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.
