Saturday, October 18, 2008

Economic Downturn: Part II

Following the government rescue of Fannie Mae and Freddie Mac in early September was the collapse of some of our largest investment banks in the country. On September 15th, Lehman Brothers, a global financial services firm, filed for bankruptcy. This was the largest bankruptcy filing in U.S. history. The biggest factor contributing to Lehman Brothers' collapse was the increasing number of failed home loans that I discussed in yesterday's post. Because of the incredible size of this company and the large effects it had in the financial market, stock prices fell dramatically on that Monday morning. Not only the stock price of Lehman Brothers, but a lot of other financial firms as well. If Lehman Brothers went under, who could be next?

And because the stock market's ups and downs are largely determined by the optimism or pessimism of where the economy is headed, the entire market took a huge hit that day and the days to follow. Every morning for two weeks I was looking at the paper to see which bank might be the next to go.

One financial firm that was suffering was AIG, one of the largest insurance companies in the world. You might ask how an insurance company is involved in mortgages and investments. Good question. In order for an insurance company to maximize its profits, (besides mailing you little pamphlets on how to be a safer driver) they invest the money they receive from their insured clients in many different ways - mortgages being one of them. Apparently, AIG could not find private funding to help them through their hard times, so the government loaned them up to 85 billion dollars for an 80% stake in the business. This is why you, as a taxpayer, now own an insurance company, and why it should bother you that a lot of wasteful spending is going on within the business.

Don't get me wrong. I'm all for private business and for the right of those businesses to pay their employees any salary they choose. But if you don't play by the rules, you're going to get kicked out of the game.

Next time, I will talk about the 700 billion dollar proposed rescue plan and what that means for us as taxpayers and citizens.

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