MSU Law Faculty in the News
Local experts say stock turmoil may be what market needed
Monday, September 15, 2008
The Grand Rapids Press
Chris Knape
GRAND RAPIDS -- Fallout from the collapse of Lehman Brothers Holdings Inc. and the abrupt sale of Wall Street bulwark Merrill Lynch is expected to be minimal for the average Michigan consumer.
But experts following Monday's monumental Wall Street news said end result of turmoil be the kind of medicine the market needs over the long term.
Lehman filed for Chapter 11 bankruptcy Monday after running into a liquidity crisis that left it without the cash needed to maintain operations. The company is expected to liquidate assets and wind down most operations.
Fears over similar liquidity issues apparently drove Merrill into the hands of Bank of America in a $50 billion all-stock deal also announced Wednesday.
The end result will be a continuation of the tight market for those in the market for a loan, but a potentially stronger economy, said Paul Drueke, senior vice president with Stifel Nicolaus in Grand Rapids.
"I am looking at this as a cleaning of the system and deleveraging of America," he said. "People are going to have to start saving because they can't borrow anymore. Borrowing is not going to be efficient or available anymore for a lot of people."
The direct impact for the average Michigander is minimal, said Elliot Spoon, an assistant dean at Michigan State University College of Law and co-chairman of the Michigan Securities Law Institute.
He said the situation presents a fork in the road that could lead to more indirect effects.
"The turmoil in the markets may cause other companies to spiral downward because so much of this is market driven," Spoon said.
Monday's news "may also signify we are now bottoming out. The companies in the worst shape have taken their medicine," he said. "The truth is: I don't know."
Kent County Finance Director Bob White said he knew of no government entities at risk as a result of bond offerings or other investments held by Lehman or Merrill.
White said the situation might benefit top-rated municipal bond issuer like the county as investors are increasingly willing to settle for a lower return in exchange for a quality holding.
"It's a terrible market for investing, but a good market to be (issuing bonds)," White said.
Officials from Grand Rapids' Merrill Lynch office declined to comment on how the Bank of America purchase could impact local operations or clients.
They referred a call to the company's headquarters in New York.
One local banker said the deal was positive news for those with Merrill investment accounts.
"Now they've got a better balance sheet behind them," said Don VanDine, Wells Fargo Bank regional vice president in Grand Rapids.
In terms of the average investor, he said the situation only shows the need to take a closer look at one's financial institution.
"It's more important than ever to go with quality and examine the fundamental quality of your financial institution, be it a bank or a brokerage house or an insurance company," VanDine said.
"Take a really hard look at how well capitalized your institution is."