Brokers Banks Once Feared They Now Own

Ten years ago many bankers feared and envied Merrill Lynch as much as they did Charles Schwab & Co., as entities encroaching into the business of Main St. banks.

Since 1999, when Depression Era legislation that separated commercial and investment banking was repealed, ironically, some of the disintermediation commercial banks feared has gone the other way.

Merrill, the world's largest brokerage, whose company logo was a bull, is now owned by a commercial bank. Last night's announcement by Bank of America was a shock.

The bank was expected, rather, to take over Lehman Brothers, a once leading investment bank, dating to the 1840s. Lehman had been rumored to be a takeover candidate since the start of this year. It had found itself the owner of $60 billion in mortgage-backed securities now backed by very little.

Merrill, however, wasn't rumored to be a takeover candidate-despite heavy subprime mortgage losses and the ensuing departure of its chief executive late last year.

No one need be reminded that JP Morgan Chase now owns Bear Sterns, following intervention by the Fed in spring. Word is that the government wanted to draw the line on taxpayer largesse and gave Lehman a deadline of Sunday night, by which time to find a buyer or go bust. Prospective commercial bank buyers (Bank of America and Barclays) backed off. Further proof that the game of 'Who Moved My Cheese?' is never dull.

Of course, the institutional collapses we're now seeing are among the worst since the Great Depression, which prompted the consumer protections enshrined in the Glass Steagall Act 1933. That was repealed by the Gramm-Leach-Bliley Financial Services Modernization Act 1999, allowing commercial banks to get into the securities business.

If WAMU or other commercial banks heavily invested in unpaid mortgage loans fail, it might raise again the question of what lines of business are appropriate for insured depositaries.