“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.