Risky business!
Besides being the title of an early Tom Cruise movie, Risky Business are two words that sum up the last several months of financial news.
Let's review: Today, Monday, September 15 158 year old investment bank, Lehman Brothers, declared bankruptcy after a long weekend when other major banks and government entities could not agree to bail out Lehman. In fact chief Lehman suitor Bank of America, instead, bought 94 year old Investment Bank Merrill Lynch for 50 billion dollars in stock!
Confused? The Federal government and the Federal Reserve refused to back Lehman as it had earlier backed Investment Bank Bear Stearns, for which they had extended 28 billion dollars to back risk and allow Bear Stearns to be taken over by JP Morgan Chase, where it is now merged. So at the end of the day, where there had been five giant investment banks -- Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs, Morgan Guaranty Trust -- only two were left standing as independent entities -- Goldman Sachs and Morgan Guaranty. The others were absorbed by still larger companies. Such is the risk of doing business in the Investment Banking sector! Until this week these companies were the very pillars of the financial world.
Wait! But there is more. One of the largest insurance companies in the world, AIG - American International Group has fallen at the end of today to a share price of $4.76, having lost billions of dollars in the last year and down from a high of $70 during a 52 week period. No doubt a great many investors have lost money. No doubt each of these companies has experienced a large amount of "short" selling and profit taking, ( see our blog post of August 7, Investopedia ), At the closing bell on the New York Stock Exchange AIG was fighting for its corporate life. AIG extends across the globe; its failure would have dramatic impact. So stay tuned. Warren Buffett is looking at AIG. The State of New York, where AIG resides, is allowing AIG to tap its (AIG's) assets for 20 billion dollars. Also 10 large banks have joined together to create a fund to loan 70 billion dollars to companies on the precipice. So powerful private and public forces are moving.
The Federal Government has been doing its part. Remember Fannie Mae and Freddie Mac ( see our blog post of July 17 on them ). They have now been taken over and are reorganizing. Since over five trillion dollars was at stake the Government could not allow Fannie Mae and Freddie Mac to fail. And of course there was the Indy Mac takeover by the Federal Deposit Insurance Corporation.
September 15, 2008 will be a day remembered far into the future in histories of American finance. The Dow Jones Industrial Average fell 504 ponts today the most since September 11, 2001. Are we going through a collapse? Or is it just the highs and lows of the "business cycle" a harsh correction to the "irrational exuberance" of recent years. Stocks overvalued are now contrasted with major stocks that are undervalued, an opportunity for investors willing to take the risk. Certainly AIG would seem ripe to buy, since it is so low, but this is a risky business after all. It's the time of the Buffetts and Templetons of the world. First the causes of these collapses must be understood. There is vast agreement that subprime loans and leveraged bad debt has brought down these giants, that and untold profits that have now turned to dust. Bank of America seems to be a company that has capitalized on these failures, acquiring Merrill Lynch and Countrywide ( the foremost perpetrator of subprime loan practices ) JP Morgan Chase is another company that has taken advantage of the crisis to purchase Bear Stearns at nearly "junk" prices.
The Housing Mortgage crisis continues but overpriced properties are coming down perhaps more closely to their true value. However there is widespread pain and foreclosure over these overpriced properties and financial bubbles built into the subprime mortgages loaned by companies such as Countrywide. The disasters there are now affecting the financiers who initially profited. The business environment remains volatile, like the gas prices at the pump.
In Risky Business II we will try to provide a primer as to where you may find more information, enough to begin to obtain perspective on what seems to be the daily economic crisis.
Besides being the title of an early Tom Cruise movie, Risky Business are two words that sum up the last several months of financial news.
Let's review: Today, Monday, September 15 158 year old investment bank, Lehman Brothers, declared bankruptcy after a long weekend when other major banks and government entities could not agree to bail out Lehman. In fact chief Lehman suitor Bank of America, instead, bought 94 year old Investment Bank Merrill Lynch for 50 billion dollars in stock!
Confused? The Federal government and the Federal Reserve refused to back Lehman as it had earlier backed Investment Bank Bear Stearns, for which they had extended 28 billion dollars to back risk and allow Bear Stearns to be taken over by JP Morgan Chase, where it is now merged. So at the end of the day, where there had been five giant investment banks -- Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs, Morgan Guaranty Trust -- only two were left standing as independent entities -- Goldman Sachs and Morgan Guaranty. The others were absorbed by still larger companies. Such is the risk of doing business in the Investment Banking sector! Until this week these companies were the very pillars of the financial world.
Wait! But there is more. One of the largest insurance companies in the world, AIG - American International Group has fallen at the end of today to a share price of $4.76, having lost billions of dollars in the last year and down from a high of $70 during a 52 week period. No doubt a great many investors have lost money. No doubt each of these companies has experienced a large amount of "short" selling and profit taking, ( see our blog post of August 7, Investopedia ), At the closing bell on the New York Stock Exchange AIG was fighting for its corporate life. AIG extends across the globe; its failure would have dramatic impact. So stay tuned. Warren Buffett is looking at AIG. The State of New York, where AIG resides, is allowing AIG to tap its (AIG's) assets for 20 billion dollars. Also 10 large banks have joined together to create a fund to loan 70 billion dollars to companies on the precipice. So powerful private and public forces are moving.
The Federal Government has been doing its part. Remember Fannie Mae and Freddie Mac ( see our blog post of July 17 on them ). They have now been taken over and are reorganizing. Since over five trillion dollars was at stake the Government could not allow Fannie Mae and Freddie Mac to fail. And of course there was the Indy Mac takeover by the Federal Deposit Insurance Corporation.
September 15, 2008 will be a day remembered far into the future in histories of American finance. The Dow Jones Industrial Average fell 504 ponts today the most since September 11, 2001. Are we going through a collapse? Or is it just the highs and lows of the "business cycle" a harsh correction to the "irrational exuberance" of recent years. Stocks overvalued are now contrasted with major stocks that are undervalued, an opportunity for investors willing to take the risk. Certainly AIG would seem ripe to buy, since it is so low, but this is a risky business after all. It's the time of the Buffetts and Templetons of the world. First the causes of these collapses must be understood. There is vast agreement that subprime loans and leveraged bad debt has brought down these giants, that and untold profits that have now turned to dust. Bank of America seems to be a company that has capitalized on these failures, acquiring Merrill Lynch and Countrywide ( the foremost perpetrator of subprime loan practices ) JP Morgan Chase is another company that has taken advantage of the crisis to purchase Bear Stearns at nearly "junk" prices.
The Housing Mortgage crisis continues but overpriced properties are coming down perhaps more closely to their true value. However there is widespread pain and foreclosure over these overpriced properties and financial bubbles built into the subprime mortgages loaned by companies such as Countrywide. The disasters there are now affecting the financiers who initially profited. The business environment remains volatile, like the gas prices at the pump.
In Risky Business II we will try to provide a primer as to where you may find more information, enough to begin to obtain perspective on what seems to be the daily economic crisis.
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