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Investments take a hit. Bank deposits are safe. No improvement soon
By Kevin G. Hall
McClatchy Newspapers
Published on Tuesday, Sep 16, 2008
WASHINGTON: Here are some answers to questions about the big changes in financial news:
Q: What does all this Wall Street volatility mean to me?
A: If you have a 401(k), or shield some of your income from taxation through an IRA or a lot of your retirement savings are in stocks, you've already seen a sharp drop in value. The Dow Jones industrial average is on pace for one of its worst years ever, but even if you've parked your cash in a bank, today's rising inflation is eroding its value.
Q: Is this like 1929, when the stock market's crash led to widespread bank failures and the Great Depression?
A: No. The intervention so far by the Federal Reserve and the Treasury, the existence of federal deposit insurance for national bank customer accounts and the willingness of Congress and the president to fight the downturn with fiscal policy all underscore that there are cushions in place that didn't exist 80 years ago. Still, today's financial turmoil could spread, and the economy could suffer more before stability returns.
Q: Will the collapse of Lehman Brothers make things worse?
A: It could, or it could make things better. The weekend meetings between top federal regulators and senior executives of Wall Street firms resulted in the surprise takeover of Merrill Lynch by Bank of America and a lack of suitors for Lehman. Some analysts feared a Great Depression-type of financial-market meltdown Monday morning, but markets were orderly, not panicked, as news of the events sank in.
With the government-brokered sale of investment bank Bear Stearns in March, Bank of America's absorbing of Merrill Lynch and the bankruptcy filing by Lehman, Wall Street's weakest players have been pushed off the field.
Goldman Sachs, Morgan Stanley and JP Morgan remain the biggest traditional investment banks, and Merrill is expected to keep operating under its own name. The consolidation in investment banking has taken most insolvency concerns off the table, and over a longer horizon, this could point toward a return to stability.
Q: What about the shorter horizon?
A: The chief executive of Bank of America, Kenneth Lewis, said Monday that he didn't see the clouds parting for his industry until 2010. Banks that still have exposure to the complex mortgage bonds that are at the heart of the crisis continue to get hammered. That includes Wachovia of Charlotte, N.C., and Swiss giant UBS.
This financial crisis is still rooted in bad mortgages that were packaged into bonds and sold to investors. As long as home prices keep falling, investment and commercial banks that own vast piles of those bonds will keep taking write-downs and their bleeding will continue.
Q: How do these banking-sector problems affect me?
A: Problems in the banking sector spill into the broader economy. As these complex Wall Street investments sour, banks need to keep more capital on hand to assure investors that they can weather any future losses from loan portfolios. That means banks are playing defense.
If you want a business loan, car loan, home loan, student loan or virtually any other kind of loan, they're hesitant to lend, lest they wind up with more bad loans. With lending drying up, auto dealers are sitting with inventory they can't move and real-estate agents are showing homes they can't sell. The economy is slowing as credit is squeezed.
The crisis feeds on itself. As banks and corporations are perceived to be short of capital and their stock prices fall, their need to raise capital grows even as lenders are defensive. That forces them to sell assets at low prices, and it becomes a vicious circle. That's what insurance and finance giant American International Group now faces.
Q: Given all these risks, why isn't the government bailing out Lehman Brothers?
A: Bailouts are in the eye of the beholder. The Treasury Department and Federal Reserve determined that Lehman's problems had been well publicized since at least spring, other financial players had made adjustments to that and Lehman's failure thus didn't pose a risk of contaminating the broader global financial system the way the sudden failure of Bear Stearns would have if the feds hadn't intervened. But make no mistake, a bailout of Wall Street has been under way since last March, and deepened this weekend.
What the Federal Reserve began in March and expanded Sunday is the practice of taking all kinds of collateral in exchange for short-term emergency loans to investment banks. Previously, investment banks had never enjoyed this sort of borrowing because they aren't regulated the same way commercial banks are. The Fed now accepts as collateral a wide range of debt, securities and even the controversial mortgage bonds issued by the private sector and by Fannie Mae and Freddie Mac. The Fed also is now lending to financial institutions that it doesn't regulate.
WASHINGTON: Here are some answers to questions about the big changes in financial news:
Get the full article here.
Comments
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Posted 08:00 AM, 09/16/2008
What's wrong with this picture? Corporate welfare run amuck. What are taxpayers getting from our taxes? Bailouts for giant corporations addicted to money making at taxpayer expense. Whatever happened to government for the people? Where is our bailout?
m, m
Posted 10:10 AM, 09/16/2008
all tbe while CEO's are pulling in 30 million a year in pay. small banks got gobbled up in the 80's and 90's in the name of deregulation. Big companies=big bucks for political favors
Posted 11:27 AM, 09/16/2008
I personally feel that they all deserve this, if they had not all been so greedy then the bad home loans would never have been made. If the loans had not been made and every one had not started loosing so much money, then they would not have scrambled to the oil market and thus artificially inflated those prices and now they are loosing their shirts there. Let them all fail and get things back to where they belong.
Posted 02:08 PM, 09/16/2008
The ignorance of the posters on this forum amazes me. Or perhaps it doesn't. All of this "they got what they deserved" and "let them fail" talk is rather petty and sad. These institutions employ thousands of Americans. If they fail, those people lose their jobs. They were also a source of capital for mortgage lending and other loans. When you can't get an auto loan or a home loan or you can't find anyone to buy your home then maybe you'll rethink your "I'm glad they went out of business" childish mentality.
Orrville, Oh
Posted 02:58 PM, 09/16/2008
Enabling banks stockholders (money marketers) to can the more stock dividends (money) quarterly in their portfolios. Derived from workers, consumers, taxpayers, and America’s children and grandchildren wages or independent business profit. Makes complying with realities demand demanding every Human Being produce the amount they use for life. For wages or independent business profit. Enabling him or her to pay with money for every product and service. They need to love, nurse, nurture, discipline, protect, and provide for every child (job) they conceive. http://www.loreneberly.com
Posted 08:22 AM, 09/17/2008
Say what you will, the quote by the famous bank robber John Dillenger still holds true; "For any bank to prosecute a robber is the height of gall"
