Stock Market Game Week in Review

For Stock Market Game teachers, here's a look at the Lehman Brothers crisis, Enron and the importance of diversification.
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The Stock Market Game is a curriculum-based teaching tool that allows students to invest a hypothetical $100,000 online stock portfolio to learn about long-term saving and investing.

Unfortunately, this week's headlines carried bad news on and off Wall Street. While the National Weather Service in Houston warned Ike may bring "certain death" for residents along Galveston Bay, the topic on the Street right now is whether or not

Lehman Brothers

(LEH)

will suffer the same fate as

Bear Stearns

.

It's been a tough week for the nation's fourth-largest

investment bank

as the company's stock plummeted after reports of its nearly $4 billion

quarterly

loss -- its biggest ever since the company went public in 1994. Lehman has reportedly reached out to a number of banks and rival investment houses about a possible deal to buy the company, although on Sunday

Barclays

reportedly

was emerging as the leading potential buyer

.

Reuters

reported that U.S. Treasury Secretary Henry Paulson is "adamant" that no government money be used in any deal that resolves the Lehman crisis.

In other news, Enron shareholders and investors will split about $7 billion from financial institutions accused of participating in the fraud that caused the company to collapse. Close to 1.5 million individuals and other entities will be eligible to share in the distribution under the settlement plan, which is the largest ever in a U.S.

securities

fraud case. The distribution plan was part of a $40 billion lawsuit filed by shareholders and investors claiming

Bank of America

(BAC) - Get Report

,

JP Morgan Chase

(JPM) - Get Report

,

Citigroup

(C) - Get Report

and other smaller players were involved in the accounting fraud that led to Enron's demise. In its heyday, Enron was the biggest energy-trading house in the world and the nation's seventh-largest publicly traded company, with a

market cap

topping $60 billion.

The Enron scandal is probably the best example of why the concept of

diversification

is so important and should be introduced to your students early in their SMG session. Diversification means creating a portfolio containing different types of investments within each of the major asset classes: stocks,

bonds

,

mutual funds

and cash.

A diversified portfolio might include stock in several different companies or a number of stock mutual funds,

government

and

corporate bonds

, and U.S.

Treasury Bills

. While The Stock Market Game program is limited to

common stocks

and mutual funds (some states have recently included bonds), students can diversify their portfolios easily by selecting stocks and funds from different

industries and sectors

. By diversifying, portfolios are protected against market downturns and are able to take maximum advantage of market conditions.

The most destructive effect from the Enron scandal was its impact on company employees. Many did not diversify their portfolios and when the company declared bankruptcy, they were not only without jobs, but also in many cases, their life savings as the company's stock became worthless. The scandal also prompted U.S. regulators to create the

Sarbanes-Oxley law

, establishing new rules to police and restore public trust in corporate America. The "Matching SOX" issue of

In the News

tackles the topic of corporate governance and the Sarbanes-Oxley law. The newsletter is located in the Publications section of the

Teacher Support Center

. Be sure to also check out the "What is Diversification" core lesson which helps students interpret company and industry charts to determine which investments to make with their SMG teams. This lesson is located in the "In the Classroom" section of the

Teacher Support Center

.

To learn more about The Stock Market Game, visit www.stockmarketgame.org.

This article was written by a staff member of The Stock Market Game.