Lehman Brothers, Merrill Lynch: What Does It All Mean?

The financial fallout continues on Wall Street, with Lehman Brothers in crisis and Merrill Lynch in danger. Money Coach Alvin Hall and NPR's Adam Davidson explain details of the crisis, and what consumers can expect moving forward.

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MICHEL MARTIN, host:

I'm Michel Martin, and this is Tell Me More from NPR News. Coming up, should kids get paid to learn? The Mocha Moms have their say about giving cash for grades. But first, we want to talk about the trouble on Wall Street.

Stocks fell to their lowest point since the day after 9/11 yesterday, dropping more than 500 points. The steep fall followed the weekend's meltdown on Wall Street. Lehman Brothers investment firm filed for bankruptcy. Merrill Lynch found a rescuer in Bank of America, which is buying it at a fire-sale price. And then there's the world's largest insurance company, AIG, still scrambling to shore up shaky finances. All of this is just a week after the Feds bailed out mortgage giants Fannie Mae and Freddie Mac.

For more about what these means for Wall Street and for the rest of us, we're speaking with NPR's Adam Davidson. He's been reporting on the financial crisis. Also with us is our regular money coach and personal finance expert, Alvin Hall. Gentlemen, thank you both so much.

ADAM DAVIDSON: Thank you.

ALVIN HALL: Thank you.

MARTIN: Adam, first, give us the big picture. Why are all these financial giants facing such difficult times?

DAVIDSON: For at least a year, we've known that many of the world's biggest financial institutions have - literally, the term that they use is toxic waste, and it's kind of as ugly as it sounds. They have these investments - this is the whole subprime housing thing you keep hearing about. They have these investments that are effectively an engineered kind of bond, an incredibly complicated financial instrument created by Harvard physics PhDs using massive computers.

But at the end of the day, it's a financial instrument that banks thought had a lot of value, and we've learned over the last year that they don't have that much value. In other words, it's like coming home, turning on your computer, checking your savings account, and finding out that the 10,000 bucks you thought you had in savings was not worth anywhere near 10,000 and worse, you have absolutely no idea what it's worth. So this has been the undertone for financial markets since at least August 2007, so, you know, 13 months already.

And throughout this time, every major financial institution in the world is trying to, first of all, figure out for themselves how much money they actually have. It's a crazy situation. Major banks don't know how much they're worth because of the complete craziness of these financial instruments. And then, as we have seen, bit by bit, a little bit of news will come out and suddenly, the world's investors will say, we don't trust those guys anymore.

MARTIN: I was going to ask you about this. Why did things seem to come to a head this weekend?

DAVIDSON: I mean, there were specific reasons for Lehman. Lehman released some news last week that, on their new estimate, their bank was worth several billion dollars less than they thought it was before. And that really spooked investors. They said, wait a second. We thought you had $4 billion more than you do. I don't trust you anymore.

But then, what's worse for the financial system, or maybe in the long term, it's actually good, but we can get to that later. But what happened is investors say, wait a second. If Lehman can just one day show up and say, we have $4 billion less than we thought we did, maybe Merrill Lynch will do the same thing. Maybe AIG will do the same thing. They have the same crazy financial instruments that everyone doesn't know how to value.

So Lehman, it was for real reasons. There was actual information. Merrill and AIG, it's fear. It's, what do those guys have? I just have no idea. And they're not giving me a convincing story. I just have lost trust. What is interesting is to realize just how much of the global capitalist system is based on simple trust. And when you lose that, you lose your business.

MARTIN: Let's bring Alvin Hall in. Alvin, in addition to offering us your good, sort of common-sense advice for consumers, you have been a consultant for Lehman Brothers for the past decade, running training programs.

HALL: Yes. Yes. I design operational training programs. I help the technology people design systems that will help settle the trades, reconcile the trades, make sure they're in the right positions at the end of every day.

MARTIN: So you are not involved in any sort of their policy decisions or financial decisions. But I do want to ask, what's the mood up there? Is it - I mean, on the one hand, there's been so much turmoil over the last couple of months. People must've been feeling kind of shaky. But what's the mood up there this week?

HALL: The mood is quite gray, I would say. It's not dark. It's just gray. People are concerned how far these layoffs will actually extend. Yesterday, I was talking to a friend of mine who had worked at Lehman Brothers for almost 13 years, and she said to me that her 401k had dropped by 75 percent in value, her retirement fund, and she's in her early 50s. That sort of feeling of, oh my God, it's worse than I thought; what would be the knock-on effect, you hear everywhere - from the diners on Wall Street to the guy from whom I buy my coffee every day. Everybody can see the knock-on effect and see it coming.

