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Lehman Files Largest Bankruptcy in U.S. History

Feds refuse to bail bank out; Long-term effects unknown

By Mark Huffman
ConsumerAffairs.com

September 15, 2008

Personal Finance • Feds Report More Signs of Recession • Consumer Confidence Rebounds in November • Cheap Oil May Be Economic Stimulus • Job Security Lacking This Holiday Season • An Upside to the Down Market: A Lower Tax Bill • Americans Tap Savings to Cope with Economy • Economists' Panel Sees Prolonged Recession • Getting A Small Business Loan in Bad Economic Times • Jobless Rate Spikes in October • Monthly Job Cuts Hit Five-Year High • Business Economists See More Signs of Recession • What's Ahead For the Economy? • Consumer Confidence Plunges to Record Low • Bankers See Recovery in Second Half of 2009 • Autumn Has Long History as Financial Disaster Season • Finding a Job Takes Longer in Slow Economy • Baby Boomers Scramble to Reassess Future • What's Your Recession Game Plan? • Study Finds Racial Disparity in Retirement Savings • New York Threatens to Prosecute AIG for Fraud • Inflation Not a Factor in September • Retirement Postponed for More Americans • Economic Worry Supplants Terrorism Fear • Wall Street Leaders Missing In Action • Doctors Worry About These Stressful Times • Financial Meltdown Takes Toll on Consumer Confidence • Economic Turnaround Will Take Time • Retirement Plans Hammered in Credit Squeeze • Fed Takes Another Step to Bolster Credit Market • Economists Offer Plan for Stabilizing House Prices • House Passes Bailout Bill; Bush Signs Into Law • Senate Expected to Pass Bailout Bill • FDIC Seeks Increase in Deposit Coverage • Voter Anger Rattles Congress; Bailout Fails • Congress Agrees On Compromise Bailout Bill • Somber Washington Prepares for Bailout • Deal Or No Deal: What The Bailout Means To You • FDIC May Need Additional Funds if Banks Keep Failing • Which Type of Money Market Account Is Right for You? • How Does The Banking Crisis Affect You? • Lehman Files Largest Bankruptcy in U.S. History • Why Individual Investors Shouldn't Buy Individual Stocks • Bear Stearns to Pay $28 Million to FTC for Abusive Lending Practices • When Should You Sell Exchange Traded Funds? • Has the Bear Market Hit Bottom Yet? • How Do You Survive a Bear Market? --- • More Personal Finance News

Lehman Brothers, a major Wall Street investment bank, filed for Chapter 11 bankruptcy protection early Monday after efforts to find a buyer broke down Sunday. Potential buyers walked away after the U.S. Government signaled it would not commit taxpayers money to shoring up the firm.

In its bankruptcy filing, Lehman lists debts of $613 billion. Much of that is unsecured debt owed to banks from Tokyo, Hong Kong, New York, Singapore and Taipei, among others.

Lehman's collapse is the latest fallout from the subprime loan debacle and the resulting housing implosion. Other major banks, which are holding mortgage debt assets similar to those held by Lehman, are also on shaky financial ground.

What does all this mean for consumers? If you are a consumer who is employed in the financial industry, it could be disastrous. If you're not, then it might affect you all that much, at least not right away.

"The risk is that other firms will fail, credit will become even tighter and firms will not be able to borrow," Joel Naroff, chief economist at Naroff Economic Advisors, told ConsumerAffairs.com. "Then it becomes an economic issue as growth slow, layoffs accelerate, spending is cut back and we wind up in a steep recession."

Naroff says at this point, no one has any way of knowing how great the threat to the economy is. The Federal Reserve is pouring liquidity into the markets to prevent a financial meltdown, but he concedes more failures could set off a dangerous chain reaction.

In an editorial Monday, Britain's The Economist said the U.S. financial crises has entered a new and dangerous phase.

"If Lehman's assets are dumped in a liquidation, prices of like assets on other firms' books will also have to be marked down, eroding their capital bases," the publication said. "Lehman's demise highlights the industry's inability, or unwillingness, to rescue the sick, even when the consequences of inaction are potentially dire."

In an interview with CNBC.com, Wilbur Ross, chairman and CEO of WL Ross & Co., predicted as many as a thousand banks would go under in the coming months.

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