Wall Street meltdown may have little local impact
September 16, 2008
The crisis on Wall Street has financial markets across the nation bracing for the impact, but local Realtors and banking experts advise not to panic as it may be too soon to tell the effect on the Truckee-Tahoe region.
Lehman Brothers Holdings Inc.’s demise, sealed Monday with a bankruptcy filing, served as another reminder of the severity of a mortgage meltdown that began two years ago.
Founded 158 years ago in Alabama by three brothers, Lehman had survived the Civil War, two world wars, the Great Depression, a currency crisis and the Sept. 11, 2001 terrorist attacks that destroyed its former headquarters in New York.
But Lehman couldn’t overcome the deepening problems that saddled it with about $60 billion in rotten investments tied to the steadily deteriorating real estate market.
That deterioration may not be felt in the local housing market, which is shaping up for recovery in 2009 as loans are expected to open and interest rates drops, said John Falk, spokesman for the Tahoe Sierra Board of Realtors.
“The impact shouldn’t be profound,” Falk said. “We were much more concerned over Freddie Mac and Fannie Mae because they’re so important to the housing market.”
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Credit markets may tighten as a result of the bankruptcy, causing a potential strain on the housing market recovery, but the impact would be “a tremor, not an earthquake,” Falk predicted.
“I don’t think it will have as close a nexus that the credit issues have had, but surely it won’t help,” Falk said.
Local businesses and individuals may find it hard to expand due to loan shortages, but most at risk are those struggling with defaults, said Mark Pingle, a University of Reno economics professor.
“The problem is now in defaults. If you have bad credit, it’s going to be much harder to get a loan than in the past,” Pingle said.
Conversely, a credit crunch may have more Americans looking to save, which would be a positive outcome of the slowing economy, Pingle said.
“Since the 1980s, Americans have moved away from saving,” Pingle said. “As credit becomes less available, people will have to save more and that would be a blessing.”
Lehman’s disintegration into the largest bankruptcy in U.S. history marked a stunning collapse for an investment bank that had been hailed as one of Wall Street’s best-managed firms as recently as a year ago.
“Lehman Brothers failure is basically having a ripple effect through the entire banking system,” said Mark Guthrie, owner of Westface Financial and faculty member of the Sierra College business department.
Lehman shares ended Monday at just 21 cents, a devastating descent from $67.73 just 10 months ago. The plunge wiped out more than $35 billion in shareholder wealth. Common shareholders all but get wiped out when a company files for bankruptcy, which allows it to restructure while creditor claims are held at bay.
But financial advisors warn local investors not to panic.
“Clients should continue to hold Lehman Brothers bonds as the market works to obtain greater clarity regarding the liquidation value of these securities,” according to Bruce Turner, a financial advisor for the Edward Jones branch in Truckee.
As Wall Street firms and government officials work to find a solution to the Lehman Brothers collapse, Pingle said he remains confident that a nationwide depression is unlikely and the impact should not be felt locally.
“Unless there is a significant meltdown in the whole financial structure in the U.S., there should be very little impact,” Pingle said.
” The Associated Press contributed to this article.