Nightmare on Wall St - Failures of Lehman, Merryl, AIG, WaMu....

In The Simpsons Movie, when Bart Simpson, utterly embarrassed by a situation, moans - "This is the worst day of my life!", his father replies - "This is the worst day of your life, SO FAR". The same could be said about the happenings in the last week of the US Financial sector.

What a week it was. just when you were thinking that the worst was over, the financial sector keeps hitting new lows. Couple of months back Bear Sterns was taken over by JP Morgan in a Shotgun wedding arranged by The Fed. Markets were a bit stable, and now it spread like wildfire in the last week. These are a couple of things which went bad in the financial sector in the last week.

- Freddie Mac & Fannic Mae were nationalized
- Lehman Brothers stock in free fall resulting in its declaring Chapter 11 bankruptcy
- Merryl Lynch bought over by Bank of America, after a free fall in its stock
- AIG group stock going down, resulting in its "restructuring"
- Washington Mutual (WaMu) Bank's stock tumbling
- Wachovia Bank's stock nose diving

So now out of the big Five wall street investment firms, only two - Goldman Sachs & JP Morgan were left standing. This extreme uncertainty in the financial sector trashed the DowJones, making it face the worst percentage fall in 6 years.

The ticking timebomb here is that the investment firms make a lot of trades with one another. Since there are a very few big firms taking up both sides of most of the trades, the trades suffer from counterparty risk. i.e. if you make a trade which realized a profit on the books, but the counterparty to the trade cannot pay up since it went bankrupt, then you lose too since you wont be seeing any real money from them. Now that Lehman has gone down, all the trades done with it need to be unwound, or a loss taken. When these losses start appearing on the books of other investment firms, they too will start taking a hit.

Lehman's is the biggest bankruptcy filing ever with $639 billion in assets. So there are bound to be repercussions everywhere in the financial sector. UK regulators have already asked firms to declare their exposure to Lehman. Citi group looks like it has a serious exposure to Lehman, which if it did, would seriously undermine its current precarious position.

Already there is a talk of a further rate cut by the Fed, which, at current inflation levels, can only be bad.

So is the rock bottom hit? is this the worst? I cant help thinking of the answer given to Bart Simpson...