The demise of Lehman Brothers (NYSE:LEH) will have a ripple effect in the wider financial markets, says Jennifer Yousfi. Creditors around the world will lose money on the company’s $613 billion debt. And the liquidation of Lehman’s portfolio - a liquidation on an unprecedented scale - will have a market-flooding effect, driving down asset values and stock prices to dangerously low levels. This from Money Morning:

Filing for bankruptcy could mean a quick sale of the stocks, bonds and derivatives in Lehman’s portfolio, according to Oppenheimer (NYSE:OPY) analyst Meredith Whitney, Bloomberg reported.

“Due to the liquidation of unprecedented scale, we expect a broad-based decline in marks on asset values,” Whitney wrote in a report. That “will force the other brokers to mark down their assets accordingly, and therefore pressure all capital ratios.”

Flooding the market with billions of dollars in securities for sale when the market is already feeling immense pressure in the financial sector is going to put even more downward pressure on share prices.

“Bankruptcy severs all counterparty contracts, and therein lies the systemic risk,” David Kotok, chief investment officer of Vineland, N.J.-based Cumberland Advisors Inc., which manages $1 billion, told Bloomberg. “This would be the first time we’ve tested how much damage will be done by a bankruptcy.”

According to Bloomberg data, Lehman owes more than $157 billion to its 10 largest unsecured creditors, which includes $155 billion in bondholders’ assets.

Lehman’s top creditors include several Asian banks. Tokyo-based Aozora Bank Ltd. (PINK:AOZOF) is the largest single creditor listed in the bankruptcy filing and is owed $463 million for a bank loan, Bloomberg reported. Mizuho Corporate Bank Ltd. (ADR:MFG) is owed $382 million, while a Hong Kong-based Citigroup Inc. (NYSE:C) unit is owed an estimated $275 million, according to the filing.

As the fallout from Lehman’s bankruptcy continues to unfold, global financial firms, which have already taken more than $510 billion in credit-related losses and writedowns to date, have to prepare for an even bumpier ride.

“No one, currently working on Wall Street, has ever experienced a credit event like the one we are currently facing,” Bernstein Research analyst Brad Hintz, a former Lehman chief financial officer, wrote in a note to investors earlier this month, MarketWatch reported. “The credit events the market has lived through since 1980 … appear like ripples in a pond compared to the plunge we are currently experiencing.”

Source: Buyout of Merrill and Bankruptcy of Lehman Heightens Worry of U.S. Credit Crisis Pain Still to Come