Bear Stearns, Fannie, Freddie......Lehman???

The names seem familiar, as were the problems faced by the first three. Are we up for a repeat of the This was the first thought that came to my mind the moment I heard the shares of Lehman brothers plummeted 45% in a single trading session. The reason attributed to the massive slide was the failure of the Investment bank to conclude talks with a South Korean Bank for capital infusion. A possible capital infusion into Lehman had arrested the negative sentiment in the financials sector, particularly the investment banks which seem to have become favorite whipping boys for the stock market. Is Lehman on the verge of collapse?? Its really difficult to have an answer to this question, but going purely by the market movement of its stock something surely seems to be amiss. Things have really turned sour for Lehman, one amongst the four US entities which are pure investment banks, the others being Goldman Sachs, Merrill Lynch and Morgan Stanley.

While in a conversation with my Boss over Lehman a while ago, he pointed it out at times the markets serve as self fulfilling prophecies. Like in the case of Bear Stearns, the liquidity problems surged once other banks started refusing to lend money in the interbank market. Recently, there was news of officials from the Federal Reserve calling up Credit Suisse, a swiss bank to verify whether they had cut off credit to Lehman Bros.

Problems for the US economy seem to be only getting worse. The Treasury placed Fannie and Freddie under a conservatorship with a view to removing the ambiguity of the mortgages owned or guaranteed by the pair. These two entities combined either own or guarantee about $ 5 trillion in mortgages. The fresh set of problems with Lehman leaves me wondering whether the Fed is going to intervene again should there be an escalation of the problems. A precedent has been set in the case of Bear Stearns; however the options available with the Fed seem to be rapidly diminishing. They were able to stem the rut in the US economy by aggressively cutting interest rates; they have seemingly stemmed the systemic risks in the short term by placing Fannie and Freddie under conservatorship. But my worry is, has the Fed got enough ammunition left should another wave of problems hit the financials sector.

In my view, the next wave of problems could be from “prime” loans, or loans given to people with good credit records. Jamie Dimon, the CEO of JP Morgan, which reportedly has huge exposures to these loans had remarked recently the outlook for these loans is “terrible.” Though these problems may or may not materialize, one thing seems certain. The financials sector and the stock markets on a larger scale are not out of the woods yet. Just as things were slightly beginning to look up, we have a fresh wave of bad news hitting the markets. How the markets cope wit the latest developments would be an interesting thing to witness. As far as investors go, the pain experienced over the past 6-9 months is likely to linger on for a while. All we can do is wait and watch.