With the bankruptcy of Lehman Brothers, the venerable investment bank, and the takeover of Merrill Lynch, the largest broking house in the United States of America, by the Bank of America, the architecture of the global financial system — to use a phrase popularized by the World Bank and the International Monetary Fund after the Asian financial crisis of the late 1990s — has changed irrevocably. What is much less clear is what is going to replace it. The demise of Lehman had been ‘predicted’ ever since JP Morgan swallowed Bear Stearns; it was a matter of when, not if. The takeover of Merrill Lynch by BoA was much more surprising. Also, credit agencies have slashed the credit ratings of the American Insurance Group, the largest insurance company in the US which desperately needs to raise capital. One thing is very evident: the sub-prime crisis is no longer sub: it is prime.

For the US markets, this is the end of the Glass-Steagall Act of 1933 that separated investment banking from commercial banking. Traveler’s Insurance — which owned Salmon Smith Barney — bought Citibank in 1998, making that the first nail in the coffin of Glass-Steagall. JP Morgan’s purchase of Chase Bank was the next. Now, with BoA’s purchase of Merrill Lynch — the largest purveyor of credit purchasing the largest purveyor of stock ownership — the line is all but erased. And to think that Franklin Roosevelt signed the Glass Steagall Act — he also played a significant role in its formulation and entry into the US Congress — to avoid the kind of speculative mania that drove the US and the rest of the world into the Great Depression of 1929. Closer home, the stock markets closed flat, which many are taking as a positive sign; but markets, while good sentiment indicators, are lousy predictors. All this may come back and bite. Most employees of Lehman Brothers are likely to lose their jobs; employees of Merrill Lynch’s joint venture in India — Merrill does have the controlling stake — may have to live through uncertainty about their future for some time. For AIG, the future of the joint venture with the Tata group hangs in the balance; the company has some success in penetrating India’s difficult insurance market. The governor of New York State said that he would allow AIG to borrow from its own subsidiaries to manage day-to-day operations. With banks in India owning both insurance companies and investment banks, perhaps it is time Indian regulators looked at the risks this model carries.