A lot has been happening these past two weeks in the financial sector which have been a bit complex and overwhelming for me to comprehend. So here’s what I’ve learned from talking to people and reading about it:
Lehman Brothers – They’re an investment banking firm and this Tuesday, they filed for bankruptcy. Causes: they were overleveraged. Too much of their assets were financed on borrowed money. Also, the ever familiar issue of having too large of a holding on bad mortgage investments. Barclays is buying Lehman.
Merrill Lynch - Earlier this year Bank of America purchased Countrywide and this week, they bought Merrill Lynch, at a 70% premium too. They paid $29 a share rather than $17, which was how much Merrill was worth. I heard the reason was to stave off bidding wars because other banks were eyeing this purchase as well.
AIG – Insurance and investing company. They just got an $85 billion loan from the U.S. Treasury. At 10% interest rate, that’s a good deal for Uncle Sam for sure. Where are going to get that kinda’ growth these days? Not on the stock market I can tell you that much! And I don’t think AIG will tank so it’s a guaranteed 10% return. We win!
Freddie & Fannie – First of all, these two companies are government sponsored. They’re there to make the mortgage market a bit more liquid which would foster more home purchases. Banks sell their mortgages to Fannie Mae & Freddie Mac so they can have more capital to go forth and give out more mortgages. Anything that passes through these two by default get AAA ratings. Meaning, they’re good on getting paid back. This is because they’re government sponsored. Many foreign countries invested in Fannie and Freddie thinking they were very secure investments due to the government-ties. Unfortunately, with the innovative mortgage loans that may go sour and with the difficulty of estimating how severe the bad loans are out there, they’re not sure if they can carry these hefty mortgage fallouts. So the government took them under a conservatorship. What once was an implicit loan payment guarantee became explicit. They’re saying, if Fannie and Freddie can’t pay their loans because people can’t pay their mortgages, the U.S. Treasury will pay. The hope is by keeping Fannie and Freddie afloat, it will keep mortgage rates low and encourage those thinking of buying homes, to buy. Maybe by doing so, we’ll see the bottoming out of this real estate market and things will improve.
I’m not saying these entities should or shouldn’t be bailed out. But what I see is typical election-year spending. During the months before a presidential election, it’s hard for politicians to turn their backs on their constituents. So set the money loose on the voters. Maybe McCain will get his wish afterall.
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