I woke up this morning, logged on to the Wall Street Journal web page, and a huge lump formed in my throat. The rumors of Lehman Brothers, one of the oldest investment firms in the nation, has failed. Merrill Lynch, one of the most well-known investment banking firms, is sold to Bank of America for about $50 billion dollars. AIG, one of the largest insurance companies in the world, will undergo a re-structuring process with its equity and debt holdings. This might not mean THAT much to you when you first read or hear about it, but it is huge. There is no telling what the stock market will do, but my guess is that the Dow Jones will drop well below 11,000 for the first time in a couple years.
Many of the largest banks in the United States and other world banks are putting together a pool of money to help smaller investment banks and other banks to have access to in order to stay afloat. The Fed has agreed to chip in some money as well. It’s good to see other private firms realizing the severity of what is going down and their willingness to help for the common good of our economy.
The political implications of this morning’s news are vast. The economic implications are even wider. When will the fall-out of credit and housing crisis stop? The fact that one drop in the housing market and financial credit market has literally taken down numerous storied investment firms, just shows the greed of the executives from these companies. They did not diversify well enough, and we can learn from their mistakes for our own investments. You cannot follow the gravy train of a good thing for too long. If you put all of your eggs in one basket to maximize profitability, you will lose eventually. A well-diversified portfolio is invaluable.
We’ll monitor the situation today and keep you updated. I don’t think my 401k is going to look very good this month…