In a year of financial chaos, how can one even narrow the choice of most shocking financial collapse to just five candidates? Financial collapses took down venerable Wall Street firms and government enterprises. Even an entire country fell on the weight of this worldwide financial storm. There were so many financial casualties that the task to narrow this down to just five was difficult. We have chosen these five and placed them in alphabetical order.
Bear Stearns Bear Stearns held a respected place on Wall Street dating back to before the Great Depression, but in March 2008, this once-respected Wall Street firm was bought by JPMorgan Chase (NYSE: JPM) for just $2 per share (or about $236 million). The stock price had been $36.75 on March 14, 2008 -- just two days before the JPMorgan deal was struck. Bear Stearns had been the most aggressive player in packaging and selling mortgage-backed securities, and their hedge funds were heavily loaded with the junk they sold. Many saw the fall of Bear Stearns as justice because it was the only major Wall Street bank that did not work with the Fed and participate in the $3 billion bailout of Long Term Capital Management in 1998. Payback is a bitch.
TheStreet.com's Jim Cramer says you just can't be as negative as you were before the latest actions.
It's been right to be more than the average bear for months now. But if you believe that housing played some role in the downturn, then you have to believe that the latest moves are very meaningful for that trashed market.
We have had two major problems in housing: affordability and the ease and cost of mortgage money. We got news this week that ameliorated both difficulties, and we cannot sniff at them as much as it has paid to sniff at everything else that has been done.
First, the government's buy of GSE paper revives a moribund market and ends a lot of federal indecision. If you recall when the government confiscated the Fannie (NYSE: FNM) (Cramer's Take) and Freddie (NYSE: FRE) (Cramer's Take) preferreds and therefore made FNM paper more dangerous, the government at the same time said that it would make mortgage rates come down, presumably by buying a ton of Fannie/Freddie paper. Instead it made a half-hearted effort by buying about $25 billion in paper and then disappeared!
Despite cutting the Fed Funds rate from 5.25% to 1% since August 2007, mortgage rates remained stubbornly high. They also remained elevated after the $800 billion bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). It finally looks like the latest plan to spend $600 billion to buy mortgage-backed securities (MBS) is causing mortgage rates to drop. But are lower mortgage rates good for the economy?
Yesterday's MBS buyout plan helped cut the rate on a 30 year fixed mortgage from 6.38% to 5.5%. If people can qualify for a refinancing, then the lower rate will save them money -- one analyst estimated $200 -- on their monthly payments. But given the state of the economy, with over half a million people losing their jobs every month and banks taking extra care to lend only to the most creditworthy, it looks like the ones who need those lower rates the most won't be able to get them.
With the huge overhang of housing supply from foreclosures and the pain of at least $6 trillion in lost home equity since the real estate market began to tumble, it is unlikely that lower mortgage rates will start a stampede of people into the housing market. But it sure would be bad if the lower rates ended up creating yet another housing bubble. For the time being, the best thing that lower mortgage rates could do is to help people use the extra cash to pay off their other debts.
And eventually it would be helpful if all that extra housing supply got sopped up. That would go a long way to stopping the economic decline.
Why should you care what's going on in China? It makes many of the products we buy -- particularly the ones sold at Wal-Mart Stores (NYSE: WMT). And it has been recycling the profits it makes due to its relatively low labor costs into buying American debt. In fact, without its willingness to purchase our Treasury bonds, we would probably not be able to afford the $8.2 trillion worth of bailout plans that we've created so far -- or the additional $20 trillion we might need in the future.
If we were in the ninth inning of this financial collapse, instead of the second, then China's slowdown would not matter so much to our future. But if we need an additional $20 trillion over the next several years to put a floor underneath this economic collapse, we are not going to be able to rely on China to help foot the bill as we have in the last year. That's because China is slowing down; it has been growing at 12% a year for several years in a row, but that rate is likely to slow to at least 5.5%.
