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History-Making Week for U.S. Financial Community
September 13, 2008 4:42 PM
ABC News' Betsy Stark reports: It may be hard to notice through a hurricane the size of Texas and the media blizzard surrounding Sarah Palin, but history has been unfolding in the nation's financial system.
Who could have imagined that the government would take over the nation's two biggest mortgage companies, Fannie Mae and Freddie Mac, only to be orchestrating what will either turn out to be the sale or the liquidation of a 158-year-old investment bank the very next weekend? Who could have imagined that, in the same week, the nation's largest savings and loan, Washington Mutual, would fall to a $2 stock, casting its solvency in doubt? And who could have imagined that in the very same week, investors would be panic-selling the stock of Merrill Lynch, the nation's largest retail broker, and dumping shares of the insurance giant AIG, all while they worry and whisper about other financial giants that once seemed invincible, including the likes of Wachovia and GE Capital.
It is somewhat reassuring that the stock market held its own through this enormous turmoil. After a big rally Monday and a big selloff Tuesday, it mostly moved sideways through the Lehman Brothers drama. But investor confidence is on a razor's edge. The government is signaling it's done using taxpayer money to bail out Wall Street cowboys now paying for the outsized risks that earned them outsized profits. And if it is unsuccessful in pressuring private bankers into a deal to buy Lehman, we could wake up Monday morning watching what happens when a major investment bank with a maze of global counter-parties is allowed to fail. It is unlikely to be pretty.
We're not accustomed to seeing banks fail, not really big banks. But economists I talk to say in the bursting of this housing bubble, it's both inevitable and therapeutic that a bloated banking system, which binged on bad debt, is compelled by market forces to consolidate. The government will not restore confidence in a system that relies on confidence -- as well as credit -- by rescuing one institution after another after another. It's not good economics and it's not good politics. Taxpayers would be justified in objecting: many of them are losing money on their homes and their 401-k's and they're not getting bailed out. There is a big 'moral hazard' in privatizing profit and socializing risk.
I have asked the question several times of the experts I have spoken with over this historic week: can you reassure me that the U.S. financial system is essentially safe and sound? The answer I hear is 'yes.' Some of it is the safety in numbers. There are nearly 8500 banks in the U.S., according to the FDIC. They have $13.3 trillion in assets and $8.6 trillion in deposits. How many are in trouble? Officially, there are 117 on the problem list. Fully 98 percent of the banks it monitors are "well-capitalized." Of course, the FDIC covers commercial banks and savings institutions. The investment banks are another story. Here we can hopefully derive some comfort from knowing a lot of the bad news is already out there--that's what those $500 billion in write-downs of bad assets is all about.
But it's not over. To borrow the metaphor of the hurricane now obscuring these extraordinary events, we might even be in the eye of the storm. And there's no question that's a scary place to be.
September 13, 2008 in Economy | Permalink | Share | User Comments (101)
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Hillary supporters should support McCain/Palin. If Obama wins, Hillary will not have a solid position in DEM. Obama, Kennedy and Blacks will dominate the party. Hillary will never has a chance to run again!!!
Think about it!!!!!!!!!!
Posted by: kerry | Sep 13, 2008 5:09:46 PM
The obvious answer:
More deregulation
More wars that pay for themselves
More "value based" appointments in Justice
More rosy scenarios from the President's Press Officer
Less accountability
Palin/Gramm 2012
Posted by: doug | Sep 13, 2008 5:36:30 PM
kerry - Actually everyone should flock to Ron Paul who has, along with his financial advisor Peter Schiff, been warning of these events for nearly a decade. Both republicans and democrats suck. Vote 3rd party.
Posted by: Ben Straub | Sep 13, 2008 5:42:11 PM
Don't forget - more tax cuts too. In fact let's cut capital gains taxes to zero.
Posted by: Alan | Sep 13, 2008 7:07:22 PM
I would love to see a special prosecutor appointed to investigate the Fannie/Freddie collapse. I believe those doing the perp-walk would be a Who's Who of the D.C. wine and cheese crowd.
Posted by: Woody | Sep 13, 2008 7:07:23 PM
Don't forget - more tax cuts too. In fact let's cut capital gains taxes to zero.
Posted by: Alan | Sep 13, 2008 7:07:24 PM
Historic week indeed. Never in my brief history have I felt more forgotten about or uncared about than I do right now. My confidence in nearly everything has erroded just as surely as the ozone layer. Until there's some viable alternative to the two parties that rule this land I simply don't care who the president is. It's not going to make one lick of difference to ME who wins in November. Caring hurts when your the only one doing it.
Posted by: sickofit | Sep 13, 2008 7:43:08 PM
It may be true that most of the banks have reasonably healthy balance sheets, but few people talk about the hundreds of trillions (yes, Trillions) of dollars invested in unregulated derivatives contracts that cannot be valued with any confidence at this junctur--because there is no market for them. (These include credit default swaps and a variety of other flavors of derivative investments. These are held to a significant degree off the balance sheets of large institutions.) It's likely that the problems with derivatives, which include the mortgage-backed securities that have caused a great deal of trouble already, have quite a bit further to run.
