What Caused This Financial Crisis

If you have read any newspaper, watched any news station or listened to any talk radio station, there has been a lot of talk about the financial crisis that our economy is currently in. I explained in an earlier blog about what happened with the American International Group (AIG) and if they failed that we could have already been in a depression. Now what the average person wants to know is how did we get to this spot that we are currently in and what can we do to get out of it?
There are many different issues that could explain where we are today but one big issue that surrounds all of the financial worries on Wall Street have to do with the two biggest mortgage lenders in the United States, Freddie Mac (FRE) and Fannie Mae (FNM). Freddie Mac is a company that engages in mortgage purchasing and credit guarantee and portfolio management in the United States. Fannie Mae is the primary mortgage liquidator to help insure mortgage companies, savings, loans, commercial banks, credit unions, state and local housing financial agencies have enough money to lend to home buyers. In short, these two companies insure loans made by banks and mortgage companies.
George W. Bush made a speech on Thursday September 25th, 2008 on national television that helped explain to the average person across the United States about what is going on. In short, there were plenty of foreign investors outside the United States interested in investing in the United States because the United States is a safe place for business. All of the money that has come in from these outside investors, with low interest rates, made it easier for people to get credit to help families borrow money for whatever they may please. These loans helped people open businesses and as a result more jobs became available. The negatives come in the housing market. With easy credit and the assumption that the price of housing would rise, mainly in Florida, California, Arizona and Nevada. The mortgage lenders like Freddie Mac and Fannie Mae lent out loans that some people would not be able to pay off. These institutions were under the assumption that people could pay off their houses when they would sell in the future. As it turns out this did not occur.
The number of houses that were being built continued to increase and soon there were not more houses out for sale than people willing to buy them. This creates a problem because the supply exceeds the demand and as a result the price of houses dropped. So people who wanted to try to refinance or sell their homes at a higher price would not be able to do so. The people who owned homes would not have enough money to pay off their homes because of the bad loans that were given out. In the mortgage industry today the mortgage companies package mortgage back securities that are sold to investors worldwide. Freddie Mac and Fannie Mae are the leading purchasers of these securities.
These two companies are financed by Congress so many believed that they can borrow large sums of money. There were a lot of questionable investments that took place. This lead to a domino effect and many companies that had ties to these investments, Bear Stearns and Lehman Brothers, collapsed. The next company that could have collapsed would have been Merrill Lynch (MER) before they got bought out by Bank of America.
The US Treasury Secretary, Hank Paulson, is proposing a $700 billion dollar plan to help rescue our financial institutions. This plan mainly says that the US Government is going to try to buy back 10,000 mortgages each day. This would cost the tax payers alot of money. This bill is going to have to be passed or else many bad things could occur. The stock market could go down and go down fast. This is because the market does not like uncertanity so the people who have the most power would sell their stocks.
Now you know what has caused this financial crisis and what we have to do to get out of it.

Financial Crisis

In the past week our government could have just saved our entire economy from ending up in a depression. On September 15th, 2008 the Dow Jones Industrial Average, this is a index fund of the 30 largest companies, fell 5%. This was because of bad news about the fourth largest investment bank in the United States, Lehman Brothers Holdings, having to file for Chapter 11 bankruptcy the next day. This is the largest bankruptcy in US history.Earlier in the year the fifth largest investment bank, Bear Stearns, was on the verge of going bankrupt until the Federal Reserve Bank of New York gave them a emergency loan and JP Morgan Chase bought the company out at $2 per share. Lehman Brothers filing for bankruptcy was not as big of a concern compared to what could have happened to the American International Group (AIG).

The American International Group is the world's largest insurance company. It is 18th largest company in the world. American International Group helps provide insurance, financial and investment products to businesses and to individuals in 130 countries around the world. The American International Group is the largest insurance company for aircraft companies in the world, insures many telecommunication companies, insures ports around the world that may have exposure to natural disasters and own Ocean Financing which is the United Kingdoms that has exposure to the housing market. In short, if something happens to a business and they need insurance, AIG helps provide insurance.

