It seems like everyday there’s new news with bailouts and banks. Today it was that JPMorgan Chase Bought WaMu for 1.9 Billion. Naturally consumers have a lot of questions and they should have them. I’m not an expert. In fact, I’ve been distanced from the news as I’ve been halfway around the world as it was all going down. I’ll try to answer a couple of frequently asked questions you may have about the bailout-bank situation today.
Is My Money Safe At My Bank?
I would like to say yes. If you asked me 3-4 months ago, I would have undoubtedly said yes. However, now I actually have a sliver of doubt. It’s true that the Federal Deposit Insurance Corporation (FDIC) pledges to insure your money. The problem is that this insurance comes from the US government, and the government itself is largely in debt. As we’ve seen with the $700 billion dollar bailout, the government is willing to take on more debt. The problem is what happens if a lot of the bigger banks start having problems. How many billions or trillions or extra money does the government have to give people?
I would look for banks that are on solid standing. I am pretty lucky in that much of my liquid money is at Bank of America. They seem to be in much better shape with a market capitalization of 156 billion dollars. A friend of mine who has a Washington Mutual account told me today, he was withdrawing most of the money in the account. Even if the FDIC guarantees it, you don’t want to have to wait for them to make you whole. I don’t believe they are required to work quickly and while you are waiting for them there may be late fees and the like. I don’t mean to scare you, there’s probably only a .01% chance of this happening (my off the cuff estimation), but it’s still something to consider.
How Do You Feel About the $700 Billion Bailout
Many people have been asking me about how I feel about the 700 billion bailout. There’s little to feel good about. It’s like choosing between a rock and a hard place. On one hand, I see what the government is doing. If it doesn’t support the banks now, the situation will escalate and everyone will be in even worse shape than it is today.
However, I’m a bit of an idealist. I believe that those who have been responsible with their mortgages shouldn’t be penalized. This bailout penalizes all tax payers, not just the ones are have been irresponsible. We’ll eventually have to pay more taxes (likely after this election) to make America fiscally responsible again. It hurts the American dollar. I felt that personally visiting Australia last week. While the Australian dollar is still less than the American dollar, it didn’t buy nearly as much.
One of the worst parts in my opinion is that the bailout doesn’t penalize the executives who earned millions and millions while this was going down. It’s not like it was some secret and no one knew it was coming. Sites like the The Housing Bubble have been saying it for years. It was simple logic that people getting interest-only ARMs isn’t going to last. I was wrong thinking that the people who signed silly things would learn a valuable lesson and that would be the end of it.
What Can We Learn from this Bailout
The fact that the responsible people are going to pay for this is sending the wrong message to America. Why be responsible if your going to end up having to pay anyway. The other message it sends is that you can be irresponsible and the US Government will just bail you out. Doesn’t it tempt you to just skip paying taxes for a few years?
What message did it send to the companies? I read somewhere (I think The Economist) that the smaller banks weren’t going to attention of the government and hence the bailout money. However, the bigger banks, well the government can’t allow those to fail. The reading quoted one anonymous bank executive as saying that the safest plan was to acquire assets quickly to be one of those big banks.
So while I’m quite angry about the whole situation, the only thing I can think of doing about it is continue to do what I’ve been doing. I will look to to secure my own finances and build diverse income streams. At the same time, I’ll try to educate people to avoid being fiscally irresponsible in the first place. Perhaps if we all work together we can prevent this kind of mess from happening in the future. Then again, perhaps I’m too much of an idealist.
The bailout is a horrendous socialistic nightmare. Let the companies go out of business and allow the competition to buy up their deposits and assets at market price (aka “fire sale price”).
My mother and I had quite a conversation about whether the FDIC insurance would actually do any good in the face of bank failures these days. She didn’t have much faith in it, though since the system was put into place, no one has lost their (insured) deposits at an FDIC insured bank as of yet.
The thing that gives me a glimmer of optimism that there won’t be a massive run on the banks is that the situation is different today than it was in the 1920s and 1930s. Most of our money is really just floating around out there as a bunch of 1s and 0s in the electronic banking system. Most people don’t have to go to the bank to withdraw greenbacks to pay their mortgages, utilities, etc. As long as we continue to have online access to our “cash” to pay the bills, and as long as the check clearinghouse system continues to work between banks, I see no need to go grab cash out of my online savings accounts and stash it in the mattress, or bury it in the back yard.
I may be sadly mistaken, but I hope not. I totally agree that it’s unfair that those of us who have been responsible savers and borrowers all along are going to pay the bill for this mess.
My capitalist beliefs tell me this bailout should never have happened, the market should prevail, but I’m not enough of a macroeconomist to accurately predict the consequences of failure to bail, so I can’t judge whether this will turn out to be a wise move, or not.
The problem with what your friend is doing is that it is a panic reaction. If everyone went and did what they did… we’d collapse tomorrow. I think everyone needs to take a deep breath (including our government) and really think about what they are doing. WAMU, while it is the largest failure ever, got bought by JP Morgan Chase which is on pretty solid ground (I mean, they bought Behr Sterans for ~$500MM and the real estate in NYC was worth that alone). It is business as usual today (as a WAMU customer, I’m not worried) and they will slowly transition the brand over.
