Douglas & McIntyre
Bubbles, Bankers & Bailouts

Book details:

February 2009
ISBN 978-1-55365-319-6
Paperback - Trade
5" x 7"
144 pages
Business & Economics / Finance BUS027000
$14.95 CAD

Douglas & McIntyre

Bubbles, Bankers & Bailouts

The Global Financial Crisis and How You Can Survive It

Excerpt / Additional Content

From

Introduction: How the economic crisis started . . . and how to ride it out

You tolerate your boss, pay your bills and taxes, feed and clothe the kids, make your mortgage payments, contribute to an rrsp, use your credit cards with prudence and manage to live in some contentment with your spouse.

And what happens? It’s all threatened by people you never heard of in places you’ll never visit spending amounts of money you’ll only dream of on schemes you can’t understand. Is this fair? No, it’s reality.

Things were scary enough through the summer of ’08 with Afghanistan, Iraq, al Qaeda, C. difficile and Sarah Palin to worry about. In September, news reports began warning of the risk of a recession shortly after Stephen Harper and George W. Bush declared that the economies of Canada and the United States were strong. Then two people you never heard of — Fannie Mae and Freddie Mac — announced they were broke. The U.S. federal government solved their problem by giving them hundreds of billions of dollars. How do you write a cheque for hundreds of billions of dollars? You don’t. You crank up a printing press, let it run full speed over the weekend and ship the cash the next day.

Soon people whose names sound more familiar were also crying poor. They were Lehman Brothers and Bear Stearns. Meanwhile Merrill Lynch, the folks who were always bullish on America — now why would they need money? — sold themselves to the highest bidder. That’s when stock markets around the world began to crumble.

You grew concerned. Brokers and financial advisers suggested you stay calm. “Stocks go up and stocks go down,” they said. “Relax.”

By October 2008 it was difficult to relax. The world’s biggest insurance company, known as aig, announced it was basically broke. How can an insurance company go broke? If too many claims arrive to be paid, an insurance company simply raises its premiums, doesn’t it? What massive insurance claims sank aig? Did another Hurricane Katrina, San Francisco earthquake or global tsunami drain the insurance company’s piggy bank? One day aig is sitting in an enormous skyscraper in Manhattan with limousines waiting to take its executives to lunch, and the next day it’s in the Bowery, or wherever New York bums go, asking for spare change. Spare change in this case amounted to us$150 billion.

Through the rest of October the news grew worse. According to People Who Should Know, which includes tv news anchors, the Wall Street Journal and your brother-in-law who once owned shares in Bre-X, a recession loomed on the horizon or even around the corner. By November, stock prices were dropping faster than a naughty girl’s knickers on New Year’s Eve, and printing presses at the U.S. Mint kept churning out greenbacks. President George W. Bush promised to hand American businesses and banks an amount of money you could not envision or even believe. By mid- November the anticipated bailouts, including outright purchases of companies, looked like this:

  • TARP: $700 billion
  • Bear Stearns: $29 billion
  • GM, Ford and Chrysler: $25 billion
  • AIG: $150 billion
  • Fannie and Freddie: $200 billion
  • Mortgage-backed securities: $144 billion
  • FHA Rescue Bill: $300 billion
  • JPMorgan for Lehman Brothers: $87 billion
  • TAF program: $200 billion
  • Commercial paper: $50 billion
  • Fed currency swaps: $740 billion
  • Total (take a deep breath): $2.625 trillion

For those who really need to know what those terms mean:

TARP ( troubled asset relief program )

Money for people who are supposed to know how to manage money but lost all of theirs, so American taxpayers will give them lots of their own cash.

Mortgage-backed securities

Pieces of paper representing thousands of mortgages on homes and office buildings.

FHA Rescue Bill

Legislation passed by the U.S. Congress in the spring of 2008 authorizing the Federal Housing Authority to help American homeowners in danger of losing their homes because they couldn’t meet their mortgage payments.

JPMorgan for Lehman Brothers

Riding into Wall Street on a white horse, financier jpMorgan Chase & Co. bought its competitor Lehman Brothers to save it, using $87 billion from the U.S. Federal Reserve. Some reports claim another $51 billion was advanced the following day; others disagree. After the first $50 billion, who’s counting?

TAF (term auction facility)

A temporary (sic) program managed by the U.S. Federal Reserve designed to “address elevated pressures in short-term funding markets.” Banks and other “depository institutions” that are “in generally sound financial condition” and “are expected to remain so over the terms of taf loans” can borrow money for 28 or 84 days to tide them over until payday or next weekend’s garage sale.

Commercial paper

Loans, extending from overnight to 270 days, that are made to large banks or companies that need cash to meet short-term obligations like a payroll or this month’s payment on the corporate jet. They are backed only by a promise, which means if they can’t pay it back they promise to have the government do it. Which is what happened to a lot of banks in the fall of 2008.

Fed currency swaps

If a company in Canada wants to buy something from the United States, it must pay in U.S. dollars. To get them, it visits a bank and asks for $x million in Yankee greenbacks. If the bank doesn’t have that much in Yankee dollars in its vault, it borrows it from another bank. But when things get tough, banks don’t like making loans even to other banks. This makes it difficult to do business, so federal government bankers get on the telephone and call their counterparts in other countries saying something like, “If I send you $100 billion in greenbacks, will you send me $100 billion in loonies?” and “How about them Leafs?” The national banks make the foreign currency available to the private banks who need it.

With the exception of the imminent departure of George W. Bush from Washington, none of this was good news. The effect on Canada, however, would not be as disastrous as on the United States. Or so we were told.

By December people stopped mentioning recession and began dropping the D-word. A global depression appeared possible, if not imminent. The assets of General Motors, once the most valuable corporation in the world, were worth about as much as the average corner variety store.

The risk that the entire North American automotive industry could vanish became more real with every Chevrolet, Ford and Chrysler sitting unwanted on dealers’ lots. While Toyota, Honda, Suzuki and other transplants might continue producing vehicles in North America, the loss of jobs at the Big Three automakers would strike a blow to the continent’s economics that had never been witnessed before. The impact of several hundred thousand workers being unemployed in Canada would take years, even decades to correct.

Meanwhile the rest of the economy continued to slide and nobody appeared immune. If you were employed, you wondered how long you could keep your job. If you were retired, were about to retire or were still contributing to an rrsp, you watched the value of your investments dribble away like fine Merlot through a leaky bucket.

This was serious. Canadians began asking, Is the world economy truly collapsing around me? How could such a thing happen? Who caused it and how? And what the hell can I do about it??!

! The first thing you can do is stay calm and read this book.