Essentially the Only One

I was idly browsing the Yahoo financial page and came across this entirely typical article about estate planning. Tellingly sponsored by the Fidelity investment company, it begins, as all these articles do, with an anecodote.

When Les and Anna Glowacz made an estate plan five years ago, they felt confident they'd be able to pass a sizable chunk of assets to their offspring. But after the economy went south, "everything changed," says Anna, 55, a pharmacist.

Their net worth - mostly tied up in real estate investments in Chicago, where they live - has dropped roughly 15%, to about $4 million, and probably has further to fall. The couple worry that possible tax hikes down the road could take another bite, eroding the legacy started by the grit and sacrifice of Anna's immigrant parents.

Note the figure involved - $4 million. Looking at almost all similar articles reveals anecodotes of similar financial dimensions - people making six figure salaries, owning two homes, etc. What they never highlight are families making the median household income of, as of 2007, $50,233.00 - a figure that approximates my family's own household income.

So there's a big disconnect here. An affluence gap. Obviously, from a point of view of generating advertising revenue, webpages such as Yahoo Finance would like to target the top, say, 10% of income earners making well over $100,000 a year and maybe the bulk of their readers are indeed in that grouping.

But they make for dismaying and essentially irrelevent reading for those of us - by far the majority in this country - who do not belong in these higher groupings. Beyond that, there is the assumption that people who are internet savvy and financially literate enough to take an interest in online business news are, automatically, part of that same affluent grouping. Personally, all such articles do for me is increase my distrust of the entire financial services industry. So I try not to read them. But, as is clear here, they do catch my eye from time to time.

Oct. 28 (Bloomberg) -- Teachers at the Clara Zetkin Middle School in Freiberg, Germany, were counting on a budget surplus to ease staff shortages across the state of Saxony.

Those hopes have faded as a result of bets made by state- owned Landesbank Sachsen Girozentrale on structured investments backed by mortgages in the U.S. The German lender loaded up on asset-backed securities and derivatives manufactured and sold by Wall Street amounting to more than 27 times the bank's equity. Now Saxony, which pledged taxpayer money as a guarantee against losses, is on the hook for 2.8 billion euros ($3.5 billion).

This is a very long article, but well worth the read if you are in the least bit interested in how the tangled web of dodgy finance spread worldwide.

One of now many examples, alas. I would like to see some of the folk behind this fiasco punished, but it's not likely.

Here are the S.&P. sector breakdowns for the first five days of October:

Consumer Staples, down 7.2 percent
Telecommunications, down 9.7 percent
Health Care, down 10 percent
Utilities, down 11.6 percent
Energy, down 15.8 percent
Consumer Discretionary, down 16 percent
Industrials, down 16 percent
Information Technology, down 16.3 percent
Materials, down 18.2 percent
Financials, down 20.4 percent

Of the 500 stocks in the index, 12 are up so far in October, and nearly all of them are beaten down financials that bounced a bit from very low prices.

From And You Thought September Was Bad by Floyd Norris, New York Times.

August borrowing drops at 3.7 percent rate

The Federal Reserve said Tuesday that consumer borrowing fell at an annual rate of 3.7 percent in August, before the financial crisis became acute in September, forcing the government to approve a $700 billion rescue of the financial industry.

August's decline in consumer credit marked the first time that total borrowing had fallen since a 4.3 percent rate of decline in January 1998.

The weakness reflected a big decline of 5.4 percent at an annual rate in the category that includes auto loans and a 0.8 percent rate of decline in the category that includes credit cards.

I predict that this will not be an exception and we will see months of further decline. For two reasons: Firstly, credit is drying up rapidly and comprehensively. Secondly, and less significantly I suspect, people are pulling back from making big purchases as they see their household net worth crater and their debts spiral upwards.

For an economy that relies on consumer spending for about 70% of its growth, this is not good news.

But there seems to be so much bad news right now that this little tid-bit was buried deep in the business pages.

Another Black Monday tomorrow?

Well, no House vote to consider, but we have this news:

Iceland going bankrupt - not just a company this time, but a whole (admittedly small) country.

Hypo Real Estate Gets $68 Billion Bailout From German Government, Lenders - definitely touchy situation this.

The German government said that it would guarantee private savings accounts

BNP Paribas to Purchase Fortis's Units in Belgium, Luxembourg- just in time, by the sounds of it.

and

U.S. Stock Futures Drop as Deepening Credit Crisis Prompts Rescue of Hypo

The seas are as stormy as they ever were despite Congress's passage of the rescue bill. And will be so for some time yet.

The document proposing the largest financial bailout in U.S. history is refreshing concise. You can read it here.

It gives the Secretary of The Treasury enormous power:

(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

but the taxpayer is considered:

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Note that the taxpayer is #2 on that list

And an awful lot of zeros are postulated:

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary's authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

As we well know, any amount set in a government document is usually only a starting point, and I am sure this will balloon as well.

