Turmoil Roils Wall Street

It's going to be one hell of a week on Wall Street as two bastions of the Street, Merrill Lynch and Lehman Brothers have succumbed to the credit crisis from having so much debt on their hands that they had no way of paying for any of it.

Lehman Brothers' announcement that it is filing for bankruptcy came after all potential buyers walked away. Potential suitors were spooked by the U.S. Treasury's refusal to provide any takeover aid, as it had done six months ago when Bear Stearns faltered and earlier this month when it seized Fannie Mae and Freddie Mac.

In an effort to calm the markets, Lehman pre-announced third-quarter results on Wednesday. In an affidavit filed with the bankruptcy court, Lehman Chief Financial Officer Ian Lowitt said that action "did little to quell the rumors in the markets and the concerns about the viability of the company." He said the uncertainty made it impossible for Lehman to continue.

Employees emerging from Lehman's headquarters near the heart of Times Square Sunday night carried boxes, tote bags and duffel bags, rolling suitcases, framed artwork and spare umbrellas. Many were emblazoned with the Lehman Brothers name.

TV trucks lined Seventh Avenue opposite the building, while barricades at the building's main entrance attempted to keep workers and onlookers from gumming up the steady flow of pedestrians flowing in and out of Times Square.

Some workers had moist eyes while a few others wept and shared hugs. Most who left the building quietly declined interviews.

Lehman Brothers filed for Chapter 11 bankruptcy protection last night, and Merrill Lynch got bought out by Bank of America for roughly $50 billion. It had been expected that Bank of America would go after Lehman Brothers, but Bank of America wouldn't move on Lehman Brothers without the federal government providing protection.

The markets are going to be hurting badly this week, but this situation has been months in the making.

This situation will ripple through the NY Metro area, where Wall Street executives and workers live and spend their considerable salaries. It also means that the real estate market in the region is going to take a hit as well, as people are not as likely to buy new homes and may consider downsizing their homes even as they are unable to find buyers for their existing homes.

Jim Cramer is arguing that the situation demands that the Federal Reserve cut interest rates. That may increase the amount of liquidity in the markets, but I don't think it addresses the fundamental problems with the credit market - namely that so many banks have exposure to assets that are below water after issuing credit to lenders who had no ability to repay and the paper issued to spread the risk didn't take any of this into consideration. He's not the only one to think that a rate cut is coming, even though the Fed thinks inflation is the bigger concern. Given that energy costs have dropped well off their highs, inflation costs are muted in comparison to the credit crunch.