Q & A: What does the crisis mean for you?

Allison Linn Senior writer • Profile • E-mail

The recent developments have done more than roil financial markets — they've also roiled many Americans, who aren't sure what the developments might mean for them. Here are some common questions and answers.

Why did Lehman Bros. file for bankruptcy protection?

The simple answer is that their liabilities exceeded their assets, says Barry Ritholtz, chief executive of the research firm FusionIQ and author of the forthcoming book “Bailout Nation.”

The investment bank was weighed down by $60 billion in soured real estate holdings, and a tighter credit market made it difficult for the company to come up with the cash it needed. Lehman also was unable to find another investment company that would be willing to buy Lehman out.

What is AIG and how is it involved in the credit crisis?

American International Group Inc. is one of the world’s largest insurance companies whose business includes guaranteeing mortgage investments. The company has sustained billions of dollars in losses as those investments have gone bad, throwing it into a cash crunch.

How close is Wall Street to a complete meltdown, and what's being done besides mergers and government bailouts to stop the bleeding?

While there’s no doubt that the markets are in turmoil right now, Dean Baker, co-director of the Center for Economic and Policy Research, says that recent government intervention makes it unlikely that we will see Wall Street fall into a meltdown.

Wall Street turmoil Bernanke, Paulson: Congress must act now First fear, then loathing, toward Wall Street Bush, Democrats differ on bailout’s passage Last U.S. investment banks to change status How Wall Street met its downfall U.S. offers 4 measures to restore order Vote: Is the government doing enough? Consumers, retailers cautious amid crisis Paulson: Rescue to cost ‘hundreds of billions’ Judge allows Barclays to buy Lehman units U.S. begins backing money-market funds Q&A: What does the crisis mean to you?

Besides government bailouts and mergers, Baker notes that the Federal Reserve has made below-market, short-term loans to help certain companies weather difficult periods. 

Ritholtz also notes that, while certain banking firms have faced considerable problems, there are others who managed to avoid major real estate investments and are riding out the storm better.

Still, Ritholtz is among those who think we are likely already in a recession, and he also thinks we could end up in a difficult bear market.

"If we're lucky, we're halfway through this," he says.

What does today’s news mean for my 401 (k) and other investments?

The events of the past year or so have sent the stock markets on a roller coaster ride, and experts don’t expect that to end anytime soon.

“At this point it’s really, really hard to see how things are going to sort out,” Baker says. “Clearly, these are very uncertain times.”

Still, even as investment firms and housing-related industries suffer, Ritholtz points out that some sectors of the economy, including energy companies and industrial exporters, have held up relatively well.

Nevertheless, few expect things to stabilize soon.

“We are going to see more bad news,” Baker says. “We are going to see more banks fail, possibly big ones.”

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