Oh well. A pretty mess we are in.

I'm listening to Liszt's "Mephisto Waltz No. 1", something of concert and piano competition standard and not really my favorite Liszt, but it makes a very apt soundtrack for the extraordinary events on Wall Street this week.

There is a wedding feast in progress in the village inn, with music, dancing, carousing. Mephistopheles and Faust pass by, and Mephistopheles induces Faust to enter and take part in the festivities. Mephistopheles snatches the fiddle from the hands of a lethargic fiddler and draws from it indescribably seductive and intoxicating strains. The amorous Faust whirls about with a full-blooded village beauty in a wild dance; they waltz in mad abandon out of the room, into the open, away into the woods. The sounds of the fiddle grow softer and softer, and the nightingale warbles his love-laden song

This is the program note to the piano piece, and substitute Wall Street for Faust and greed for the Devil (is there really any difference?) and you have just about got it. The nightingale that steps in to soothe us - well, that is the U.S. Government and the 500 billion to 1 trillion dollars of its our money.

Well, we'll see next week if the song is still sweet. It's clear even now that we've lived through a week of financial upheaval that rivals that of 1929, although, so far, with a happier outcome. No mass panic, people jumping out of skyscrapers and ashen-faced acknowledgements of ruin.

Personally, I think this bailout should have come months ago, but, as in the case of the addict who does not realise the extent of his condition until he or she reaches rock-bottom, perhaps such upheaval was necessary first. Unexpected things are going to continue to happen, but I sense that this was indeed the bottom. The government saw the abyss up close and chose to act. Better that by far than the alternative (although already the dedicated free marketeers are upset - well, they have reason to be, the housing finance industry in the U.S. has been almost wholly nationalized now). That a Republican administration should be behind this is simply boggling, but, as always, political expediency - not to mention being backed completely into a corner - wins out whatever the ideology in the end.

Government Officials Said to Consider AIG Conservatorship Plan

AIG shares fall 48% in afterhours trading. Looks like another nationalization coming.

UPDATE from the NYT:

In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.

In return, the Fed will receive warrants, which give it an ownership stake. All of A.I.G.’s assets will be pledged to secure the loan, these people said.

Reserve Primary Money Fund Falls Below $1 a Share

Redemptions delayed. It is practically unheard of for a money market fund share value to fall below $1 (thus generating a loss). $64.8 billion in assets as of Aug. 31. Unlike bank deposits up to $100,000, money market funds are uninsured in the U.S.. People are going to lose money on a supposedly safe investment here.

In a country where it is still possible to scare people with the words 'socialized' medicine, the government is about to step in with one of the most socialist acts possible - the nationalization of a company.

In this case, two companies, namely Fannie Mae and Freddie Mac, that are behind just about half of the mortgages in this country. This will put the taxpayer on the hook for billions of dollars.

This is being done to prevent the complete collapse of mortgage lending in the U.S.A. A collapse caused by unregulated capitalism and greed at its basest. With all the 'taxpayers' money - in this money the government doesn't actually have, and will simply add to the out-of-control deficit - on the line, we can probably say goodbye to any thought of rational healthcare system as well as expect either future economic collapse or absolutely necessary and considerable tax increases.

Well done, Bush administration!

UPDATE: Nice little addition from the BBC

Together, the two firms own or guarantee about $5.3 trillion worth of home loans - about half the outstanding mortgages in the US.

That is about 25 times as big as the obligations of Northern Rock - which was nationalised by the UK government earlier this year, and twice the size of the UK economy.

UPDATE 2 Nice bit of commentary from Jim Cramer, whom I like because he is a natural optimist. I hope he's right this time.

The wagering on American house-price appreciation has taken place in every venue and, in many cases, with gigantic leverage, magnifying a problem of historic proportions with a financial Armageddon quality we have not seen EVEN IN THE GREAT DEPRESSION. In other words, not since the Great Depression, but including the Great Depression. That's how important it was for houses to appreciate.

....

The only hope to break the chain of despair and turn around the endless declines in home values to the point where you SHOULD walk away from a home with a mortgage larger than the value of your house, is to stop this house-price depreciation.

The Treasury's takeover of Fannie and Freddie can change that because once mortgage paper packaged by the government enterprises is federal government paper, then ANYTHING can be worked out with the borrowers, and the borrowers represent the lions' share of the troubled homeowners in the country who have not already defaulted.

UPDATE 3 Evidence of smoke and mirrors here - how many other major financial companies are in the same boat?

Paulson was prompted to step in after Morgan Stanley, which had been hired to analyze the companies' financials, concluded that Freddie, and to a lesser extent Fannie, relied on accounting maneuvers to meet their capital requirements, according to people with knowledge of the findings. The accounting overstated the value of their actual reserves, the people said.

UPDATE 4 Lovely quote from Floyd Norris

Remarkably, the country that prides itself on being the beacon of free enterprise finds itself with a system that needs government money to finance the most important asset most Americans will ever own.