A bad day on Wall Street Monday may have repercussions on main streets all over America as hometown banks tighten their lending guidelines and people shut their wallets in response to falling stock account values, Rapid City residents say.

Stock prices plummeted on Monday as the New York Stock Exchange absorbed the news that investment banking giant Lehman Brothers was bankrupt and Merrill Lynch had been sold in the wake of huge losses in the sub-prime mortgage markets.

Sitting in bright sunshine outside Wells Fargo bank, Pete Geyerman, 77, worried his way through a hot dog at Chuck Campbell's sidewalk hot dog cart. Retired from careers in the clothing business and radio sales, Geyerman considered the falling value of his own stock market investments while wondering about the overall stability of the U.S. financial markets.

"I grew up in the Dirty '30s, when one crisis snowballed into another," he said. "You could have things snowball again."

Inside the downtown Rapid City bank, Pete Cappa, district president of Wells Fargo for western South Dakota, agreed that Wall Street's woes "definitely adds to the fear and the uncertainty in the financial markets" that his customers are feeling right now.

"Investors of today are really nervous at the moment," Cappa said. "I think people right now are migrating to little or no risk."

Wells Fargo weathered the sub-prime mortgage crisis well, Cappa said. "We never really got into the subprime market." His bank consistently ranks number one or two nationally as a mortgage originator, but it sells them to other investors instead of holding them.

Former investment banker John Quinn said Geyerman was justified in worrying about what he called "the worst thing to happen to Wall Street since 1929." Quinn spent 28 years in the investment banking business, six of them with Merrill Lynch. Today he serves as chief executive officer of the Rapid City campus of National American University.

"There's an enormous amount of wealth destruction going on in the financial markets," Quinn said. He called the historic news about the downfall of Lehman and Merrill Lynch "housing-fueled disasters" caused by the implosion of a housing bubble, a sub-prime mortgage crisis and investment banks that were under capitalized and over leveraged.

"Some investment banking firms have just $1 in capital for every $30 of debt," he said.

Unlike hometown banks, investment banks handle the issuing of new securities and also provide the financing for large mergers and acquisitions.

Their huge debt ratios, combined with an overbuilt housing market, are a lethal mix, said Norbert Sebade, president of First Western Banks in western South Dakota.

"These are very trying times in the financial markets, but this is not a result of a bad economy. We must remind ourselves that the root of this problem with investment banks is directly related to poor lending practices and the excessive use of leverage," Sebade said. "When you combine those practices with an overbuilt housing market you have an upheaval in the market."

Sebade predicts that large and small banks all over the country are going to tighten their lending guidelines in an effort to keep this crisis from spreading to other sectors of the economy.

Quinn agrees.

"In the very short term, credit standards are going to be raised even higher. Credit will be even harder to get, especially for people at the margin," he said.

And a crisis on Wall Street and in the housing industry can easily leak over into other sectors of the economy, Quinn said.

"If the value of your stock portfolio and your house are both falling, you don't feel like going out and spending a lot of money," he said.

Campbell took time out from selling hot dogs Monday to say he plans to "sit tight and not panic" when it comes to his stock investments. He prefers to take a long-term view, and a skeptical one, of investing.

"There's nothing I can do about it anyway," he said. Campbell said he is not even worried about the Bank of America stock he owns, although both Quinn and Geyerman said they might be. Bank of America will spend $50 billion to buy Merrill Lynch.

"I'd stay away from the financial sector. We don't know where the bottom is yet, and as bad as those stocks are right now, it could get even worse," Quinn said.

There's plenty of blame to go around, Quinn said, but Geyerman placed the bulk of it squarely on the Bush administration for its lack of government oversight and regulation of the financial markets. He laments the taxpayer-funded bailouts of financial giants Freddie Mac, Fannie Mae and Bear Stearns as necessary, but expensive, solutions to averting financial collapse in the mortgage industry.

"Who's going to pay for it?" he asked. "Not me. I won't be around that long, but others will."

The downfall of Lehman Brothers, Merrill Lynch and Bear Stearns leaves just two of the five major U.S. investment banks that existed at the beginning of 2008 intact. Only Morgan Stanley and Goldman Sachs remain.

Spokesmen at local branch offices of both Merrill Lynch and Morgan Stanley declined comment Monday.

Contact Mary Garrigan at 394-8424 or mary.garrigan@rapidcityjournal.com