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Economic Fear - The Fed's Financial Rescue of Wall Street

James Bird Guess
 


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As American jobs decreased by 63,000 in Feb 2008, mostly in the auto manufacturing and residential housing construction industries, the Washington Post reported that prices for groceries, gasoline, health care and other living essentials for a typical middle income American family rose by 9.2 percent since 2006. Within the same time period, average income for typical non-managerial workers increased only about 5 percent.

On top of that, the wealth or net worth of American homeowners continues to fall due to the decline in home values and increases in credit card debt, which according to USA Today soared 7.8 percent to $943 billion in 2007. More importantly, to keep the economy from declining, President Bush and Congress have manufactured a $150 billion economic stimulus package. The economic effects of the stimulus package will probably not be enough and since the checks won't arrive until May, it may be too late.

So how will the economic stimulus package work? The American government will probably borrow the $150 billion from us in exchange for U. S. treasuries. Then they will give it back to us by mailing us a check from the IRS for $300 to $1200 each, hoping we will spend it to make the economy look good.

This is like the owner of a clothing store who is frustrated about slow business and declining sales and so he goes to the local bank and takes out loan and then calls his customers to tell them he has “customer appreciation rebate checks" he wants to give them to spend at his store. Once the customers rush to pickup the checks and spend the money at his store, his sales reports may look great, but they are actually financial optical illusions.

Obviously, the American consumer is hurting right now, but we will more than likely overcome these financial growing pains on our own probably around early 2009. And recently our “Big Brother" government has decided to just let us “cry foreclosure tears" and focus his attention on protecting his favorite sibling - Wall Street.

On March 16, 2008, Bear Stearns, a Wall Street investment bank worth about $20 billion or $150 for a share of its stock in March 2007 became another victim of “Mr. Sub- prime. " Bear Corp. , under the supervision of the Federal Reserve was encouraged to sign a merger agreement with commercial bank JP Morgan Chase. The terms of the deal allowed Chase to buy Bear Stearns stock for $2 a share at first, then in response to angry shareholders Chase increased its offer to $10 a share, valuing the company at a measly $1.3 billion. Also, Chase would cover the first $1 billion in potential losses from Bear owned debt assets, while the Fed agreed to cover any remaining potential losses up to $30 billion.

Bear Stearns made billions betting that investors would continue buying sub-prime mortgage related assets it created, so it continued to buy mortgage notes from commercial banks. After the mortgage notes were purchased, Bear would create an investment product that was considered “guaranteed" since it was backed by collateral of the mortgage notes, which in turn were backed by the collateral of the house itself.

Every time the homeowner paid their mortgage, the commercial bank that originally created the mortgage would send the money to Bear and then Bear would forward the interest payments to investors who bought the investment product. So what happened? Once the word got out that homeowners were defaulting on their mortgages, the investment products that Bear created were considered to be worthless. Why? Because the investment product Bear created and resold to investors was only good if homeowners continued to pay their mortgages.

Now that homeowners are defaulting, their homes will go into foreclosure and sell at extreme discounts. This also means the investment products that were considered “guaranteed" by those mortgage notes are no longer worth their true value and therefore must be discounted as well.

The investors who bought those investment products from Bear are crying for their money back and other investors are not willing to purchase any other products from Bear fearing potential losses. Since Bear cannot sell products because of investor fear, and it cannot raise cash for the same reason, it will be difficult, if not impossible, to continue its basic business operations.

So what! We live in a capitalist economy and people take risks to get rewards, so why not let Bear fail and stumble into bankruptcy?

The reason is that the Fed thought Bear was too large of a company to fail. If Bear did decide to close shop and file for bankruptcy, that could have potentially caused investor panic and probably more bankruptcies on Wall Street. Investors would investigate their investments and begin to demand their money back and hold onto it until they felt financially comfortable again. Their financial actions would have further aggravated the economy and possibly pushed us into a recession or rather a deeper economic hole.

Create Wealth, Enjoy Life!

James “Bird" Guess

President & Founder

The Black Economy.com

James “Bird" Guess graduated college with dreams of climbing the corporate ladder and becoming a prominent financial executive. But after only working a year in “Corporate America", James grew bitter of the politics and bureaucracy associated and decided to venture out on his own to become a full-time entrepreneur.

With a repossession and other unpaid debts on his credit, James had a negative net worth. Starting with only $1,000 saved from college, he single-handedly built a quarter million dollar apparel business from the trunk of his car. Shortly thereafter, his business model would transition from retailer to wholesaler of apparel, which generated $750,000 dollars in revenue.

James could now take one step closer toward financial freedom. As an entrepreneur, he has bought and sold over $1.5 million of apparel. He now uses his financial acumen to help individuals, entrepreneurs, businesses and investors create wealth in their lives! James is now the President & Founder of BlacBird Investments LLC. http://www.BlacBirds.com & http://www.theblackeconomy.com , Create Wealth! & Enjoy Life!

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