Stock Market Drops 504 Points, Lehman Brothers Bankrupt
by Jeff Davis
The stock market was reminded once again of the monumental size of the subprime crisis as the investment firm Lehman Brothers filed for bankruptcy and Merrill Lynch had a last second rescue by Bank of America. The Dow Jones plummeted 504 points as panic spread throughout Wall Street. A Reuters article notes “Wall Street had its worst day since markets reopened after the September 11 attacks as fears about the U.S. financial system’s stability surged on Monday after Lehman Brothers filed for bankruptcy and insurer AIG struggled for survival. The day followed one of Wall Street’s most agonizing weekends ever, which saw the demise of Lehman Brothers and forced Merrill Lynch (MER.N) to accept a takeover by Bank of America Corp (BAC.N). But Sunday’s barrage of shocking news was no exorcism for anxious investors and traders…. The Dow Jones industrial average (.DJI) slid 504.48 points, or 4.42 percent, to 10,917.51 — its biggest one-day point drop since September 2001.”
An article from the International Herald Tribune reports “The dramatic turn of events was prompted by the cataclysm of losses that has shaken the American financial industry over the last 14 months. The moves came after a weekend of frantic negotiations between federal officials and Wall Street executives over how to avert a downward spiral in the markets. Questions still remain about how the market will react and whether other firms may still falter like AIG, the large insurer, and Washington Mutual, both of whose stocks fell precipitously last week. Coming just a week after the government took control of mortgage lenders Fannie Mae and Freddie Mac, the magnitude of the industry’s reshaping is staggering: two of the most powerful firms on Wall Street, Merrill Lynch and Lehman, will disappear.”
The subprime crisis is a combination of several disasters. The first was an insane decision to lend money to low income minorities, who never qualified for a home loan before. All these new loans “looked good” on paper and there was a competition between lenders to rapidly expand this type of loan. Within the space of a few years, a great many loans (possibly millions of mortgages) were made of the subprime variety. (more…)