MARTIN: And as I mentioned, that the Dow fell 500 points yesterday. Obviously, how you are going to react to this depends on who you are, how close you are to retirement, what other, you know, assets you may have or resources you may have. But putting your financial consultant hat on there, is there any general guidance about how people should react to this kind of instability?

HALL: I think, at this point, if you have stayed with the storm this long, then it sort of - you really have to weigh whether or not you want to bail out of the market and sit on the sidelines, but you're really selling out after a lot of bad news has come out. And probably more will come out. You have to look at that. I think it's time for people to look at their spending and try to accumulate some cash.

I think people right now - we don't know what's going to happen. We don't know how long this is going to last. They keep saying, oh, it may recover in the spring. I don't think so. I think the knock-on effect of this throughout the economy is going to be a lot more profound than people admit. After all, it was started in the housing industry. And the housing industry is the bedrock of the American dream. And when more people lose their houses, corporate profits start to drop. Unemployment will spread. It does not look good. It feels so much to me like the market drop in the 1970s. It just feels the same.

MARTIN: Adam, what about this point: Are there other companies that we should be watching out for? Are there other sectors that we need to be worried about?

DAVIDSON: Let me give you the worst-case scenario. What happens is, because of those things we talked about before, banks don't know how much money they have, so they don't know how much money they can lend to other people. They don't lend as much money.

Our economy, the entire global economy runs on credit, so it doesn't matter if you're in the housing sector or you make, you know, peanut butter brittle or you run a movie studio or whatever you do, you need access to credit. And what is happening is, in the trillions of dollars, the available credit in the world is shrinking. Now, so far, and no one's quite clear why, it hasn't been as bad as we thought it would be. There is enough credit to basically run the mechanisms of global capitalism.

The fear is that there will be much less credit, and then it's not just banks, every industry just kind of slows down. And they lay people off. They don't build new factories. They don't introduce new products. And that's when you really have a broad contagion, a real strong recession. This doesn't seem likely to be Great Depression bad. It's kind of maybe 1970s bad, which isn't good. I mean, that's, you know, a lot of unemployment, a lot of slowness, just a general lousy feeling for a while, but then we'll get through it.

MARTIN: Let me ask this one question about the - Bank of America announcing it would purchase brokerage firm Merrill Lynch after the government made it clear that the - to the Street that there would not be any bailout. First of all, I wanted to ask why, after just having bailed out Fannie Mae and Freddie Mac, and the whole question of Bear Stearns in March, I mean, some people think it's a bailout, some people don't, sort of depending on sort of point of view.

Why did the feds make such a strong statement about why they wouldn't intervene now? And what do you think the effect of this Bank of America takeover of Merrill Lynch has overall? I mean, it becomes the world's largest financial services company, but do we care?

DAVIDSON: First of all, why did the feds say, no, this one we're sitting out; we're not bailing you out? The basics of capitalism, the reason it works is that one of the core-central features is companies go out of business when they make dumb decisions. And all of these banks at the core of this made really stupid decisions. They took huge risks, and they are now reaping the rewards, and you want that to happen.

MARTIN: Now, Bank of America now becomes the world's largest financial services company. Good news for consumers, bad news for consumers, and to the market?

HALL: Potential good news if Bank of America decides to consolidate and cut their fees to consumers. However, the CEO of Bank of America has stated that he thinks that investment bankers are too expensive, and he doesn't want to hold onto them. So that is a Merrill Lynch franchise. If you come into the merger with that attitude, then the bankers can take their skills elsewhere. So he's going to have to be very political and very savvy to keep those valuable people and at the same time, offer consumers a very good deal in this merger.

MARTIN: Adam, final thought. Have we hit the bottom?

DAVIDSON: There's absolutely no way to hit the bottom. My gut tells me we haven't. I think, for the average person, I think Alvin's right, save money, probably not a great time to quit your job and go for some speculative thing; focus on the long term. We'll be OK in a few years, but the next few months are - it's going to be rocky like this. Don't pay too much attention if you don't have to.

MARTIN: OK. Maybe leave the Jaguar in the lot, huh?

HALL: Sell it.

MARTIN: NPR correspondent Adam Davidson joined us from Brooklyn. Our money coach, personal finance expert Alvin Hall, joined us from our New York bureau. Gentlemen, thank you both so much.

HALL: You're welcome.

DAVIDSON: Thank you.

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