Andrew Boggs, MALL727.net As the economy takes a tumble, stores close under tight credit restrictions, and many out of work are forced to scramble for survival. image:43878:1::0

Stock prices are based on future earnings, thus the general idea is to buy low and sell high. With a bit of knowledge and a lot of luck, an investor stood a chance to increase their net value based on calculated risk management.

The 1920’s was an era that roared economically in the stock market, thus a lot of individuals poured their money into stock hoping to financially fatten the nest egg or to making a killing on the market. And indeed, many did became rich in paper. But the problem with a stock certificate is there always is a risk as to whether an investment will pay off or hold its value.

What occurred was a sudden loss of output in the later part of that decade. People stopped buying, and unemployment started to climb, and climb, and climb. And with it went the stock market. Suddenly the prize was not worth the risk. In 1929, stockholders awoke one morning to find their paper worth was no more. The heavy dependency on stock made individuals and companies vulnerable to the market’s bumps, bounces and shudders. Thus when the market dropped, so did people’s confidence in the economy.

Before the crash, the Dow Jones Average topped out at 597% over an eight year period. With the freeing of funds from government to capital use after the first World War, commodity prices inflated. With worries over inflation, the U.S. Federal Reserve Bank sharply raised interest rates to cool the economy down. However, the rise in interest rates had a negative effect on the economy, causing a recession. When hard assets like commodities and real estate started their decline in value, investors began to put their money in stocks and bonds. Dow then started a climb from 63.90 in 1921 rising to 150% by 1925. In a secret agreement between the U.S. Treasury and the Bank Of England, the Gold Standard was reinstated.

The English pound had been regarded as a world medium of international exchange, thus it was felt to be to everyone’s benefit to enable to have the pound exchangeable for gold. Strengthening the pound depressed the value of the dollar, causing a robust economy to boom. Suddenly it became cheaper to borrow money to put into the stock market. The allowable margin stood at 10%, meaning you could buy $10,000 in stock with only a grand down - and that was the problem. People were now more willing than ever to borrow to invest in large business expansions and pricey stocks. The frenzied market peaked on September 3rd, 1929 when the economy over speculated, then burst into fiscal flames. The Fed saw the danger signs of an economy meltdown and instituted a 1% increase in rates in August of that year, however, the adjustment was too late.

The war inflation had diminished along with the artificially low interest rates between 1925 and 1927. Under the Republican-led Herbert Hoover Administration, there was a tax reduction and an agreement with Germany over financing of war reparations. The Dow started to fall - first day dropped by 20%, next day by 30%, with a temporary bottom at 230.07. The treasury stepped in, offering large amounts of credits. This stopped banks from failing, but it proved only a temporary band-aid. The market rallied for a short time, however, towards the end of a year, the markets started a slide towards a financial abyss. By 1930, there was an average of sixty bank failures per month in the United States. The Fed tightened its lending, however, things only got worse.

Between November and December, 398 banks folded, including the Bank Of The United States with over 450,000 depositors. The news caused a nationwide panic for financial institution depositors. Tax cuts, public works, spending, pep speeches didn’t work, the market continued into a nose dive. Modest recoveries would spur momentary market recoveries, but they were only short lived.

On July 8th, 1932, the market bottomed out at 41.22. It would take ‘till November 23rd, 1954 before the market overcame its 1929 high. Between 1929 and 1933, there were an average of 17 suicides per 100,000 people in the United States. One suicide note was from a radio manufacturing executive who jumped from a hotel balcony in Manhattan. It read, “We are broke. Last April I was worth $100.000. Today, I am $24,000 in the red.” Another jumped out a fifteenth story window. Others asphyxiated themselves by natural gas. Farm production was cut nearly in half. Over 1,000 people a day lost their homes through foreclosure by 1933.

The Securities Act Of 1933

The Securities Act Of 1933 required investors receive substantial amounts of information on securities being marketed. It was designed to prevent deceit, misrepresentations and other fraudulent activities. A great deal of research would be offered by the issuers of the securities. The act required significant disclosure about the stock of a company and its financial underpinnings. The disclosures would be a preventive to companies misbehaving in their financial affairs. Requirements included registration with the Securities and Exchange Commission (SEC) before public offering of stock. A prospectus is offered along with a registration statement. Major areas of information included;

Description of issuer properties and businesses.
Information of securities being offered.
Information on issuer’s management.
Information about the securities, if other than common stock.
Certified financial statements by independent accountants.

