Monday October 6, 1:12 pm ET
Major markets in Europe, Asia and Latin America sank Monday as traders looked past America's bank bailout bill and focused on Europe's growing financial crisis.
The most influential European markets suffered big losses. London's FTSE 100 ended down 7.9%, the CAC 40 in Paris skidded 9%, and the XETRA DAX in Frankfurt tumbled 7.1%.
Russia's RTS index fared worse, shutting down after it fell more than 20%. The index lost 9% of its value in the first 30 minutes of the trading day.
Iceland halted trading in six bank stocks Monday, as Icelandic banks' assets dwarf the rest of its economy and its currency has fallen sharply in the past week.
The global financial meltdown also hit Latin America, where the economies are reliant on commodity exports.
Brazilian stocks plunged 15%, and trading was halted twice on Sao Paulo's Ibovespa index. Brazil's currency, the real, slumped nearly 7% to a near 2-year low. Mexico's IPC index dropped 9.6%, Argentina's Merval sank 9.4%, Chile's IPSA was down 6.8% and Colombia's IGBC fell 5.3%.
Experts say a worldwide economic slowdown could devastate the economies of Latin America, which have until recently reaped the rewards of historically high global demand for commodities. Falling markets could stem that demand.
Earlier Monday, Asian and Pacific markets ended roundly lower. Japan's Nikkei Exchange closed down 465.05 points, or 4.25%, at 10,473.09, a 4-1/2 year low. South Korea's Kospi index finished the day off 4.3%.
The Australian Securities Exchange plunged about 3.4% to 4,544.70, and Hong Kong's Hang Seng lost nearly 5% of its value, falling to 16,803.76.
In the U.S., the Dow Jones industrials plunged by as much as 587 points, falling below 10,000 for the first time since October 2004.
Meanwhile, the euro slid below the $1.36 mark for the first time in over a year.
Bailouts, deposit guarantees sink markets
The slump followed a weekend in which Germany's private financial sector promised to put up an additional 15 billion euros, in addition to the 35 billion euros already pledged, to help shore up Hypo Real Estate bank, the nation's Finance Ministry said Sunday.
The rescue package will help ailing Hypo, one of Germany's largest housing lenders. Earlier in the day, the German government said it would guarantee all private checking and savings accounts in an effort to abate a growing financial crisis in the country, a government official said.
European countries one after another announced deposit guarantees to relieve financial stress on banks and on their markets. Iceland and Denmark issued guarantees Monday after Germany, Ireland, France, Greece and Sweden did the same Sunday.
The guarantees began with Germany, which said it would guarantee all private bank savings and CDs in Europe's largest economy.
"We want to tell people that their savings are safe," said German Chancellor Angela Merkel on Sunday.
Coordinating a response
Yet investors jeered the guarantees, as they raised questions about their potential impact on government finances. Some analysts say the actions showed European governments could not agree on a unified approach to their financial crisis.
But European governments tried to find a coordinated response to the crisis sweeping financial markets.
European Union finance ministers were to meet in Luxembourg on Monday and Tuesday to discuss ways to boost the battered banking system. Italian Prime Minister Silvio Berlusconi is pushing a bailout similar to the one passed by the U.S. Congress last week and signed by President Bush on Friday.
Some analysts have said they expect the Federal Reserve, the European Central Bank and the Bank of England to orchestrate the first joint action on interest rates since the September 2001 terrorist attacks.
-- The Associated Press and CNNMoney.com staff writer David Goldman contributed to this report.
Monday, October 6, 2008
Monday, September 22, 2008
5 Lessons for the Next Financial Mania
Friday September 19, 3:33 pm ET By Rick Newman
Why do we keep relearning the simplest rules in the world?
Why do we keep relearning the simplest rules in the world?
Buyer beware. Cut your losses. What goes up must come down. If it seems too good to be true, it probably is. No matter how complex the market meltdown of 2008 might seem, all of these simple aphorisms--clichés, really--directly apply.
Of course, in every financial free-for-all--whether it's the S&L crisis, the dot-com bust, the Enron fraud, or today's housing-related meltdown--the chicanery takes a different form. On Wall Street, they call that "innovation." But right now, innovations like credit-default swaps and mortgage-backed securities look more like old-fashioned pyramid schemes: I'll take your money, you take somebody else's, and eventually some guy neither of us knows (or the government) will get stuck holding the bag.
Here's a guarantee: Wall Street will "innovate" again. A lot of guys in expensive suits will make a lot of money for a while. You'll want in, even if you don't completely understand what's going on. The suckers will be the ones who forget what happened in 2008. Smart investors will remember the following lessons:
The fine print matters. One of the most startling developments of the whole debacle has been the vulnerability of money market funds, which most investors consider virtually as safe as a government-insured savings account. Turns out they're not. When a couple of institutional money market funds "broke the buck" and essentially fell below the value of the principal invested in them, the government rushed to set up an insurance fund to back such funds. That's because confidence in the market is rooted in the safety of such basic accounts, where many investors park cash they might need over the short term--assuming the principal is safe.
