Financial Crisis 101 - 10/22/08

November 12, 2008 2:36:18 PM PST
Today has been marked by a blizzard of numbers, and most of them are bad. We can start with the Dow Jones Industrial Average: down 514.45 points. Ouch.But as you might expect, it's the numbers behind the plunge in the Dow that are the big story, and in this case, the big problem is EARNINGS.

If you want to see evidence of how the financial crisis is conjoined with the economic crisis, look no further than companies' balance sheets. With an exception or two, today's earnings reports were not pretty.

First in the financial sector, Wachovia Bank reported a third quarter net loss of 23.7 billion dollars. Many of Wachovia's problems stem from its purchase of Golden West Financial Corp. two years ago for 25 billion dollars. That got Wachovia seriously involved with those adjustable-rate mortgages when the housing market was at its peak.

Bad timing.

Other companies reporting earnings: Boeing down 28%, Merck down 28%, which immediately reported it will cut 10 per cent of its workforce, DuPont down 30.2%, Yahoo down 64.1%, and they will also cut 10 per cent of their employees.

The one high-profile tech company that has bucked the trend is Apple, which announced a profit of 25.7%, thanks in large part to the iPhone craze.

Here are some more bad numbers. From CNNMoney.com, the number of layoff announcements involving at least 50 employees rose to its highest level last month since 9/11. According to the Labor Department, there were 2,269 "mass" layoffs last month, and that's up by 497 from August.

Here are some more. According to the chief economist at Moody'sEconomy.com, about 12 million Americans now owe more on their mortgages than their homes are worth. He calls them under water mortgages. And that's up from 6.6 million under water mortgages at the end of 2007, and just over 3 million at the end of 2006. When property values go up, homeowners can pull cash out of their homes by refinancing mortgages, but when home values crash, as they have, that source of cash is gone, and if some unexpected need for cash comes along, that's when you default. If you need a gauge that closely charts the housing crisis, the dramatic rise in under water mortgages is it.

There is some news today about the 401k calamity. Americans have lost about two trillion dollars in retirement savings over the past year. That's not only bad for you; it's bad for the economy at large. If you think your financial future is less secure, you probably will spend less on goods and services now.

Well, an organization called the American Benefits Council, which is a lobbyist group in Washington, today proposed a 10 point plan to help people who are helplessly watching their pensions, or 401k's or IRA's melt away like the Wicked Witch of the West after Dorothy douses her with a bucket of water.

The Benefits Council is calling on Congress to take action. I'm sure not a benefits expert, but two of the points jumped out at me. The plan calls for individuals to be able to borrow on a one-time only basis up to 10 thousand dollars from their retirement accounts without penalty.

Another provision would exempt individuals who are 70 ? and up from taking distributions in 2009 or 2009 to "protect retirees from excessive distributions that deplete their retirement savings."

The President of the Benefits Council said this; "Employees and retirees need the certainty of knowing that during this current turmoil, they can access retirement assets if they need to and won't be compelled to withdraw from their plans if they don't need to. Pensions are long-term obligations. Employers should not be forced to make unexpected contributions based on short-term unprecedented market volatility. If Congress fails to act, employers will be compelled by law to restrict benefits and compelled by circumstances to 'freeze' pension plans to mitigate the impact of market conditions."

Here's a link to the full 10-point plan.

Speaking of links, I came across a web site called "Books for Understanding" and it has a list of books to help understand the financial crisis. When I say the books don't seem like beach reading, I mean they appear to be pretty serious academic works. But if you read one, then I'll read one. Here's the link.

It's been a tough day for the economy, even though, ironically, the credit markets continue to improve. It's pretty clear this won't be easy.

Jim Gardner


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