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Will the investment bank shake-up affect consumers?

Let's see -- Lehman Brothers employees haul their belongings out of the New York headquarters live on CNBC, top officials of the financial world scramble to arrange a marriage between Bank of America and Merrill Lynch, and AIG, one of the biggest insurance and financial services companies in the world, wants a $40 billion loan from the Fed. That's just one weekend's worth of activities following a year that has battered the financial world.

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How concerned should consumers be about all of this?

Mismanaging mortgage risk
"Lehman's failing doesn't mean anything to consumers," says Bert Ely, principal at Ely & Co., a financial institution consulting firm in Alexandria, Va.

"It's an investment bank and it's ultimately going down because of all the mortgage risk it took on and because it didn't manage that risk well. The good news for consumers is that the government didn't rescue Lehman. The problem with Fannie and Freddie is that profits are privatized and losses are socialized. With Lehman, there's a very substantial hit to stockholders, employees and creditors."

Commercial banks such as Bank of America and Wachovia are focused on taking deposits and making loans, as opposed to investment banks such as Lehman Brothers, Morgan Stanley and Goldman Sachs, which are more oriented toward the securities market and can't accept deposits. They're in the business of raising capital and managing financial assets.

Retail banks on the ropes, too
Clearly, not just the investment banks are gasping for air. Wachovia has acknowledged billions of dollars in losses, tossed out the CEO and has a new man working to turn the bank around. Washington Mutual, the nation's biggest thrift institution, has been dealt a severe, possibly fatal blow, from bad mortgage loans. A new CEO has been brought on board and is fighting through a reportedly dire situation.

Ely is in the camp that thinks Washington Mutual is too weak to make it over the long term. He says he's intrigued by discussions that have gone on with once-spurned suitor JP Morgan Chase, particularly since JP Morgan didn't participate in this weekend's activities. Wachovia, says Ely, will probably work through its issues.

There has been a lot of talk about whether the FDIC could absorb a loss the size of Washington Mutual. Ely points out that it's not about the FDIC because the agency has no resources of its own.

"The FDIC assesses its losses on the banking industry. So the question is, does the banking industry have the resources, and I would say yes."

Bank of America's acquisition of Merrill Lynch, a huge global wealth management firm, puts another load on BofA's shoulders.

Next: "The key thing for BofA is to not screw things up at Merrill."
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