For certain individual households a lot of people may use Allstate, State Farm or some local insurance company. The American International Group had reported a lot of problems on their balance sheet. This is just a financial document that shows the financial condition of a company. In the business world this is an extremely important document because the balance sheet shows many things such as what a company owns and what they need to pay off in the short and long term. AIG was in a lot of trouble because of the Lehman Brothers bankruptcy. AIG had some financial concerns when it came down to its mortgage backed securities. Investors were concerned because they reported worse numbers than Lehman Brothers who filed for bankruptcy earlier that week. The big investors then started selling AIG so fast that they almost went bankrupt. 

On Wednesday September 18th, 2008 AIG's stock price went all the way down to $1.25. That is about a 96% drop in one year. Investors were very negative on their future and did not just start selling AIG but investors started to sell the financial stocks at fast rates. The financial stocks make up almost 20% of the entire stock market. If this sector has huge declines then most of the sectors that have anything to do with the financial stocks will get hit hard. So on Wednesday the Dow Jones Industrial Average, the largest index fund, fell more than 5%. Investors were very worried about AIG because if  they declared bankruptcy our economy might be forced into a depression. If you thought that the two declines during this week then you would have missed some that would have been catastrophic. 

A few hours after the stock market closed on Wednesday September 18th, 2008 the US Treasury reported that they would provide AIG with an $85 billion dollar emergency loan for 2 years. With this loan the US Government would control 79.9% of the largest insurance company in the world. If this had not happened then there is a possibility that on Thursday September 19th, 2008 if you went to an atm and wanted to withdraw cash there might not be any cash that would have come out. 

The United States Government did so much in these past few days, especially the Treasury Secretary Hank Paulson, than President Franklin Roosevelt did in his time during the Great Depression. 

Tell me what you think about this economic crisis that is currently going on.

Posting on another person's blog

I made a coment on NOLA girls blog, "Will My Home Still Be There?" I also made a coment on Thryston's blog, "How To Save A Life."

Why the price of oil is heading lower.

As the weather was getting better across the United States the price of oil started to increase at a fast rate. Many people were complaining about how high prices were at the pump. On July 11th, 2008, the price of crude oil traded on the New York Mercantile Exchange, now owned by the Chicago Mercantile Exchange, at an all time high of $147.27. As of September 2nd, 2008, the price of crude oil finished the trading day at a 10- month low at $109.23. When I first found out that the price of oil was on the decline I was a little bit confused because alot of stock and energy analysts said that the price of oil was going to increase above $150. The largest investment bank in the world, Goldman Sachs, made a prediction that the price of oil could go up to $200. I was very interested to see why the price of oil went down about 26% in just over one month, so I did some work about why oil went up and down so fast.

A few reason why the price of oil has dropped so much is over a month is because of declining demand in the United States and abroad by using some alternative sources to oil, and because of an increase in the US dollar. As the price of oil increased, the average consumer began to spend his or her money more wisely which led to consumers making adjustments on what they were spending at the pump. Also, when the United States dollar was traded on the foregin exchange market (forex) in for another currency such as the Euro, then the return that you would get back is in the foreign currency would be worth more than trading in the foreign currency in for the United States currency.

Another reason why the price of oil went up so much and is now coming down is because during the summer more people tend take vacations using their cars and other sources of transportation that may use alot of oil. In the winter a lot of students have school, and the weather is not always that good in the Northern Hemisphere as in the Southern Hemisphere. This have the effect of less traveling that would occur. Companies such as Exxon Mobil, Chevron, British Petroleum, Royal Dutch Shell and ConocoPhillips can raise the price of gasoline that people pay at the pump so much because there is not a clear effective alternative that was non petroleum based that would fuel cars that well. This means that drivers would have no choice but to refuel their cars with gasoline at gas stations. As a result of the raise in gas prices, Exxon Mobil earned a record $11, 680 million dollars of net income in the second quarter of 2008. That is the most any company has ever earned in one quarter. Also, not as many people travel when students are not in school. As the summer starts to end the price of oil should continue to drop because not that many people are going travel across the country and the oil companies can lower prices so they will not have the consumers look for as many alternatives.

The reasons that are listed above are my opinion on why the price of oil is on the way down and the price that you are going to pay at the pump should be on the decline.