Wall Street's financial meltdown raises many questions

The events that roiled Wall Street this weekend and Monday raised real fears about the health of the nation's financial system.

Investors and bank customers no doubt have a lot of questions about what's going on, whether their money is safe and how long this turmoil may last. Here's what some local and national investment advisers and economists had to say:

What should individual investors be doing right now?

Avoid panic. Yes, portfolios and retirement funds such as 401(k)s are taking a beating, but financial advisers caution investors, especially long-term investors, against the urge to sell. Instead, they should consider realigning their portfolios and adding stocks, said Graham Spiers, chief investment officer at the investment-advisory firm Waypoint Advisors in Norfolk. "It's painful," he acknowledged. "It's hard to make the decision to buy into weakness."

"I have no idea of how this will end, but we'll get through this," said Spiers, who said many investors have money on the sidelines waiting to be put to work.

Are investment accounts at brokerage firms still safe?

Up to a point. The Securities Investor Protection Corp. protects the cash and securities - such as stocks and bonds - held by a customer at a financially troubled brokerage firm such as Lehman Brothers. But it doesn't work the same way as the Federal Deposit Insurance Corp. does for bank deposits.

Does this turmoil threaten the safety of insured deposits at commercial banks?

No. Concerns about financial weakness at a California savings bank, IndyMac, triggered a run by depositors in July, and the number of bank failures so far this year has been climbing. However, the FDIC has stepped in to protect insured deposits.

Financial advisers and those familiar with bank conditions insist that deposits of up to $100,000 per account remain secure. It's possible to have more than $100,000 of insured deposits in a single bank by checking with the institution, said Bruce Whitehurst, president of the Virginia Bankers Association.

Savers concerned about insurance limits on deposits or about the financial condition of a particular bank can find information on the FDIC's Web site, www.fdic.gov.

How will this affect individuals hoping to borrow?

If you want a business loan, a car loan, a home loan, a student loan or virtually any other kind of loan, banks are hesitant to lend, lest they wind up with more bad loans.

"Interest rates might be a little bit higher, especially for individuals who don't have stellar credit," said Christine Chmura, president of the Richmond forecasting firm Chmura Economics & Analytics.

Does that hurt the economy?

With lending drying up, auto dealers are sitting with inventory they can't move and real estate agents are showing homes they can't sell. The economy is slowing as credit is squeezed.

The collapse of Lehman Brothers and Merrill Lynch's agreement to be acquired came in the wake of the government rescue of mortgage companies Fannie Mae and Freddie Mac and bailout of brokerage firm Bear Stearns. When is this upheaval among financial institutions likely to subside?

Financial advisers in Hampton Roads said they don't see a quick resolution to the difficulties at giant brokerage firms and banks. So far, most of the difficulties have involved heavy losses on their mortgage-backed securities.

"This has yet to roll through the corporate sector," said Larry Bernert, a principal at the Norfolk money-management firm Wilbanks, Smith & Thomas Asset Management. "Banks haven't written down the values of the loans used for leveraged buyouts," the corporate takeovers that relied heavily on borrowed funds.

At the money-management firm Palladium Partners in Norfolk, principal Katherine Willis described Monday as "a bloody day in the market," and "we've got more to go," she said. "We don't know how the landscape will unfold."

Willis expressed surprise that large financial institutions such as Lehman had not acted more aggressively to curb their exposure to the risks of mortgage-backed securities. "What's startling," she said, "is how companies that were worth billions of dollars and run by very bright people could find themselves in these situations."

What led to the problems at Lehman Brothers and Merrill Lynch?

A. Many of the large banks and brokerage firms that packaged and sold mortgage-backed securities aren't sure what the securities still on their books are worth. That problem is complicated by Wall Street's growing uncertainty over how much particular banks and brokerage firms would owe one another if one of them defaulted, Spiers of Waypoint Advisors said.

A recovery in the nation's housing market would help. One source of the problems afflicting giant banks and brokerage firms was overbuilding in housing, Chmura, the Richmond economist, said. "The housing sector is not going to pick up until the inventory is worked off."

In some parts of the country that witnessed explosive building activity earlier in the decade, falling prices have already begun to reduce the inventories, she said.

The Associated Press contributed to this report.