That would be a great growth rate for the U.S., but it represents a huge slowdown for China. Forty five percent of China's GDP growth is due to fixed asset investment -- like construction of houses and manufacturing plants. And a big part of that business is steel -- whose prices have lost 36% of their value since the peak, dropping from $768 a ton in June to a low of $490 a ton this month. One steel plant is cutting production by 15%. This means that global suppliers of commodities -- such as iron ore, copper, and cement -- around the world are suffering. What does this have to do with U.S. debt?
TheStreet.com's Jim Cramer says a quartet of fellows is at fault, including Geithner.
Well, I'll be. They are finally getting their hands dirty. Two new programs announced Tuesday are the most bold and, frankly, foolproof yet because they can't not work. The first, the buying of GSE debt, immediately took mortgage rates below 5%. In one day! That will, at last, trigger a huge wave of refinancing and a definite rush to buy homes for those who have been holding back. I reiterate that housing bottoms next year!
The second, needed to jumpstart the completely moribund asset-backed market, will allow you to buy asset-backed bonds that are guaranteed by the Treasury, meaning that you would be a fool not to borrow because you are buying risk-free bonds with much higher rates than Treasuries. How can that not work? How can you not want to lever up to buy them? At last we are totally interventionist with all stops being pulled out, no niceties. We are just printing money and giving it at a great rate to anyone who wants it.
One of the most exasperating elements of this financial era is the desire of the feds not to intervene in situations that demand intervention. There's a quartet of fellows at fault: New York Fed president and soon to be Treasury secretary, Timothy Geithner; Chris Cox of the Securities and Exchange Commission; Ben Bernanke of the Federal Reserve; and Hank Paulson of Treasury.
Freddie Mac (NYSE: FRE) said today that it received a notice from the New York Stock Exchange (NYSE), warning that the mortgage firm could be delisted due to its rock-bottom share price. FRE has been trading below $1 for more than 30 days now, and must notify the exchange by December 2 whether it intends to rectify the problem.
If Freddie does decide to meet the NYSE's listing requirements, it will have until mid-May to address the share-price issue; if not, its common stock and preferred stock are subject to suspension and delisting. In a statement, Freddie Mac said it's "currently working with its conservator, the Federal Housing Finance Agency, to explore options relating to this deficiency and has not yet determined its response."
Earlier this week, Freddie's sister Fannie Mae (NYSE: FNM) received an identical warning from the NYSE. The troubled siblings hit the headlines for somewhat more respectable reasons earlier this morning, when the pair announced they would temporarily halt foreclosures during the holiday season.
After opening broadly higher this morning, FRE has fallen to a 6% loss at 46 cents per share. Sibling Fannie is faring better today; that stock is up roughly 9% at last check -- though today's gain takes the per-share price only as high as 36 cents.
Citigroup Inc. (NYSE: C) shares jumped over 12.5% in pre-market trade (7:34 am) after the The Wall Street Journal reported that the second-largest U.S. bank by assets may be weighing a sale of all or part of the company, including the Smith Barney brokerage, the credit card unit and the transaction services unit. Citi shares have lost over 25% of their value Thursday and have actually lost 50% this week as investors became concerns over whether it has enough capital. This morning the WSJ reported the bank is holding a board meeting to discuss the options. Citi shares continued their plunge today, down another nearly 19% by midday trading as CEO Pandit said the bank plans to keep Smith Barney.
Dell Inc. (NASDAQ: DELL) reported Thursday after the close that fiscal third-quarter profit sank 5% as corporate spending on computers and other technology products declined due to economic concerns. But it seems Wall Street was expecting worse. DELL's earnings were 37 cents per shares in the quarter, 6 cents better than analysts polled by Thomson Reuters had expected. The stock traded nearly 5% higher in pre-market trading (7:41 am). Dell shares ended up declining in the session, down 5.4% by midday trading as analyst cut targets on the stock.
Salesforce.com, Inc. (NYSE: CRM) had investors cheering even louder as it said profit and revenue grew sharply -- 55% and 43% respectively -- in its fiscal third quarter, beating expectations. This could mean that online business software may be better insulated from the economic downturn than conventional offerings. CRM shares gained nearly 10% in pre-market trading (7:39 am). As markts grapple with Citi news, CRM shares declined over 6% by midday trading.
