A finance professor at UW Madison doesn't think Wall Street's woes are over yet. Prof. Jim Seward says Leman Brothers and Merill Lynch had different client bases, but similar problems. "In both cases, each of these firms ended up investing a lot of mortgage related securities, and financing a significant part of those investments with borrowings," says Seward.
As the housing bubble burst, those debts caught up with both firms. "In Lehman's case, they went out of business, and in Merill's case, one can . . . sort of read the tea leaves and understand that they sold the company before the same fate awaited them," Seward says, in describing what he sees as just the latest round of Wall Street woes. "If you go back to the Bear Stearns resolution, I think people thought that had taken care of things, and of course it didn't" says Seward. "Then early last week when Fannie Mae and Freddie Mac were effectively seized by the government, I think people thought that was it."
Seward says there's no evidence yet that the financial markets have stabilized. "I think as long as real estate, which triggered this whole thing, continues to decline, it's hard to be optimistic that we've reached any kind of a bottom." If you're looking for a silver lining in all this gloom, there is this. "I suspect the Federal Reserve will be decreasing interest rates this week," says Seward.
