One Scary Collapse After Another
It’s been quite a week. First, venerable giant Merrill Lynch (not so “bullish” anymore) goes down in flames, with Bank of America stepping in to pick up the pieces. Then 158-year-old Wall Street firm Lehman Bros. announced it was bankrupt. And insurance company AIG revealed that it needed billions in cash to stay afloat.
After days of insisting that it would not bail out AIG, on Tuesday night Fed officials did an about-face, saying the U.S. government would step in to save the company, the L.A. Times reported on its Web site.
In the largest single financial intervention in the nation’s history and a measure of the depths of America’s financial crisis, the Federal Reserve will loan insurance giant American International Group Inc. $85 billion to finance the company’s likely liquidation over the next two years, people familiar with the decision said tonight.
Apparently, the Fed decided that the risk of not acting was too great:
Fed Chairman Ben S. Bernanke acted after AIG, the world’s largest insurer, told the government that without aid the company would file for bankruptcy tonight, a move that Fed officials concluded would send devastating ripples through the global financial system and jeopardize economies around the world.
A few months back, I posted about a guy in Florida who was predicting a virtual collapse of the U.S. financial system. At least one reader thought it was alarmist and over the top. Here are some excerpts:
I was going to call this “Banks March Us Into Depression,” or maybe more fitting is . . . “Complete Collapse of US Banking System.” Folks, that is what we are looking at. I don’t see any way around it.
Banks cannot afford to take 50-75% hits on mortgages, and that is exactly what is happening. The precipice is here, and we are on it. Recent reports about home sales rebounding are insignificant, because no one is accurately describing the growing inventory build-up. Banks simply don’t have the margins to deal with this crisis. And for that reason, we will see massive bank failures and this will snowball into a complete economic meltdown.
The banks will fail, just as they failed in 1929 . . . but worse because this time some of this leverage is as high as 40:1. Insurance? Where is that going to come from? There is no insurance that can cover the cost of the coming bank failure, unless we just print more money.
What’s next? Well, Washington Mutual, a big bank with national name recognition, was just downgraded to junk-bond status, thanks to its reported $240 billion in real estate loans. Its stock is trading at around $2 a share. Whoo-hoo!
I’d like to hear what some of you are thinking. Are you worried? Are you taking steps to safeguard your finances? Or do you think this whole thing is overblown?
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