Sunday, September 21, 2008

nightmare on wall street

There's a lot going on in politics, economics, and the financial realm right now. The media is doing its best to shock everyone into attention and frankly it's working. "Congressional Leaders Stunned By Warnings" led me to call my dad and inquire about his plans for retirement funds in the stock market right now. His reply? "Girl I don't even have power, you think I'm worried about the stock market right now?" I urged him to investigate asap when he's on company resources tomorrow. We learn in finance to invest what you're able to lose and ride out the bumps and bruises that the market might give you because you can't let the little things deter you from the overall upwards trend of the markets. But what if all the rules are changing? You can catch up on everything and get a breakdown of what's breaking down with this article from the WSJ: "Worst Crisis Since '30s, With No End Yet in Sight."

The U.S. financial system resembles a patient in intensive care. The body is trying to fight off a disease that is spreading, and as it does so, the body convulses, settles for a time and then convulses again. The illness seems to be overwhelming the self-healing tendencies of markets. The doctors in charge are resorting to ever-more invasive treatment, and are now experimenting with remedies that have never before been applied. Fed Chairman Bernanke and Treasury Secretary Henry Paulson, walking into a hastily arranged meeting with congressional leaders Tuesday night to brief them on the government's unprecedented rescue of AIG, looked like exhausted surgeons delivering grim news to the family.

Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can't pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.

Ben Bernanke has got the whole system on hush mouth right now because the system is suddenly incredibly fragile and one false move could push our fickle and volatile markets over the edge. AIG, the insurance giant with a titanium rating, was all healthy a few months ago and fell straight to pieces almost literally overnight. All of the complicated financial derivative instruments that investment bankers have been inventing since 1980, to the point that not even they understand them all much less the regulators that are supposed to be keeping an eye on the bankers and policing the greed, are looking more and more culpable in this financial turmoil of ours. It would seem like a great time to get into options except the SEC suspended short selling. That's going to screw hedge funds up even more than they already are with the credit crunch going on and the fall out that is seemingly endless from subprime mortgage lending.

My opinion? America, and subsequently the greater financial world, got too greedy. We lost our integrity in granting loans to people we knew couldn't pay them off. The accountability got lost deep in the chain of command and now the fallout is spreading like cancer. I'm a 50 year old woman making minimum wage. You give me a loan saying it's going to have 2% interest and it'll increase later...but I can pay it, I shouldn't worry about it. You take the accounts receivables that I owe you and bundle it up with a lot of other people's loans who are in the same boat that I am. You sell that bundle to a big bank who can buy it cheap because the risk is so high that we won't pay -- but people have been paying so it seems like a great deal. Lower risk for the higher return. Solid, right? Wrong.

All of a sudden my adjustable rate mortgage goes up to like 8% (I'm making up numbers as I vent, don't hold me to the figures) and my mortgage note is suddenly more than my rent+all my bills at the old place. I can't afford my house, you don't get paid, so they don't get paid, and now I'm homeless and you're claiming losses. Multiply that by $600 billion by 2012 and you see where the problem is. But all those debts that the big banks took on expecting to get paid they now have to revalue for next to nothing because nobody wants to buy debts that nobody is going to pay and if you're a bank that took on $63 billion in these questionable debts it all amounts to you basically being screwed and needing Bank of America to come save your behind. But Bank of America did it too, so did Washington Mutual, Merrill Lynch, Lehman, etc., etc. Good thing all the fundamentals of our economy are solid, right McCain? Blah.

We need new regulations. I hate to bring the 5-0 in but we need new regulations. Hedge funds don't have to report to the SEC. The financial system has gotten so intricate that people don't understand what everyone else is trading. Shorts were suspended first, are swaps next? I have no issue with suspending all of these trades that make the market more volatile by signaling to the average joe equities investor that everyone thinks these stocks are going to fall heavily by betting against them. When you buy a put option and I buy a call option we even each other out. But when everyone is betting that the stock is going down, it seems like fundamental values go out the window. I think we need more transparency in the markets and on the balance sheets and income statements. I think it's the fault of all of the bankers and traders who gave out shoddy mortgages and then manipulated billions (trillions?) of dollars to seem like they were legitimate. I don't know if a bailout will work. What is $500 billion and what are the consequences for lending, for the volatility of markets, for the capriciousness of investors, for inflation, for globalization, etc.? Is it a temporary fix like the I do believe that the invisible hand has got to kick in at some point. No lie can live forever. "This house of cards, build on deceit, will fall."
At this point we just have to see how far we'll fall and manage our risks for the future.

"Let us choose for ourselves what is right; Let us know among ourselves what is good." - Job 34:4

"There is no fear of God before their eyes. Now we know that whatever the law says, it says to those who are under the law, so that every mouth may be silenced and the whole world held accountable to God. Therefore no one will be declared righteous in his sight by observing the law; rather, through the law we become conscious of sin." Romans 3:18-20

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