Having released its results (terrible as they were) early and failing to reach deals to raise desperately needed capital, Lehman went into the weekend trying to sell itself or part of its business. Intense discussions continued over the weekend with an announcement early this morning, Australian time.
Lehman's woes underscore the severity of the credit crisis which began more than a year ago as the US housing slump swelled losses stemming from busted mortgage investments, the recession and loss of value in many other groups of assets from credit cards to leveraged bonds to those nasty CDOs. Even as the Lehman issue was resolved, attention has shifted to other financial firms.
That's why quarterly profits from Goldman Sachs and Morgan Stanley will be of vital importance to market sentiment. Both are expected to report more write-downs, but small profits overall, although the huge drop in trading volumes in the quarterly is hurting commission income.
Broker and investment bank Merrill Lynch, giant insurer American International Group, once the world's largest insurer by market capitalization, are among the other companies threatened by the credit maelstrom.
AIG will also be sold off as investors fear the worse for insurers from the huge hurricane Ike which hit the Texas coast at the weekend. In fact there are estimates that Ike could cost from $US8 billion to $US18 billion. It's only early days and will depend on the amount of damage to oil and gas refineries in the Houston-Galveston area.
As well, there's Washington Mutual, America's biggest retail bank and savings and loan, with $US143 billion in deposits.
Its shares fell to successive lows last week and despite claims it is well capitalised with $US50 billion in liquidity, Bear Stearns and Lehman Bros were heard to make similar claims, to no avail.
This crisis and the one involving Fannie Mae and Freddie Mac will have a direct bearing on US interest rates: the Fed has been at the centre of the Lehman talks and the meeting Tuesday night of its key interest rate setting committee will probably be the most informed of all meetings about the dangers of the credit crunch.
The small group of interest hawks on the Open Market Committee will be very circumspect. Everyone in the US knows that the world's most important set of financial markets is edging towards the precipice that one wrong move or bit of obstinacy from policymakers or regulators could deal a shattering blow to the fragile sentiment.
An interest rate rise would do just that: a rate cut is out of the order, at this stage, unless there's a belief that more relief is needed quickly.
A sharp drop in wholesale price inflation last month might have opened the door to allowing the Fed more freedom to cut that previously thought.
But retail sales last month were much, much worse than thought.
For that reason Tuesday night's August Consumer Price Index on Tuesday will be vital, especially after the fall in the Producer Price Index, as reported Friday. It was actually the largest fall in the PPI, or wholesale prices in nearly two years.
But as prices were declining, led naturally by slumping oil, petrol and commodity prices (helped of course by the rising value of the US dollar), American consumers were staying at home in the millions.
The US Department of Labour reported that wholesale prices fell 0.9% last month, nearly double the 0.5% the market had been expecting, as all types of energy from petrol to natural gas fell sharply.
The Commerce Department reported retail sales dipped 0.3% in August after a big surprise: July's drop of 0.1% was revised to a fall of half a per cent in Friday's figures, indicating that this quarter will almost certainly go close to no growth at all in the US. Consumers account for around 70% of US economic activity.
Some analysts reckon US economic growth could slow from around 3.3% in the June quarter to 1% in this quarter and then no growth next quarter.
Another pointer towards the recessed state of the US economy was the biggest rise in four years in business inventories.
The US Commerce Department said businesses' supplies of unsold goods in warehouses and stock rooms rose by 1.1% in July, compared to market expectations of a 0.5% rise.
It was the biggest rise since July 2004 and the rise came as business sales rose by a smaller-than-expected 0.5% in July, down from a 1.7% rise in June. Economists had forecast a 1.4% rise.
If continued in August, it will keep the economy out of the red this quarter, but in reality it's a sign that US producers were caught short by the surge in demand because of the tax rebate from May onwards and produced too many products.
That means output will contract as businesses re-balance their stocks. That could see unemployment boosted as companies close facilities. While the Fed is expected to keep rates steady at 2%, investors will scrutinize the Fed's accompanying assessment of the economic outlook for clues about corporate profit prospects and about inflation.
Third quarter profit forecasts are too high at the moment with many analysts still having unrealistic expectations about how non-financial and non-energy companies will perform.
Financials will be weak to positively gloomy, energy and commodity companies were earn less as prices fall, retailing will be mixed (Wal-Mart strong, the rest weak) and even exporters will be hurt.
General Electric and other big exporting firms are seeing price weaknesses and an inability to push price rises through and hang on to them as the sharp rise in the dollar forces margin cuts to maintain sales.
GE shares fell 5% on Friday as well, because of fears about the damage being done to its big financial business from the problems in the markets, the sinking economy and retail sales. It's got problems from commercial and residential property as well, while its credit card business is thought to be under pressure from rising default levels among consumers.
That's already hitting other big card issuers, especially American Express.
This week sees a report on August industrial production tonight; the important housing starts figures for last month on Wednesday and on Thursday: weekly jobless claims and a report on business activity in the Mid-Atlantic region from the Philadelphia Federal Reserve.
