If you read the news today, you might have noticed that the Dow Jones Industrial Average dropped 777 points today in response to the financial rescue plan failing to pass in the House of Representatives. Contributing to the uncertainty is Citigroups buyout of Wachovia’s banking operations and the jitters from world markets. Though we may be down over 10% on the Dow just in the last few weeks of trading, but here are some quick tips to help you weather this financial storm:
1) Think Long Term
As long as you’re not retiring in the next 5-7 years, hang in there! The market is a cyclical beast, meaning it’ll have its ups and downs.
“A well-founded long-term investing strategy — with allocation among and diversification within investment classes — will carry you through good times and bad to reach long-range objectives. The risk of using short-term thinking with long-term money has the potential to far outweigh the effects of inherent volatility,” says Greg McBride with BankRate.com
Keep your eye on the ball, but also make sure you’re taking a look at the game as a whole as well.
2) Don’t Pull Your Money Out of the Bank
The worst thing you can do right now is pull your money out of the bank and stuff it under a mattress. Banks are safe and your deposits are backed by the FDIC. The markets cannot function without your deposits. Yes, really!
It’s called the multiplier effect. 20 cents of ever dollar you deposit is held by the bank, and the other 80 cents is lent out to other borrowers who need it. They spend the money and it is eventually redeposited to be lent out again. Look at this cycle happening 10x and you’ll quickly see why $1 has the power of $10.
3) Don’t Hold Back on Spending…
Part of the reason why our economy has slowed down is because of the lack of consumer spending. Spend and buy as you normally would. That’s one way to directly contribute to our economic recovery.
4) …But Remember to Save Some Money Too
There’s no better time than now to create a 6-month emergency fund to help you weather a loss of a job or an economic crisis. You’ll be set in case you get laid off.
5) Pack it in for a Possible 18 Month Ride
The number one question I received in the past few weeks is: “When will the recession be over?” In all indications, it’ll be AT LEAST 18 months before anything starts to pick up again. That’ll put is in the year 2010. We have sky high unemployment, large losses on Wall Street, and flat consumer spending. The biggest issue is that there is still 18 months of supply of homes on the market that needs to be sold off. Also, not to mention that we’re still waiting for the next wave of mortgage foreclosures to hit the banks.
The effects of a recession are more psychological than anything else. Hang in there and we’ll ride it out together.
It is official, Washington Mutual Bank has failed. I’ll tell you what that means and what’s next for WaMu, coming up next on this special extended audio-only edition of 2MinuteFinance.
(Intro)
Tonight, the Federal Deposit Insurance Corporation, or the FDIC, took over Washington Mutual Bank and sold it to JP Morgan Chase. It is considered the largest bank failure in US history. So what happened?
The company was heavily invested in sub-prime mortgages. Because of the declining home values, WaMu was stuck with an investment that was now worth less than they had originally leant. In order to make sure they had enough cash on hand to make up for the loss on their mortgage investments and meet their obligations to depositors (like you an I), the bank tried to seek capital, also known as raising more money.
They did so last spring and raised $7 billion dollars. Unfortunately, their mortgage losses continued to mount. As of tonight, WaMu had $227 billion dollars in real estate loans, $307 billion dollars in assets, and $188 billion in deposits. Though since September 15th, depositors have taken out $16.7 billion dollars in deposits, or about 9% of the bank’s deposits. This tipped WaMu from being a solvent bank, or being able to meet all of its obligations, to being insolvent, or not being able to meet all of its obligations.
Tonight, the FDIC took over WaMu and immediately sold part of the company to JP Morgan Chase, also known as JPMC, for $1.9 billion dollars. So what does this sudden transition mean?
If you’re a WaMu bank customer, this means nothing for you. JPMC has assumed all deposits, including uninsured deposits. Meaning, even if you had more than the $100,000 dollar FDIC insurance limit in deposits with WaMu, JPMC will honor your deposits. You WILL receive every dollar you had originally deposited in WaMu. Come Friday morning, it will be business as usual.
If you’re a WaMu borrower, you’re not off the hook! No no no! You still have to pay back your loans and mortgages. Keep sending them to the same address on-time.
If you’re a WaMu employee, the future is not certain. JPMC has indicated that it would close less than 10% of the bank’s branches. So there would be some small jobs losses in the retail banking side. But the future of the other divisions of WaMu is uncertain.
If you’re a WaMu stockholder or bondholder, you are basically wiped out. Because JPMC bought WaMu from the FDIC and not the shareholders, and because they only bought the assets of WaMu, the stock is basically worthless and their bonds will not be repaid. So if you’re looking at the timeline of events, WaMu failed first, rendering the stock worthless, then the FDIC took over the bank, then JPMC bought the bank, all tonight. In the hierarchy of who gets repaid after a bankruptcy, shareholders and bondholders sit at the bottom of that list.
So what’s next for WaMu?
As mentioned earlier, JPMC has indicated they would close less than 10% of WaMu’s branches. As long speculated, the company has always wanted to enter the retail banking market in the west coast. As of right now, JPMC’s retail banking network is only in the east coast. As of this moment, the combined bank is now the largest bank in the United States with 5,400 branches in the US in 23 states. That is, until Bank of America completes their acquisition of Merrill Lynch in the near future.
So if you’re a WaMu customer, you’ll probably have greater access to your money in the near future, coast-to-coast.
The only question now is what is going to happen with all of WaMu’s losses. Will the government hold onto the losses, an idea floated with the current bailout plan? Will they help private companies take over the bad debt? Who knows? The only thing for certain is that JPMC will take a $31 billion dollar write down and sell an additional $8 billion dollars in stock to cover themselves against future losses.
For more information on the JPMC-WaMu failure and subsequent acquisition, visit our website at 2MinuteFinance.com. I’m Bobby Lee, thanks for listening.
Lehman Brothers Headquarters in New York (Courtesy STLToday.com)
The big news this weekend is that the saga of Lehman Brothers seems to be coming to a head.The federal government is trying to rescue the company, but there are no buyers.The only potential suitor for Lehman Brothers, Bank of America, pulled out of negotiations and purchased Merrill Lynch instead.But what does this mean exactly and why is it big news?
Lehman Brother is one of the top 10 brokerage firms in the nation.Their company provides trading services, wealth management and investment banking services.Basically, from a consumer’s standpoint, unless you had a few million dollars or more in cash you wanted a financial adviser to manage, you probably would not have heard of their company before.
Previously, Lehman Brothers owned BNC Mortgage.BNC specialized in lending money to not-so-qualified borrowers who wanted to purchase a home.These borrowers who may have had a low credit score, previous bankruptcies, or posed a high-risk of not being able to pay back the mortgage (default) were considered sub-prime borrowers.Because sub-prime borrowers were riskier to lend money to, lenders, like BNC, charged a higher rate of interest to compensate for the risk.
In a nutshell, these lenders would spread out their risk by not holding onto these mortgages.Instead, they packaged and sold these mortgages on the market (auction-rate securities/secondary market) to investors who would take the risk.Flush with the money of the investors who just bought the mortgages from the lender, BNC and others would then lend more money to more high-risk borrowers.Thus the vicious cycle continued.
Have you ever looked at your savings account and notice how little in interest your bank is paying you on your savings? I’ll explain how you can increase your interest rate by investing in a Treasury Bill rather than putting your money in a savings account on this episode of 2MinuteFinance.
After viewing the video, check out these resources below.
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