 Bank of America survived the U.S. financial market crunch last week and the company has reportedly bought Merrill Lynch Bank for $50 billion to save Lynch from bankruptcy. Shown here is the Bishop BofA branch. Photo by Mike Bodine By Mike Bodine
Register Staff
9-20-2008 The ticking time-bomb that is the sub-prime mortgage crisis finally blew this week, pounding U.S. financial markets and spreading fallout and shell-shock around the globe. Local financial advisors suggest, however, that smart investors should not be too affected by the upheaval on Wall Street.
On Monday, U.S. financial markets reported a nearly 5 percent drop in stock value, the biggest financial loss since the attacks on 9/11. While the market rallied on Thursday after word that the U.S. government would intervene, worldwide markets are suffering as well with the Russian market not even opening after Monday’s crunch.
Lending institutions are feeling the pinch which will reportedly make getting a loan even harder for those with marginal credit histories.
However, those with “good credit histories should have no trouble getting credit for real estate loans locally,” according to Don Matthewson of Wachovia Securities in Bishop. He said Wednesday that the relatively low and stable prices in Bishop, compared with the rest of California, makes local real estate investment a safe venture for buyers and lenders alike.
Matthewson added that this is a critical time for people to look at their investment and retirement portfolios to see how diversified they are, with the more diversification the better. He said he’s known of some 401(k) retirement investments to be lumped into a single fund, which investors should avoid to limit potential losses.
Matthewson pointed to some things investors should keep their eye out for. He explained that a mutual fund, for example, carrying a Collateralized Deposit Obligation (CDO), is risky as the obligation is probably going to default because CDOs are a hodgepodge of sub-prime, good and bad loans. While a mutual fund with a Collateralized Mortgage Obligation (CMO) is backed by fully functioning mortgages, such as those issued by Fannie Mae and Freddie Mac that the federal government just bailed out, and are guaranteed to be paid back to the individual investor if the fund defaults.
So, the CMOs will be paid back to the investor, but with taxpayer dollars. It is a strange circular money exchange, with the taxpayer paying into the system to get back their investment, which was the taxpayer’sdollars to begin with.
Local investment advisor Thaddeus Taylor said people need to pay attention to their investments. “Common sense is always a virtue, it just takes a little longer for Wall Street to catch on.”
Taylor’s advice parallels the opinions of Wells Fargo Chairman Richard Kovacevich, voiced to Reuters News Service on Thursday. Kovacevich said that his decision not to have Wells Fargo take part in the risky sub-prime mortgage business cost his company’s stock value to drop 4 percentage points from 2005-07, and $160 billion in fees in 2006. Kovacevich and Wells Fargo are being rewarded for their common sense, seeing a 6.65 percent increase in stock value this week, while other banks have seen 30 percent drops, or worse.
“I’m like a kid in a candy store,” Kovacevich said. “We are buying with both hands.”
Projecting to the future, Matthewson said he does not agree with the assertion of Barry Ritholtz, director for equity research for Fusion IQ, that the U.S. is “in the middle of a deep dark recession, and it won’t end soon,” as reported by the Associated Press (AP) Sept. 16. But, Matthewson did predict that, “a worldwide recession is ominous.”
Matthewson said he foresees many other smaller banking institutions being bought up by larger firms as mortgages and loans – the money-makers for smaller, commercial banks – become harder to give out or insure.
On Monday, the Dow Jones industrial average fell more than 500 points, more than 4 percent. AP reported that on Monday, “About $700 billion evaporated from retirement plans, government pensions and other investment portfolios.”
This follows a turbulent 24 hours on Wall Street when Lehman Brothers, an investment bank founded in 1850, filed the largest bankruptcy in American history. Lehman and Merrill Lynch bank had both expanded aggressively into the sub-prime mortgage field, approving loans to low-income applicants or those with poor credit, with Lehman losing $14 billion in 18 months, according to the British newspaper The Guardian. Merill Lynch was bought up by Bank of America with a $50 billion transaction to save it from Lehman’s fate. Washington Mutual stock fell nearly 30 percent and closed Monday at $2 a share. The Bishop WaMu branch said that any word of the company being up for sale are rumors.
One of the scarier scenes from Monday was the near collapse of American International Group (AIG), the world’s largest insurer. AIG lost 60 percent of its stock value, wiping out nearly $20 billion from shareholders. Matthewson said AIG insures debt obligations, so the loss of AIG would have detrimental effects internationally, as there would be nothing to insure insurance. On Tuesday, the feds offered an $85 billion bail-out for AIG to prevent a worldwide financial collapse.
Friday morning President Bush, standing beside Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, announced plans for the government to buy the bad loans and liquidity from failing institutions so the poisonous loans do not infect other institutions. Bush has also announced a plan to federally insure mutual funds.
Thomas Jefferson, himself a debtor who died owing $107,000 to creditors, wrote in a letter to James Madison in 1789, “Excessive debt is a means by which governments oppress the people and waste their substance. No nation has a right to contract debt for periods longer than the majority contracting it can expect to live.”
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