State sure to feel effects from Wall St. meltdown

Sep 16, 2008 (New Haven Register - McClatchy-Tribune News Service via COMTEX) -- LEH | Quote | Chart | News | PowerRating -- Sep. 16--Wall Street may be in New York City, but the descent of the mammoth investment firm Lehman Brothers Holdings Inc. into Chapter 11 bankruptcy protection Monday, along with Bank of America's acquisition of the Merrill Lynch & Co. investment bank, will be felt in Connecticut, experts say.

The state's Fairfield County area is linked to Metropolitan New York, with many of its residents commuting into the Big Apple to work. Due to layoffs, primarily in the financial sector, approximately 36,000 to 40,000 jobs have been lost, said Donald Klepper-Smith, chief economist at DataCore Partners LLC in New Haven and economic adviser to Gov. M. Jodi Rell.

Expect job dislocations to continue, personal assets to

deflate and consumer consumption to decline, all of which will lead to less revenue for the state from personal income taxes and sales and use taxes, Klepper-Smith said.

"There are too many questions and not enough answers right now," he said. "For every investor in the stock market, this undermines confidence. Investors don't feel good, businesses don't feel good and consumers don't feel good."

The stock market went into a tailspin over Lehman's bankruptcy filing and what amounted to a forced sale of faltering Merrill Lynch to Bank of America for $50 billion in stock. The Dow Jones industrials fell 504.48 points, or 4.42 percent, to 10,917.51.

From a historical perspective, Monday's trading activity marked the worst point drop for the Dow since it lost 684.81 on Sept. 17, 2001, the first day of trading after the Sept. 11 terror attacks. It also was the sixth-largest point drop in the Dow, just behind the 508.00 it suffered in the October 1987 crash.

The Standard & Poor's 500 index declined 59.00, or 4.71 percent, to 1,192.70, and the Nasdaq composite index fell 81.36, or 3.60 percent, to 2,179.91.

In an unexpected move, the insurance and financial services giant American International Group talked to the Federal Reserve Monday about securing an emergency line of credit. As investors flee, falling stock prices are forcing the company to sell assets.

"The only time worse than this was the 1930s. This is probably the worst crisis of our lifetime, and probably the second-worst in history," said Paul Schatz, a wealth manager and founder of Heritage Capital LLC in Woodbridge.

The bear market has not yet bottomed out, so it has yet to see a turnaround, he said. Schatz lauded the federal government's decision not to commit taxpayers' dollars to rescue Lehman Brothers.

"Institutions must be allowed to fail in order for capitalism to survive," Schatz said. "Certainly, this is the continuation of the lesson we should all learn from the housing crisis: There's no free lunch."

The swift developments that began over the weekend are the biggest yet in the 14-month-old credit crisis that stems from toxic, coast-to-coast subprime mortgages and home values that keep falling.

"There are no signs these (investment bank) write-downs are done," Klepper-Smith said. "All we know is, we have these aftershocks reverberating."

State Treasurer Denise Nappier issued a statement assuring taxpayers that despite the latest market upheavals, Connecticut's $25 billion pension fund remains intact.

"As long-term investors with a well-diversifie d portfolio, we are well-positioned to weather this latest turbulence," Nappier said.

"Like the rest of the country, we are experiencing some falloff; however, we are faring better than many, and I remain confident we will come out ahead over the long term," she said.

The state's position in Merrill Lynch has been strengthened, due to the proposed takeover by Bank of America, Nappier said, adding that as of Friday, the book value of Connecticut's equity stake stood at $38 million, and the book value of its debt position at $10 million.

Together, these investments represent two-tenths of 1 percent of total assets, she said. The state also holds $130 million of Merrill Lynch debt in other short-term portfolios.

Connecticut's pension fund also has exposure to Lehman Brothers. The state holds an equity stake in Lehman Brothers with a book value of $19 million, and a debt stake with a book value of $33.3 million. "The outlook for these holdings has certainly been compromised due to the bankruptcy filing; however, the ultimate value remains to be determined," Nappier said.

The investments in Lehman Brothers also represent two-tenths of 1 percent of total assets.

The governor said in a statement that she held a conference call Monday with the three commissioners of the state departments of Community and Economic Development, Insurance and Banking.

"They stated that Connecticutbased banks and insurance companies are sound at the current time and that these Connecticut businesses are in far better shape than their counterparts," Rell said, adding that the commissioners were directed to closely monitor conditions.

Lehman Brothers stock price closed Monday at 21 cents per share, down $3.44; Bank of America shares closed at $26.55, down $7.19; Merrill Lynch closed at $17.06, up 1 cent; and AIG closed at $4.76, down $7.38. All are traded on the New York Stock Exchange.

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