[Update 8:58: Wal-Mart Stores Inc. (NYSE: WMT)named Mike Duke CEO and president, succeeding Lee Scott. WMT shares actually gained 1.7% by midday trading even as investors try to understand the timing of this management change.]
How many days, months, quarters, etc. will this ugly bear market continue? It is just as bad as buying dips on Internet stocks in 2000. The FOMC minutes gave a lowered economic expectation for 2009, like we didn't know that was coming. Housing starts were the worst on record, and now inflation is coming down so hard that deflation is the new damnation of the markets. Does it really matter what gets said anymore? No, it doesn't. Gee, were you even surprised that the deterioration into the close only picked up steam and the Dow shed 5% to close below 8,000 as the S&P decided to close at a five-year low? Sorry there is no good news, but this market is no longer a market.
Citigroup Inc. (NYSE: C) is trading like it is no longer going to be around as its old self. This is truly ugly and unfair, but then again ... who has been rewarded for defending a financial stock? NO ONE. Shares were down 21% at $6.53 before the close.
E*TRADE Financial Corp. (NASDAQ: ETFC) gave pretty decent numbers considering the current climate, yet it is getting crushed every day along with anything and everything else financial. This one was down 17%at $1.03 right before the close.
General Motors (NYSE: GM), Ford (NYSE: F) and Chrysler executive will return to Congress on Wednesday. After facing less than a receptive Senate Tuesday, they will appear before a House committee today to plead for a "bridge loan" to give them a massive infusion of cash they need to stay afloat in their race against the clock. GM's CEO Wagoner "warned that the failure of the U.S. auto industry could lead to a loss of 3 million jobs within the first year and ripple throughout communities around the country," saying it would be a "catastrophic collapse." GM shares traded 2.9% lower and Ford's 2.4% lower in premarket action (8:04 am). GM shares have been plunging over 15% by midday trading and Ford's by nearly 25% as Senate lowers bailout expectations, seeking to compromise.
Boeing Co. (NYSE: BA) is delaying jet deliveries by as much as 10 weeks as it attempts to recover from a strike by its machinists, according to a report in the Wall Street Journal. BA shares were down 2.6%, with the market, by midday trading.
Toyota (NYSE: TM) -- The troubles in the auto industry don't affect just American carmakers.Toyota said Wednesday it will reduce production in the U.S. to cope with slowing sales there. It will stop production at all its plants in the U.S. and Canada for two extra days next month, and cut about half of 500 temporary workers at a plant in Georgetown, Kentucky by March. It will also reduce production of two models. TM shares were down 4% by midday trading.
TheStreet.com's Jim Cramer says that's the real problem, and every little bit helps.
Many are decrying that the AIG (NYSE: AIG) (Cramer's Take) bailout now helps the holders of the collateralized debt obligations (CDOs) who bought insurance against them from AIG. The idea is simple: These CDOs are worth, in many cases, next to nothing depending upon the vintages, geographies and FICO scores, but they will now be paid back at pretty much face value -- AIG CEO Ed Liddy said the prices will be negotiated, but I don't see how they can get any less because AIG guaranteed it and the U.S. is not abrogating any of these guarantees.
It's an obvious windfall and still one more piece of the stinking puzzle that involves unwinding the bogus real estate finance that prevailed from 2004 to 2007. The bigger issue, though, is whether the government will then take over MBIA (NYSE: MBI) (Cramer's Take) and Ambac (NYSE: ABK) (Cramer's Take) -- I know people at those companies say they don't need it, so OK, they don't ... but let's say they do for the purposes of reality -- and have them make good on all of the credit default swaps they wrote against bad CDOs.
If the government is willing, they can buy several trillion dollars of these easily through this method and then sit on them and hopefully they will come back to some value.
