Archive for October, 2008

Financial Crisis – The Simiplified version

Federal Interest Rate cuts


Money auctions for Banks

Bailing out financial institutions like Bearn Sterns, WAMU
$700B Bail out to take all bad mortgages
Increase the FDIC and NUCA Deposit insurance

Take over of Short term debt’s by US Fed Government
Injecting $250B to banks by buying their Shares

Are you thinking like me, “What in the hell this all this means to me and country?”. There are Unknows to a common consumer like you and me. I know it is frustrating as we all are not MBA’s and Financial anlayst to figure them out. I hear you loud and clear because I can’t even understand this more complicated and convoluted financial jorgans after reading books and research over the internet. In simple terminology, it is all different colors of financial helps given to our US economy to boost the confidence level of the investors. To explain the details to you all, I was searching for simple terms and found help from one of my favorite financial wiz lady Manisha Thakur. She is an author of best selling book titled ONMYOWNFEET. I am going to use her explaination with her permission molding with my version of the story.

What’s happened to US Economy?


For easy understanding, let us use the simple analogy of current financial market to the overweight mid-aged man who is having heart problem. Economy is now in a critical situation like this patient. He has heart attack and doctors are trying to revive him back by giving periodic shocks. He is alive and well for a day or two but he goes back again to a bad situation. Doctors been trying hard with different treatment everyday. Similarly, Treasury secretary Paulson and Fed Charman Ben Bernake are working like doctors to revive back the economy with their best tools and arsnels. Those colorful financial packages I mentioned above are few of their thoughtful treatments to bring back the economy(patient) to a somewhat steady state or atleast make him live without going to a worse situation.

Is the economy going off the cliff?


It might seem that way with all news coming out everyday. It is actually very close to under recession. Many say its already in recession. But the odds are pretty darn good economy (Patient) is going to pull through fine like it in 1980’s and other times. No one knows for sure. It is a cycle and it got worse due to the subprime mortgage crisis and credit crunch. Important thing is it going to take time and extended period of physical therapy like streamlining the lending process, other financial to-do’s to get back in shape as a nation.


What happened to the economy?


Patient needs blood to circulate freely to live, economic version of blood is credit. It is good credit, not credit we talk in credit cards. Credit you loan to business and bank. Small business owner needs credit to buy more build business, put inventory, hire more employee. Consumer also needs credit to buy an house who can really afford. So during the last past months, the credit has frozen /seized like clogged artery in the patient. If the credit drys or banks don’t have money to lend or loan to small business, it will be the end of small businesses. They won’t be able to buy things for their business, hire people and can’t fund their business, which is bad? If small business is the back of bone of any economy especially US. If they can’t run their business efficiently, it will shake up the foundation of the economy and put it great depression.

What is being done to fix it?


They are trying to free up the money or feed in more money in to the economy to get the credit flowing like the blood flowing to the arteries. Government is doing to figure out on how do you make the blood flowing smoothly in the patient (economy) again. Like making the credit available to banks to flow into the economy. They are doing that in different ways like bail outs by taking over debts, injecting money by buying their shares and much more. Its all steps to put more money in the economy. But thats not the only solution. Investors has to gain confidence back again on the economy and start to invest on the companies. Government can’t do that by any means. So it is going to take its own for that to happen.

Why is this artery got clogged or happened?

Obviously with the Patient, there are typical reasons like Genetics, poor diet, no exercise caused his health problem. In essence to the economy, poor diet or no exercise can be related to faltry lending practices and going away with following basics. Housing market is the major culprit and root cause to start it all out. It was 15 years ago when government really pushed home ownership and made American dream real by lending money thru banks. On the way, greed took over and many banks and financial institutions lended money to people who can’t even afford those kinda of houses making the artery to gummed it. This subprime mortgage crisis adding lot of debt to the banks like fat in the arteries making it to clog. As you all know, clogged artery can’t function property as the blood will eventually stop going to the heart and create heart attacks. Similar thing happened, banks stop lending to other banks and businesses because of the debts bursting the bubble.

Whom to blame?

There are many people to be blamed starting from government who started campaign pushing the banks to lend freely, bank and financial institutions which lended without any proper papers and also the tax payers who got loans knowing they can’t afford with lot of risk. So it is easy point fingers but you have to very careful when you pointing fingers. When you are pointing a finger, 3 fingers points back to you..


Look in the mirror, Are you at a home which you can’t really afford it and struggling with it? Ask for help with your lender who are not told by the Government to be flexible and easy on the home owners. They will work with you to reduce your interest rate and balances so you can start paying the loans instead of foreclosing it. Start saving atleast 15% of income for tomorrow and future, pay credit card bills fully every month. Credit card debt is next in line crutching the banks after home debts.


Collectively we can all do things to make the nation stand up back healthy as a strong one. It will also help other countries who got hit by this financial tsunami to boost their confidence level.

