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.