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Will bank shake-up affect consumers?

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Let’s see — Lehman Brothers employees haul their belongings out of the New York headquarters on a Sunday night 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.

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 since 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.

“Merrill Lynch has a great franchise — much more retail-oriented franchise — than Bear Stearns or Lehman Brothers had,” says Ely. The key thing for BofA is to not screw things up at Merrill. They need to integrate and cross-sell very slowly and deliberately so they don’t destroy the strengths of Merrill in the process.

“But what really counts for the consumer is intense competition at the local level and I don’t see any of this impeding that in any way.”

Calming customer fears

Robert Ellis, senior vice president of the wealth management group at Celent, a financial services consulting firm, says retail firms need to talk to customers and calm their fears.

“There’s incredible uncertainty and we have a downward stock market. It’s only natural for people to be concerned. What we’re seeing is retail firms getting caught in the backwash of some of the bigger industry problems. We started with subprime, which led to the credit crisis, and now that’s leading to this huge situation with credit default swaps. We’ve seen one crisis after another. But the problems are coming from a proprietary-trading, investment banking world. They’re not coming from a wealth management retail-public world. Unfortunately, most consumers don’t understand the distinctions and so they get nervous.”

In addition to these top tier institutions, many community banks are having financial difficulties and a fair number of them are expected to fail over the next couple of years. Ely says predictions of 150 to 200 community banks failing are probably overstated.

“Of the 11 banks that failed this year, maybe four or five were community banks. The failures this year, particularly the bigger ones, were outliers within the banking industry. IndyMac was certainly not a community bank, nor was ANB Financial. Some of the others may have been in the community bank-size range but they hardly acted like community banks. They were so concentrated in doing construction lending and lending in lots of different markets, which to me is not a community bank.”

The information on how you can protect the assets you have in a bank hasn’t changed. Stay within the FDIC limits or check with the National Credit Union Administration (NCUA) if you have a credit union account.

If you have a brokerage account, the Securities Investor Protection Corp., or SIPC, protects investors at failed brokerages. Visit its Web site for more on how SIPC coverage works.