When A Lehman Brothers Goes Bankruptcy
Surely we can expect the housing market to recovery soon, right? The failures of Merrill Lynch and Lehman Brothers suggest we are not close to that occurring. The mortgage market will be even more chaotic, meaning no money for real estate.
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 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.
The end result is we have not lost faith in our banks. There has been no rush to get money out. This gives us a chance to fix the banks, but cannot help with a simple fact. The housing market is in for a long, brutal ride.
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.
If mortgage securities are viewed poorly, the housing market is in major trouble. With no new money coming in, loans are going to be hard to get. A lack of liquidity will drive prices down and it could get very ugly indeed.
Many are suggesting another Great Depression scenario. It this a possibility? With banks failing right and left, including huge financial institutions, one can legitimately ask the 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.
Unlike the last Great Depression, the financial markets are intertwined. A depression in the US will be a depression worldwide. Nobody wants that to happen, so look for aggressive action to prevent it.
