Lehman Brothers' bankruptcy will weaken commercial construction

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lehman brothers' bankruptcy will weaken commercial construction

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Jim Haughey

RCD Chief Economist

Sep 15, 2008

While the Treasury and FRB were willing to guarantee prime rate mortgages and the conservative bonds that finance them, they correctly refused to guarantee the high risk private financial investments that characterized the Lehman Brothers portfolio. Many in the financial market expected a government bailout for Lehman Brothers. Now, they have a clear and painful signal that they have to be more cautious with risk.

Unraveling Lehman Brothers’ financial commitments will be ugly. The highly leveraged investment bank had over $600 billion in debt because it was involved in every niche of the financial market. It is possible that many smaller financial entities will become insolvent during the long unraveling process. This could include local and regional banks, insurance companies, bond and mortgage insurers and some public entities that invested in high risk Lehman Brothers’ products.

Regionally, New York City takes the biggest hit with a drop in financial market employment and an even bigger drop in aggregate financial market wages and bonuses. The companion discount sale of Merrill Lynch to Bank of America will add to the loss of very high income jobs at Lehman Brothers. New York has been the strongest commercial and multi-family in the country but that could change very quickly.

The flip side is that much of the country will get a small boost from the financial crisis. Already, the dollar has declined markedly which will extend the export boom for farm products, commodities and machinery. And the price of oil dropped more than $5.00/bbl. in anticipation of a near term hit to US economic spending.

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