Local financial experts said yesterday's Wall Street meltdown will make it more difficult for some people to purchase homes and could force others to declare bankruptcy.
The collapse of the housing market that has plagued the economy for two years yesterday resulted in the bankruptcy of Lehman Brothers and the sale of Merrill Lynch — two of the largest investment banks in the country.
Over the weekend, federal regulators worked with financial industry experts to put together a deal to prevent the bankruptcy of both companies, which could have plunged the country's and the world's financial markets into even deeper chaos, according to local financial experts.
While the deal saved Merrill Lynch by having the largest investment house in the nation bought by Bank of America for $50 billion, Lehman Brothers, the fourth largest, couldn't be saved and was forced into Chapter 11 bankruptcy.
The swift developments are the biggest yet in the credit crisis that stems from the toxic subprime mortgage debt.
The news, announced yesterday morning, forced the Dow Jones industrials to slide 500 points in the worst drop since the September 2001 terrorist attacks.
Yesterday's trading followed the pattern of the past year; there were some signs of optimism, but they were dashed when investors weary of bad news perceived there was more ahead.
While the Lehman Brothers and Merrill Lynch situations had reached some resolution, the market remained anxious about American International Group Inc., or AIG, which is seeking emergency funding to shore up its balance sheet. A faltering of the world's largest insurance company likely would have financial implications far beyond that of Lehman, the largest bankruptcy in U.S. history.
Bill Ryan, of Ryan Financial Advisors in Andover, said that on the positive side, the name of Merrill Lynch will be retained, offering some relief to shareholders and others that the company still exists, at least on paper.
"Bank of America will keep the name," he said. "Nobody wants a brokerage firm to go out of business."
At the same time, however, many Merrill Lynch employees will likely lose their jobs, and those who don't will become "salesmen for Bank of America products."
Merrill Lynch has an office at Brickstone Square in Andover. Calls to that office were not returned, and a corporate spokeswoman referred questions to the Bank of America Web site. A press release on the site noted that "by adding Merrill Lynch's more than 16,000 financial advisers, Bank of America would have the largest brokerage in the world with more than 20,000 advisers and $2.5 trillion in client assets."
The impact of the latest tumult in the marketplace appears to be that the economy — and consumers — will continue to struggle.
Merrimack College Business School Dean Robert Cuomo said the news continues to leave consumers in a bad way when they're trying to buy a home, despite dropping mortgage rates.
"They're going to get burned and continue to get burned," Cuomo said. "You still have lenders around being very cautious about lending."
Cuomo said up until now, a credit score in the high 600s would put someone in good position to score a low-rate home equity loan or mortgage. Now, people have to be in the low 700s to mid-700s to be considered for the best rates.
Chris Doherty of Howe & Doherty Realtors in Andover, said the Lehman bankruptcy will continue to leave people uncertain about where the economy is going.
"It's hard to put a finger on how it will impact them," he said. "But it might slow down somebody's forward progress on moving up, or upgrading their home, or getting into home ownership."
He said that while lately he's had good turnout at open houses, he agreed with Cuomo that banks have become a lot stingier about lending money.
"It hasn't kept good, qualified buyers from getting a loan, but there has been more scrutiny of people on the margins," he said. "People who are left out of the marketplace have to wait until they can improve their credit or save more money for a down payment."
Something else he's seen is that banks aren't offering bridge loans or interim financing. They only want to loan to people who have already sold their homes before giving them money to buy a new one.
Meanwhile, for more and more people the only option seems to be bankruptcy, according to Salem, N.H., bankruptcy attorney Richard Gaudrea.
"A lot of people end up in a house they can't afford when something happens to their income, or their mortgage converts to an adjustable rate," he said. "Plus, they have lost equity in their homes. A lot of people are filing for bankruptcy as a result."
He said personal and business bankruptcies have doubled this year over last year at his practice.
"A lot of people are hurting out there," he said. "And nobody's helping them."
Tim Jordan of Jordan Financial Services in Bradford said that people who have stock in Lehman Brothers would be hurt by the bankruptcy filing, but that otherwise most investors should be OK.
"In general, when something like this happens the market reacts and overreacts," he said. "It creates panic by investors and the do-it-yourselfers sell off, which further exacerbates the downward spiral."
But, he said, in the long run the market may be helped by getting rid of Lehman Brothers because the company was too involved in subprime mortgages. The market is expected to remain fractious when trading resumes today.
Besides its continuing concerns about AIG, Wall Street will be waiting anxiously for the Federal Reserve's regular policy-making meeting. The central bank is expected to keep rates steady, though some traders have speculated about a surprise rate cut. The market will be looking for signs from the Fed that it is willing to lower rates amid the nation's continuing economic problems and because the price of oil has retreated sharply from its highs in July. The drop in oil gives the inflation-wary Fed more room to maneuver.