However, there are exemptions from SEC Rules. Those include;

Private offerings to limited individuals or institutions.
Limited offerings.
Intrastate offerings
Municipal, State and Federal Government Securities

Exemptions such as Rule 144A exempts resale of restricted securities between Qualified Institutional Buyers, otherwise known as QIB’s. This secondary market is one of the biggest players on Wall Street. Rule 144 permits sales of restricted controls and securities without registration. There is a limited length of time for such securities to be held along with the maximum amount allowed to be sold. Of that, the issuer must be in agreement with the sale. An SEC Requirement for the status is the filing of Form 144. Normally the issuer is in compliance of an offered legal opinion on the resale. However, the 144 Rule requires securities sold within a three month period not to exceed set limitations;

1% of outstanding stock
Average of weekly reported volume in trading of securities on national security exchanges for a preceding four week period.
Reporting of average weekly volume of trading on securities reported through consolidate transactions (NASDAQ) system.

Notice of resale is to be provided to the SEC, if amount exceeds 5000 shares over a three month period, or an aggregated sale price over $50,000. After a period of one year, the restriction is subject to removal.
In the cases of mergers, buyouts or takeovers, the owners of the securities filed under Form 144, must re-file once a merger, buyout or takeover is completed.

In “Regulation S”, a safe harbor is offered, defined when an offering is deemed as coming to rest abroad, and thus is not subject to registration obligations under Section 5 of the 1933 Act.

There is a Civil Liability for violation of registration acts for both the issuer and underwriters which are subject to fines and other legal actions.

Deregulations During the George W. Bush Administration

A George W. Bush Strategy for deregulation in the marketplace could be summed-up as “The Market Can Do No Wrong!” One area was the “reduction of frivolous lawsuits” aimed at protecting corporate leaders from the “mundane” task of compliance minutiae by overzealous regulators. This meant removing safeguard instituted regulations. Another area was a Republican-supported provision requiring Fannie Mae and Freddie Mack sell off 1.5 trillion in mortgage assets the company held as investments. The bill reduced both Fannie Mae and Freddie Mack from large investment funds to simple conduits that bought mortgages, packaged them into securities and sold them on the market.

There was an argument that the act would make it more difficult for individuals to obtain mortgages. Bush honchos felt that the financial sector was capable of policing itself, encouraging lawmakers to ease-up on the oversight. The deregulation efforts started up under the Ronald Reagan Administration, ramped up to its peak under the Presidency of George W. Bush. The guise was to allow the market to determine its own fate.

However, the “no peeking under the covers” by federal regulators has led to massive problems requiring a $70 Billion Dollar bailout. The Fed’s have already started rescue bailouts for American International Group (AIG), Fannie Mae and Fannie Mack, along with the transference of Bear Sterns under very attractive terms to JP Morgan Chase. Lehman Brothers got the short end of the stick, allowing it to go into bankruptcy.

Some companies are falling under scrutiny for attempting to hand out golden parachutes to executives within the failed firms. Another area of questionable activities is the allowance of “short selling” as a way for investors to limit risks. In simple terms, “short selling” is a practice where an investor obtains stock through the practice of “borrowing”, rather than actually owning the stock with the agreement to “purchase” it later to cover the “short.” The idea is that by procuring a stock, one would profit from an expected decline in a security such as a stock or bond. It differs from a normal strategy of purchasing a security under the aegis of a stock rising in value. The term is used as a strategy that allows an investor to gain in a decline in the price of a stock.

The uptick is the taxpayer is expected to bail out poor business practices of investors and banks partially due to short selling..

The $700 Billion Bush Bailout Plan

Currently, the United States owes over ten trillion dollars to other countries it has borrowed from, 1.5 trillion is owed to China, with 490 billion in US Treasury securities. We also have over $500 billion tied up in the Iraqi war. 2.5 million bank foreclosures are being predicted by the end of 2008. According to Bloomberg, the numbers are up by 53% over the previous year as of June 2008. These are scary numbers. As mentioned earlier, bank and investment firm defaults are now making daily news. National unemployment figures for the United States is running at 2.2 million individuals. All this bodes bad for the U.S. economy.

With the $700 billion bailout from the US Government, the American taxpayer is being virtually shelled at both ends now, and for future generations to come. The bailout is intended to buy the toxic mortgage papers and other bad debt, getting it out of the hands of tottering banks in an attempts to keep more bank failures from occurring. It is also meant to prop up the New York Stock Exchange (NYSE), and other exchanges around the world. One of the areas of concern is the aforementioned “short selling” activity that the Feds are attempting to bring under control. With credit being tightened, sales of homes and other major ticket items have taken a deep plunge.

With the advent of the news about the Treasury taking over the banks, the stock market rallied, but quickly continued to lose confidence as investors returned to cutting their losses. Even an address by President Bush failed to make a dent in the downward slide. In his recent speech, the President said, “In our nations’ history, there have been moments that require us to come together across party lines to address major challenges. This is such a moment.” However, on January 20th, 2009, it will no longer be Bush’s problem as he steps down from the Presidency.

