September 15, 2008

Lehman and Merrill are Dead

By Bruce Six, Senior Vice President - ALM

The events of the past weekend are truly historic and will create long term change in the financial markets. At this point what we know is Lehman Brothers, a 158 year old investment banking firm has filed for bankruptcy. Also, Merrill Lynch has been purchased by Bank of America for $50 billion of stock. Just a year ago if someone had mentioned Lehman or Merrill as weakening to the point of not being able to continue on their own, even the most jaded market participants would have laughed it off. It’s too early to fully digest the impact of both of these market changes but this period will be added to the history books our grandchildren will be reading.

What we do know at this point is the Fed Funds futures market has changed dramatically over the weekend. The market now expects the Fed will lower the target rate to 1.75% at tomorrows meeting and the rate will go down further to 1.50% at the October 29 meeting. Changes before a Presidential election are not common as the Fed prefers to appear independent of politics but the market needs the liquidity and the mortgage market needs to open up to put a bottom under this market place. Real estate has started getting attention from larger market players but John Q. Public is still on the sidelines. A rate cut could get the public back in the game and provide some normalcy to the economy.

For credit unions with money to invest, today will not be a good date to look at the broader markets because of the disarray. Mid-Atlantic does have some specials that you can check on if money does need to be put to work. Strategically, putting excess funds to work with the members should be a better bet.

Lastly, Mid-Atlantic has had calls from a few members this morning asking about our exposure to Lehman and Merrill. Mid-Atlantic does not have exposure to either of these firms so any impact from their recent changes will only be felt through the broader markets.