You, Your Money and Current Financial Crisis – Part 2 – Q & A

In my Part-I, I talked about how we endup in the financial death crisis explaining the series of heart attacks we faced along the way. This blog is concentrate more on how does really affect the consumer in many stands. This content is initially published by LittleIndia Magazine contributed by me for Oct edition.

The financial crisis sweeping Wall Street and global banking and financial institutions has understandably raised alarms among consumers on the risks to their savings, retirement and brokerage accounts. Here are some pointers on navigating the financial minefields.

How does this crisis affect you?



Many individuals who close to retirement have all their eggs in retirement baskets comprising mutual funds and stocks, which have seen their values drained one-third of their capital. It is a big blow for them and many will suffer consequences for years to come as the withdrawals can’t meet their needs.

People who are saving up for their kids college education also have sustained major losses, but many of them still have time on their side as market conditions improve. Families who put their money in savings accounts and CD’s, are weighted by the dismally low interesting earnings on these accounts.

Products and services from distressed companies will also likely suffer and employees in these companies are at risk of losing their jobs. Cumulatively, this economic meltdown is likely to have a huge impact and it will likely stay for long time to come.

What you can do to avoid losing your money?

There is no silver bullet solution. But there are a number of things you can do to secure your savings. If you are already invested in the financial market directly as a stock investor or indirectly through your mutual fund portfolios, just stay put and don’t do anything. This turmoil will eventually end and your portfolio might emerge better in few years. If you cash out now, you might take a bit hit. You can’t withdraw your funds from your retirement and 529 accounts anyways, although you can alter the distribution of your portfolio. For that you should seed advice from your financial advisor or fund counselor. Don’t follow the herd. You need someone to analyze your particular portfolio. If you have more than $100,000 in a one or more accounts in one bank, try to split it up and put it in different banks or financial institution.

You are only covered by FDIC (Federal Deposit Insurance Corporation, an independent federal agency) insurance or NCUA (National Credit Union Administration, another federal agency) insurance as one person for all your accounts in one bank. If you have a joint account, you are covered up to $200,000 in that particular bank or credit union. Many people lost their money during the IndyMac bank failure as they had more than $100,000 in that bank. Don’t make that mistake.

With the recent legislation changes, $100,000 amount for each individual has been increased to $250,000 till Dec 2009. Don’t know whether it will be made permanent.

What bank to open an account?

No one really knows which bank is safe or at risk at this time. Even the CEO’s of the financial institutions are unsure. But you don’t have to worry about the institution. Whether it’s a local bank or a national brand bank or a credit union, so long as it is FDIC or NCUA insured, you are covered up to $100,000 in that bank in the past. Right now, you are covered $250,000 till Dec 2009 according to the new bill passed 2 weeks ago.

What is the guarantee for my funds in bank and brokerage accounts from the government?

Let’s split these questions. Your bank or financial bank accounts, like savings, checking and CD’s are covered under FDIC or NCUA. Even your money market account is covered under these insurances only up to $100,000 per person. It is a common misconception that each account is covered for $100,000. In fact, the total amount in all your accounts in a single bank is covered up to $100,000. The $100,000 is been increased to $250,000 recently to help tackle the situation and losing consumer confidence. It is only till Dec 2009 and may be made as permanent measure. Also President announced Oct 15, 2008, there will be a full insurance coverage for money in non-interest bearning accounts for business accounts. No formal announcements about it yet.

Retirement accounts like IRA or Roth IRA in banks or credit unions are covered separately. After recent legislative changes, insurance coverage on certain retirement accounts, such as IRAs and Keoghs, is extended for up to $250,000 in both banks and credit unions covered by FDIC and NCUA. No Change made in his policy.

Next let’s get to your regular investments in a brokerage account or 401k. What happens if your brokerage firm fails? Hold onto your stocks and bonds; they are most likely safe. SIPC, the Securities Investor Protection Corporation, a nonprofit, membership corporation, funded by its member securities broker-dealers, seeks to restore funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms.

Of course, there is no insurance against market losses. However, as long as your securities are registered in your name, or are in the process of being registered, you own them, no matter what happens to the brokerage. You just need your statements to prove ownership of the securities to receive your refund. The SIPC covers customer up to a maximum of $500,000, including a maximum of $100,000 on claims for cash.

Conclusion

We are under a deep economic downturn. Eventually, however, the clouds will dissipate. We are already started seeing some signs, like slowing down in the decline in home sales, which is an indication that housing market could pick up. It is important because when the housing market stabilizes the economic conditions will improve. Be hopeful, be patient. That may be hard to do, but there is little else you can do but sit back and watch the market roller caster play out.

