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Q&A: Market turmoil to ripple through economy

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.

What's all this mean for the larger economy?

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.

Q&A: Market turmoil to ripple through economy 09/15/08 [Last modified: Thursday, September 18, 2008 10:04am]
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