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September 15, 2008

Major Changes On Wall Street Cause Stocks to Plunge

Two major players on the stock market folded early Monday. Lehman Brothers is filing for bankruptcy and Merrill Lynch is being bought by Bank of America. The fall of these two major American companies has set off a landslide in the stock market. However, the Merrill Lynch deal is seen as a positive deal that will offset some of the fallout from the Lehman bankruptcy.

Lehman Brothers, an 158 year old investment bank will file Chapter 11 bankruptcy. The value of the companies’ share had declined 94 percent this year. The mortgage crisis caused the company a good deal of grief and it was unable to pull itself out of the slump. Federal regulators and Wall Street executives worked around the clock to come up with a solution to a major financial crisis.

The weekend brought some calm to the plunging financial markets. The Federal Reserve announced plans to lighten up on lending restrictions for the banking industry. 10 domestic and foreign banks came together to form a 70 billion fund for loans to financial institutions that are in trouble. However, the help came too little to late for most financial markets. A major selling in the U.S. markets was expected today.

As the financial day began, the stock market was showing signs of plunging. Futures in the Dow Jones Industrial Average and the Nasdaq composite and the Standard & Poor’s 500 were 3 percent lower. Markets around the world were also slipping because of the unstable American markets.

Bad real estate bets broke both Merrill Lynch and Lehman. Lehman’s stock price plunged 27 percent just last week. That was down 65 percent for the year. Merrill Lynch posted net losses of over 17 billion for the past four quarters. The acquisition of Merrill Lynch by Bank of America will create a massive financial institution. Bank of America will acquire Merrill Lynch’s 16000 financial advisors and 2.5 trillion in client assets.

The government has worked to bail out some financial institutions. Of course, the government can not be expected to bail them all out. Other terms must be met for some of the banks. Fannie May and Freddie Mac were just taken over by the government by Washington this month. This attempt to help stop the countries failing housing market may or may not have an impact. Foreclosures and falling home prices continue to make the real estate market terrible.

American International Group is the nation’s last insurer. They are expected to put out a new plan that will detail a way to restructure how financial institutions are insured. The restructuring plan is expected to include selling off parts of the business and increasing investor’s confidence by raising cash. This is an experimental technique that is being viewed on a wait and see basis. The Untied States financial market is so incredibly unstable that it is hard to say how well this will work. With some of the countries oldest and most respected financial institutions folding, no one is making any promises.

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