Can someone please explain in laymen's terms what happened on wallstreet today?

I don’t have a solution, but I admire the problem!

Basically, a bunch of major corporations are in financial trouble. For example Lehman Brothers, a company been around since 1850 has gone bankrupt. Similarly big companies such as S&P and AIG are in trouble now. About 600 billion $ has been lost in shares, lots of investors have lost lots of money. Even if you didn’t invest in those specific companies itself, they have caused other stock markets to crash and thus everyone has lost money. Due these companies going towards bankruptcy, a LOT of jobs have been lost too. This is really big news because it just further instills the “we are going towards a recession” fear/theory. And of course, whenever that much money and that many jobs are lost, it is bound to make it to breaking news.

Both Lehman Brothers and Merrill Lynch were faced with liquidity crises and attendant losses on financial instruments. Merrill Lynch has recorded some large losses at the end of last year and the beginning of this year and saw more coming. In order to avoid the kind of panic that hit Lehman, Merrill Lynch engineered a sale and merger of itself to Bank of America. This is an all stock deal with Merrill stockholders now owning stock in Bank of America although Merrill stockholders have lost scads of money over the last year.

BofA could only do this for stock, there is no way they could have raised $50 billion in cash.

Lehman could not find a buyer and the government didn to step in and try to rescue the firm so they filed a bankruptcy petition.which means they sought protection from their creditors under the jurisdiction of the court.. In essence they have put the company up for liquidation.

The thing to remember is that on Friday the government basically announed that they were not going to step in an save another institution.

This had a negative effect on the equities market and resulted in today’s mess.

SRM

I’ll use an overly dramatic, graphical approach because I have a feeling that this is only the beginning.

@ PnL – Thanks for your input I appreciate it. Quite helpful.

@ srmorgan – I believe I followed everything accept I don’t understand what this is “liquidity crises and attendant losses on financial instruments.”

@paulc your link broken

Edit:its evidently only broken for me.

uberbatman your new icon rocks

ADVENTURE!!!!!!

@ uberbatman – I believe the link is the hindenburg

his link works fine

Bri_L – you are welcome. GQ btw, i am hoping to learn more from future answers on this thread.

Thanks PnL!

As I am contracting and out of permanent work i am a bit freaked.

@Bri_L.

Liquidity is the abillity to pay your bills on time. You could for example have a big investment in your house but not be able to pay the light bill cause you have no cash. In this instance, these banks were involved in numerous financial instruments, different types of loans and investments and there are periodic repayment dates, just as you have with your rent or mortgage.

The big thing here was something called CDO or collateralized debt obligations which are basically packages of mortgages or portions of mortgages that were marketed and purchased by investors and investment banks. In this case Lehman has had been able to roll over or re-finance the debt periodically but now there were many many doubts that Lehman would be able to repay the obligations due to a lack of cash and nowhere to borrow it. So in this instance the firm failed to be able to make payments and found themselves illiquid.

That is liquidity in a nutshell and I don’t understand the current crisis in any real dimension. The whole thing is just staggering..

SRM

AHhhh. Thanks. That made sense of it.

I am starting to think it is a good thing I say “eh” a lot. I might be Canada bound eh?

Thanks again all!

@BRI_L
Something else, Lehman’s bankruptcy petition shows assets of $639 BILLION and liabilities of $619 BILLION. Staggering’
Now off hand, you would think that if you have more assets than liabilities you have a positive net worth and should be able to pay your bills and have a little bit (20 Billion- chump change). left over.
That’s the way your checking account looks at the end of the month, no?

But Lehman apparently does not have the cash to make current payments and can not turn its assets into cash in order to keep up with paying their bills.

This is an oversimplification but it should give you an idea of what is going on. The petition is here http://www.creditslips.org/ and it is the first item on the blog.

The petition shows that Lehman’s biggest creditor is Citibank, followed by Bank of New York Mellon and then two banks in Japan and the amounts owed are huge

.
SRM

The numbers we are talking about are staggering.

This is going to be bad. Very very bad.

wait. what’s this about Bank of New York Mellon? i have foreign bonds coming in from israel that get paid from that bank. oes this affect me, or does the state of israel guarantee my payments?

@paulc: Did you mean this link? http://www.popartuk.com/humour/crude/airship-hindenburg-pp0098-poster.asp

EDIT: The first time I tried your link, it did not work. The second time, it did work. Go figure!

@Bri_L: To say that this is going to be “very very bad,” is like someone saying, “OOPS!” after the attack on Pearl Harbor.

This is not going to turn out to be an economic hiccup on Wall Street.

We might just see another 1930’s style Depression, courtesy of the GOP, and the Bush Administration (who probably will financially benefit from it).

And no, I am not exaggerating.

I am very economically challenged/I don’t understand this much at all.
What steps should the average American take towards protecting their savings? Specifically, should I…take my money out of my bank account? Maybe that’s a really dumb question… ;)

@jjd206, I don’t think it is a dumb question at all

@jjd2006 – i think that would make an excellent new Q if you want to ask it :)

@jjd2006: Make sure your bank is FDIC insured. If it is, you are safe up to $100,000. Beyond that there are specific rules about how much is insured. Still, FDIC insured means that any account with up to $100,000 is perfectly safe. If the bank goes under, you might have a bit of trouble accessing money, but you WILL still have it and you WILL still get it.

There is a super article on FDIC insurance that spells it out for the everyman and I will go find it.

Okay, this isn’t the article I was talking about but is required reading if you had any business with AIG, Merrill, or Lehman: http://consumerist.com/5050433/what-merrill-lehman-and-aig-customers-need-to-know

EmpressPixie rules

Don’t know what FDIC insurance is? Check this out: http://consumerist.com/consumer/blogs/what-is-fdic-insurance-257378.php

Also, this gives you a chance to figure out how much is covered if you exceed $100,000 using the link at the bottom of the page:
http://consumerist.com/5026278/help-how-can-i-make-sure-my-money-is-covered-by-the-fdic

she most certainly does :)

aw, thanks Bri!

Last but not least, “if my bank fails, when will the FDIC pay up” article from the Consumerist: http://consumerist.com/5030701/if-my-bank-collapses-how-long-before-the-fdic-pays-up

Thank you, Pixie!!

You are welcome!

also, one last article

EP. I agree w/ what you are saying about FDIC insurance….I would add, however, that one should still consider moving their money if their bank is unstable financially. In other words, it is alot easier to access money from a new stable bank, than to wait for the gov’t to cut you a check based on the FDIC insurance so you can pay your mortgage, make payroll for your employees, etc. There is a lag time.