Lehman Bros. Merrill Lynch. Fannie Mae. Freddie Mac. Countrywide Financial. Bear Stearns.
In staggering succession, some of Wall Street's oldest and biggest firms have been seized, failed outright or merged into other companies. "It's the worst news out of Wall Street since I've been alive," said Steve Romick, manager of FPA Crescent fund.
The credit crunch, which began in the real estate market, has emerged as a full-blown financial crisis threatening the global credit markets. Thanks partly to nimble emergency moves by the U.S. government, the financial system has avoided a full-scale collapse. There is widespread concern, however, that other financial institutions could be brought down by the sliding home mortgage market.
In the short term, it will be harder for people with shaky credit to get loans, particularly mortgages. And if you're investing in stocks for retirement, your savings have shrunk by 20 percent or more in the past 12 months. For most others — even those invested in brokerage accounts at Lehman or Merrill — the developments are likely to have little immediate effect because of government safeguards that protect individual investors with up to $500,000 in their accounts.
On Wall Street, though, the hurt runs deep and broad. Two Wall Street icons are about to vanish as independent companies. Leh-man Bros., which began 158 years ago as Alabama cotton traders, filed for bankruptcy protection. And Merrill Lynch, whose bull mascot has been Wall Street's symbol of optimism since 1970, agreed to be absorbed by Bank of America.
"It took my breath away," said Jim Dunigan of PNC Wealth Management. "I don't think anyone would have come up with that scenario."
The stock market, still reeling from the government takeover of mortgage giants Fannie Mae and Freddie Mac, plunged Monday.
The Dow Jones industrial average sank 504 points, or 4.4 percent, to 10,918 in the biggest point drop since Sept. 17, 2001, the day stock trading resumed after the Sept. 11 attacks. Monday's sell-off wiped out $700 billion in shareholder wealth.
As bloody as Monday's market trading was, the carnage was less than some had expected. "It wasn't pretty, but it wasn't a catastrophe," said Bill Gross, manager at the Pimco mutual funds.
Even so, the danger isn't over. Analysts say too many companies have borrowed too much to buy high-risk assets — mainly securities backed by subprime mortgages, which are loans made to borrowers with poor credit.
Now, companies that own those securities must write off their losses and raise fresh cash. That means fewer consumer loans and stricter loan standards, said Hugh Johnson of Johnson Illington Advisors.
Banks will be cautiousThe unfolding financial crisis means that banks — those that do not fail — probably will become much more cautious about how much they lend, and to whom, than they were from 2004 to 2007. "It's back to basics," Johnson said.
The stock market was spared an even steeper fall Monday because the government had moved to make sure Lehman's collapse didn't spark immediate failures of dozens of other financial institutions.
It was a vital step. Lehman is an investment bank. Unlike a traditional bank, which makes loans, an investment bank arranges financing for commercial banks, companies, cities and states. Should a city, say, need to issue bonds for a new bridge, an investment bank will arrange the terms of the financing and sell the bonds to interested investors.
But Lehman also arranged many other types of financing, including debt backed by subprime mortgages and complex financial arrangements called derivatives. On a given day, many of those notes come due or are renewed. The government assured those who might have trouble with their Lehman trades that they could receive short-term loans until matters can be sorted out.
To make sure that companies weren't caught short, the Federal Reserve made it easier for troubled institutions to raise cash. Meanwhile, a group of 10 major banks cobbled together a $70 billion emergency loan pool.
Crisis could spreadThe crisis could spread. American International Group (AIG), an insurance giant, is scrambling to raise cash. Shares of Washington Mutual, the nation's largest savings and loan, have plunged more than 90 percent during the past 12 months. Both have been damaged by heavy subprime mortgage holdings.
Before they can resume normal operations, the companies must sell off their bad holdings and raise more money. "Until some entity with a checkbook steps up to buy those assets, instead of the government financing them, then we have a problem," Pimco's Gross said.
That will be difficult. For one thing, AIG and Washington Mutual are only the most visible companies trying to raise capital and sell problem investments. Other large holders, such as hedge funds and sovereign wealth funds, are scrambling to unload such securities.
Washington Report: Seizure of Fannie and Freddie
Mortgage bailout should drop rates
