September 22, 2008 - The U.S. bank meltdown has shaken world markets over the last few months. According to John Waggoner, USA Today investment columnist and author of Bailout, “In March of 2008, the world markets woke up with one of the ugliest hangovers in history.” Bear Stearns, the fifth largest U.S. investment bank, was sold in March for $10 dollars a share (compared to its 2007 high of $172) to JP Morgan Chase. By September, AIG had declared bankruptcy and received $85 billion in loans from the government; Lehman Brothers was sold to British bank Barclays; and Merrill Lynch merged with Bank of America.
As the Bush administration pressures Congress to pass a $700 billion bailout plan this week, the likelihood of the bailout costing shareholders and taxpayers millions of dollars is leaving many wondering what caused the meltdown and how they can protect their investments in the deteriorating economic environment.
In the new book BAILOUT: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments (Wiley; September 2008; $24.95; 978-0-470-40125-5; Hardcover), Waggoner not only explains how the meltdown happened, but more importantly, he advises individuals how they can protect their investments from the fallout of future corporate disasters.
Waggoner compares the entire meltdown in the housing and mortgage markets to a vast period of national intoxication. He delves into the separate ingredients that resulted in the mania that created the real-estate bubble and how that bubble burst when foreclosures, most originating from loans requiring little more than a signature and a credit check, exploded in 2007. Waggoner recounts how Bear Stearns, known as leader in mortgage-backed securities, was not brought down by its losses but by rumors that it did not have enough cash. Despite some $18 billion, Bear’s business partners fled to competitors, paralyzing the firm. In order to prevent the subprime contagion from spreading to the rest of the banking system, the Federal Reserve stepped in to broker a shotgun wedding to J.P. Morgan Chase. Waggoner also explores the recent government rescue of Fannie Mae and Freddie Mac.
If Bear Stearns can collapse, are any companies truly safe? While investors may be tempted to stuff their savings under a mattress, Waggoner argues that this would be a grave mistake. Even if the country slides into the next Great Depression, individuals must invest their savings to beat inflation. On the other hand, “…putting all your money into one type of investment because you’re worried about a market crash is often the single best way to lose money.” Waggoner demonstrates how to diversify stock holdings to increase the margin of safety and incorporate bonds to offset any periods of deflation. Waggoner offers practical advice that enables readers to take advantage of good economic times and stave off financial ruin during downturns.
Waggoner points out “…sooner or later—and we certainly hope sooner—the economy will recover, earnings and personal income will rise, and life will be good again. And—you can count on this—somewhere in the next recovery will be the seeds on the next new financial mania. Don’t fall for it.”
BAILOUT provides the lifeline needed to help navigate readers through the economic crisis so that their investments remain intact when the current volatile market recedes.
ABOUT THE AUTHOR
John Waggoner (Washington, D.C.) is a personal finance reporter for USA Today, where he has worked since 1989, covering mutual funds, stocks, bonds, and the economy. Waggoner also writes a weekly column, “Investing,” for USA Today. He is a regular contributor to The Nightly Business Report on PBS. Waggoner is the author of Money Madness: Strange Schemes and Extraordinary Manias on and off Wall Street and co-author of The Busy Family’s Guide to Money. He has previously served as a senior editor at The Independent Investor and Donaghue’s Money Fund Report, now IBC Money Fund Report.
