Wall Street Crisis: Mass Extinction Underway?

Months ago, when the Fed helped to bail out Bear Stearns by brokering a deal with J.P. Morgan Chase, it was clear that this was just the tip of the iceberg. And with the Fed recently helping to bail out Fannie Mae and Freddie Mac, it was only a matter of time before the Fed ran out of fingers to put in the leaking dike.

The extend of the greed and risk-taking on the part of Wall Street financial firms with respect to careless lending practices with home mortgages is now obvious. With Lehman Brothers now filing bankruptcy, and with Bank of America buying Merrill Lynch, we are seeing some long time financial forms either bit the dust or being assimilated. While it is sad to see any employee lose their jobs, I have no sympathy for the fat cats of Wall Street who made the collapse happen.

If you don’t have money in these troubled institutions, you may not think you have a problem. And if you do have money there, you may think that the FDIC insurance of balances up to $100,000 will keep you somewhat protected. Think again. Shortly after the Bear Stearns collapse, my husband and I took the opportunity to split up our CDs (which had just matured) and split them up over several banks. We were told at that time that while FDIC insurance is real and it will cover depositors, what the FDIC doesn’t make very clear is HOW LONG it will take to recover the money. In fact, one bank told us that it could take 10-20 years before we ever got the full amount of our money back, if in fact there was a collapse of the bank. So those people who have money in a Lehman Brother’s bank may have to wait a long time to see the full amount of their money should the FDIC have to step in to cover deposits.

Should people feel unsettled about these happenings? You bet. With many people having money in personal retirement plans like 401ks and IRAs, there is a lot of money out there just sitting and waiting for someone to screw it up for you. Even though the days of free-wheeling mortgage lending seem to be over for now, the repercussions will be felt for some time to come. It really is about time that the greedy executives and money managers at financial firms bear some punishment for the risks they took with money that didn’t belong to them. Unfortunately, the people who will really pay are depositors and average stockholders and the “common” employees who put their trust – and their money – in these firms.

If you haven’t taken a look at your own finances, it’s time that you do. If you have any deposits in any banks that exceed FDIC insurance limits, it may be time to split them up. And do your research – make sure if you do start moving your cash or investments that you put them in financial institutions that seem to be at the top of the heap right now. J.P. Morgan Chase, who basically stole Bears Stearns, and Bank of America, who lapped up Merrill Lynch, seems to be some of the few that appear stable. While I am not telling people to use these banks, it’s just a hint to do your homework before you hand over you money.

When the dust settles – and who knows when this will all be over – we may see less banks and financial institutions, but they may be stronger for it. Maybe the Fed will also get its act together and get some needed controls put in place. Hopefully, everyone will also learn from these mistakes and be smarter for it. My money - your money - depends on it.





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Investment Firms’ Money Grab

In the wake of the Bear Stearns bailout by the Federal Reserve, now other investment banks are tapping the Fed for emergency loans. There is some good – and some bad - in this. The good is that hopefully these loans will help stabilize the investment banking industry, which got rocked by the collapse of the mortgage market and the virtual collapse of Bear Stearns.

The bad – these same investment bankers aren’t being held accountable for their investing mistakes and mismanagement of their businesses.

While I understand one of the reasons for the existence of the Fed is to protect this industry and keep the country’s financial well being stable, it does seem unfair that smaller businesses not involved in banking have to sink or swim on their own.

I’m not saying that the government should save everybody. My point is, people that run these investment firms, who probably made millions or billions on their investments when things looked rosy, should be somehow financially accountable for the company’s losses. With the Fed bailing these people out, there is no incentive for these same people to do any better in subsequent investments, since it’s not their own money they’re using. My guess is that the biggest culprits in this mess were the hedge fund managers – a group of people who are virtually unregulated in how they operate. If the Fed is loaning these people money to help their businesses survive, I think the least we can do is ask them to install some oversight to prevent future collapses.


Here’s the Associated Press Release on the investment loan situation:


“Investment firms tap Fed for billions By JEANNINE AVERSA, AP Economics Writer
Thu Mar 20, 5:40 PM ET



WASHINGTON - Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported Thursday.

The lending is part of a major effort by the Fed to help a financial system in danger of freezing.

Those large firms averaged $13.4 billion in daily borrowing over the past week from the new lending facility. The report does not identify the borrowers.

The Fed, in a bold move Sunday, agreed for the first time to let big investment houses get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, got under way Monday and will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.

Goldman Sachs, Lehman Brothers and Morgan Stanley said Wednesday they had begun to test the new lending mechanism.

