Commentary

Markets Dive After Feds Shun Lehman

The Feds apparently drew the line this weekend regarding financial bailouts for dysfunctional investment banks, shunning Lehman Brothers despite its desperate pleas for help. Sleep deprived officials from the Federal Reserve and the US Treasury, along with beleaguered financial industry chieftains, were huddled in the NY Fed’s fortress-like headquarters in lower Manhattan, trying to avoid another market meltdown. Judging by investor reactions on Monday, they appear to have failed miserably.

The Dow Jones and the S&P 500 each shed over 4 percent of their value, and the Nasdaq- not known for a high concentration of financial stocks- lost slightly over 3.5 percent. And the trading volume was heavy, indicating more than just a whiff of panic in the air.

The goal of the big pow-wow was to find a buyer for Lehman Brothers, the once venerable investment house. But, there were none to be found. Lehman will now have to file bankruptcy protection. (Merrill Lynch escaped this fate when Bank of America stepped in Sunday to buy the giant brokerage firm.)

This ends months of drama and speculation as to the fate of the 153-year-old investment bank. According to the NY Times, neither the Fed nor the Treasury was willing to pony up taxpayer funds to guarantee the steaming pile of souring mortgage-related securities festering on Lehman’s balance sheet. The message from the feds was clear: the bankers have to start cleaning up their industry with their own money.

The lack of US government support more than likely led Lehman’s last potential savior, the British banking giant Barclays, to back away from a deal. (The Times noted that some participants in the discussions said the Financial Services Authority, the British securities regulator, was quite negative on Barclays buying such a troubled institution.)

For years, financial companies were reaping enormous profits while completely ignoring the enormous amount of risk they were assuming. The latest act in America’s continuing financial crisis will truly test the private market’s ability to clean up the mess that it created.

© 2008 Splendid Marbles.