“Government Bails Out Fannie May and Freddie Mac.” “Markets In Turmoil.” “Wall Street in Crisis as Giants Teeter.” “Banking Free Fall Not Over.” These were some newspaper headlines and media broadcast lead-ins for events last month, as the world markets plunged into financial chaos.
Seniors are faced with new and unfamiliar decisions about their investments and finances, and every day deals us new surprises about our largest financial institutions.
These events remind everyone of Black Monday, October 1987. The savings and loan industry faced financial disaster. Our stock market crashed. People were scared. Our government managed to nurse the S&L business back to health.
But the danger is more significant this time. The banking industry is larger than the S&L industry. Real estate values are more stressed. More jobs are being lost. There is an enormous global impact. Furthermore, additional challenges exist today that did not exist in 1987.
One, is the global exposure to derivatives. The total amount of derivatives is estimated to be $300 to $500 trillion. Two percent of derivatives going bad would mean defaults of $6 to $10 trillion. Put that into perspective: Lehman Brothers, the largest bankruptcy ever, was valued at $691 billion. Two percent of derivatives equals 10 to 15 times the value of Lehman Brothers. This is how uncertainty gains momentum, and no one knows how these relatively new investments will act in uncertain and volatile markets.
Another challenge is demographics. Approximately 80 million baby boomers will retire in the next 20 years. The unfunded liability for Social Security and Medicare is between $70 trillion and $100 trillion dollars. Money that would have and could have been used to fund these programs is now being used to alleviate the present crisis rather than fix the future crisis of Social Security and Medicare. How we allocate our limited amount of money is the challenge of the 21st century.
Now the good news: This too shall pass. Markets move cyclically, and our markets will rise again! Think of this as trimming your shrubs in the spring to enhance and encourage growth in the future.
Meanwhile, this is a tremendous opportunity for our industry. Crisis inspires our prospects and clients to meet with us and become emotionally involved in the decision-making process. We are the only people who can prepare Americans for the challenges that lie ahead.
Our industry must be reminded that we do not make people rich; we prevent them from becoming poor. The Depression-era comedian Will Rogers mused that “People are more concerned with the return of their money than the return on their money.” Remember, we sell guarantees. What an awesome time to be in our business.