fiscal 2006 and 2007, Fuld earned a total of more than $80 million, an
astounding sum for a company Lehman's size. Lehman's general counsel Thomas
Russo made more than $12 million in each of those years. Top lawyers for much
larger U.S. companies make a fraction of that amount.

Given all of this excess, there's no way this business model can last. The best
bet is that Morgan Stanley will eventually be absorbed by a big bank that will
reduce leverage, shrink pay scales, fund assets with deposits and impose strict
risk controls. That's what JPMorgan CEO Jamie Dimon is doing with the old Bear
Stearns and what Bank of America CEO Ken Lewis will no doubt do with Merrill.
Goldman, on the other hand, has the financial strength to move in the other
direction and buy a bank. Even so, the Wall Street follies will soon end. They
were great while they lasted - though mainly for the hired hands.
First Published: September 15, 2008: 12:53 PM EDTSEC Filings data provided by Edgar Online Inc..