If you’re not a LEH stockholder, you might think that Lehman Brother’s emergency sunday bankruptcy will have no effect on you.  In that case, you might be very very wrong.  For those unfamiliar with Lehman Brothers, they are ( or were, I should say ) the fourth largest investment bank in the United States.  The fallout from their bankruptcy could cause quite a bit of turbulence in the financial sector. In other words, if you own any bank stocks – you’ll probably see some volatility. 

No investment is a sure bet

Let me paint you a picture.  On February 1st, 2008, LEH stock traded for $66 per share.  Right now, that same share is worth $.20 ,if you can find a buyer.  If you had invested $10,000 in LEH back in February, your stock would now be worth about $30.  Even if you had been a more shrewd investor, and purchased LEH last week at a much more reasonable $12.77 per share, you would still be down to $156.  Why do I show you this?  So you can see that just because a stock seems cheap, it isn’t automatically a good deal.  In the case of LEH, it’s a terrible deal at any price.

What went wrong with LEH?

Let’s just say the root of the trouble was overexuberance on real estate.  We all know what happened to high dollar real estate values and the subprime mortgage mess.  Lehman Brothers bet big time on these types of loans, and they took a massive beating.

Why didn’t the Federal Reserve save the day?

When Bear Stearns died, the Federal Reserve engineered a JPMorgan Chase buyout.  In other words, the Fed decided that Bear Sterns failing was unacceptable – so they used taxpayer guaranteed money to finance a bailout.  The criticism they took from this move was huge – and so no bailout this time.  After all, why should the US Government and its people bail out any company?  What that amounts to is the private companies and shareholders get any profit the company makes, while the risk, debt, and losses are pushed off onto the taxpayer.  I think it’s safe to say the average taxpayer doesn’t think that’s a fair deal.

Who’s next?

Lehman Brothers is huge.  Sure, they’re only in Chapter 11 bankruptcy, which means there’s a chance they will survive in a smaller, more streamlined form.  But if they can fall, and the US government doesn’t step in, who’s next?  Is any bank immune from this financial mess that we’ve created?  I don’t know for sure.  I will be keeping a close eye on the news to find out though.  And I’m sure glad I don’t own any LEH stock.