What Just Happened? (and do I care?)

Talk about high drama on Wall Street. I don't even know where to begin. Normally when large established companies start to tank, they are gobbled up by healthier companies. They don't just fail.

The Economist's Nightmare on Wall Street has a pretty succinct recap.

EVEN by the standards of the worst financial crisis for at least a generation, the events of Sunday September 14th and the day before were extraordinary. The weekend began with hopes that a deal could be struck, with or without government backing, to save Lehman Brothers, America’s fourth-largest investment bank. Early Monday morning Lehman filed for Chapter 11 bankruptcy protection. It has more than $613 billion of debt.

Other vulnerable financial giants scrambled to sell themselves or raise enough capital to stave off a similar fate. Merrill Lynch, the third-biggest investment bank, sold itself to Bank of America (BofA), an erstwhile Lehman suitor, in a $50 billion all-stock deal. American International Group (AIG) brought forward a potentially life-saving overhaul and went cap-in-hand to the Federal Reserve. But its shares also slumped on Monday.

Then, of course, the Fed bailed out AIG with an $85 Billion Loan Rescue.

I have read thousands of words this past week that relate to derivatives and credit default swaps, and I regret to inform you I still don't know what they are. Although the Globe and Mail did a decent job that my brain understood for a few seconds what was what, as does the NYT's The F.A.Q.’s of Lehman and A.I.G..

So what's a person, a little person with piggybank blues, supposed to do? I'm not talking about desk jockeys on Wall Street (that's more like Fort Knox blues...), I'm talking about grad students, people who work for non-profits, freelancers, baby white collars, artists, the just-trying-to-get-by-ers: people who may or may not have even heard of AIG before Monday and couldn't tell a CDS from an MP3, but certainly understand that this is ass-backwards socialism and a free-marketeer f*ck up.

Well, first things first, check the IRA!

Morningstar has a nifty little list in Lehman, AIG, Merrill: Which Funds Are Most Affected?. Fidelity pops up a few times. Most of my Roth is with T. Rowe Price, so I called them. The lady was nice. My list was Lehman, AIG, and Merrill and she had the foresight to add Washington Mutual. So-called Lifecycle or Retirement Funds, a mutual fund that is a basket of funds whose allocation and risk are tied the year you want to retire (so my Roth is in a fund called Retirement 2040), probably have a little of one of those troubled companies. In my case a couple funds own less than 1% of AIG and WaMu. And here's where diversification actually works. Even if two of my funds own less than 1% of those sickly companies, that's two out of, say ten, mutual funds in the Retirement 2040 fund. Morningstar also has an article on Funds Exposed to Other Dangerous Financials. A few posts ago I said I was selling a fund and buying stock instead, well the fund was Oakmark Select and they're cited in the article as owning 3.47% of Morgan Stanley. So I say, call the toll free number of all your mutual funds and ask them just how much you own of Lehman, Merrill, AIG, and whatever major US company happens to be on the brink of failure that day. They've already heard the question a million times, and they'll be more than happy to tell you the answer. Some, such as TIAA-CREF's open letter to shareholders simply tell you what's what on their website.

Another thing people are worried about are the "safe assets", like money market funds. Lots of money market funds buy things like the debt of a nice big cozy company called AIG. A money market fund is no savings account, even though people use it for a similar purpose- to safely stash some cash. A money market fund is a fund with shares, ideally trying to stay above a dollar per share. If money market funds dipped below a buck a share, then it's time for the little guys like us to worry. Buy stuff on eBay? Your money might be sitting in PayPal's money market fund. Have an online brokerage account? Your extra cash might be sitting in a money market fund. Or maybe you actually do have a significant chunk of change in a money market fund because they historically perform better than savings accounts and are supposedly "just as safe". They're probably fine, but I'd still move something like an emergency fund from a money market to a savings account if that's what I had. And two friends of mine just sold their apartment and need to stash a fair amount of money for an indeterminate amount of time, but not long term. For large account holders I would check out Your Cash: How Safe Is Safe? for a better handle on your options.

So that's all. Call your mutual fund companies, know what your risk exposure is and sleep easy. And hope you don't have to retire in 2009. Other than that, I'm going back to trying to figure out just what's really on sale in the stock market to buy, and what's just a financial flotilla of garbage.

When the $h*t Hits the Fan

You know it's bad when Greenspan says the economy is in a once-in-a-century crisis, because that time frame includes, um, the Great Depression for chrissakes!

I re-subscribed to the WSJ recently, and I've been online perusing the comment sections of the lead articles. Ninety percent of what's said I can't even repeat, but I have to say I learn more from the commenters than I do from the articles. Cursing aside, the workers on the Street are freaking out and doing so with great articulation and conviction. And after a little while I started to wonder, should I be freaking out too? Does it matter to me if an investment bank or two goes under? Right now, no, I'm getting ready to call it a night with the A/C, a propped pillow, and a nice book of fiction. In the morning there will be more news and I can figure out if the sky is falling on me, as well as on Lehman, Merrill, AIG, etc.

One interesting note on the WSJ article comments- many want to do unspeakable things to Bush, Greenspan, Paulson, and the Republican party in general. I can't quite figure out why, a lot of industry-speak and jargon thrown around. But there was also a lot of talk about the repeal of the Glass-Steagall Act, signed by none other than President Clinton. The act separated investment banking from commercial banking, and many say its repeal led to subprime mortgage stupidity. Along with Bush, Greenspan, Paulson, and the Republican party in general. PBS has a nice timeline of the Glass-Steagall act here, for those interested.

