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Bear Sterns. AIG. Lehman Brothers. Even Goldman Sachs. The list goes on. Large companies are failing or having liquidity problems in droves. The mortgage crisis is impacting every corner of the global business climate. It’s an interesting note that Oracle is boasting record profits despite the tough economic situation. This will not last. Organizations will not put up with being ripped until they can move to something else. Oracle is nearing the end of it’s stranglehold on software. Why? Open source.

So what does this mean for IT budgets? Aggressive cost cutting. Everywhere. Firms are beefing up on cash and cutting expenses in every area, including IT spending. The first thing to go will be expensive software licenses and internal IT budgets. The problem is that CIO’s can’t eliminate software functionality. However they can move quickly to more cost effective solutions. Expensive proprietary licenses can be eliminated and IT staffing can be reduced.

I happen to run an open source/SaaS firm, and we’ve noticed an upswing in interest from a broad swath of businesses. Why the upswing? 3 major reasons:

1. Flexibility – Businesses are tired of getting locked into a feature set.
2. Control – If the vendor or solution doesn’t work, businesses want the assurance they can take their software and data elsewhere.
3. Cost – Our on-demand (SaaS) and on-premise solutions are 50% below market rates for closed-source solutions.

Let me make a bold statement: an economic downturn of this scale has the potential to change not only the financial sector landscape, but also the software development and delivery industry. High-cost proprietary vendors will have an increasingly difficult task of selling value to an increasingly cost-conscious business world. Open source software has the potential to offer robust software, compatibility and interoperability, and a price point that becomes increasingly attractive.

Software as a Service (SaaS) is also a trend that is poised to gain significant traction because of recent events. Organizations are looking to shed overhead and assets in favor of a dynamic model that can scale with their business. Investing in expensive IT equipment like servers, network equipment, and the staff to run it all is a fixed cost. You can’t run servers with no staff. SaaS solves this. Businesses can grow and shrink dynamically and connect IT costs directly to business size and objectives.

In a time where most businesses are taking big hits, I’m very bullish about the open source/SaaS market. I’m watching it on the ground level, and I see the value proposition growing stronger in many hurting industries.

This morning another historic event occurred: Lehman Brothers filed for chapter 11 bankrupcy. With $615 billion in direct liabilities, it will be by far the largest bankruptcy in history. Lehman is 158 years old, and a longtime pillar of Wall St. However in recent weeks the bank has come on hard times due to bad bets on mortgage securities. The resulting losses caused major credit downgrades and produced a situation that made it more expensive for Lehman to fund transactions than the revenue it created. The bank fell fast; it was only Friday that executives had an emergency meetings. Today they are in full chapter 11 (liquidation) bankrupcy.

A bankruptcy of this size is unprecedented, and it’s really unknown what it will do to the rest of the market. It could cause a cascading effect on other financial institutions and create a truly unstable financial marketplace. Another note: this is 2008, and the world is connected financially. European and Asian markets are already plummeting on news.

So I’m not a doomsday guy, but this level of instability is a little scary. It will be interesting to find out just how resilient our global financial system really is.

The next 48 hours or so will be fascinating to watch!

It’s finally official. The US government is now running the two largest mortgage backers. It’s more of a rescue than a takeover, as both institutions were forecast to go insolvent in the coming months. Collectively they back $5 trillion in mortgage debt, about half of the total mortgage debt today.

I was a little surprised when I read the news, as it was looking like Freddie and Fannie might just need a little additional liquidity to operate until the market stabilized. A full government takeover goes much further. To start with, the existing CEO’s of both companies are now removed, and finance heavyweights David Moffett (US Bancorp) and Herb Allison (TIAA-CREF) will be running the firms. Another interesting development is that the institutions charitable contributions will be reviewed.

It appears that the government wants to cut the fat and get these institutions back to doing their core function: providing stability to the mortgage market. All the special terms for acquiring financing may have caught up to the firms, and it once again shows that government favoritism for private entities doesn’t help anyone in the long run.

Watching this all flush out in the coming months will be fascinating. The losers in the end are you and I: US taxpayers. It will likely cost tens of billions before this is all behind us. This fiasco will be another line item on national budget that has an insane negative number with way too many zeros behind it.