Financial Collapse? It Was Bound To Happen!

We’re getting almost constant feedback in the news these days regarding the current collapse of several large financial institutions.

Bank of America purchased Merrill Lynch over the weekend, deciding that “the bull” was a better deal than Lehman Brothers, which was also on the market. Lehman, without a new suitor coming forth, ended up filing for bankruptcy protection on Monday.

AIG Tumbles And Slips

The American International Group, or AIG, is also on the ropes looking for a way out as it tries to find $75 billion in funding to stop its own bleeding. When the stock market opened on Tuesday, AIG promptly saw the price of its shares drop by 75%, but recovered most of its losses later in the day when rumors of a government bail out surfaced.

Finally, but certainly not the last of it all, Washington Mutual saw its bond rating drop to junk status on Monday, but also saw its share prices increase by 20%.

You may be asking, “what is going on here?” And, I must tell you that I haven’t fully grasped the seismic shift in the financial markets but I do understand that much of this is payback for those institutions who invested heavily in real estate and other lending opportunities early in the decade when money was cheap. Now, finding themselves over exposed when interest rates increased and consumers defaulted on their loans, these same companies are fighting for their lives.

Fannie And Freddie Take It On The Chin

Along with Fannie Mae and Freddie Mac, lenders who back the bulk of the US real estate market, the reverberations are being felt through the investment world as stock markets from New York to London, and all across Europe and Asia are witnessing steep declines with central banks in many countries pouring billions of dollars into the financial markets to stem the slide.

Maximizing The Political Side Of The News

Politicians are quick to grab the leading news story of the day and have been making sport of it all week. Senator McCain is promising an investigation into Wall Street, a move echoed by Representative Pelosi. Senator Obama is using the news to attack McCain, citing that the economic practices of President Bush are to be blamed for the crisis. Obama is trying to tie McCain to every Bush practice and policy, hoping that voters will think that a McCain presidency will be akin to Bush serving a third term.

Clearly, making political hay out of any newsworthy situation is par for the course, but it isn’t as easy as that. Low interest rates, as part of Federal Reserve Bank policy, encouraged lenders to relax their lending standards, welcoming hundreds of thousands of consumers into the housing market who probably never should have been there. No documentation mortgages was one of the stupidest ideas, allowing many people to purchase a home without proof of income.

Perhaps the biggest problem with the current crisis is that there is very little oversight of the financial industry. The federal government has agencies and people in place who are to hold financial institutions accountable, but no one is warning the American people of the problems that lay ahead. Instead of politicians blaming each other, why not tell us — people with a vested interest in these companies — what is really going on to help us make an informed decision about what we need to do?

Sorry, I guess I’m trying to make simplistic sense out of this crisis, but it seems to me that there should be much more accountability without the federal government controlling companies and putting that burden on the taxpayer to bail out shareholders and prop up executives who stand to walk away with millions of dollars in their pockets.

Photo Credit: Steve Woods