Back in the morning with, I'm sure, news so bad it makes you wish for a breadline. That Greenspan, he's such a joker.

Library Fodder: The Man Booker Prize Shortlist

They just announced the six finalists for the Man Booker Prize, that literary prize for novelists from the Commonwealth of Nations and the Republic of Ireland. Talk about the sun never setting.

Anyways, if you're itching to put a hold on a book at your local library and need some book ideas, check out the list:

Aravind Adiga The White Tiger
Sebastian Barry The Secret Scripture
Amitav Ghosh Sea of Poppies
Linda Grant The Clothes on Their Backs
Philip Hensher The Northern Clemency
Steve Toltz A Fraction of the Whole

You might notice the absence of Joseph O'Neill's Netherland and Salmon Rushdie's The Enchantress of Florence, so like all prizes, this shortlist won't be short on debate.

A Middle Finger to the American Savers

First, I would like to congratulate myself on two posts in two days. After a year of blogging, I realized that even my virtual free association on economic matters needs to take some time off every now and then. I sense that the blogging vacation is officially over, so back to work I go.

Business Week's article, Why American Savers Have Drawn the Short Straw tells us what we already know; sucks to be us. And by us I mean the savers, today's white unicorn.

Presumably right about now it's the savers who should be rewarded. We lived within our means and ignored the white noise of those big bad institutions who were trying to get us snookered into their own profit making scheme. We paid down/off credit card debt instead of punting it to the moon. We put a little away for retirement, for a rainy day, for a future purchase to be paid in full. And now when everything comes tumbling down, we should be basking in our glory, the proud but silent collective I told you so!

Fat chance.

Even with a current account deficit that, starved of domestic savings, requires $2 billion a day in foreign financing, economic policymakers are fixated on propping up credit and giving the participants in the housing bubble second chances. In order to do so, they are stripping the hides off of net savers.

Since August of last year, the Federal Reserve has slashed interest rates from 5.25% to 2.00%—wielding a blunt instrument that was swung enough to bend the yield curve in favor of suffering banks. You know, the institutions that screwed up but were too big and important to be deprived of an inalienable right to cheap deposits that they can loan out at several points higher.

My ING savings accounts are certainly not keeping up with inflation. I've tapered off what I save to the bare bones because things like groceries and gas are taking a noticeably bigger bite out of my monthly budget. And my Roth IRA is losing money as fast as I'm putting it in. So when I read this morning's WSJ headline announcing that the Federal government is taking over Fannie and Freddie, I'm having an apoplectic seizure in front of my laptop. Sure, I'm a just little guy (or gal, as it would be), my piddling savings isn't propping up nearly half of the outstanding mortgages in this country (like Fannie and Freddie, in case you were wondering why they get the bailout). But seriously. Moral Hazard anyone?

Moral Hazard is a term economists like to banter about; it basically means that if you don't hold companies in check, they think they can do whatever the heck they want. And they do. And the bailout of Fannie and Freddie, and previously Bear Stearns, pretty much fits the bill of creating a moral hazard. Joseph Stiglitz did an outstanding job of breaking down Fannie and Freddie's moral hazard in a recent article for the Financial Times.

Defenders of the bail-out argue that these institutions are too big to be allowed to fail. If that is the case, the government had a responsibility to regulate them so that they would not fail. No insurance company would provide fire insurance without demanding adequate sprinklers; none would leave it to “self-regulation”. But that is what we have done with the financial system.

Even if they are too big to fail, they are not too big to be reorganised. In effect, the administration is indeed proposing a form of financial reorganisation, but one that does not meet the basic tenets of what should constitute such a publicly sponsored scheme.

First, it should be fully transparent, with taxpayers knowing the risks they have assumed and how much has been given to the shareholders and bondholders being bailed out.

Second, there should be full accountability. Those who are responsible for the mistakes – management, shareholders and bondholders – should all bear the consequences. Taxpayers should not be asked to pony up a penny while shareholders are being protected.

Finally, taxpayers should be com­pensated for the risks they face. The greater the risks, the greater the compensation.

All of these principles were violated in the Bear Stearns bail-out...

But the proposed bail-out of Fannie Mae and Freddie Mac makes that of Bear Stearns look like a model of good governance. It sets an example for other countries of what not to do. The same administration that failed to regulate, then seemed enthusiastic about the Bear Stearns bail-out, is now asking the American people to write a blank cheque. They say: “Trust us.” Yes, we can trust the administration – to give the taxpayers another raw deal.

So, I would like my bailout, please. I would like the consumer savings account to have its own interest rate, and I would like it to be at least 1% higher than the rate of inflation. I'm sure this would cause all sorts of problems for Fannie and Freddie, and I'm sure that it is a suggestion only an economic neophyte could make. But think of it this way. Maybe American savers can bail out America, instead of China doing it for us. If only you'd stop giving us the middle finger.

B of A $75 offer

I've been a lazy poster lately. Here, I'll make it up to you and hand over seventy five bucks...

Bank of America, with its newly ubiquitous ATM storefronts, enticed me to open up an online checking account. The offer of $75 is good for new online banking customers. I just opened up their online checking account, with no account minimums or fees. I did deposit $25, you need to deposit the twenty five bucks within thirty days to get the $75 bonus (deposited within 90 days). I figure I'll close it after a few months and take my money and run. Probably to ING, my long neglected piggy bank.

A 200% return on my money, now there's something unheard of in, oh, say, ten years...