But money-market accounts generally aren't insured by anybody, as the fine print in the prospectus no doubt points out. That illustrates a problem repeated over and over in the current crisis: A failure to understand the risks of an investment. During the housing boom, everybody focused on how much money they might make--and precious few focused on what could go wrong. Wall Street investors underestimated how risky mortgage-backed securities would be if housing prices fell. A lot of home buyers failed to do the math on their interest-rate resets, assuming it would all work out. Yeah, it's tedious to scour the fine print in such an overlawyered society. But if you don't even know what the worst-case scenario is, you'll be paralyzed if it actually happens.
Don't trust CEOs. Not because they're all liars, necessarily. But because they get paid, among other things, to be energetic cheerleaders no matter how bad their team is losing. The CEOs of Bear Stearns, Lehman Brothers, and Merrill Lynch all assured investors and the public that things were getting better for their firms, when the exact opposite was happening. Shareholders who believed them, and held on to their shares, lost a lot of money as bad investments and losses piled up. Skeptics who doubted the CEOs, and sold, cut their losses--or even made money, if they shorted the stock while the companies were on the way down.
Lehman CEO Richard Fuld wasn't just deceiving shareholders; he may even have been deceiving himself: In retrospect, it appears that Fuld had an unrealistic view of his firm's value, turning down buyout offers he deemed too low while waiting for a better offer--or government bailout--that never materialized. CEOs have an obligation to shareholders, but in reality that's second to their own self-interest--or self-delusion.
Don't trust geniuses. Wall Street is home to some of the brightest minds in the world, math and computer and finance geniuses with advanced degrees from all the best universities. If only they worked for you and me.
What they really do is find ways to make money for themselves and their firms. What they don't do is make sure their schemes serve the public interest. So a new kind of double-secret derivative might look really smart when it taps a new way to boost returns for the Bank of Brilliant People. If it works, everybody else will copy it, perhaps adding their own twists. But odds are, nobody in the system has bothered to run computer models showing what will happen if everybody starts issuing double-secret derivatives--and something goes wrong.
Theoretically, that's what government regulators are supposed to do. But the government is usually way behind the fast-thinking, overconfident gamblers on Wall Street. New regulations will attempt to change that. But the geniuses always find ways to outsmart the government and its flat-footed beat cops.
Don't trust yourself. It might have seemed like a great time to buy a house early in 2006. Interest rates were low and home values had been skyrocketing. Friends and neighbors seemed to be getting rich on real-estate deals and financing Lexuses and swimming pools with home equity. There was no reason to think the party would stop anytime soon.
But if you made your move then, you bought at the peak of the market, and chances are your big investment has lost 10 or maybe 20 percent of its value in less than three years. Yet lots of people who considered their money to be smart bought homes at precisely the wrong time. Now, the soaring foreclosure rate on many of those homes is one of the biggest underlying causes of the entire financial crisis.
People who bought at the peak of the market are generally OK if they bought a house because they needed a place to live--and plan to stay there. But millions who bought to join the craze, make easy money, or live like royalty--natural human impulses--now live in a nightmare, not a dream. And there's no government regulation that will curb greedy me-tooism.
Don't count on a bailout. It might seem like the government's writing a check to everybody with an overdue bill or two. There's federal relief for people behind on their mortgages. New insurance for investment accounts. And, of course, billion-dollar loans for troubled conglomerates.
But there's heavy political pressure to make sure taxpayers get something back, and besides, anybody who qualifies for a government bailout is already in a lot of pain. Mortgage relief, for example, goes only to homeowners who are in such dire shape that a regular bank won't help them out--and you might have to give the feds some of the cash if you sell your home for a profit. The federal loan to AIG is at such a high interest rate that the company's shareholders want to pay off the debt as early as possible. And the government could always say no, just like it did to Lehman Brothers. Whatever you consider the worst-case scenario can always get just a bit worse.
Why do we keep relearning the simplest rules in the world?
Why do we keep relearning the simplest rules in the world?
Buyer beware. Cut your losses. What goes up must come down. If it seems too good to be true, it probably is. No matter how complex the market meltdown of 2008 might seem, all of these simple aphorisms--clichés, really--directly apply.
Of course, in every financial free-for-all--whether it's the S&L crisis, the dot-com bust, the Enron fraud, or today's housing-related meltdown--the chicanery takes a different form. On Wall Street, they call that "innovation." But right now, innovations like credit-default swaps and mortgage-backed securities look more like old-fashioned pyramid schemes: I'll take your money, you take somebody else's, and eventually some guy neither of us knows (or the government) will get stuck holding the bag.
