Money & Investing - Banks.com

Right now, things are getting a little dicey on Wall Street. After yesterday’s rather dramatic tumble in trading (was it an ultimatum to Congress?), things are looking toward a partial recovery today. The stock market is slowly turning around, doing its best to struggle to a rally. But the real question on everyone’s mind is this:

Which companies will survive the financial crisis?

It seems as though no company is immune from the effects. But some companies seem to be getting government help (AIG) and others are left to fail (Lehman Brothers). Others are recipients of guarantees and help to buy other companies out (JP Morgan). Indeed, as Stephen Simpson points out on Investopedia, it appears that the government is deciding who will survive and who will fail:

It seems apparent to me that the federal government has made an increasingly implicit (but not yet fully explicit) determination that a small group of larger banks will be allowed to play the role of buyer-of-last-resort. I doubt that the acquisitions of Merrill Lynch or Washington Mutual would have been permitted just a year or two ago, but now a lot of the anti-trust and regulatory oversight has been suspended in the name of keeping the whole system running. 

Of course, in this climate, it is hard to decide  which companies to invest in, with the hope that they will emerge intact and eventually thrive. It does appear, though, that Citigroup is likely to be in this group, as is JP Morgan and some of the other investment banks and others that are being helped along.

All this deal-making, though, is bad for the ordinary investor. The companies that are bought — like Wachovia — are finding that the value of their stocks is dramatically reduced, leaving investors (including those who have holdings in investment accounts) with practically nothing.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

It’s going to be a busy day on Wall Street today. Indeed, the stock market is already dropping on all the news coming in, even though some of it appears positive at first blush. Today’s big stock market news events include the $700 billion bailout, the auto industry bailout and Wachovia’s pending acquisition by Citigroup.

$700 billion bailout heads to a vote

The House is expected to vote on the $700 billion bailout package today. By Wednesday, a Senate version is expected. However, despite the fact that the bill is expected to pass, Wall Street is showing signs of trepidation. Rather than the three-page proposal by Treasury Secretary Henry Paulson (granting him sweeping powers and ensuring almost no oversight), the document is instead 110 pages and includes rules that limit executive compensation for companies that take advantage of the bailout, as well as limiting the power of the executive branch in the process.

Auto industry bailout

As part of a massive spending bill ($630 billion) last week, Congress passed money for an auto industry bailout via loans. The justification is that the Big 3 automakers need help getting their assembly lines and what have you modernized so that they can make more fuel efficient cards and hybrids. Which is funny. Since the auto industry has been throwing money at members of Congress for the past three decades in order to prevent that very thing from happening. I guess the nice tax breaks they have don’t allow them to enough capital to fund changes that would update their business models.

Wachovia to be bought by Citigroup

In an attempt to keep Wachovia from going under, the FDIC is brokering a beal whereby Citigroup is buying Wachovia’s banking operations. The move is designed to provide capital for the struggling financial company, prevent Wachovia from going out of business, and save the taxpayers money, since the FDIC won’t have to expend any funds.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Tags: stock market, stock market news, investing blog, auto industry bailout,
economy, investments, $700 billion bailout

The drama on Wall Street continues. Washington Mutual has gone down, taken over by the FDIC and promptly sold to JP Morgan. And the $700 billion bailout of Wall Street has been delayed.

Bailout stalls, brings Wall Street down

Wall Street, of course, is counting on this bailout. That is why the stock market is down. Every delay means losses to stocks, due to “confidence” issues. It is a chance for the companies to get rid of the bad assets that they chose to invest in (will regular folks get the same Mulligan opportunity?). It clears out the paper. It allows the big New York banks to start lending money for mergers in the future, and lending money to each other.

But will it really affect most people on Main Street? That’s the question. Will the entire economy crumble if Wall Street investment banks fail, one by one? I’m not so sure that it will. Yes, the statement shock for regular folks with retirement plans will be there. And things could get dicey for a while. But most of us, with our modest investments in diversified and fundamentally sound companies (via mutual and index funds), will probably be able to weather this storm.

Besides, the WaMu situation shows that if something has real value, someone will buy it and “save” it. I’m not huge on straight up capitalism. But it appears, in this instance, that there are definite merits to the free market. I mean, look, WaMu was saved without having to resort to taxpayer money. Because, fundamentally, the company is going to be okay. The future returns are worth it to JP Morgan.

Obviously bad assets, on the other hand, like the credit derivatives that the government proposes to buy, do not have the same value. Who will buy them from the government? They are bringing Wall Street down because they were a bad idea in the first place. Why perpetuate the bad idea? Perhaps the government should offer loans, á la AIG. That would promote liquidity, allow Wall Street firms to absorb the losses, and the government would get its money back. With interest.

What do you think?

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Tags: stock market, stock market news, investing blog, Wall Street bailout,
economy, investments, WaMu