Q&A: Market turmoil to ripple through economy

Fill out this form to email this article to a friend

Lehman Brothers' bankruptcy filing and Merrill Lynch's $50-billion shotgun marriage with Bank of America could affect anyone with a pension, mutual fund, home loan or bank account. Here's how:

What does Lehman Brothers' bankruptcy mean for the average investor? Should I worry about the safety of my money?

The greatest danger is if you've invested in shares of Lehman Brothers itself or bonds issued by the company. Some of its biggest bond holders are mutual fund-401(k) mainstays Pimco Advisors, Vanguard Group and Franklin Advisers. They could lose at least $86-billion from Lehman's failure. Boston-based Fidelity, the world's largest mutual fund company, owns 5.9 percent of Lehman, and that stock is likely to be worth little or nothing after bankruptcy. But a well-run mutual fund diversifies its assets so that a disaster on one side of the ledger is counterbalanced by successes on the other. Pension funds and other state funds invested with Lehman also face losses. Even Citizens, Florida's property insurer of last resort, owns $35-million in Lehman securities.

Didn't Lehman Brothers and Merrill Lynch get into trouble by investing in bad mortgages? Does their failure hurt my ability to buy and refinance a home?

It should be business as usual for people making their house payments on time. But home loans could get scarcer and refinancing options narrower. That's because banks, despite relatively low interest rates, are rationing credit. "As bad as the credit crunch was, it's going to get worse because any time banks see financial disarray, they're going to back off," said banking expert Ken Thomas in Miami. That could prolong the housing slump, and some economists like Thomas don't see a turnaround in Florida home prices until 2010.

I've got money in Bank of America. How does the merger with Merrill Lynch affect me?

Bank of America's stock took a tumble Monday, but that's likely just a blip for a company that's successfully building a financial services empire. It bought the largest credit card company in MBNA. Then it absorbed mortgage giant Countrywide. Now Merrill Lynch comes into the fold with its massive network of brokers and financial advisers, including thousands in Florida and more than 100 in the Tampa Bay area. "The merger takes Bank of America one step closer to being a financial supermarket,'' Thomas said. With so many financial services available under one roof, customers could get discounts, say, on a brokerage account if they kept so much money in a savings account. As always, bank accounts are insured by the Federal Deposit Insurance Corp. You're covered on individual accounts up $100,000 or $200,000 for a joint account.

Thomas likened Monday's news to a Category 5 hurricane for which we've yet to assess the damage. For starters, thousands of employees in those companies could lose their jobs (Lehman Brothers refused to say how many people it employs in Florida). Lehman's and Merrill's troubles are also proof that the dismal chain reaction set off by the housing crisis hasn't fully run its course and that a nationwide recession is increasingly likely. The Federal Reserve was expected to hold interest rates steady at a meeting today, but more people think it might lower rates to stimulate the economy, figuring recent oil price declines have contained inflation. "These problems are still with us and will be for some time," said Scott Brown, senior economist at St. Petersburg's Raymond James.

Can we expect more instability in other brokerage houses? What about Goldman Sachs and Morgan Stanley, two of the remaining big names?

Goldman Sachs and Morgan Stanley appear to be in better health. Both report earnings this week. In fact, Goldman is helping arrange a bailout for troubled insurance giant AIG. Morgan Stanley chief executive John Mack bucked up employees Monday with promises of "opportunities for profitable growth." Mark Vitner, economist with Wachovia, stressed that other brokerage firms like E.F. Hutton and Paine Webber went away without throwing the economy into a tizzy. Thomas wagered that Goldman and Morgan would need to merge with large banks to survive in the longer term. The reason: They need access to those cheap, dependable deposits from mom and pop account holders.

Comments on this article

by James	Sep 18, 2008 10:04 AM
The fed has been telling the American ppl since 1981 that we are spending more than we're making and a day is going to come when we have to pay for it. Well the day is here. People have to stop spending what they don't have. According to economist

by Snoz	Sep 17, 2008 1:27 PM
First Bears & Sterns. Then Fannie Mae and Freddie Mac. Now AIG. The nationalization of private and semi-private corporations. Reminds me of communism, not free markets. Perhaps if we had regulated responsibly this would never have happened.

by Snoz	Sep 17, 2008 1:27 PM
Republican deregulation got us here. The ripples from this financial nightmare have yet to reach us, but soon will. If you don't like it, tell them with your vote. That's the way the system works. Still think your vote doesn't count?

by Sandra	Sep 17, 2008 1:21 PM
Joe - While spending provides for goods and services, saving provides for credit liquidity allowing banks to extend loans out which grow the economy. It's a fine balance - Spending AND Saving are both fundamentals.

by Paul	Sep 16, 2008 1:44 PM
It is a good thing that Vanguard diversifies its investments and only holds a very small portion of Lehman in its funds. If there is any it is only .02% of the funds investments.

by David	Sep 16, 2008 10:29 AM
I've been concerned for some time with this administration's quest for power. Creating a crises at election time to make postponing the election seem reasonable would be one way of maintaining what they started. Let's not let that happen.

by kathi Gibson	Sep 16, 2008 10:29 AM
what does washington mutual have to do with this? what happens to to a home owner that has their home loan with a bank that goes down?

by Westminster	Sep 16, 2008 10:29 AM
Another feather in the cap of Bush's economic policy , Go on George only 6 months left what else will you do to screw up the world, go for Iran they are not in the world bank , they want to trade oil in euros ,tell more lies to expand the illumi's $s

by Ty

Sep 16, 2008 10:07 AM

Does it really matter how much the Fed has? They can theoretically back anything. The Fed controls the money supply. You cant run out of money if you control the money supply. I personally dont know whats legal or illegal. But if Im playing Monopoly, the bank never runs out money. If they do, then they just start writing more money on napkins. And really, what happened over the past 2 weeks? Why did things suddenly go from "scraping by but not looking good" to "blowup"? Certainly it wasnt under the encouragement of a regulator. Did some accountant in a back room run some numbers overnight at Lehman and say "Sorry guys, I just learned that we need to bankrupt this morning"? The more I think about it, it looks like the banks are taking advantage of the panic situation to get their hands on the trillions the USG/Fed are dishing out for bailouts. Its the perfect crime. Everybody knows that a perfect crime always involves a distraction. What

by Kay	Sep 16, 2008 10:05 AM
When grandma passed, we found a stockpile of flour, sugar, etc. We called it "depression era" thinking. Thanks for the advice grandma. It looks like we'll need it.

by joe	Sep 16, 2008 10:05 AM
Candi obviously you don't understand economics or the history of the great depression. The depression snowballed because people saved their $ and didn't spend. Save $ means less items made and bought. That leads to less jobs.

by Candi	Sep 16, 2008 7:36 AM
We are going to have a depression, it's going to be a rough road ahead for the middle class. Stop spending more than need be. Save as much money as you can. There will be many more homeless, with job closing's.

by Jim	Sep 16, 2008 7:36 AM
Gee,does this mean Jeb Bush will lose his "sweetheart" consulting job with Lehman Bros.?This is the same Bush who with retirement fund manager Coleman Stipanovich got Florida retirement funds into the equation.Thanks for the great public service Jeb.

by Jay	Sep 16, 2008 7:36 AM
What about AIG?