Global markets are crashing down today. Asia (Hang Seng down 12.7%, Nikkei 225 fell 6.4%) and Europe (Dow Jones Euro Stoxx 50 crumbled by 5.9% and the FTSE 100 index tumbled 5.4%) are collapsing in unison. And in the last year, they have lost 51% of their value -- destroying $29.6 trillion in stock market value. You may have noticed that stockholders are the silent majority of the financial crisis. This is the group of citizens that Richard Nixon tried to mobilize to win elections. And it's the same group that John McCain's advisor, Phil Gramm, talks about when he says Americans are Whiners.
There are plenty of corporations and financial institutions that can afford lobbyists. The clients of lobbyists don't whine -- they get bailouts. As vice chairman of UBS AG (NYSE: UBS), Gramm is one of the lobbyists that the average taxpayer can't afford, so we end up paying to bail out those who can. How much? Commercial Paper (CP) gets $540 billion; Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), and American International Group (NYSE: AIG) get $322.8 billion; and the top nine banks get $125 billion to pay bonuses (since Hank Paulson did not require them to lend it out).
Even if stockholders could hire lobbyists, it is unlikely that governments would be able to come up with enough cash to reimburse us for the $29.6 trillion we've lost so far -- or for the additional $20 trillion we could lose if things keep going the way they have been. With confidence lost that governments will solve the problem, people are now trying to cut their losses before they get even worse.
That lack of confidence is what will drive global stock markets for the foreseeable future.
Over the past few years, the line between news and spin has grown thinner and thinner, to the point that it is no longer visible, even with the most advanced scientific instruments. In fact, according to most physicists, the line can only be detected by the infinitesimal gravitational pull that it seems to exert on surrounding particles, like faith in democracy, trust in authority figures, governmental accountability, and the inexplicable popularity of Perez Hilton. As a consequence, real-life causes and effects, decisionmakers and victims pale beside the far flashier waves that rustle through the covers of magazines and the ranks of the punditry. In the end, the past few presidents have demonstrated that truth is less important than "truthiness" and events are less important than titles.
In this spirit, the time has come to put a name on the economy's current crisis. As some talking heads have already noted, the Bush administration made a major mistake by allowing the term "bailout" to define the government's response to the economic meltdown. John McCain proposed the term "rescue," which sounds far more noble, while Treasury Secretary Henry Paulson suggested calling it the "Troubled Asset Relief Program," presumably hoping that a really boring title would make taxpayers forget about the issue. Using the same logic, petty thieves are now lobbying to have the term "pickpocketing" replaced with the monicker "involuntary, extralegal, above-market thigh massage."
The banking system has been crumbling for over a year, but last month's collapse of American International Group (NYSE: AIG) -- which prompted an $85 billion government takeover -- suggests that insurance is not immune from the problems. As a reminder, AIG got snared in the $62 trillion Credit Default Swap (CDS) market whose growth was spurred by McCain advisor, Phil "Americans are Whiners" Gramm.
Bank of America'searnings plunged 68% to $1.18 billion, or $0.15/share -- missing by 60% analysts' forecast of 62 cents. Bank of America will raise capital by selling $10 billion of common stock and slashing its dividend in half from 64 cents to 32 cents. One analyst cut the bank's 2009 earnings estimate to $2.50 per share from $3 per share -- this is well below the $3.12 per share from a Thomson Reuters analyst poll -- and lowered his price target by $2 to $26.
National City Corp. and its National City Bank both suffered debt downgrades from Fitch. For instance, Fitch slashed the bank subsidiary's long and short-term Issuer Default Ratings (IDR) to A- from A. And it lowered the bank and holding company's Individual rating to C from B.
TheStreet.com's Jim Cramer says the end-of-day bounce was just shorts afraid of a worldwide rate cut.
The shorts must have just gone on "ease watch." You can tell what that is. Some devastating news will come out, say, about once-proud Royal Bank of Scotland (NYSE: RBS) (Cramer's Take), some ratings downgrade, and boom, Britain is hit for a full percentage point decline. Then, as if by magic, it rallies almost back to unchanged as the shorts don't want to be hung before worldwide rate cuts.
I always thought this behavior was curious because I don't know of a short-seller who thinks that intervention even matters, or says it doesn't matter, for that matter!