On Wednesday alone, lending reached $28.8 billion, according to the Fed report.

The Fed created a way for investment firms to have regular access to a source of short-term cash. This lending facility is seen as similar to the Fed's "discount window" for banks. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed.

Investment houses can put up a range of collateral, including investment-grade mortgage backed securities.

The Fed, in another rare move last Friday, agreed to let JP Morgan Chase secure emergency financing from the central bank to rescue the venerable Wall Street firm Bear Stearns from collapse. Two days later, the Fed backed a deal for JP Morgan to take over Bear Stearns.

Thursday's report offered insight on how much credit was extended to Bear Stearns via JP Morgan through the transaction the Fed approved last Friday. Average daily borrowing came to $5.5 billion for the week ending Wednesday.

Separately, the Fed said it will make $75 billion of Treasury securities available to big investment firms next week. Investment houses can bid on a slice of the securities at a Fed auction next Thursday; a second is set for April 3.

The Fed will allow investment firms to borrow up to $200 billion in safe Treasury securities by using some of their more risky investments as collateral.

By allowing this, the Fed is hoping to take pressure off financial companies and make them more inclined to lend to people and businesses.

The housing collapse and credit crunch have led to record-high home foreclosures and forced financial companies to rack up multibillion losses in complex mortgage investments that turned sour.

In the past day and weeks, the Fed has taken extraordinary moves aimed at making sure that problems in credit and financial markets do not sink the economy.”


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The “Collapse” of Bear Stearns

The recent near fatal collapse of investment company Bear Stearns is not a surprise. In fact, it was probably years in the making, with greedy financiers capitalizing on the real estate boom and the Fed continuing to lower interest rates to ridiculously low levels. So low, in fact, that banks and investment groups were loaning money to people that didn't have jobs.

Bear Stearns got caught in this mess by getting in so deep with the real estate market that when it started to become undone, Bear Stearns had little to protect itself. Then, when it’s banking investors decided to take their money out of Bear as they had little confidence in them, the company found itself on the brink of insolvency. Of course, the Fed (Federal Reserve) comes to the rescue. They had to; otherwise the entire banking system may have faced a domino effect collapse.

Barrons is reporting “Wall Street hasn't faced a crisis of this magnitude since the implosion of the giant hedge fund Long Term Capital Management in 1998. And the news isn't expected to improve any time soon. This week Bear, Goldman Sachs (GS), Lehman Brothers (LEH) and Morgan Stanley (MS) are slated to report results for their first quarter, ended in February. The results won't be pretty”

How could a company like this get into a mess like this? My thought it is greed, plain and simple. They took the words of fictional movie character Gordon Gekko a little too seriously, when he said in the 1987 movie Wall Street, “Greed is good.” Well, greed is not good, because companies like Bear Stearns were so blinded by the real estate bubble – caused by low interest rates – that they couldn’t see that the bubble was bursting around them and they had no safety net.

But I also blame the Fed. They lowered interest rates so low that banks made risky loans to virtually anybody with a pulse. People were getting interest-only loans for price-inflated homes, with adjustable rate mortgages. Problem is, people didn’t realize that those adjustable rates could go UP. Yet, the Fed continued to lower rates, causing money to be so cheap that inflation started to run rampant. So now the Fed has to bail out Bear Stearns and who knows what other financial institutions down the road. I suppose we are lucky that the Fed can bail them out, but it makes me wonder if we weren’t – or aren’t – a breath away from a depression-like era. The great depression of 1929 started because of over speculation on the stock market. Now we may be faced with a similar situation because of over speculation in the real estate market.

I worked for a company who was owned for a short time by Bear Stearns in the 1980s. They were greedy then, taking out every single dime of the company they could, and cutting costs to the point that there was almost no company left to run. We were lucky that someone came along and bought us from Bear and allowed us to actually run the business. In a way, I’m glad to see their fall from grace. But I’m sorry that the Fed has to bail them out, and I’m also sorry that it may still create a huge ripple effect in the banking industry.

These are very uncertain financial times for everyone. Bear Stearns may be only the tip of the iceberg. Stay informed, and watch your investments carefully. Don’t be like Bear Stearns and let greed blind you to any financial peril ahead.

NOTE: It was reported that late in the day Sunday March 16, J.P. Morgan purchased Bear Stearns - for $2 a share. The big losers here are shareholders; Bear opened on Friday March 14 at $54.24, and closed that day at $30. Hopefully some of the executive at Bear lost a lot of money in their own stock holdings.

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