The Wall Street Journal Guide to the End of Wall Street as We Know It: What You Need to Know About the Greatest Financial Crisis of Our Time--and How to Survive It PDF
Preview The Wall Street Journal Guide to the End of Wall Street as We Know It: What You Need to Know About the Greatest Financial Crisis of Our Time--and How to Survive It
The Wall STreeT Journal Guide To The end of Wall Street as We Know it What You need to Know about the Greatest Financial Crisis of our Time— and how to Survive it dav e Ka nS aS 28559 frontmatter.indd 3 12/23/08 10:28:29 AM To Monica, my lovely wife 28559 frontmatter.indd 5 12/23/08 10:28:29 AM ConTenTS Introduction ix ONE “More risk is Simply More Profit” 1 A brief history of risk 2 ἀ e S&L crisis, the Asian financial crisis and the tech bubble 2 “Value at risk” 4 ἀ e hunt for the “big one”: ἀ e dollar doomsters 6 “We’ve figured it out” 9 ἀ e Nifty Fifty 9 ἀ e implosion of Long- Term Capital Management 10 Some good old- fashioned scandal: Enron, Arthur Andersen and WorldCom 12 ἀ e dog that d idn’t bark: ἀ e telecom debt implosion 12 ἀ e origins of the subprime crisis 14 Alan Greenspan 15 ἀ e thirst for yield 18 Fannie Mae and Freddie Mac 19 FAQ 22 What is a bubble? 22 Do home values always rise? 22 Why did fear of risk diminish so completely? 22 Why do low interest rates matter? 23 iii 28559 frontmatter.indd 7 12/23/08 10:28:29 AM Contents TWO Financial Wizardry 25 ἀ e alphabet soup of derivatives: CDSs, CLOs, CMOs 27 Feeding the Wall Street mortgage machine 29 ἀ e ratings agencies 34 Private-equity funds 38 Robert Shiller 43 Leverage demystified 44 FAQ 45 Have financial derivatives created problems in the past? 45 Why are financial derivatives so popular? 45 When did financial wizardry become popular? 46 THREE Canaries 47 “Real estate prices always go up . . .” 48 . . . Until they start going down 48 BNP Paribas runs into trouble 50 ἀ e run at Northern Rock 51 Bank runs 53 Countrywide and Bank of America 54 ἀ e Federal Reserve System 55 Capital- raising programs and write-d owns 57 ἀ e Street forces Bear Stearns to its knees 59 ἀ e Credit Crunch 62 LIBOR 66 ἀ e Sarbanes- Oxley Act 67 FAQ 70 Why did the crisis take a relatively long time to unfold? 70 Should the government have done more to protect investors sooner? 70 Why did stock prices sometimes rise sharply in the midst of the credit crunch? 71 What’s the right amount of debt, or leverage, for the financial system? 71 iv 28559 frontmatter.indd 8 12/23/08 10:28:30 AM Contents Will there still be a subprime debt market? 72 What will be the biggest changes in the housing market? 73 FOUR Tsunami 75 ἀ e takeover of Fannie and Freddie 75 Henry Paulson 77 ἀ e death of Lehman Brothers 79 Merrill Lynch: Bank of America buys the Bull 83 AIG 86 Morgan Stanley 88 Bank holding company vs. investment bank 90 ἀ e week that changed American capitalism 92 Timothy Geithner 98 Ben Bernanke 99 FAQ 104 Why has the government spent so much money rescuing financial firms? 104 It seemed as if the government made all this up as it went along. Is that true? 104 What other parts of the world have been and will be affected by the crisis? 105 Who will be the best off after the crisis? 106 When will it end? 106 FIVE The new World order 109 ἀ e end of Wall Street 109 Goldman Sachs 112 It pays to be big—or at least complex 114 Hurdles ahead for J.P. Morgan and Bank of America 115 A quick history of regulation 118 When is Main S treet’s rescue coming? 121 FAQ 123 Wall Street dominated global finance. Who will dominate it now? 123 Will any more banks or investment banks fail? 123 v 28559 frontmatter.indd 9 12/23/08 10:28:30 AM Contents Will anybody from the failed companies at the heart of the financial crisis go to jail? 124 When will the regulations change? 124 Does the recent crisis mean that capitalism is doomed? 125 Why so many references to the 1930s? Are we looking at another Great Depression? 125 What does the new world look like from Main Street? 126 SIX What is Safe? 127 Getting your financial house in order 127 Savings and checking accounts and CDs 129 ἀ e FDIC 130 Money Market accounts 133 Brokerage accounts 135 Mutual funds 136 Retirement accounts 137 Insurance 138 Annuities 139 Commodities, futures and options 140 Hedge funds 141 Your home 142 FAQ 143 Are my cash deposits safe? 143 What protections are there if my brokerage firm goes bust? 143 Is my insurance policy still good if the insurance company fails? 143 What government programs might help me with my mortgage payments? 144 Will the government run out of money funding all these bailout and insurance programs? 144 Checklist to determine the safety of your assets 145 vi 28559 frontmatter.indd 10 12/23/08 10:28:30 AM Contents SEVEN debt and destruction 147 ἀ rift is back in 147 Credit cards 151 Mortgage and other house-related debt 153 Auto debt 157 Student debt 158 A last thought on debt 159 FAQ 161 Is it ever wise to take on debt? 161 What about borrowing to buy a car? 161 Can you really borrow against your 401(k)? 161 How many credit cards should I have? 162 Should I sell my retirement assets to pay down expensive credit card debt? 162 What about borrowing from a peer-t o- peer lending site to pay down debt? 163 Checklist for Paying Down Debt 164 EIGHT on investment Strategy 165 Warren Buffett 165 ἀ e basics 168 Pensions and 401(k)s 170 A word on real estate 172 Advice for young people just starting out 174 Advice for those in the middle of life 177 Advice for those near or at retirement 179 FAQ 184 Why a fee- only financial planner? 184 Should I think differently about the stock market after the financial crisis? 184 Should I consider “life- cycle” funds that adjust over time to take on less risk as I get older? 185 vii 28559 frontmatter.indd 11 12/23/08 10:28:30 AM Contents What about commodities? 185 Should I invest in real estate? 186 Investment checklist 187 EPILOGUE 189 Acknowledgments 197 About the Author Credits Cover Copyright About the Publisher viii 28559 frontmatter.indd 12 12/23/08 10:28:30 AM inTroduCTion i n The PaST Year, both the U.S. and global financial sys- tems have changed so radically that few, if any, could have predicted it. Large banks have failed, Wall Street’s investment banks have essentially become extinct and borrowing has become exceedingly difficult for both companies and individ- uals. In order to try to save the financial system and boost the flagging economy, the government has extended more than $7 trillion—about half the total annual U.S. economic output—in various guarantees and loans. In December, the National Bureau of Economic Research declared that the U.S. economy had officially fallen into reces- sion at the end of 2007. Since then, tens of thousands of home foreclosures, millions of lost jobs and withered investment and retirement portfolios have added to a grim picture. It is an eco- ix 28559 frontmatter.indd 13 12/23/08 10:28:30 AM
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