I have in Russia watched the USA financial system meltdown into a pool of liqidated assets and then in turn watched the Russian financial system go up in flames. I have watched the Aisian market crash but not quite flame out. I have watched the markets all over the world smolder and sink out of sight.
I do not believe in the stock market and now you see why. I believe in precious metals and other very long term stable financial tools. I never get rich but I still have my money!
How did this happen? I think of it as payback. Wall Streeters (All stock markets are wall streets) all over the world, didn’t have to worry about regulation, and they didn’t worry about risk. They had no fear of repercussions, this lack of fear became a hothouse of greed and ignorance on Wall Streets — and on Main Street as well. When greed exceeds fear, trouble follows.
A very Powerful man, Warren Buffett, probably one of the world’s most successful investors, back in 2003 called greed and ignorance, “derivatives” or better yet he said, “weapons of financial mass destruction.” But to the greedy rich wall streeters, what did he know? He was a 70-something alarmist fuddy-duddy who had cried wolf for years. No reason to worry about wolves until you hear them howling at your door, right?
The wolf has started howling…..
We started with Bear Stearns months ago, everyone said whew that was close and the worse is over. That was nothing but the tip of the iceberg because we now are going to see how much ice is under the water level on all these defaulting issues. The folly and fiasco of Fannie & Freddie started the avalance
The USA Government stopped Fannie and Freddie from going belly up. Why? Because many if not most of the mortgages and mortgage securities owned or guaranteed by Fannie Mae and Freddie Mac were bought by foreign central banks, which wanted to own dollar-based securities that carried slightly higher interest rates than boring old U.S. Treasury securities. A big reason the Fed and Treasury felt compelled to bail out Fannie and Freddie was the fear that if they didn’t, foreigners wouldn’t continue funding our trade and federal-budget deficits.
Lehman’s fall shows the downside of using borrowed money. Even though Lehman has a 158-year-old name, it’s actually a 14-year-old company that was spun off by American Express in 1994. AmEx had gobbled it up 10 years earlier, and it wasn’t in prime shape when AmEx spat it out. To compensate for its relatively small size and skinny capital base, Lehman took risks that proved too large. To keep profits growing, Lehman borrowed huge sums relative to its size. Its debts were about 35 times its capital, far higher than its peer group’s ratio. And it plunged heavily into real estate ventures that cratered.
Then AIG collapsed…
The market lost faith in AIG too, but the government was forced to save it. A major reason is that AIG is one of the creators of the aforementioned credit-default swaps. What are those, you ask? They’re pixie-dust securities that supposedly offer insurance against a company defaulting on its obligations. If you buy $10 million of GM bonds, for instance, you might hedge your bet by buying a $10 million CDS from AIG. In return for that premium — which changes day to day — AIG agrees to give you $10 million should GM have an “event of default” on its obligations.
America bailed AIG out. Now we have to remember that Bear Stearns died not long ago and Merrill Lynch bit the dust a few days ago.
Goldman stands, along with Morgan Stanley, as one of the last two giant U.S. investment banks not to collapse (as Lehman and Bear Stearns have) or be sold (à la Merrill Lynch), Goldman too has been pummeled. The firm’s quarterly profit plunged over 70%. New York University economics professor Nouriel Roubini says: “They will be gone in a matter of months as well. It’s better if Goldman or Morgan Stanley find a buyer, because their business model is fundamentally flawed.” (Ouch!)
Now the big three: GM, Ford and Chrysler are knocking on deaths door. They are asking for loans from Uncle Sam to help them out. Then MaWu bank is arranging survival help. The story goes on and on and on and on…
Now in Aisia, Russia, Europe, South America, Austrailia and lets just toss the rest of the world in this pile. The realization that holding American securities was not such a good thing.
So whatever the politicians all over the world do, we as a world society are going to be poorer than we were a month ago. Wall Streets all over the world has lost credibility; everyone will be less likely than before to lend endless amounts of cheap money. America has lost a lot of credibility and that ultimately will lead to higher borrowing costs?
Coping in this new world will require adjustments by millions upon millions of people. We all will have to start living within our means — or preferably below them. If you don’t over borrow or overspend, you’re far less vulnerable to whatever problems the financial system may have. Companies need to start surviving with in their means!
My Grandma allways said, “If you don’t have the money in your pocket, then do not buy it!”
Remember: “greed and ignorance, or better yet, “weapons of financial mass destruction””
Kyle & Svet
comments always welcome.