How Lehmans Bankruptcy Affects Housing
In startling news, people wake to a Monday where two of the behemoths of Wall Street and the financial world have gone down hard. The fate of Merrill Lynch and Lehman Brothers is scary and harbors the question of whether the mortgage market is dead?
Lehman Brothers was founded in 1850. It is a massive investment bank with fingers in financial markets across the world. On the morning of September 15, 2008, it filed for bankruptcy protection with 613 billion dollar »”>billion dollars in debt.
The essential failure of Merrill Lynch is even more troubling. Saddled with bad debt, it was thought to have a solid plan for surviving. Obviously, that was not the case. With help form the Feds, Bank of America purchased Merrill for a song at $29 a share.
Make no mistake, the failures of these two stalwarts is an amazingly bad sign. These are not some small regional banks going down the drain. This is the equivalent of Google failing and selling out to Microsoft as a last gasp gesture.
The current market is staggeringly bad. If large banking companies keep being wiped out, the liquidity for mortgages and even basic credit cards is going to disappear. Still, nobody seems to be particularly worried.
The Federal Reserve deserves the credit for this. Showing a delicate touch, the Fed has been providing liquidity for banks in trouble as well as snapping up and flipping failing banks to those in a more solid position. Amazingly, most of us just yawn.
Why the silky smooth handling of the Federal Reserve has stopped a panic from happening, it has not been able to change a fundamental fact. The housing market and the security backing it are an absolute disaster.
How bad are things? We have reached a point where it the officers and board of directors of companies might be found liable for investing in mortgage securities because they are such bad investments.
Think about that for a minute. The American Dream has become a bad investment. Home ownership is arguably the single biggest factor that keeps our middle class from disappearing. If there is no money to fund it, that may no longer be the case.
So, are we headed for financial catastrophe? Could the banking industry collapse and lead us to another Great Depression? It sounds ludicrous, but the fates of Fannie Mae, Freddie Mac, Lehman Brothers and Merrill Lynch make it a valid question.
If we are going down, we will go kicking and screaming. The Federal Reserve is fighting with all its might. The announcement that banks from around the world will pool 70 billion dollars to help stressed institutions is huge.
The financial world is a mess. Unlike the Great Depression, the Federal Reserve is working to drag us through the crisis. We may end up bruised and bloodied, but I believe we will make it out the other side.
Filed under: Business