As to the current Treasury Secretary, Henry Paulson, he too will be stepping down at the end of Bush’s term. This will leave a void during the nation’s darkest economic moment. Both Presidential candidates Barack Obama and John McCain are already planning for that day. Barack favors Warren Buffet, while McCain says he would ask former CEO of eBay, Meg Whitman to be the new Treasurer.

Buffet is Chairman and CEO of Berkshire Hathaway. Warren has been named the richest man in the world by Forbes Magazine. Berkshire Hathaway’s core business is insurance, including property and casualty. The conglomerate is diversified in areas including candy production, retail, home furnishings, encyclopedias, vacuum cleaners, jewelry sales, newspaper publishing, the manufacture and distribution of uniforms, manufacturing, importing and distributing of footwear, as well as ownership of several regional gas and electric utilities.

Warren Buffet is highly respected for his business acumen. Meg Whitman was President and CEO of eBay from March 1998 to March 2008. She has a Bachelor of Economics from Princeton University and an MBA from Harvard Business School. Before eBay, Meg held executive positions at Stride Rite and Disney. Meg was worth an estimated $1.4 billion in 2007. Whitman serves on the boards of eBay foundation, Proctor and Gamble and DreamWorks Animation.

Where Did The Money Go?

Trillions of dollars in retirement savings, money for college, and money to meet company payrolls is now gone for many. The question is where did it go? With sagging real estate values and stock markets, your savings statement has hemorrhaged badly. With stock, you are actually buying a piece of paper with the hope it increases in value over time. But that’s just it, a piece of paper in exchange for your cash.

The idea is to turn it back into cash - a lot more cash down the road. In a loss situation, the value of a stock or real estate holding devalues. Give an example, a $500,000 dollar house one week, becomes a $450,000 house the next week. Where did $50,000 go? Its all in the mind. Every bit of the house is there, it’s just in someone else’s mind the building wasn’t worth as much. Potential money is not actually currency in your hands, its worth what others would be willing to pay for it.

Money is not gold, its paper - its legal tender used for a means of exchange or barter. And right now, market confidence is down, meaning investors are trying to get out of the market to lessen the financial blow of losing its value. The bigger the risk, the bigger the potential earnings - however, in this market, people are losing their shirts.

Bringing The Money Back

There are two Presidential contenders whose job it will be to improve the economy from its dire condition. Barack Obama and John McCain have their own individual ideas of fixing the economy.

John McCain’s views include;

Modernizing the nation’s labor laws so that they allow for more flexible scheduling arrangements.
Ensuring that the nation’s labor laws don’t get in the way of working at home.
Promoting telework so that workers can spend less time commuting.
Making health more portable so that workers don’t lose their benefits when they switch jobs.
Ensuring that workers can choose retirement plans that best suit their needs.
Providing workers with more choice in job training assistance so that they can build the skills they need for new and better jobs.
Keep tax rates low.
Cut corporate tax from 35% to 25%.
Allow first year deduction of Equipment and Technology Investments.
Establishment of a permanent tax credit equal to 10% of wages spent on Research and Development.
Allowing families to keep their business.

Barack Obama’s views include;

Enact a Windfall Profits Tax to Provide a $1,000 Emergency Energy Rebate to American Families.
Provide $50 billion to Jumpstart the Economy and Prevent 1 Million Americans from Losing Their Jobs.
Provide a Tax Cut for Working Families.
Eliminate Income Taxes for Seniors Making Less than $50,000.
Simplify Tax Filings for Middle Class Americans.
Fight for Fair Trade.
Amend the North American Free Trade Agreement.
Improve Transition Assistance
End Tax Breaks for Companies that Send Jobs Overseas.
Reward Companies that Support American Workers.
Invest in our Next Generation Innovators and Job Creators.
Double Funding for the Manufacturing Extension Partnership.
Invest In A Clean Energy Economy And Create 5 Million New Green Jobs.
Create New Job Training Programs for Clean Technologies.
Boost the Renewable Energy Sector and Create New Jobs.
Create a National Infrastructure Reinvestment Bank.
Invest in the Sciences.
Make the Research and Development Tax Credit Permanent.
Deploy Next-Generation Broadband.
Provide Tax Relief for Small Businesses and Start Up Companies.
Create a National Network of Public-Private Business Incubators.
Ensure Freedom to Unionize.
Fight Attacks on Workers' Right to Organize.
Protect Striking Workers.
Raise the Minimum Wage.
Create a Universal Mortgage Credit.
Ensure More Accountability in the Subprime Mortgage Industry.
Mandate Accurate Loan Disclosure.
Close Bankruptcy Loophole for Mortgage Companies.
Create a Credit Card Rating System to Improve Disclosure.
Establish a Credit Card Bill of Rights to Protect Consumers.
Ban Unilateral Changes.
Apply Interest Rate Increases Only to Future Debt.
Prohibit Interest on Fees.
Prohibit "Universal Defaults."
Require Prompt and Fair Crediting of Cardholder Payments.
Cap Outlandish Interest Rates on Payday Loans and Improve Disclosure.
Encourage Responsible Lending Institutions to Make Small Consumer Loans.
Reform Bankruptcy Laws to Protect Families Facing a Medical Crisis.

