Why you should care that Lehman went bust

By Brian Richards

updated 7:27 a.m. ET Sept. 16, 2008

Lehman Brothers will soon be no more. Merrill Lynch is being acquired by Bank of America. And AIG is desperately trying to shore up its capital.

These events are, without exaggeration, the biggest Wall Street headlines in a decade.

Even though Lehman Brothers was larger and older than Bear Stearns – its existence predates the Civil War – it was the first to get that dreaded dose of tough love. There was no Barclays or Bank of America deal, no "good bank"/"bad bank" arrangement – for the first time this year, the government allowed a large financial player to fail.

The implications of this failure are massive, and they'll be absorbed over a period measured in months, not days. For one, Lehman's 25,000 employees face an uncertain future. Its customers, many of them big financial institutions, will have to unwind what are bound to be extremely complicated transactions. And investors will have to figure out what to make of the largest U.S. investment bank failure since Drexel Burnham Lambert in 1990.

To get after that last issue, I asked a panel of Fool advisors and analysts to share their thoughts on these events. Here's what they had to say.

As of Friday's close, Lehman traded hands for $3 and change, down more than 90 percent from its 52-week high. Not many average Joe investors held this stock. So why is this failure so far-reaching?

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?

Bill Mann, advisor: Lehman matters for its role in the financial markets far beyond its own capitalization. Lehman owned some $600 billion in assets, some more liquid than others, all of which are likely to be sold during bankruptcy. There should be no doubt, for example, that some of the extreme levels of volatility in emerging markets have come from Lehman Brothers selling heavily to raise cash in the face of this crisis.

Andy Cross, advisor: Lehman is the latest financial butterfly to flap its wings, and it'll have ripple effects throughout the entire world of finance. What's interesting in this case is that the Federal Reserve put its hand up to say "enough." After bailing out Fannie Mae and Freddie Mac, and backing the JPMorgan Chase buyout of Bear Stearns earlier this year, the Fed apparently decided that Lehman did not qualify as "too big to fail."

Tim Hanson, senior analyst: This isn't just about Lehman. The company's bankruptcy filing this morning is the latest symptom of a sick financial sector. In a way, this whole experience illustrates just how intertwined the global economy actually is. What started as the admirable goal of helping a few more people own their own home and jumpstart a slowing economy in the wake of crisis (Sept. 11, 2001) ended up inflating a massive housing bubble, encouraging financial institutions to take on unprecedented amounts of risk, taking down a number of venerable financial institutions, and decimating consumer confidence. This has essentially put us back to where we started: looking for ways to jumpstart a slowing economy in the wake of crisis. It will, however, take time. Lehman now must unwind its enormous trading positions, which will put greater downward pressure on asset values in the near-term.

MORE FROM MOTLEY FOOL

Motley Fool Section Front

China TransInfo Technology Corp.: Warming Up or Cooling Off? Clarient, Inc.: Warming Up or Cooling Off? Evolution Petroleum Corporation: Warming Up or Cooling Off? Meridian Interstate Bancorp: Warming Up or Cooling Off? Radian Group, Inc.: Warming Up or Cooling Off? Tiens Biotech Group (USA), Inc.: Warming Up or Cooling Off? Sorl Auto Parts, Inc.: Warming Up or Cooling Off? Sutor Technology Group, Ltd.: Warming Up or Cooling Off? Why You Should Care About Corporate Governance Rocket Stock or Dud? Motley Fool Section Front