Posted by: Supergrrl | Sep 13, 2008 7:47:25 PM
I don`t give a Rat`s ### if they all go Bankrupt...the sooner the better!...I did note vote to give these shysters Billions of tax money.
Posted by: Boris | Sep 13, 2008 7:57:46 PM
Hey guys, while we are all bickering on party
participation, the financial community is
going belly up! Now here is a new one for
you to digest. You know all those insurance
companies that are covering all those disasters
in Texas and Louisiana. They also will be looking
for handouts from our Government. Maybe we
should think twice before we hand out money
to other countries and get our own priorities
back in shape.
Posted by: spacerook1 | Sep 13, 2008 8:10:58 PM
Keep this up (taxpayers rescuing financial institutions, grossly unqualified and deceptive republican presidential candidates), and pretty soon the retirement dreams of every American will match the retirement savings of bankrupt-airline pilots. If the taxpayers are going to guarantee any non-government debt, at least limit the guarantee to 80% of the debt -- let the greedy risk-takers at least suffer a 20% penalty for their contribution to the problem.
Posted by: James F | Sep 13, 2008 8:16:06 PM
can anyone say that they have seen worse than the last 8 years---bush mcbush ----never again
Posted by: rodney | Sep 13, 2008 8:28:10 PM
After watching the bailouts of FNMA and Freddie Mac; Bear Stearns; the Lehman Brothers situation; the suggested $25 Billion for the auto manufacturers; bank failures and that isn't even mentioning the undercapitalized government committments like social security and medicare, it makes me wonder what part of our financial system is sound. We should do what every household in America has to do, stop spending what you do not have and focus on reducing your debt. If we did this as a country and did not bail out or subsidize the greedy risk takers on wall street, maybe we could balance our budget, reduce our taxes and provide for the future. Probably too much to ask in an election year though, maybe next year....
Posted by: jim 234 | Sep 13, 2008 8:31:17 PM
For all you younger voters out there. This is what it felt like when Nixon was pulling his shenanigans. The gas lines, inflation, war and perceived moral decay. Things really haven't changed all that much have they?
Posted by: Chris Whitlow | Sep 13, 2008 9:01:03 PM
A common pattern is for the managers of banks to say they have everything under control only to have to take more wirteoffs days to weeks later so you can't rely on their word. There is no financial transparency anymore and you can't take anyones word that they are solvent and will survive. This is a really bad situation. In my opinion the whole thing is breaking down at the top, while people below are having their own problems, the lucky ones able to keep treading the swirling waters. This problem is so bad at the top, it can only be fixed at the bottom and I am not sure what that means.
Posted by: Brian | Sep 13, 2008 9:12:51 PM
Think about this, if people like kerry get their way, the idiots, McCain/Palin will be in the white house to destroy what's left of America. Don't let the neo-cons finish off the US, vote democrat, vote REASON for a change.
Posted by: JR | Sep 13, 2008 9:19:55 PM
In the end everything Ron Paul said during the debates was correct. Screw the rest of the republicans. Democrats have also done plenty of harm. Give me some politicians that care about the out of control spending and easy money.
Posted by: Huh | Sep 13, 2008 9:33:05 PM
At what point do the bailouts stop. Maybe the government should bail out every mom and pop business that has failed because of the rediculous economic policies of Bush.Reagen also proved this to be the wrong path. Trickle down economics is a failure and only makes the rich become richer and the rest of the country looses.
Posted by: J | Sep 13, 2008 10:25:35 PM
I hope more Americans are paying attention to the facts and outcomes of our nation economics. There are political tendencies by some to blow smoke and mirrors to hide the economic incompetence (government and enterprise) of the past eight years. Political idealism alone can be dangerous facility to govern, regardless of the bias.
When there are a record number of bank failures, trending unemployment, trending inflation, high national and personal debt and unstable world markets and commodities shaken by war and political regional turmoil, then one must recognize these events as symptoms of a greater problem of poor leadership and weak political competency as the root cause.
Smart politics follow efficiencies as do the free-markets in relative cycles. Poor performance should never be rewarded nor should political excuses be considered as solutions.
Change by nature is historic, change with clarity of purpose, parity, and competencies are historic steps forward for us all.
Posted by: threeriverscrossing | Sep 13, 2008 10:26:08 PM
I hope more Americans are paying attention to the facts and outcomes of our nation economics. There are political tendencies by some to blow smoke and mirrors to hide the economic incompetence (government and enterprise) of the past eight years. Political idealism alone can be dangerous facility to govern, regardless of the bias.
When there are a record number of bank failures, trending unemployment, trending inflation, high national and personal debt and unstable world markets and commodities shaken by war and political regional turmoil, then one must recognize these events as symptoms of a greater problem of poor leadership and weak political competency as the root cause.
Smart politics follow efficiencies as do the free-markets in relative cycles. Poor performance should never be rewarded nor should political excuses be considered as solutions.
Change by nature is historic, change with clarity of purpose, parity, and competencies are historic steps forward for us all.
Posted by: threeriverscrossing | Sep 13, 2008 10:30:14 PM
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