Anatomy of the Crash
The subprime mortgage crisis exploded, bringing some of the biggest U.S. mortgage lenders and insurers to their knees. The market for asset-backed commercial paper — short-term loans made up of bundled assets, including mortgages and car loans, that investors purchased in droves because of their seeming low-risk and high yields — had been frozen, starving banks and spawning a credit crisis. The Dow Jones industrial average went haywire, dipping and then closing one day in July of 2007 above 14,000 for the first time.
In October of 2007, Merrill Lynch posted a doozey of a loss: $8.4-billion, all chalked up to subprime. Two months later, it was Morgan Stanley's turn: in December, the company posted its first ever quarterly loss: $5.7-billion, also related to subprime.
"I thought there would be a major recession coming, probably one of the worst ones since the big Depression," said Stephen Jarislowsky, the 83-year-old Montreal-based asset manager who Forbes listed as worth $1.9-billion in 2007. "But I had absolutely no clue that the very biggest banks, the biggest mortgage companies, the biggest insurance companies in the world effectively would fail," he said. "I thought the year would be very tough. And I can tell you that the year proved even tougher than I thought by a mile. I think the situation is really very catastrophic."
Two days earlier, a large mortgage lender in the United States, IndyMac Federal Bank, folded, squeezed by tight credit, falling housing prices and mounting foreclosures. Now, the fear of more troubles spread to the country's two main mortgage securitization companies, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). They were in danger of going bankrupt.
Fannie and Freddie's debt was essentially guaranteed by the government in a structure intended to encourage home ownership. But if Fannie and Freddie went into insolvency, the government itself would have a huge credit problem on its hands.
In an effort to avoid that scenario, on the night of July 13, U.S. Federal Reserve Board chairman Ben Bernanke and Treasury Secretary Henry Paulson announced plans to prop up Fannie and Freddie, which Mr. Coxe called "essentially the bastard spawn of a union between expansionists in government and greedy private-sector people."
In particular danger was Lehman Brothers, a top investment bank badly in need of, but unable to find, a saviour.
On Monday, Sept. 15, Lehman, which employed 25,000 people, filed for bankruptcy protection in what was the biggest bankruptcy in the history of the United States. The same day, Merrill Lynch narrowly avoided Lehman's fate by agreeing to sell itself to Bank of America for about $50-billion; insurance giant AIG was rescued by an $85-billion government bailout the next day. Three days later, the government unveiled a massive bank bailout plan, which inspired a brief market up-tick. However, the $700-billion package was rejected by Congress 10 days later. The Dow and the Toronto Stock Exchange recorded what were at the time the largest one-day point drops in history — 777 and 840, respectively. Soon, the reverberations were being felt in Russia, where the market tumbled 18 per cent in one day; there were also plunges in China, Mexico and Brazil.
How Far Will It Go ?
Since the world banking establishment has disintegrated and exists now by virtue of taxpayer subsidy, stock markets have lost enormous value and continue to spiral downward.
Will it match the crash of '29 when the market dipped 23% over two days? No, just 21% last October, but it has fallen a total of 50% since mid 2007. There is little comfort to be had in the knowledge that the Crash of '29 continued to an 80% deadfall by 1933.
Three years ago this commentator advocated selling and predicted a real value of 7000 points on the basis of profit margins at that time. Today, profits have dissappeared; book values, unfortunately suggest dismaly lower prices for stock.
Unemployment levels are clearly rising as tens of thousands of jobs evaporate weekly. Government unemployment statistics are misleading at best as they do not account sufficiently for quality jobs vs. low end employment. Obama's misleading 2009 numbers and even rosier predictions for 2010 employment and economic recovery are shared by neither bank nor accredited risk assessment institutions.
% ************Presidential ***Moody's
****************2009 2010*** 2009 2010
GDP ************-1.2 +3.2 ****-3.6 -0.1
Unemployment *** 8.4 7.9 ******9.3 11.4
Even the FDIC is recoiling with alarming speed at the looming risk and weakening prospects of recovery, having just raised it's account insurance premium rate charged to bands nearly seven fold to 3.2% from 0.5% ! Indeed, Moody's now places the odds of entering "depression" at 25%; up 15% just three months ago.
It is similarly difficult to evaluate conditions on the basis of GDP which is also manipulated statistically. Governments and economists were slow to acknowledge (by December 2008) what the public had known for months that we were, indeed, in recession. At what point will the recession deepen to the point of depression. By and large the public trust has been broken by the fraudulent behaviour of banking, insurance and financial institutions, stock price manipulation, Madof "Ponzi" schemes, subprime mortgage crisis, securities commissions headed for decades by the scions of the investment industry itself. And, of course, now by governments, confused and powerless, bent on bailing out, without preconditions, the very wolves who have pillaged the economy.
It takes no Socialist to see that it was, indeed, all built on a lie and that Capitalism itself, proved to be the biggest lie of all.
The first solution to the mess is bringing the criminals to their knees. Frontier justice would be too gentle. There must be serious accountability otherwise all undertaken will be lost.
The second, to re-establish government regulation across national economies and under will of the people.
The third, reclamation of markets from globalization and the social, economic and environmental exemption globalization has afforded the crooks.
Finally, relief of economic suffering and perhaps stimulus.
Will Obama be up to the task? Will there be "Change You Can Believe In?" I suppose we can "Hope".
