For those people -- the great majority of the population -- Monday started the week pretty much like any other. If they glanced at the news, it was to note more headlines predicting financial ruin for investment banks and institutional investors (the news is of the actual ruin of Lehman Bros. (NYSE: LEH) and probably Merrill Lynch (NYSE: MER) and AIG (NYSE: AIG), but after months of such news, that may have been lost on many people). Wall Street may not have been front of mind to most people going about their day today.
• Stocks Sink on Lehman News
• Will Fed Resume Rate Cuts?
• An Unprecedented Bankruptcy
• Banks Establish Emergency Fund
• Bank of America to Buy Merrill
• Future of AIG Uncertain
• SEC to Rein in Naked Shorts
Then there is the other side of the new dividing line: People involved professionally in the financial markets. For us, the events of the weekend and today are a sea change. Huge investment banks failing, securities trading opened on a Sunday to allow firms to unwind their positions, the government finally saying no to massive bailouts. There are going to be multiple thousands of finance professionals who lose their jobs. What will that do to the economy?
For me, a New York City resident and editor of BloggingStocks, I've felt the kind of nervous anxiety all day where I don't know if I'm going to cry or laugh. Among our team there has been plenty of gallows humor -- two actually quoted the same R.E.M. lyric in messages to me before 8 a.m.: "It's the end of the world as we know it."
That sounds dire (indeed, today feels very dire to me). But when I put aside my anxiety and wonder what all this means to folks that aren't engaged in the financial world professionally, here is how I see things shaking out:
For investors: The stock market will no doubt be extra-turbulent through the end of the year (on top of the financial sector's meltdown, we have election uncertainty and a weakening economy to worry about). I don't expect stocks to trade higher by the end of the year and think we may see a dramatic sell-off in the weeks to come. If we get a sell-off, you should use it to buy some strong stocks on the cheap. If you expect to need cash in the next year that you currently have invested in stocks, I would suggest gradually using rebounds in the market over the next few weeks to exit some positions. This is a good time to have an extra cash cushion.
For customers of financial services firms: If you have a Merrill Lynch credit card, an AIG insurance policy, or a Lehman Brothers brokerage account, I don't think you need to worry. Lehman accounts are protected, and you can move your assets to the new firm of your choice. If you did business with Merrill, you'll soon be doing business with Bank of America. It's unclear if AIG will survive, but your policies will likely be transferred to a new firm. Now, if you want to sue your broker for investing your money in any of these companies, you have a tough challenge ahead.
If you borrowed money from one of these firms: If you have a credit card, mortgage, or business loan from any of these firms, don't think this is your lucky day. You still owe the money and the firms, even as they morph into new forms, will still come after you for it.
If you need to borrow money: Surprisingly, I think ordinary consumers may find it easier to borrow money in the future as a result of this mess. Interest rates are likely to come down and basic consumer lending -- credit cards, lines of credit, car loans -- are profitable for banks who will be turning to consumers for more of their profits.
For the real estate market: The parts of the country where financial firms are major employers will feel some additional pain as many thousands of folks lose their jobs and many need to either move or trade down to a smaller home. Wealthy neighborhoods of the New York metro area will likely be hurt the most. Major cities on both coasts may feel some additional pain, but most local housing markets in the U.S. will not be affected much at all since it seems mortgage rates will remain stable and there are plenty of banks willing to lend money.
For the broad economy: The sudden demise of such large and storied financial firms will be a blow to the economy. A lot of very wealthy people are going to lose their jobs, which will impact many more jobs down the line. Housing markets will suffer more, retailers and automakers will be hurt.
But at least for now, it doesn't feel like the economy will come crashing down. I have faith that the Federal Reserve will keep the contagion from spreading. And I think about how, to the great majority of Americans, this is just more of the same dismal financial news we've been reading for over a year now. They are still taking the bus, buying groceries, showing up at work, picking their kids up after school. They are dreaming of their retirements, kitchen renovation, or next vacation. They are out there working and spending and keeping the economy afloat.
Is this the end of the world as we know it? No. Do I feel fine, as the lyrics of that R.E.M. song continue? No. Not today. Tomorrow, maybe.