In fact, though I think it can matter not so much to our country, it does matter to those countries in Europe that really would be doing well if money weren't so tight. Our markets lost a ready source of cash and business when Europe went away, particularly upon the disappearance of China from the world's economies.
Now, of all of the new measures I like hearing, the commercial paper intervention is intriguing as the government substitutes itself for buyers for this important funding. But again, I come back to the notion that we can't really be two sides of everything, can we?
After Monday, there are probably no more doubters left. We are in a bear market and we are in a recession and anyone arguing otherwise is living in a made-up world. The only thing left to argue over is how to get out of this dire situation, and how long it will last. Looking at stocks since the beginning of the year, and over the past month since the feds seized Fannie and Freddie, the picture isn't pretty. Many familiar names have vanished, many -- luckily -- have just seen their market value cut about in half. What once were some large stocks are now some of the smaller ones, including some DJIA components.
The following list is of selected familiar names and large stocks that have plunged significantly over these time periods. It does not include the obvious names such as AIG, Wachovia, GM and the likes, but decent stocks we all liked and knew over the years. By comparison, the Dow industrials is down 25% year-to-date, the S&P 500 down 28% during the same time and the Nasdaq Composite down nearly 30%. Over the past month (since the Fannie/Freddie rescue), the Dow declined over 11%, the S&P 500 declined nearly 15% and the Nasdaq declined over 17%.
Alcoa (NYSE: AA) -- aluminum giant Alcoa is feeling the pains of a global economic slowdown and higher costs even as aluminum prices remain high. Alcoa shares hit a 10-year low Monday. YTD, AA market value has been cut in half, and over the past month alone Alcoa lost 36% of its value.
American Express (NYSE: AXP) -- the credit card company had large exposure to bad loans that affected its results. With analysts expecting credit card debt to be the next shoe to drop, AXP may see its stock fall more than the 42.2% it already has YTD. It plunged 23.68% this past month.
Apple (NASDAQ: AAPL) -- even this consumer tech darling couldn't escape the claws of the bears as worries over demand for its products increased. AAPL, one of the stocks that actually had a positive day Monday and closed at $98.14, is down 50.45% YTD, 38.73% this past month.
This post is part of AOL Money & Finance's Best & Worst in Money 2008 feature.
Why should you care 
How many days, months, quarters, etc. will this ugly bear market continue? It is just as bad as buying dips on Internet stocks in 2000. The FOMC minutes gave a lowered economic expectation for 2009, like we didn't know that was coming. Housing starts were the worst on record, and now inflation is coming down so hard that deflation is the new damnation of the markets. Does it really matter what gets said anymore? No, it doesn't. Gee, were you even surprised that the deterioration into the close only picked up steam and the Dow shed 5% to close below 8,000 as the S&P decided to close at a five-year low? Sorry there is no good news, but this market is no longer a market. 
Over the past few years, the line between news and spin has grown thinner and thinner, to the point that it is no longer visible, even with the most advanced scientific instruments. In fact, according to most physicists, the line can only be detected by the infinitesimal gravitational pull that it seems to exert on surrounding particles, like faith in democracy, trust in authority figures, governmental accountability, and the inexplicable popularity of Perez Hilton. As a consequence, real-life causes and effects, decisionmakers and victims pale beside the far flashier waves that rustle through the covers of magazines and the ranks of the punditry. In the end, the past few presidents have demonstrated that truth is less important than "truthiness" and events are less important than titles.
The banking system has been crumbling for over a year, but last month's collapse of 
After Monday, there are probably no more doubters left. We are in a bear market and we are in a recession and anyone arguing otherwise is living in a made-up world. The only thing left to argue over is how to get out of this dire situation, and how long it will last. Looking at stocks since the beginning of the year, and over the past month since the feds seized Fannie and Freddie, the picture isn't pretty. Many familiar names have vanished, many -- luckily -- have just seen their market value cut about in half. What once were some large stocks are now some of the smaller ones, including some DJIA components.
Best & Worst in Money 2008: Most shocking financial collapse
Closing Bell: Stocks slump as AMD, AT&T, GM and Merck decline
Global Q&A: A rocky road, but profits ahead
