A crisis, but how bad?

LEHMAN BROTHERS, one of the most venerable brokerage houses on Wall Street, survived the Civil War, various economic panics of the late 1800s, the Great Depression and the Nazi blitzkrieg through Europe.

But it couldn't survive the mortgage crisis of 2008.

The collapse of Lehman, the frantic and furious sale of rival Merrill Lynch to Bank of America, and the spillover to troubled insurance giant AIG and big bank Washington Mutual (known as "WaMu") led to the wildest down day on Wall Street since the grim aftermath of 9/11.

The Dow Jones average, which measures big-name, blue-chip companies, dropped 504 points, or 4 percent, and the sell-off roiled the race for the White House while stealing the TV headlines from the disastrous aftermath of Hurricane Ike.

But what does it mean to the average middle-class American? Everybody will feel the impact, but the meaning of yesterday's upheaval depends on a lot of factors - on whether you have a large retirement account in stocks, or whether you're planning to buy a home in the near future.

Certainly the roughly 25,000 employees of Lehman, as many as half of them based in the New York area. Not only is their future uncertain with the firm's bankruptcy, but many had been paid heavily in stock and stock options, or had been encouraged to put their retirement funds into Lehman stock, now nearly worthless at 21 cents a share. The New York area is likely to suffer a severe local slowdown because of the Wall Street job losses.

If for some reason you invested large sums of money in Lehman or in shares of related firms like AIG, which lost 61 percent of its value yesterday because of the firm's exposure to the mortgage market, then Black Monday was catastrophic.

But if you're like most Americans who hold retirement funds or investment portfolios in diversified mutual funds that own a large basket of companies, then it was a bad day - but not that bad. The broad indexes were down about 4 percent yesterday, and Wall Street is also in what's known as a "bear market," down more than 20 percent from the Dow's high-water mark above 14,000 in October 2007.

Experts say that holding stocks is still the best value for the long haul and that the bottom of a trough like this is the worst time to sell. "What we are telling our clients is that it doesn't make sense to sell now, not to make decisions on the short-term headlines," said Christopher Kemezis, a Philadelphia-based financial adviser for Edward Jones.

AIG owns more than two-dozen insurance subsidiaries - but experts say that the firm's financial policies shouldn't spill over to policy holders. Adam Sherman, president of Center City's Firstrust Financial Resources, said that life insurance is protected to certain limits in Pennsylvania, such as $100,000 for a cash policy, but historically no insolvency has forced a major firm to withhold death benefits.

The vast majority of U.S. banks are in good shape. But as a handful of investors in states such as California and Georgia have learned in recent months, it's a good idea to keep account balances in any one bank below $100,000, the amount of coverage from the Federal Deposit Insurance Corp.

Believe it or not, you could make the case there are several.

For one thing, the worldwide economic uncertainty has caused the recent bubble of skyrocketing oil prices to burst, with prices plunging at a faster rate than the Dow. Last night oil was down to under $95 for a barrel of crude, the lowest in more than six months. That should lead to lower prices at the pump once the disruptions from Ike are cleared up.

What's more, many experts are expecting that the economic woes will cause interest rates, including those on home mortgages, to decline in the months ahead. The first indications could come today, as the Federal Reserve Board holds a meeting amid speculation of a rate cut.

Sherman said that he expects a rate cut - and maybe a government stimulus package beyond this summer's $600 checks for most adult taxpayers. "We need to jump-start the economy," he said.

There are several. For one thing, the broader economy has been skirting on the edge of a recession for much of 2008, and while things appeared briefly to be looking up, the new job losses, as well as a tight market for credit because of these investment-bank failures, could have a ripple effect. That would mean higher unemployment across the United States, and slower growth.

Another question is the exposure of American taxpayers to the crisis and the impact on the ever-growing federal debt, especially after the government put up $30 billion to back its bailout of brokerage Bear Stearns and last week's potentially expensive move to shore up housing lenders Fannie Mae and Freddie Mac.

"Expect the federal government to do more mortgaging of your children's future in the near term," said Walt Schubert, professor of finance at La Salle University. "That does not mean that the government simply runs a deficit; it means the government runs a deficit financed by foreign citizens." *