Last Tuesday, Goldman Sachs (GS) and Lehman Brothers (LEH) announced better than expected earnings that helped to bolster confidence in the investment banking sector. Later that same day, the Fed cut the target Fed funds rate to 2.25% and opened up a Primary Dealer Credit Facility to provide additional liquidity for investment banks. With these moves, the odds have increased that the recent risk to the financial system has already peaked – though it will undoubted take a considerable period before this is fully reflected in improved balance sheets and investor confidence.
The charts below show the performance of the stocks of four of the severely beleaguered investment banks (MER, LEH, MS, UBS) during the past 195 days from the June 2007 highs, as well as during the most recent 36 days, when the pressure on these institutions was greatest. One inescapable conclusion is that UBS has been the least resilient among the group so far – a development that bears watching going forward.