Here's a guarantee: Wall Street will "innovate" again. A lot of guys in expensive suits will make a lot of money for a while. You'll want in, even if you don't completely understand what's going on. The suckers will be the ones who forget what happened in 2008. Smart investors will remember the following lessons:
The fine print matters. One of the most startling developments of the whole debacle has been the vulnerability of money market funds, which most investors consider virtually as safe as a government-insured savings account. Turns out they're not. When a couple of institutional money market funds "broke the buck" and essentially fell below the value of the principal invested in them, the government rushed to set up an insurance fund to back such funds. That's because confidence in the market is rooted in the safety of such basic accounts, where many investors park cash they might need over the short term--assuming the principal is safe.
But money-market accounts generally aren't insured by anybody, as the fine print in the prospectus no doubt points out. That illustrates a problem repeated over and over in the current crisis: A failure to understand the risks of an investment. During the housing boom, everybody focused on how much money they might make--and precious few focused on what could go wrong. Wall Street investors underestimated how risky mortgage-backed securities would be if housing prices fell. A lot of home buyers failed to do the math on their interest-rate resets, assuming it would all work out. Yeah, it's tedious to scour the fine print in such an overlawyered society. But if you don't even know what the worst-case scenario is, you'll be paralyzed if it actually happens.
Don't trust CEOs. Not because they're all liars, necessarily. But because they get paid, among other things, to be energetic cheerleaders no matter how bad their team is losing. The CEOs of Bear Stearns, Lehman Brothers, and Merrill Lynch all assured investors and the public that things were getting better for their firms, when the exact opposite was happening. Shareholders who believed them, and held on to their shares, lost a lot of money as bad investments and losses piled up. Skeptics who doubted the CEOs, and sold, cut their losses--or even made money, if they shorted the stock while the companies were on the way down.
Lehman CEO Richard Fuld wasn't just deceiving shareholders; he may even have been deceiving himself: In retrospect, it appears that Fuld had an unrealistic view of his firm's value, turning down buyout offers he deemed too low while waiting for a better offer--or government bailout--that never materialized. CEOs have an obligation to shareholders, but in reality that's second to their own self-interest--or self-delusion.
Don't trust geniuses. Wall Street is home to some of the brightest minds in the world, math and computer and finance geniuses with advanced degrees from all the best universities. If only they worked for you and me.
What they really do is find ways to make money for themselves and their firms. What they don't do is make sure their schemes serve the public interest. So a new kind of double-secret derivative might look really smart when it taps a new way to boost returns for the Bank of Brilliant People. If it works, everybody else will copy it, perhaps adding their own twists. But odds are, nobody in the system has bothered to run computer models showing what will happen if everybody starts issuing double-secret derivatives--and something goes wrong.
Theoretically, that's what government regulators are supposed to do. But the government is usually way behind the fast-thinking, overconfident gamblers on Wall Street. New regulations will attempt to change that. But the geniuses always find ways to outsmart the government and its flat-footed beat cops.
Don't trust yourself. It might have seemed like a great time to buy a house early in 2006. Interest rates were low and home values had been skyrocketing. Friends and neighbors seemed to be getting rich on real-estate deals and financing Lexuses and swimming pools with home equity. There was no reason to think the party would stop anytime soon.
But if you made your move then, you bought at the peak of the market, and chances are your big investment has lost 10 or maybe 20 percent of its value in less than three years. Yet lots of people who considered their money to be smart bought homes at precisely the wrong time. Now, the soaring foreclosure rate on many of those homes is one of the biggest underlying causes of the entire financial crisis.
People who bought at the peak of the market are generally OK if they bought a house because they needed a place to live--and plan to stay there. But millions who bought to join the craze, make easy money, or live like royalty--natural human impulses--now live in a nightmare, not a dream. And there's no government regulation that will curb greedy me-tooism.
Don't count on a bailout. It might seem like the government's writing a check to everybody with an overdue bill or two. There's federal relief for people behind on their mortgages. New insurance for investment accounts. And, of course, billion-dollar loans for troubled conglomerates.
But there's heavy political pressure to make sure taxpayers get something back, and besides, anybody who qualifies for a government bailout is already in a lot of pain. Mortgage relief, for example, goes only to homeowners who are in such dire shape that a regular bank won't help them out--and you might have to give the feds some of the cash if you sell your home for a profit. The federal loan to AIG is at such a high interest rate that the company's shareholders want to pay off the debt as early as possible. And the government could always say no, just like it did to Lehman Brothers. Whatever you consider the worst-case scenario can always get just a bit worse.
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