The past two weeks have of happenings on Wall Street have led to chaos in the financial sector. This article will give you insight and what is going on and what could happen next.
On Monday September 8th the Federal Government bailed out Fannie Mae and Freddie mac the two largest purchasers of mortgage backed securities in the U.S. This is very disturbing and is socialism for the rich in my opinion. The well connected on Wall Street and the shareholders will benefit not the American tax payer. Instead of wiping out the shareholders, replacing the corrupt and incompetent managers such a plan bails them out at a massive cost to middle American tax payers.
Then Lehman Brothers who has been in business for 158 years filed for bankruptcy they were one of the oldest investment banks. The largest ever announced in the United States. Bank of America executed a bold and swift $50 billion takeover of Merrill Lynch, while the fate of other brand-name financial institutions remained in doubt. Six months ago the Government gave 29 billion to Bear Stearns to help them avoid bankruptcy. But it was too late for Lehman Brothers, just to many losses due to all the sub prime and Alt-A loans. Over the past six months, the firm has lost close to $7 billion dollars because of bad bets on both the housing and commercial real estate markets.
Yesterday the Government announced it was lending Insurance giant AIG 85 Billion dollars! An enormous amount of money to keep them from filing bankruptcy. The company received a 2 year loan for the 85 billion in exchange for a 79% stake in the companies stock. The loan has to be paid back in 24 months, which gives AIG time to sell assets to pay the bill. This deal had to come together as an AIG Bankruptcy would have had a terrible affect on the economy worldwide.
We are clearly in unforeseen times right now. In my opinion this is bar far the worst financial crisis since the Great Depression. At the end of the day this financial crisis will be so severe and will last for several years leading to credit losses of at least 1 Trillion and maybe up to 2 Trillion dollars. Hundreds of small banks with massive exposure to real estate investments will collapse as well.
Next in line is Washington Mutual and Wachovia most likely. They are both hoping to be sold for pennies on the dollar soon and have been treading water for months now. Will Morgan Stanley and Goldman Sachs survive? Time will tell. At this point the perfect financial storm of the century cannot be contained. The only light at the end of the tunnel is the one of the coming financial train wreck that is to come.
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