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In popular folklore and mythology in almost every culture we find tales of mysterious creatures capable of changing physical form or shape-"shape shifters," the ancients dubbed them. Such legends live on today. Shape shifters are capable of making major alterations to their general appearance.
Sometimes it seems as though shapeshifting is becoming a dominant theme in today's capital market trends-with some of these metamorphoses, it's hard to know if we are looking at something real and substantive or something metaphorical or hypothetical. It could just be a theory floated about, the beginning of a trend, or the end of an era.
During the last months of 2007 and first months of 2008 there were a number of potential shape-shifts, and you can figure out for yourself if these were fantasies, the beginnings of myths, or reality. Perhaps only time will tell. Some say the most important thing about shape-shifting is whether it is voluntary or imposed.
The Federal Reserve: shape-shifting in earnest
The big news in commercial and mortgage banking, capital markets, and regulatory news is the subprime credit crisis, or "mortgage meltdown," that began in the United States and soon swept through capital markets around the globe. Commercial banks and investment banks for months have been announcing billions-upon-billons of dollars in nonperforming or underperforming assets, reserve set-asides for bad loans, write-offs and write-downs, and more. The total tab could exceed $500 billion or more before we are out of the crisis.
The shape-shift here was originally triggered, we submit, by the 1999 demolishment by the federal government of the seven-decades-old protective barriers that existed between depository institutions (banks and thrifts) and the investment banking and brokerage organizations. The Glass-Steagall Act, a Depression-era law, eventually became an anachronism according to market players because in the global marketplace "financial supermarkets" would rule the roost. Thus large banks-Citibank, Bank of America, Chase-could combine with major Wall Street houses to create the holding company supermarkets of the future, such as JPMorgan Chase. The numerous bank/bank holding company consolidations that took place from 1995 through 2002 were important shape-shifts that set the stage for the credit crisis of 2007-2008 (and beyond?).
The Federal Reserve System was established in 1912 and structured over the years, among other things, to...