Financial Crisis 101 - 10/24/08

PHILADELPHIA - October 24, 2008 - Even before the financial crisis set in, Friday's were often tense days on Wall Street as many investors tend to take profits before the weekend. But our current situation has turned Friday's into a stomach-churning, angst-driven, hair-losing horror show. Welcome to today!

Even as the sun rose over the East this morning, long before the markets opened for business, investors on both coasts and in between knew they were in for a rough ride. Stocks in Asia and Europe had already gone belly-up: Japan's Nikkei down 9.6%, South Korea down 10.6% and Hong Kong down 8.3 %. Singapore's market plunged 8.3% to its low water mark for the last five years. And all this was even before Americans were making coffee.

Of course, let's not forget our European friends: Britain down 5.6%, Germany down 5.1% and France down 3.8%. So why should we be any different? Well the fact is we aren't. The Dow Jones Average sank 400 points at the opening bell, and save for a little blip up after the release of some encouraging housing news, it's been living in that minus 200 to 400 point neighborhood most of the day. It finished the session down 312 points.

It's difficult to explain the why's of Wall Street on any given day in normal times, and even more difficult these days because the market is responding to so much bad news at once. But one thing many analysts are saying with confidence, the corporate earnings being announced this week point to a long and deep global recession, and the world markets are responding the way they're supposed to: badly.

Of course everybody wants to know how low can the markets go. Where's the bottom? When will investors wave the white flag of surrender and capitulate? If you can answer those questions with absolute certainty, I'll give you Gary Papa's personal work telephone number so you can let us in on the secret! The point is Gary's privacy seems safe because if there's one thing that's certain in all of this, it's the uncertainty. That's why fear is king in the financial markets.

Remember we talked about the VIX several days ago? That's a measure from the Chicago Board of Trade that gauges how volatile investors think the S&P index will be over the next 30 days. It's affectionately referred to as The Fear Index. Well by mid-day, the VIX was up over 15% to 78.27. Anything over 50 means you could stand to use a little antiperspirant. By way of comparison, the low in the VIX for the last 52 weeks was 15.82.

Oh those were the days.

We are entering the thick of the college admission season with many early decision deadlines scheduled for next month, and many students already hearing from "rolling admission" schools. Throughout the tri-state area, students are filling out applications, writing essays to make themselves sound irresistible to their dream schools, and in some cases, settling in for months of nervous waiting.

For parents, this can also be an anxious time and now more than ever. College is expensive, and in some cases fabulously so. The financial crisis will undoubtedly present new challenges, but maybe some new opportunities as well. There's a blog called It recently gave some advice that some of you might find very helpful:

What Families Need To Know About The Economic Crisis & College Planning

The news has recently been filled with stories about the economy, using chilling words like crisis, recession, and depression. Many families have been nervously watching their investments rise and fall like a rollercoaster; other families are struggling with worries about layoffs and home foreclosures.

Admidst all the turmoil, many families are also wondering how the current economic situation will affect colleges, admissions, and financial aid in the near and long terms. While it is still too early to predict how a prolonged economic downturn might affect individual colleges and universities over the long term, there are some important facts that students and parents need to be aware of, and plan for, now. Here are some key issues that families need to know:

Every family needs to discuss college finances honestly. All parents want the best for their children, and most of us hope that the economy improves swiftly, but no family should avoid an open and frank discussion of the factors that may influence their ability to pay for college. The time to have this conversation is now, early in the process, not after your child has been admitted to that "dream college" you can't afford.

Having a "financial safety" is more important than ever. Students, parents and counselors often talk about admissions safeties, but it's also important to build financial safeties into your college list as well. In these uncertain times, even families who haven't yet been hit by the recent ups and downs on Wall Street need to plan for all contingencies. A financial safety is a college that you would be happy to attend, where you have an excellent shot at admission, and that your family will almost certainly be able to afford, whether due to a low cost of attendance, or a high likelihood of receiving enough financial aid or merit money to make paying realistic for your family.

