The closing bells at the stock exchange tolled for investment firms Lehman Brothers and Merrill Lynch Monday. Lehman went bankrupt. Merrill Lynch was bought out by the Bank of America. University of Saint Thomas Finance Department Chair David Vang says the leaders of both firms thought they were the "smartest men in the room."
"They assumed an awful lot of risk and under a set of assumptions that I think most people on the street would have said this does not make sense."
The stake through the heart of both companies was the deepening mortgage crisis. It is the same dilemma that took down Bear Stearns and threatens mortgage giants Freddie Mac and Fanny Mae. As for ordinary "man on the street" investors with brokerage accounts at Lehman Brothers or Merrill Lynch, financial experts insists their money is safe.
"You don't have to worry that your stuff is going to get seized and taken away from you," says University of Minnesota Carlson School Finance Chair Andrew Winton. "What they don't insure you against is that the market is down and your stocks, if you hold them, are going to be worth less. That you don't get insurance for, but your holdings should be pretty safe.?" As for any investor holding stock in Lehman Brothers, itself? "That's probably not going to be worth very much."
Professor Vang says, with the exception of newly out-of-work Lehman Brothers employees, the impact to ordinary Americans will be indirect. "Where this is gonna affect most people most obviously is in their own investments, their own 401K's and so forth."
Wall Street was stunned by the Lehman/Lynch "double whammy". The Dow took a dive. The market closed down more than 500 points on Monday. Questions arose immediately. Should Uncle Sam have stepped in to help as it has with mortgage giants Freddie Mac and Fannie Mae? Treasury Secretary Henry Paulson says no. "I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers."
Even New York Mayor Michael Bloomberg, facing thousands of job losses in his own city, declined to call for federal intervention. "The Federal Government cannot save every failing company, nor should it try."
By Allen Costantini - 9/15/08
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