Financial crisis 'worst I have ever seen': BMO economist

It might not have had the visual impact of Hurricane Ike in Texas, but Monday's shakeup on Wall Street likely is a similarly "once-in-lifetime" event.

"This is the worst I've ever seen," said Sherry Cooper, chief economist at BMO Financial Group.

What Cooper saw was a financial meltdown with Lehman Brothers becoming the biggest bankruptcy in American history and blue-chip investment house Merrill Lynch & Co. becoming a green light discount special and taken over by Bank of America.

The result at the end of Monday was two financial giants disappearing along with the prospects for a short-term U.S. economic turnaround.

Shaky Wall Street

"It's all basically going down the drain,'' said Franz Wenzel, who helps oversee about $830 billion as deputy director for investment strategy at Axa Investment Managers in Paris, to Bloomberg News. "The rhythm of the shoes that drop has accelerated. That's what we follow with caution.''

As a measure of how bad the Wall Street situation became, stock sellers dumped equity issues at an increasingly rapid pace as the day progressed. 

As markets closed, the Dow Jones industrial index fell 4.4 per cent, or 500 points, and, in Canada, the TSX slid by more than four per cent, or 515 points.  That represented the TSX's second worst day of the year. 

Some equity holders were initially concerned that other financial heavyweights, such as the insurance company American International Group Inc. and the country's savings-and-loan Washington Mutual would follow Lehman into bankruptcy proceedings.

Other investors just decided that the turmoil of Monday combined with recent bad economic news was enough and they sold for peace of mind.

The markets were buoyed somewhat during the day by central bank intervention. The European Central Bank, the Bank of Canada, the Swiss central bank and the U.S. Federal Reserve all pledged more financial resources to allow ailing firms to cover shorter debt coming due earlier.

As well, a group of 10 financial institutions pledged a total of $70 billion US for firms seeking cash.

"These actions reflect the extraordinary market environment. The banks are committed to continuing to work closely with one another ... to ensure the industry is doing everything it can to provide additional liquidity and assurance to our capital markets and banking system," said the group in a press release late Sunday night.

Soothing Talk

Unlike central banks, however, North America's political leaders took a more hands-off approach to Wall Street's problems.

U.S. President George Bush talked about the ability of the country's financial markets to recover on their own.

"In the short run, adjustments in the markets can be painful both for people who have investments and employees of affected companies. In the long run, I am confident that our capital markets are flexible and resilient and can adjust to these developments," he said at the White House on Monday.

U.S. Treasury Secretary Henry Paulson went even further, saying Washington was not interesting in bailing out Lehman.

"I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers," Paulson told reporters on Monday.

Potential suitors for distressed Lehman were scared off in recent negotiations after Washington refused to offer guarantees to possible buyers.

Earlier this year, the federal government did extend public assistance to ailing Bear Stearns, a troubled brokerage firm that was eventually bought by J.P. Morgan Chase.

In Canada, Prime Minister Stephen Harper offered a similarly measured response to the global economic turmoil.

"I don't think now that the atmosphere should turn to one of complete doom and gloom," he said in Ottawa. "My own belief is that if we were going to have some kind of big crash or recession, we probably would have had it by now."

Advisers said individual investors still need to have a strong financial plan — and stomach — to deal with recent ups-and-downs in the equity markets.

"Something [like this] happens every few years," said Dimitri Mastoras, regional manager for BMO Retail Investments in Toronto. "It is how you react that's important."

Nervous markets

Still, that type of stolid attitude might not be long-lasting, either for policymakers or individuals.

Economy watchers are worried that the cataclysm in the financial world could wind up affecting the so-called real economy in terms of lower savings and incomes for individuals and slower GDP growth for the country.

"It's clear we're one step away from a financial meltdown," said Nouriel Roubini, chairman of the consulting firm RGE Monitor.

Thus, Washington might be forced to get more involved if the problems in the investment sector keep growing, experts said.

After all, the underlying health of the economy might not be that important if investors believe the financial problems are growing.

"Just the psychological impact of this kind of failure is going to be significant. It will colour people's feelings about their well-being and the integrity of the financial system." said Samuel Hayes, finance professor emeritus at Harvard Business School.