The Wall Street Journal Guide to the End of Wall Street as We Know It: What You Need to Know About the Greatest Financial Crisis of Our Time--and How to Survive It

218 Pages·2009·38.34 MB·English

by  Dave Kansas

The Wall STreeT Journal Guide To
The end of
Wall Street
as We Know it
What You need to Know about
the Greatest Financial Crisis of our Time—
and how to Survive it
dav e Ka nS aS
28559 frontmatter.indd 3 12/23/08 10:28:29 AM
To Monica, my lovely wife
28559 frontmatter.indd 5 12/23/08 10:28:29 AM
ConTenTS
Introduction ix
ONE “More risk is Simply More Profit” 1
A brief history of risk 2
ἀ e S&L crisis, the Asian financial crisis and the tech bubble 2
“Value at risk” 4
ἀ e hunt for the “big one”: ἀ e dollar doomsters 6
“We’ve figured it out” 9
ἀ e Nifty Fifty 9
ἀ e implosion of Long- Term Capital Management 10
Some good old- fashioned scandal: Enron, Arthur Andersen
and WorldCom 12
ἀ e dog that d idn’t bark: ἀ e telecom debt implosion 12
ἀ e origins of the subprime crisis 14
Alan Greenspan 15
ἀ e thirst for yield 18
Fannie Mae and Freddie Mac 19
FAQ 22
What is a bubble? 22
Do home values always rise? 22
Why did fear of risk diminish so completely? 22
Why do low interest rates matter? 23
iii
28559 frontmatter.indd 7 12/23/08 10:28:29 AM
Contents
TWO Financial Wizardry 25
ἀ e alphabet soup of derivatives: CDSs, CLOs, CMOs 27
Feeding the Wall Street mortgage machine 29
ἀ e ratings agencies 34
Private-equity funds 38
Robert Shiller 43
Leverage demystified 44
FAQ 45
Have financial derivatives created problems in the past? 45
Why are financial derivatives so popular? 45
When did financial wizardry become popular? 46
THREE Canaries 47
“Real estate prices always go up . . .” 48
. . . Until they start going down 48
BNP Paribas runs into trouble 50
ἀ e run at Northern Rock 51
Bank runs 53
Countrywide and Bank of America 54
ἀ e Federal Reserve System 55
Capital- raising programs and write-d owns 57
ἀ e Street forces Bear Stearns to its knees 59
ἀ e Credit Crunch 62
LIBOR 66
ἀ e Sarbanes- Oxley Act 67
FAQ 70
Why did the crisis take a relatively long time to unfold? 70
Should the government have done more to protect investors sooner? 70
Why did stock prices sometimes rise sharply in the midst of
the credit crunch? 71
What’s the right amount of debt, or leverage, for the financial system? 71
iv
28559 frontmatter.indd 8 12/23/08 10:28:30 AM
Contents
Will there still be a subprime debt market? 72
What will be the biggest changes in the housing market? 73
FOUR Tsunami 75
ἀ e takeover of Fannie and Freddie 75
Henry Paulson 77
ἀ e death of Lehman Brothers 79
Merrill Lynch: Bank of America buys the Bull 83
AIG 86
Morgan Stanley 88
Bank holding company vs. investment bank 90
ἀ e week that changed American capitalism 92
Timothy Geithner 98
Ben Bernanke 99
FAQ 104
Why has the government spent so much money rescuing financial firms? 104
It seemed as if the government made all this up as it went along.
Is that true? 104
What other parts of the world have been and will be affected by
the crisis? 105
Who will be the best off after the crisis? 106
When will it end? 106
FIVE The new World order 109
ἀ e end of Wall Street 109
Goldman Sachs 112
It pays to be big—or at least complex 114
Hurdles ahead for J.P. Morgan and Bank of America 115
A quick history of regulation 118
When is Main S treet’s rescue coming? 121
FAQ 123
Wall Street dominated global finance. Who will dominate it now? 123
Will any more banks or investment banks fail? 123
v
28559 frontmatter.indd 9 12/23/08 10:28:30 AM
Contents
Will anybody from the failed companies at the heart of the financial
crisis go to jail? 124
When will the regulations change? 124
Does the recent crisis mean that capitalism is doomed? 125
Why so many references to the 1930s? Are we looking at
another Great Depression? 125
What does the new world look like from Main Street? 126
SIX What is Safe? 127
Getting your financial house in order 127
Savings and checking accounts and CDs 129
ἀ e FDIC 130
Money Market accounts 133
Brokerage accounts 135
Mutual funds 136
Retirement accounts 137
Insurance 138
Annuities 139
Commodities, futures and options 140
Hedge funds 141
Your home 142
FAQ 143
Are my cash deposits safe? 143
What protections are there if my brokerage firm goes bust? 143
Is my insurance policy still good if the insurance company fails? 143
What government programs might help me with my
mortgage payments? 144
Will the government run out of money funding all these
bailout and insurance programs? 144
Checklist to determine the safety of your assets 145
vi
28559 frontmatter.indd 10 12/23/08 10:28:30 AM
Contents
SEVEN debt and destruction 147
ἀ rift is back in 147
Credit cards 151
Mortgage and other house-related debt 153
Auto debt 157
Student debt 158
A last thought on debt 159
FAQ 161
Is it ever wise to take on debt? 161
What about borrowing to buy a car? 161
Can you really borrow against your 401(k)? 161
How many credit cards should I have? 162
Should I sell my retirement assets to pay down expensive credit
card debt? 162
What about borrowing from a peer-t o- peer lending site to pay
down debt? 163
Checklist for Paying Down Debt 164
EIGHT on investment Strategy 165
Warren Buffett 165
ἀ e basics 168
Pensions and 401(k)s 170
A word on real estate 172
Advice for young people just starting out 174
Advice for those in the middle of life 177
Advice for those near or at retirement 179
FAQ 184
Why a fee- only financial planner? 184
Should I think differently about the stock market after the
financial crisis? 184
Should I consider “life- cycle” funds that adjust over time to take on
less risk as I get older? 185
vii
28559 frontmatter.indd 11 12/23/08 10:28:30 AM
Contents
What about commodities? 185
Should I invest in real estate? 186
Investment checklist 187
EPILOGUE 189
Acknowledgments 197
About the Author
Credits
Cover
Copyright
About the Publisher
viii
28559 frontmatter.indd 12 12/23/08 10:28:30 AM
inTroduCTion
i
n The PaST Year, both the U.S. and global financial sys-
tems have changed so radically that few, if any, could have
predicted it. Large banks have failed, Wall Street’s investment
banks have essentially become extinct and borrowing has
become exceedingly difficult for both companies and individ-
uals. In order to try to save the financial system and boost the
flagging economy, the government has extended more than $7
trillion—about half the total annual U.S. economic output—in
various guarantees and loans.
In December, the National Bureau of Economic Research
declared that the U.S. economy had officially fallen into reces-
sion at the end of 2007. Since then, tens of thousands of home
foreclosures, millions of lost jobs and withered investment and
retirement portfolios have added to a grim picture. It is an eco-
ix
28559 frontmatter.indd 13 12/23/08 10:28:30 AM