You, Your Money and Current Financial Crisis

Economical/financial stature is one of the key factors to judge the strength of a country. Similarly one’s personal finance strength is determined by their sound money management practices, investments and their bank balance. Both are related and directly connected in many aspects. If the economy is not doing well having problems and went to a comma state, individual financial portfolio and finances are going to struggle to meet it goals. If the core fundamentals are at stake, it really shacks up the underlying trust of an individual towards the government. That is the current situation for many of us.



Not to mention, many are going through lot of stress and frustration with what’s been happenings for the past year and half or so in the financial market in US and the ripple effect all over the world. It is been a really wild roller coaster ride with big dips and steep ups. Recently for the few weeks its has been real deep dips with stock market revisiting the history by touching new lows every day.









Banks are failing to handle this tough situation as they didn’t forecast this worse case scenorio, companies crashing down to their knees begging for help from the government to bail them out, healthy financial institution looking like hawks to take over run down ones, unemployment percentile reaching way high since it Sep 11, 2001, new home sales fell low after 19 years and list go endless.

Start of the Turmoil


It’s not the situation; it’s the reaction to the situation – Robert Conklin


That’s an apt statement suits very well to the current financial situation. You can’t simply say that subprime mortgage crisis caused it all. It all started when the government pushed the homeownership as sweet deal and encouraged banks to lend money to get more people in their own homes. It is a good thing but ended up with bad effects. For starters to explain in simple terms, subprime mortgage crisis is the crisis created by faltered lending practices by banks approving mortgage loans for people without proper income and who can’t really afford to pay those loans. They got in using adjustable rate which started to go up after their intial period raising their payments they can’t afford. So they just default on their homes. It caused home foreclosures when the home price hit the ground triggering the chain effect of banks losing their money.


It is the reaction created by the subprime crisis that churned this financial mess. Actually the reaction to the poison started to show is colors from late last year. Countrywide, the biggest mortgage lender, sold itself to Bank of America to avoid insolvency. This spring, Bear Stearns, the most prestigious of the investment banks even with billion dollar asset, failed, and the government arranged a forced merger with JPMorgan Chase.

In summer, California’s IndyMac leader in subprime lending went bankrupt taking all the consumer’s savings with it. In September of this year, to avert a collapse of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Mortgage Corporation), who are the low interest mortgages lenders operated by shareholders and financially supported by US government. Government pitched in with 300 billions bail out offer seizing the control of both of the organization by putting them in a conservatorship that made Uncle Sam the explicit guarantor of mortgages they owned or insured.


In later part September; another missile was shot adding to the chaos. Lehman Brothers Holdings, biggest investment bank declared bankruptcy followed by his fellow investment bank Merrill Lynch selling itself to Bank of America to avoid being next to toppled. Immediately, AIG (American International Group) 4th largest insurance provider was in trouble by insuring the repayment of billions of dollars in debt had drained its capital and seeking help from the government. Government rushed and took over 75% stack in the company by lending around 70-80 billions dollars. A week ago another two independent investment banks, Goldman Sachs and Morgan Stanley, found their own survival cast by changing their face as a consumer bank according to the new laws passed by government.


What is Federal Government doing about it?

With all the happenings, US Government is trying out all the tools like lowering interest rate, flooding the economy with gazillions of dollars to keep the financial community afloat, rescuing Fannie Mae and Freddie Mac from its toolbox to bring back the economy instilling investor confidence in financial institutions. Last week, WAMU one of the biggest banks failed and FDIC moved all bank deposit accounts to JP Morgan chase. Wachovia, which was the 4 biggest banks in US, is getting sold either to Citigroup or Wells Fargo as their fight over wachovia gets sorted out. This is a big blow ever to come across the financial market, WAMU and Wachovia being one of the biggest banks to go under in US History.
Last week, after a failure attempt US Government heads and congress leaders worked hard with federal agency to create a bill to take hundreds of billions of dollars in “bad assets” off the balance sheets of financial institutions, for a price. The price is estimated to be around $700 billion which will come out from tax payer pocket. It passed the House and President signed to become a bill. This was considered as a nuclear bomb which is meant to kill the virus. But time today, thats not enough. Since the bail out, Dow index fell more than 1000 points pointing out it is not sufficient to impress or convince the investors its all over.


Some say the US is in phase of the recession and some say we are in stagflation or deflation. Whatever it may, to tell you to long story short, it’s a pile of mess and it is going to take lot of effort to get all the clean it up before we see a clean air to breath. Because of this mess, there comes concerns and confusion among investors and regular consumers.


What are consumers worried about?


This crisis seems to have created a fear factor worse than market crash during September 11. It is not anymore about the stock market whether it will start to show some resilience, when it will come back. It is actually a different fear that comes out of losing trust over the banks and financial institution. There were questions like to whether my money will be safe in bank, do I need to take my money are few of them which started to disturbing many ordinary individuals. I am planning to cover that in my next post. What is your thoughts and are you going through the same kinda of fear factor?

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