The current situation is confusing concerning and a bit frightening. You may be asking yourself how did this happen? Why did it happen. As a former Wall Street Banker ( yes I admit it) I am writing this blog as a simple way of giving insight into this mess.
You are in Business. You have money. The more money you have the more assets you have. Some of your assets are cash, bonds stocks, investments. Mainly liquid or easily liquidated assets. The you have your home , the sticks and bricks the not so liquid asset. The more assets you have the better off you are. In fact if you have a lot of assets liquid or otherwise you are living well.
Now lets look at banks. Banks have money. But money on hand is NOT CONSIDERED AN ASSET. Money is considered a liability. So what to you do? You invest that money. You in effect get rid of it. The more money you have invested the more assets you have. But logically the more assets you have the less actual money you have. Now the Federal Reserve makes you keep some money on hand and that is the reserve requirement. But other than that you are getting your money off your books and turning it into investments, or assets.
What if a whole bunch of your assets turned into non performing assets( Read sub-prime). You would have a problem. You would not have money coming in. To make matters worse the money you invested wasn't yours in the first place. So you owe money and the assets you are using to collect that money are bad. People find out you have bad assets and try to get their money. This is the money, other than the reserve requirement, you do not have. So yep, you guessed it, you have a big time liquidity problem and a run on institutions.
So when it comes to oversight and regulation how did this happen? The accountants looked at the assets and the liabilites. They saw a bunch of assets so they certified these institutions healthy. They were not tasked with evaluating the worthiness of the assets. This in a nut shell is why we are where we are today. Everything cascades from the non performing assets.
What is the answer? Oversight. Plain and simple. That oversight must include an assessment of risk when it comes to the assets of these organizations.
So to look at a political question. Fannie and Freddie needed to be bailed out. If they went under the whole system would in my opinion have collapsed and none of us would have been happy. AIG and Bear Sterns no. They would have caused pain but shrinking of the industries would have left healthy players. This is what I think and some other economists think so too. But the main point of this blog was to demonstrate how fragile the system really is and a mjor bad decision done by many can cause what we see today
****************************************************************************************
Charlie Ragonesi All Mountain Realty Big Canoe and Mountain Blog
On line at www.allmountainrealty.com Call at 706 579 1098
