Lehman's Collapse: Broader Economic Damage Unlikely

Sep. 15, 2008 2:01 PM ETLEH, AIG, MER25 Comments
J.D. Steinhilber profile picture
J.D. Steinhilber
470 Followers

The 14-month old credit crisis is clearly in its most dramatic phase. Last weekend, the U.S.government took over Fannie Mae (FNM) and Freddie Mac (FRE), in a transaction that essentially wiped out the common stockholders. The ultimate fate of these two entities has not been determined, and the cost to U.S. taxpayers is unknown, but the Treasury's take-over of Fannie and Freddie, which own or guarantee over $5 trillion of mortgages, surely ranks as one of the most significant financial events in decades.

The events of this past weekend, while not as momentous, are perhaps more startling. In the past 24 hours, Lehman Brothers (LEH), a major investment bank with a 158-year history, filed for bankruptcy after the U.S. government opted (thankfully!) to let a big institution fail rather than commit taxpayer funds to arrange another bailout of a fully private financial institution (as it did in the Bear Stearns (BSC) transaction).

Moreover, Merrill Lynch (MER) and AIG (AIG), the two other large financial firms in the eye of the financial hurricane, made major announcements yesterday. Merrill announced that it is being acquired by Bank of America (BAC) at a nice premium over Friday's depressed closing price. AIG announced that it is being forced to restructure and raise $40 billion of capital to shore up its balance sheet, which has been decimated as a resulted of insurance written against mortgage defaults. AIG's stock is down nearly 50% this morning to $6.50 (versus a 52-week high of $70.13) after tumbling 45% last week.

Going into the weekend, the outcome Wall Street was expecting was a buyout of Lehman Brothers. Instead, it got a Lehman bankruptcy, a buyout of Merrill and increased pressure on AIG. These developments have intensified fears of

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J.D. Steinhilber profile picture
470 Followers
J.D. Steinhilber (http://seekingalpha.com/by/author/steinhilber/) runs his own investment firm - Agile Investing (http://agileinvesting.com/) - that manages client portfolios using a pure-ETF approach, and writes a newsletter about ETF investing. His work stands out for its quantitative rigor, and we particularly appreciate his comparative analysis of asset classes. Sign up for a free trial subscription to Agile's newsletter. (http://www.agileinvesting.com/default.aspx/MenuItemID/72/MenuGroup/Home.htm)

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