My Bank
My very first bank account, and the very one I have today is with Washington Mutual, or WaMu for the abbreviatory-ticker symbol culture of today. I guess I chose them because they used a lot of blue in their advertisements and blue was totally in back in ‘99 and is today to some extent (though I argue that blue, and also orange, are being replaced by red and white, but not Wells Fargo).
I diverge. You may have read that WaMu was bought yesterday by JPMorgan Chase after regulators shut down the bank. I can only assume they got a crazy good deal on the buyout. But upon hearing this I seemed to remember JPMorgan Chase buying another bank recently. I was right! They bought financial giant Bear Sterns just a few weeks ago.
Who is JPMorgan Chase? Why are they doing so well while others are doing so poorly? I’m trying to figure out the latter, but the former I know a little about.
JP Morgan was a rich dude in the early 1900’s who liked boating, investing, assisting in large corporate mergers and secretly scaring the American public. The last element of his character that I mention is best defined during the Panic of 1907 where he mentioned to a newspaper that one of the major NY banks wasn’t solvent. This wasn’t the whole reason for the panic, but I’m sure it didn’t help either. After and during the panic, his bank was able to buy other banks for pennies on the dollar. (I sure love that phrase! Marketing will never be the same.)
But that wasn’t the worst part of the Panic of 1907 – the worst part was that it gave a reason for the government to enact the Federal Reserve Act in 1913 to prevent against a panic happening again. People were happy, babies were born and people were making a boat load (or a yacht load for Morgan) of money. The Federal Reserve had doubled the money supply in the first 10 years and added 60% more up until 1929.
1929. You should know what that means, and you should also know that the Federal Reserve system didn’t do as it promised in assuring a healthy market. And today is no different. Why are the banks failing again? Again, I really don’t know. But Bill Clinton mentioned on Letterman the other night (start at 4:40 in the video,) that new financial instruments, or derivatives were being used the past few years where banks would lend financing for 30 mortgages with liquidity for only 1. I’m not an economist, and I don’t claim to know what this means, but I assume it means this – for every dollar the bank has, they’re lending 30 dollars assuming that they’ll recover the difference through the interest they collect from the monthly mortgages their customers send in. But when customers stop paying, then banks have no liquidity, or actual cash to spend. Crap, I mean, didn’t we learn that this doesn’t work with Enron? They were the masters of assumption.
Back to my point,… what was my point? My point is this – before the 1929 crash, people, investment banks and other banks could buy market stock by only paying 10% and financing the rest. They called them Margin Loans and the people loved them and they all got very rich. Remember, they called it the “roaring 20’s?” The catch was, the banks could call in the loan with only 24 hour notice. So when one person got scared on Wall Street, the banks would call in their margin loans. No one could pay and it led to market collapse.
Now, the enemy is the housing market. Banks would do that crazy thing Clinton talked about while also lending to risky people with their sub-prime plans and when they needed to call in their debts for liquidity, it wasn’t available. Now the congress is asking the American people to front the bill to add liquidity back into the market, but I’m sure the American people have other liquid they’d like to soak those plans in.
I don’t think we should bail out the banks. It’s happened before, the depression was a terrible part of American and world history, but at least corrupt people lost their jobs along with the poor, and with hard work we pulled out of it eventually.
What am I trying to say? I don’t know what I’m trying to say. I’ll figure it out soon and let you know.
Tags: bail out, banks, depression, money
You can comment below, or link to this permanent URL from your own site.
September 27, 2008 at 3:59 pm
Yeah I agree. What the heck do these dang bank CEOs and the like think they are doing? Why do I have to plan and budget and protect my money while high rolling, aggressive, big shots get to squander it in high risk philandering?! Its about time the masses stand up and say NO! Wasn’t it Jefferson that after the Revolutionary War said, “God forbid we should ever be twenty years without such a rebellion.”