Local advisor explains recent bank failures

By Mike Ford, The Delphos Herald
Published:  Sunday, September 21, 2008 (2 months, 1 week ago)
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Stock market activity became headline news this week when large financial institutions were either bought out, bailed out or went “belly up.”
Because much of the information shared in the national media is complicated, local Edward Jones Financial Advisor Andy North says the companies got themselves into a hole and didn’t have enough money to get themselves out of it.
“I’m not a research analyst, so I don’t know all the nitty-gritty details but I can say that a lot of questions were raised over the lack of ability in these companies to come up with their short-term cash obligations. Without coming up with the cash and the time it takes to sell off assets to raise it, they’re forced into what we know of as a government bailout or Chapter 11 protection,” he said. “I think we simply had three companies that were all looking for help in raising capital at the same time - Lehman Brothers, Merrill Lynch and AIG. So, we had three institutions looking for money and a limited number of organizations capable of helping them. Not everyone could be helped and that’s why the announcements were made within such a short time of one another.”
North believes using bundles of mortgage loans as financial investments played a significant role.
“Overextending into the mortgage debt and real estate markets has been a problem. These are very diversified businesses that took on too much risk. They also take a tremendous amount of write-downs that are not necessarily money lost; it’s just that they have to look at their balance sheet and compare the mortgage’s actual worth to what they thought it was worth while using that mortgage as collateral. When the value of that collateral goes down, that’s when they have a crisis,” he said.
These rather large hiccups on the floor of the New York Stock Exchange greatly affect the economy, which is also significantly impacted by White House fiscal policies.
Jonathan Andreas is an assistant professor of economics at Bluffton University. He says there is a big difference between economic proposals with a long-term focus and those with a short-term focus.
“Most economists believe Obama’s fiscal policy is more responsible because they would increase the deficit less than McCain’s would. McCain is proposing to borrow a lot more money. If his goal is to have a short-term deficit in order to create a fiscal stimulus, that’s good but the problem is that his proposals would create long-term structural deficits. It’s one thing to have tax relief for a year but it’s another thing to permanently extend tax cuts that didn’t benefit everyone over the last eight years. On fiscal policy, there’s a big difference between the candidates,” he said.
Andreas says the most important dispute is over the Bush tax cuts.
“McCain wants to make Bush’s tax cuts permanent but Obama wants to restore the previous tax rates and shift the cuts to the middle class. There are also some smaller things like health insurance. McCain is proposing to tax health insurance, which, right now, neither employees or companies pay taxes on. Right now, those benefits are exempt, so McCain’s proposal would be a hit on the middle class. McCain is tilting tax cuts more toward the rich and Obama wants to reverse some of those cuts. It’s pretty clear that 95 percent of Americans will be better off under Obama’s proposal because the tax burden would be better under Obama than under McCain,” he said.

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