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Lehman bankruptcy, Merrill Lynch buyout to cause markets to sputter

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Jessica Sabbath


Financial markets are likely to plummet this morning after Lehman Brothers, the fourth largest investment bank in the U.S., filed for bankruptcy early Monday after federal officials failed to intervene to save the struggling bank.

Monday’s markets are expected to be thrown into upheaval upon the news, which was coupled with the announcement Sunday that Charlotte, N.C.-based Bank of America would spend $50 billion to buy Merrill Lynch. In addition, American International Group is seeking a $40 billion bridge loan to avoid a downgrading from credit agencies.

Stay tuned to virginiabusiness.com throughout the day to see how Virginia companies’ stock prices fare throughout the turmoil.

Al Broaddus, former president of the Federal Reserve Bank of Richmond,  told Virginia Business today that the government likely didn’t bail out Lehman for two primary reasons. One, the federal government last week said it would use taxpayer money to inject into mortgage giants Freddie Mac and Fannie Mae. “Against that background, naturally they were not eager to enlarge this potential liability for taxpayers.”

In addition, saving the firm could cause future financial institutions to conduct riskier behavior, Broaddus says. “If the government is seen as readily willing to step in and resolve these kinds of problems with taxpayer funds, it creates incentives in financial markets to take even greater risks.”

 


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