Home  News Local News Wall Street woes impact on South Florida
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Wall Street woes impact on South Florida |
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Written by Dr. Garth A. Rose
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Sunday, 21 September 2008 |
For two successive weekends there have been great shocks in the American economy. The first was the takeover of the mortgage guarantee companies, Fannie Mae and Freddie Mac, by the Federal government on Sunday, September 7; then the decision by Lehman Brothers, an American financial icon of over 150 years, to file Chapter 11 bankruptcy on Sunday, September 14.
Early Monday morning, Bank of America, who along with Britain’s Barclays Bank had been contemplating purchasing Lehman Brothers, had instead purchased Merrill Lynch, another iconic financial institution in America since 1914. As if that was not enough, later on Monday it was announced that America International Group (AIG) the biggest private and commercial insurance company in the country, reeling from its insurance of risky mortgage-backed securities against default, was also on the brink of bankruptcy, forcing the government’s intervention.
The tumultuous problems faced by these financial giants, mostly resulting from failed investments in the beleaguered mortgage industry, sent shock waves through the national economy, which saw Wall Street have its worst day in over 7 years on Monday with the DOW index falling by over 500 points. Also, consumer confidence has plunged with many people concerned about their financial future.
The problems being faced by Lehman Brothers, Merrill Lynch and AIG have some direct implications for the Florida economy.
According to reports Lehman Brothers has since 2000 made loans of nearly $2 billion to fund local real estate projects in South Florida. The projects include the Donald Trump condo Tower in Hollywood and the expansion underway at the Aventura Mall in Miami-Dade. The fate of the future of these developments are unknown at this time, although there are speculations that other lenders could buy and manage these developmental loans. Merrill Lynch has 21 offices in the region, employing 802 staffers and managing a portfolio of $43 billion. The takeover of the investment company by Bank of America is not expected to cost jobs in South Florida, or affect the investments made in the company by South Floridians. AIG has thousands of policy holders throughout the region.
However, Lehman Brothers’ bankruptcy could have an impact on some pension funds in Florida. That is because the State Board of Administration that manages the pension fund for state and county employees and assets in more than two dozen other funds, including the Florida Hurricane Catastrophe Fund and Florida Prepaid College Plan, holds more than $2.6 billion in the stocks and bonds of Lehman Brothers, as well as Merrill Lynch, Bank of America, AIG and Washington Mutual. As a result of the Lehman Bothers bankruptcy filing, the Small Business Association (SBA) could potentially lose almost $700 million. The bankruptcy could result in a drastic decline in Lehman Brothers’ stocks, as traditionally secured creditors are first in line to be impacted in a bankruptcy.
More than two-thirds of the Lehman-related stock and bonds managed by the SBA are held by the Florida Retirement System and the rest is mainly in the hurricane catastrophe fund and the Lawton Chiles Endowment Fund, which helps fund Medicare.
On the other hand, according to the SBA the Lehman stocks represent a very small percentage of funds held by the Florida Retirement System, which totals $125 billion, and has a surplus of some $6 billion.
With two of Wall Street’s giant financiers disappearing over one weekend, both public and private investors in the region will be keeping a keen eye on their respective investments. It seems that as the impact from the mortgage crisis escalates, no financial institution can be guaranteed. Only last year Lehman Brothers was the largest underwriter of mortgage backed securities in the country, now these investments have turned sour. Lehman’s problems were similar to Bear Stearns’, which also incurred severe losses from bad mortgage investments earlier this year, but Bear Stearns was rescued by the government. The government refused to bail out Lehman, but did try to help them secure new partners.
After two days of fervent speculation the government, however, decided to bail out AIG by lending the cash strapped company $85 billion. The company’s stock had seriously eroded following defaults in its insurance of mortgage-backed securities. The government defended the loan, saying it was imperative as the insurance giant’s failure could have had devastating effects on national and international financial markets. As part of the loan agreement, the government receives ownership of 79.9 percent in the shares of AIG. |
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