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The demise of Lehman Brothers can only be understood within the context of the current financial crisis, the biggest financial crisis since the Great Depression. The roots of this crisis have to be found in bad regulation, lack of transparency, and market complacency brought about by several years of positive returns. I will start by explaining these three roots and then I will discuss how Lehman contributed to its own demise and what the consequences of its filing for bankruptcy are.

Ken Lewis announced yesterday that he would be resigning as CEO of Bank of America effective at the end of the year. At the time of the announcement, there was no replacement in mind.

According to CreditSights Inc. analyst David Hendler had this to say about Lewis, “He’s drifting out to sea like a dying Eskimo, knowing the company can do better and thrive without him.”

Lewis took over as CEO of Bank of America in 2001 and since that time the bank has tripled in size and become the biggest United States lender by assets and deposits. One of the biggest problems that has arisen since he had become CEO is in the past year during the financial crisis, BofA made some pretty bad acquisition decisions. Merrill Lynch has really been a downer for the company and it also acquired subprime lender Countrywide Financial. During his time at the company, he spent over $130 billion on acquisitions alone.

Bank of America has had to find itself coming into its own over this financial fiasco and maybe Ken Lewis can’t see himself at the helm anymore. The rules of banking have changed because of what is happening and definitely what has happened. He was one of the last CEO’s of a major bank (I’m talking about the banks that were deemed too large to fail) to remain in control.

Lewis has also been the target of all the anger people have at the merger with Merrill Lynch and all the controversy that stemmed from it.

While I believe that the company is just as likely to make poor decisions with anyone in control, perhaps a new pair of eyes or someone with a fresh perspective will be able to do more good for the company. After all, Bank of America is still one of the largest banks in the United States (if not the largest) and it can be good again. It just needs to take care of its customers and make sure that it isn’t hemorrhaging money like it has been in the past year.

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The chairman of Wells Fargo agreed last year to help the company through the financial crisis, now Dick Kovacevich will be stepping down from the job as he sees that the financial crisis is over, I suppose. After 23 years of being with the company, he was chosen to lead it through the worst crisis that had happened to the financial markets since he had been there.

The position was only meant to be temporary and he knew that he wanted to retire eventually. He wanted to help the company get back on its feet as well as lead it through the acquisition of Wachovia.

On January 1, 2010 John Stumpf, current CEO of the company, will replace him as the chairman. Stumpf has been with Wells Fargo for 27 years and has been the CEO since June 27, 2007. His career started when he joined Norwest Corporation in 1982. Since that time Wells Fargo has swallowed many smaller banks including Stumpf’s Norwest bank. He is also currently on the board of directors for Visa international and is the Chairman of the Board of Directors for Visa in the United States. Like our eBay CEO friend Meg Whitman, he is also an outspoken supporter of the Republican party.

Wells Fargo is one of the banks that accepted TARP money from the government. It got $25 billion. It is also one of the banks that, when put under the government stress tests against bailed out banks, it was told that it would have to raise more capital before it could begin to pay back the loans. It sold stock to raise nearly $9 billion but the additional $5 billion will come from earnings according to the company.

Given the current economic situation that the United States is in, consider and discuss the following.

Question:

Many consider that the government’s failure to act on and help prevent the collapse of Bear Stearns as the starting point of the current financial crisis. In your opinion was the government correct in letting this happen and what should have been done differently. More importantly do you consider this to be the starting factor of the current economic meltdown?

Answer:

The government’s decision to let Bear Sterns fail was not only a warning to financial firms but to buyers and sellers of mortgage backed securities in general. While at the time it was perceived as the right thing to do, because the government was not fully aware how connected the large financial firms had become, it unknowingly led to a sell off in the credit markets.

While I personally believe that Bear Stearns as well as other institutions should be allowed to fail, I personally would not have let the firm collapse. Warning or not, their where several indicators pointing to the possible collapse of the credit market due to a fail in the housing market largely because of the enormous amount of credit default swaps that had occurred between large financial institutions.

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It lost $4.97 per share in the quarter ended Nov. 30, last year in the same quarter it earned $3.17 billion or just over $7 a share.

Other investment and banking firms are expected to report losses this week also. Amid the current financial crisis, there isn’t a lot of good news floating around on Wall Street, or any financial sector.

Goldman Sachs posts first loss since going public – Yahoo! News

So, how does this all affect the average American? Sure, if you?re completely invested in one of the failing companies it is easy to see, but for someone who isn’t in the market but perhaps has a 401 (k) they may be worried about their financial future.

Because banks are playing defensively, they are doing whatever they can to protect their assets. This causes them to not want to produce any new loans, creating sub-prime loans and mortgages is what got most of these banks into this dire situation to begin with. Even student loans will be harder to receive, which could in itself become a disaster, because college tuition will not be going down any time soon (or ever). If a potential borrower does not have great or perfect credit, loans are and will be very hard to acquire.

When the crunch is over, though, many banks will be able to lend again to those with good credit, and those with great and perfect credit will be able to get their loans at better rates. The hardest part is waiting. It is hard to wait for a loan when you need a mode of transportation and can’t get a car loan though, as not everyone lives where there is a method of public transportation or a place close enough to anything to ride a bike.

If you’ve been working and deducting some of your paycheck into a 401 (k) for any length of time, the financial crisis is something to take a serious look at. According to financial adviser Jill Schlesinger in a CBS interview, you should not stop payroll deductions into your 401 (k) just because of a sudden drop in the market, rather now is the time to be putting more money into the fund. Russell Pearlman from SmartMoney magazine also says that investors shouldn’t pull all of their money out of the market and to not panic. She states, ?As bad as things look today, they are just going to be a blip on the radar 10, 20 years from now.? As hard as it is to watch the stocks fall more every day, advisers and market analysts are saying to stick with it and that what is happening now could be the worst of it.

Not all news is doom and gloom however. Some of the brighter side of it is oil has fallen from $147 a barrel to under $70 in 3 months. When things start to shake up Wall Street, it appears that investors will begin looking for something more stable than what they are currently invested in (which probably lead to yesterday?s record jump in the price of an ounce of gold). The fall in oil definitely eases some of the financial burden facing the average consumer in the U.S. The lower oil prices will help ease inflation on all the goods that we buy.

Hopefully Russell Pearlman is right and we will all look back on what is going on now and say it is a blip. We can also hope that the worst of it is over. However you look at what is happening on Wall Street, the biggest thing to do is wait.

Many are worried about the federal bail out of AIG. That is understandable why anyone would worry about such a large federal bail out, but Strauss-Kahn also said that economies in emerging countries and developed nations are resilient and can bounce back from such a large downfall.

The Consumerist blog lists some of the bail outs and buy outs as a sign of the apocalypse. I don’t see it that way. Everything that goes up must come down, and the higher it is the harder it falls.