Some families who didn't qualify for financial aid in the past may qualify now. As home equities plummet, and investment values drop, some families who thought they wouldn't be eligible for financial aid may find they now qualify. All families should run the numbers through an online calculator such as the ones on the FAFSA4caster, or the College Board and websites.

Federal student loans will still be available. Media reports of a pending student loan crisis are often misleading, causing families to worry that no student loans will be available next year. This is simply not true. Federal student loan programs, the most common kind of student loans, are still available, and are not in danger of being eliminated. Thanks to the Ensuring Continued Access to Student Loans Act of 2008, which was signed into law last May, the Federal student loan program has been safe-guarded and loan limits actually increased for some programs. While it is true that some banks have stopped participating in the Federal Student Loan program, students will still be able to get Stafford Loans, Perkins Loans, and PLUS Loans to help pay for college next year. However, the market for private student loans - which should always be considered the last choice in paying for college - has been shrinking and likely will continue to do so if the current credit crunch continues. Families need to stay on top of developments in the student loan market, and an excellent resource for doing so is the Project on Student Debt, a non-profit organization dedicated to providing reliable and factual information on student loans and student debt.

Families with financial need must pay extra attention to meeting all financial aid deadlines this year. Although Federal sources of financial aid are safe-guarded, many colleges will experience greater demand for institutional need-based aid. As a result, it is extremely important that students and parents apply for financial aid as early as possible, meet all deadlines, and make certain to quickly respond to any requests for additional information requested by colleges.

Beware of financial aid scams. As families grow more anxious about paying for college, it's highly likely that fraudulent and unethical people will attempt to cash in on that fear. Use extreme caution if you receive unsolicited mailings and phone calls from people promising to help your family get more financial aid or win scholarships for a fee.

Many, if not most, colleges will be adjusting to changing financial circumstances. Keep these in the proper perspective. There's little doubt that a prolonged economic downturn will affect the financial balance sheets of most colleges and universities. Colleges with larger endowments may be better positioned to weather the storm, but it is likely that most, if not all, institutions, regardless of endowment size, will need to adjust and adapt. This might include taking steps such as hiring freezes, program cuts, delayed maintenance, and other cost-saving measures. However, it's important that students and parents put these into the proper perspective. Adjusting to changing circumstances is wise, and does not necessarily signal that a college or university is no longer worth considering or will be closing its doors. In considering college options, students and parents should continue to do their due diligence, asking the right questions and seeking out reliable sources of information about the financial stability of colleges being considered, but they should not jump to conclusions based on rumors, comments on internet discussion boards, or other unreliable sources of information. Do your homework, and check the facts, but don't panic. Despite media reports hinting at the contrary, the vast majority of colleges and universities will adapt, and weather this economic storm successfully, just as they have in previous economic downturns.

In some respects, you might be better off getting ready to go to college even with the financial crisis than being ready to come out. A survey by the National Association of Colleges and Employers says that job prospects for 2009 graduates will be their weakest in six years.

One place you won't see evidence of the financial crisis this weekend will be Citizens Bank Park. Every seat will be occupied by fans, many of whom would gladly trade some percentage points from their 401k's for a Phillies World Series title. The only problem: the Phillies have been less adept at hitting with runners in scoring position than the Bush Administration was in selling the bailout plan to Republicans in the House of Representatives.

Of course, the bailout plan was finally approved, so there is hope. Ironically, the government bailout in the U.K. rescued the Royal Bank of Scotland Group, which happens to be the parent owner of Citizens Bank in Philadelphia. I don't know what that has to do with the need for Jimmy Rollins to make solid contact with the ball for the first time in the Series, but I thought it was interesting how everything sort of connects in one way or the other.

Jimmy, we beg you, stop swinging at high fast balls above your shoulders. You can't hit them. Almost nobody else can either. We can't win this without you.

Jim Gardner

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