After the Fall -- What Happened, What's Next

by Gregory Zuckerman and aren !amato "uesday, #eptember $%, $&&'

(ack from the br)nk* "he +*#* f)nanc)al system last ,eek ,as rocked by the b)ggest cr)s)s s)nce the -.%&s -- and the federal go/ernment responded ,)th a mult)-pronged )nter/ent)on that )s the most s,eep)ng s)nce the Ne, !eal* 0/er the course of 1ust three days, Amer)cans ,ere shaken to see /enerable )n/estment bank 2ehman (rothers Hold)ngs f)le for bankruptcy protect)on, 3err)ll 2ynch abruptly sell )tself to (ank of Amer)ca and the +*#* hurr)edly launch an 4'5 b)ll)on ba)lout of Amer)can 6nternat)onal Group, one of the ,orld's largest )nsurers* 7ust one ,eek earl)er, the go/ernment had ba)led out mortgage g)ants Fann)e 3ae and Fredd)e 3ac* "he turmo)l has people ,orry)ng about the safety of the)r brokerage accounts, the)r )nsurance pol)c)es and e/en the)r 8safe8 stashes of cash -- as the problems at 2ehman produced losses for )n/estors )n at least one money-market mutual fund* 6n the m)dst of the f)nanc)al-)ndustry carnage, the !o, 7ones 6ndustr)al A/erage ,as do,n more than '9 for the ,eek at one po)nt m)d,eek* (ut stocks soared "hursday and Fr)day as the go/ernment announced a mass)/e effort to try to keep the f)nanc)al system from unra/el)ng* ey components: a plan to help f)nanc)al )nst)tut)ons unload tox)c mortgage assets and ne, federal )nsurance for money funds* Ho, d)d all th)s happen and ,here do ,e go from here; We tackle those <uest)ons and others belo,: Q: What's behind the financial crisis? A: "he latest ,oes are a cont)nuat)on of the hous)ng meltdo,n and the result)ng 8cred)t cr)s)s8 that ha/e been bede/)l)ng the +*#* Home pr)ces ha/e been tumbl)ng and foreclosures soar)ng s)nce the burst)ng of the hous)ng bubble 1ust o/er a year ago -- and the effects extend throughout the economy* (anks ha/e taken huge ,r)te-do,ns on bad mortgages and become st)ng)er ,)th ne, loans* 3oreo/er, many problem loans ,ere sl)ced up and resold to )n/estors as mortgage-backed secur)t)es and other products, produc)ng losses for a host of banks, secur)t)es f)rms and )nsurance compan)es* 0ther compan)es, )nclud)ng A6G, ha/e suffered b)g losses on contracts they sold pro/)d)ng )nsurance aga)nst losses on mortgage-related )n/estments* Q: How could conditions deteriorate so quickly that companies rushed to sell themselves or couldn't survive without U.S. help? A: =art of the problem has been a cr)s)s of conf)dence* 2end)ng markets that form the backbone of the cap)tal markets fro>e up* 3any f)nanc)al f)rms had become so b)g and the)r hold)ngs so complex that no one ,as sure ,hat the)r exposure ,as to the mortgage market* 6n recent ,eeks, fear that hous)ng-related losses ,ould s)nk e/en large f)rms made )t )mposs)ble for some compan)es to ra)se the cash needed to support the)r operat)ons* 6n recent years, many compan)es, l)ke many fam)l)es, loaded up on debt -- ,h)ch magn)f)es prof)ts ,hen t)mes are good but also )ncreases losses ,hen th)ngs go sour* ?ecently, g)ant f)nanc)al f)rms ha/e tr)ed to get the)r houses )n order by 8dele/erag)ng8 -- sell)ng off assets, reduc)ng debt and bu)ld)ng up cap)tal* (ut ,)despread efforts to sell d)stressed secur)t)es only push pr)ces do,n further, lead)ng to further ,r)tedo,ns that lea/e compan)es desperate for e/en more cap)tal*

