The expected demise of Lehman Brothers and other investment banks will in the long term be a good thing for the market as the excesses of the past decade, which fuelled the complex instruments that ultimately lead to the recent volatility, are flushed out of the financial system.

Towards the end of yesterday the market was informed that Lehman Brothers Holdings Inc., the fourth largest US investment bank, had become the latest victim of the sub-prime mortgage crisis as it became the biggest bankruptcy filing in history. On the day, the S&P 500 fell 4.7%, the largest one day fall since the September 11 attacks.

The 158-year-old firm, which survived tough times such as the Great Depression in the 1930s, filed for Chapter 11 protection with the US Bankruptcy Court in Manhattan. The collapse of Lehman, which has listed more than US$613 billion of debt, takes over the mantle from WorldCom Inc.'s insolvency in 2002 as the largest bankruptcy in history.

As we said in the last broadcast of StockWatch, any news on Lehman would govern the short term direction of our market and so it has occurred.

Why has this news affected the market globally?

First and foremost this news was expected by the market and therefore does not come as a surprise. That said, the fact one of the old New York power firms has had to close its doors as a result of this global crisis is enough to send shockwaves through the market.

Also, with Merrill Lynch making the decision to yield to the offer from Bank of America for US$50 billion, question marks continue to surface on the stability of the financial sector.

With three large Wall Street investment banks (Bear Sterns, Merrills and Lehman) collapsing, there is a fundamental shift in the power base of financial strength globally.

So why is the market falling if it was expected?

The recent selling is more based on the idea that the financial sector may now be in line for further writedowns as Lehman fails to meet some of its existing commitments. News from the US state that they believe around 60 cents in the dollar will be paid to senior credit holders. While initially talk was around a last minute deal coming through, the stand-off comments from the US Federal Reserve and Treasury who said they wouldn't support another Wall Street meltdown spooked potential suitors and the inevitable happened.

That said, if they felt the impact of failure would have been significant enough they would have intervened as they did with Freddie Mac and Fannie Mae, however both must have looked at the numbers and made a call that it could afford Lehman to go under, and an important lesson is learnt by all.

There is speculation that AIG and Washington Mutual are the next two financial companies about to come under stress and will lead to a continuing downgrade of the sector.

Is the worst over and what does it mean for our market?

Our previous opinion of continued volatility in the short term remains in play. Our opinion that this is a great long term buying opportunity remains unchanged.

Until the market learns that sound fundamentals and performance are the only way to generate sustainable returns we will continue to have events occur such as yesterday.

We do expect to see more short-term volatility as the rest of this plays out and a number of these high risk enterprises de-leverage their balance sheet. The US Federal Reserve is meeting today to discuss interest rates, but we expect there will be more on the agenda following recent developments.

The first task however will be to ensure that sufficient liquidity remains in the credit market given that there will be a hole following Lehman's closure.

Unfortunately until the market regains confidence in the stability and the orderly nature of trading then volatility will remain.

Despite this, we continue to hold the opinion that our economy remains very robust and we do not expect to see a similar scenario as developed in the US. What is most frustrating and really doesn't make sense is that our market has underperformed that of the US! This should mean that when this turmoil ends we will be in a great position to benefit.

Hopefully sanity remains and the natural order of the markets returns sooner rather than later, rewarding long term investors who have continued to hold quality investments.

The important point to make is that now is NOT the time to panic.

If you are holding questionable companies then safety first is what we have been advising for some time. However if your investments are quality then you just need to ride out this storm because when it passes your portfolio needs to be positioned in quality businesses and investments in order to fully benefit from any recovery.