October 10th, 2008 
Vijaianand 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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