I’ll leave you with this… because a lot of people withdrew everything they had in WAMU over the past 10 days… JP Morgan was able to buy the bank for cents on the dollar (they were already considering the buy out when it was at a higher price). This in turn made a lot of investors in WAMU lose even more, which does have a ripple affect on the overall market… especially given WAMU’s size. While they failed, WAMU was still posting over $900MM in deposits… that’s a pretty good number at the end of the day and is why they were able to sell and not go bankrupt.
“However, I’m a bit of an idealist. I believe that those who have been responsible shouldn’t be penalized. ”
The problem with this line of thinking is that those responsible aren’t companies as a whole but certain people within companies. However, when a company goes down, those who suffer most are regular employees – tellers, secretaries, IT personnel – from a programmer to a manager, actuaries, etc. Those who made bad decisions are actually penalized the least: they are the ones who made most money and are likely to be least affected.
Then businesses that deal with the bank start to suffer too…
Asher Zelig Chakansky says
The government should take the 700 billion dollars and start their own new lending institution.
Lazy Man says
My friend with the WaMu account: Actually it’s a business account and he has some debts to reconcile, so while he might have been lazy and waited a couple of weeks, he called me up and said, “Let me get this money owed out to you for your work now, just in case.” I should have explained that he’s not taking it out just to put under his mattress. Also this was before the JP Morgan deal was announced, so he had no idea that it would be business as usual today.
As to the individuals inside the companies being the problem, I couldn’t agree more. However, my point was aimed largely at the executive level. They get paid millions of dollars (through salary and/or stock options) and I believe it is their responsibility to prevent this from happening. With great power comes great responsibility. Many of them still get to keep their millions in this scenario.
I’m not sure how you’d take their millions away, but Kitty has it right, “those who made bad decisions are actually penalized the least: they are the ones who made most money and are likely to be least affected.”
Something I just read: An example of how this crisis affects other industries world-wide:
This is just one example, but it nicely illustrate what the fuss is all about.
Uncle B says
Tender spot hurting a lot? Other side too? bruises on your face and body throbbing? Is that blood running out your nose, hoping not to die? Did you recognize the tail lights of the limo that threw you off? Was it the same limo that picked you up at election time, promising a good decent clean ride? Will you ever learn? Last time these guys did this to you, your sons were killed in Iraq and your retirement fund spent to do it, your taxes went up, you did not get destroyed by the weapons of mass destruction, they were never found. Poor stupid American. Our heart-felt prayers from Canada go out to you!
Mrs. Micah says
Um, “Uncle B” you do realize that around…or at least…half of America voted AGAINST Bush, etc, right? Both times. Many of us were against the war and Patriot Act. Would you like us to use all kinds of dumb Canadian stereotypes? I don’t think Canadians are dumb, but if I were to judge just by you… :-/
I suppose everything your government does is exactly what you voted to have them do. Awesome.
Any take a look at the compensation package the WaMu CEO got for less than 2 weeks of work?
I’m glad I wasn’t a Shareholder
I think what is missing in this post about the bailout is that it is not just about saving a few banks.
After the fall of Lehman’s and the whole AIG thing, the credit markets have frozen. There have been credit tightening for a while, but during last couple of weeks it got much worse.
Here is how I understand the problem:
Businesses depend on short term loans for day-to-day operations like paying us our salaries. The businesses cannot afford to keep piles of cash lying in a vault for weeks not earning any money, the money is normally invested in the business. They need to pay us, they take a short term loan, then they get money from a customer on a contract, they pay the loan back. The current freeze in lending market threatens all businesses, not just a few banks.
The link I posted above nicely illustrates both that there is indeed a lending crisis and that the industries that have nothing to do with either mortgages or the US are suffering. The article is the interview an executive of a Greek shipping company Excel Maritime gave about ships being stranded because the companies cannot get loans to pay their crew. The way it works – they pay the crew, deliver the goods, get paid, then repay the loan, pay dividends to shareholders and invest the rest of money into business. Without the original loan, they cannot deliver the goods, so they cannot make money. If they don’t deliver the goods, the businesses that want these goods suffer too…
This is a really bad situation. I may be wrong but I do believe that not bailing these companies out has a potential to hurt us a whole lot more than bailing them. I also think there is a good chance that most of this money will not be lost.
“The government should take the 700 billion dollars and start their own new lending institution.”
Now this is a cool idea. If they add three or four percent to the rate at which they borrow, it may still be a good rate for businesses, but the government will make money. Wonder why nobody thought of it.
kenuto medrano says
Is my hard earned money safe in my bank, or what should I do I keep it in a safe at home. thank you
Betsy ross says
Economic Stablization Act:
Your facts are interesting. But you have the bailout scenario all wrong. What actually occurred was that the American political candidates could not get enough backing and funding from the American people in order to get re-elected, or in Obama and McCain’s cases, elected. The majority of Americans are sick of the two political parties system and those two parties agendas which have progressively moved away from our roots and Constitution. So, since they could not get enough private donations, they took out interest bearing loans at a rate, as you can see, that exceeded the GNP of most nations in order to get elected, and then those banks cried poverty in order to get those sums repaid, billing it as a public debt instead of a private debt against those candidates. Obama sold out his own children to get elected, is what happened, as did McCain to run his campaign. The market, of course, then crashed and the entire bailout was placed under the jurisdiction of the Secretary of Treasury to keep the details out of public view.
American politics has reached a new low, and those in Washington sold out their own kids, and all of America’s children, in order to remain in office. And affected the world markets also in the process.
With the American people the greatest victims of all, to the tune of $2,500 approximately for every man, woman and child in this country.