Blogs: Financial Doom and Gloom

Bank of America's deal to buy Merrill Lynch and the collapse of Lehman Brothers spark even more worry in the blogosphere

By Karyn McCormack

For investors watching the disaster on Wall Street unfold, Peter Cohan at BloggingStocks has a piece of advice: "If you need your money in the next 10 years, take it out of everything else and deposit it in sub-$100,000 accounts with profitable banks."

That might not be such a bad idea, especially if you believe doomsayers like Nouriel Roubini, the New York University professor of economics who predicted back in February that one or two major broker dealers would go bankrupt and now believes all of them will eventually disappear. "If Lehman (LEH) does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Sept. 15 (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch (MER) first but also in sequence Goldman Sachs (GS) and Morgan Stanley (MS) and possibly even those broker dealers that are part of a larger commercial bank, i.e. JPMorgan (JPM) and Citigroup (C))," Roubini wrote on Sept. 13 in his blog, Nouriel Roubini's Global EconoMonitor. "Then this run would lead to a massive systemic meltdown of the financial system."

"What we are facing now [is] the beginning of the unraveling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank like runs," Roubini explains. "But unlike banks they are not properly regulated and supervised, they don't have access to deposit insurance and don't have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed)."

Monitoring AIG

Roubini, who has been called "Dr. Doom," also states: "This is indeed the most severe financial crisis since the Great Depression and occurring at a time when the U.S. is falling in a now severe consumer led recession."

Unlike with Bear Stearns, the Fed and government decided to let Lehman fail on Sept. 14 after deal talks collapsed. "In a strange way, Lehman Brothers is being punished for not being more reckless," wrote Barry Ritholtz at The Big Picture on Sept. 14.

Focus also turned to insurance giant American International Group (AIG), which reportedly asked the Fed for a $40 billion bridge loan amid the threat that credit agencies would downgrade its debt, which would trigger more than $13 billion in collateral calls from investors who bought protection from AIG through credit default swaps, according to Bloomberg.