Lehman's woes heighten worries about other firms

By Elinor Comlay and Jonathan Stempel - Analysis

NEW YORK (Reuters) - As Lehman Brothers Holdings stared failure in the face on Sunday, anxiety intensified about the health of several other big U.S. financial institutions.

"We will see other major financial firms fail," former Federal Reserve Chairman Alan Greenspan said.

"Indeed, we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers," he said on the ABC program "This Week."

The implosion of Lehman, wracked by worries about losses in its portfolio of tens of billions of dollars of mortgages and real estate, comes six months after rival Bear Stearns collapsed and a week after the government took over mortgage companies Fannie Mae and Freddie Mac.

Lehman's travails have already heightened concerns about American International Group Inc, Merrill Lynch & Co and Washington Mutual Inc, whose shares all lost more than one-third of their value last week.

Merrill is in merger talks with Bank of America, the Wall Street Journal said on Sunday, citing people familiar with the matter.

Nouriel Roubini, a New York University economics professor who predicted the U.S. housing crisis, said the government lacks the wherewithal to step in every time a big financial firm fails.

"I don't see any simple solution to this mess," he said.

As stock prices fall, it becomes harder to raise capital.

And with recent capital injections into Citigroup, Merrill, Wachovia Corp and Washington Mutual under water, investors may conclude that further infusions may be a case of throwing good money after bad -- especially with the value, and perceived future value, of real estate assets heading south.

"That appears to be the major stumbling block for the commercial banks," said Gerard Cassidy, an analyst at RBC Capital Markets.

"If you were to truly mark them to market, the decline in value could be too large for them to be able to digest without raising equity capital."

So far this year, 11 mostly smaller lenders have failed and dozens may also go under in the next two years, analysts say.

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Roubini cited Merrill as being under particular stress, and said the problems could even spread to other big investment banks, Morgan Stanley and Goldman Sachs."The fundamental model of the broker-dealer is flawed," he said.