Q: What does this financial-industry meltdown mean for the broader economy? A: 8@ompan)es and consumers al)ke are f)nd)ng )t more d)ff)cult to borro,,8 ,h)ch l)kely ,)ll cr)mp bus)ness act)/)ty, says 7eff F)shman, ,ho runs 7#F F)nanc)al, a 2os Angeles-based f)nanc)al-ad/)sory f)rm* 8"h)s could lead to an upt)ck )n bankruptc)es, ,h)ch ,e'/e already seen, and the attendant 1ob losses, cuts )n consumer spend)ng and conf)dence*8 And remember that the recent cr)s)s on Wall #treet follo,s months of debate among econom)sts on ,hether the +*#* economy )s already )n a recess)on or on the /erge of enter)ng one* Q: How would the overnment's new plan stem the crisis? A: "he plan l)kely ,)ll )n/ol/e spend)ng hundreds of b)ll)ons of dollars to buy d)stressed mortgage )n/estments from f)nanc)al )nst)tut)ons at deeply d)scounted pr)ces* "hat should add a dose of conf)dence to fro>en lend)ng markets by assur)ng part)c)pants that at least one large )n/estor -- the +*#* go/ernment -- stands ready to buy these assets* @ongress has s)gnaled that )t )s open to ,ork)ng ,)th the adm)n)strat)onA appro/al could come th)s ,eek* Q: Will that intervention turn thin s around? A: "he hope )s that )t ,)ll pre/ent the cr)s)s from sp)nn)ng out of control and ,)ll thus buoy the economy* A re/)/al of the cred)t markets and a bottom)ng of the hous)ng market are keys to a re/)/al* "he go/ernment's debt plan may reduce the le/el of fear )n the market, enabl)ng the cred)t markets to operate properly* (ut such a plan ,ouldn't do anyth)ng about the excess supply of homes and the large number of mortgage borro,ers )n d)re stra)ts* Q: #o what's the outlook for the economy and the stock market over the ne!t few months? A: Hous)ng could take many months to bottom, and then rebound, analysts say* 3ean,h)le, econom)es around the globe could ,eaken dramat)cally, someth)ng many )n/estors aren't count)ng on* #t)ll, )n/estors shouldn't get too gloomy* "he stock market's decl)ne of about $&9 from last fall's peak )s close to the a/erage fall for the market )n per)ods of recess)on, notes @)t)group strateg)st "ob)as 2e/ko/)ch* 80ne can suggest that a bottom )s near,8 he says* Adds =eter (rod)e, d)rector of )n/estments at a un)t of (ryn 3a,r "rust: 8H)story has sho,n that )t )s cr)ses such as these that create the extreme pess)m)sm re<u)red to set the stage for mean)ngful market reco/er)es -- and ,e feel that the res)l)ency of our economy ,)ll aga)n be exh)b)ted as ,e enter '&.*8 Q: "s there any other ood news out there? A: Bes* "he recent collapse of energy and commod)ty pr)ces ,)ll make )t eas)er for consumers to f)ll up the)r gas tanks and heat the)r homes* 6t also ,)ll reduce pressures on many compan)es* At the same t)me, )nflat)on fears are subs)d)ng, as the consumer pr)ce )ndex fell &*-9 )n August, the f)rst monthly fall )n almost t,o years* "hat all makes )t /)rtually certa)n that the Federal ?eser/e ,on't ra)se )nterest rates any t)me soon, and m)ght e/en cut them* 3oreo/er, hard as )t )s, )n/estors should ,ork to see the br)ght s)de of lo, stock pr)ces* 80nly those ,ho ,)ll be sellers of e<u)t)es )n the near future should be happy at see)ng stocks r)se,8 famed )n/estor Warren (uffett noted )n -..C* 8=rospect)/e purchasers should much prefer s)nk)ng pr)ces*8 Dma)l: forum*sunday&%E,s1*com