Of course the above are promises being made by candidates for office. What any of these ideas reach into reality is anyone’s guess. Before the current meltdown, John McCain pronounced that, “the fundamentals of the economy are strong.” John’s ringing statement has come back to haunt him in his bid for Presidency. Barack Obama has been calling his opponent as ‘being out of touch’ concerning the economy. In an address, McCain said he would create a new federal agency, ’The Mortgage Financial Trust’, saying the agency would reform the financial services sector in providing more “regulatory clarity” concerning transparency for the American people.

Meanwhile, Barack Obama is in support of efforts by Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke in their efforts to repair the market with government funding. President George W. Bush in a radio address laid out more details, saying the bailout is essential. “Given the precarious state of our financial markets and their vital importance to the daily lives of the American people, government intervention is not only warranted, it is essential.” according to Bush. Barack Obama has said that any bill sponsored by lawmakers must concentrate on its efforts to help ’Main Street’ as well helping to bail out Wall Street.

Barack further reiterated a six part plan in dealing with the Wall Street mess;

1. If you’re a financial institution that can borrow from the government, you should be subject to government oversight and supervision. Taxpayers who have now been called upon to spend nearly a trillion dollars to save our economy from the excesses of Wall Street have every right to expect that financial institutions are not taking excessive risks.

2. We need to reform requirements on all regulated financial institutions, investigate rating agencies and potential conflicts of interest with the people they are rating, and establish transparency requirements that demand full disclosure by financial institutions to shareholders.

3. We need to streamline our overlapping and competing regulatory agencies that cannot oversee the large and complex institutions that dominate the financial landscape.

4. We need to regulate institutions for what they do, not what they are. Over the last few years, commercial banks and thrift institutions were subject to guidelines on subprime mortgages that did not apply to mortgage brokers and companies. This regulatory framework failed to protect homeowners, and made no sense for our financial system.

5. We need to crack down on trading activity that crosses the line to market manipulation. We need regulators that actually enforce the rules instead of overlooking them. The SEC should investigate and punish all market manipulation.

6. We must establish a process that identifies systemic risks to the financial system like the crisis that has overtaken our economy. We need a standing financial market advisory group to meet regularly and provide advice to the President, Congress, and regulators on the state of our financial markets and the risks they face. It’s time to anticipate risks before they erupt into a full-blown crisis.

In a rally in Florida, Republican Vice-Presidential contender Sara Palin speaking to a crowd of sixty thousand people said, “Americans are caught in kind of a perfect storm between high taxes, high gas prices, greed on Wall Street and a shortage of courage in Washington. But we need new leadership in Washington—we need serious reform on Wall Street.”

Meanwhile John McCain says he would fire Chris Cox, the chairman of the Securities and Exchange Commission, setting up an agency to handle the bailout, which would be called the ’Mortgage and Financial Institutions Trust’, basing it on the Resolution Trust Corporation which successfully handled the crisis of the savings and loan scandal back in the late 1980’s. McCain says he would go after CEO’s whom he has said misled the public. He would also tighten federal regulations while cutting taxes and corralling special interests in Washington. He further went on saying he would end the greed on Wall Street. Obama’s thoughts are enacting tough penalties on fraudulent lenders. However, critics argue that laws are punitive enough, the real problem is identifying the culprits. Obama went on to say he would toughen financial regulations already in place. There would also be an establishment of a financial markets advisory group whose job would be to take the fiscal temperature of the market, and sound an alarm if they see problems escalating on Wall Street. He would in addition enact a $50 billion stimulus plan.

Conclusion

The Wall Street Crisis isn’t going to go away overnight, any initiated plan will require time to work, and to regain the confidence of investors on Wall Street. Meanwhile on Main Street, businesses continue to shut down or cut back on employment in attempts to control financial losses in the economic turndown. What makes this even more crucial is the United States is in a Presidential election year, when a new President will be elected in November, yet will not take office until January 2009. That means any plans implemented under the current Presidential administration will be subject to review and modification when the new administration takes office. Until then, both America and the world will have to cross their fingers on how the current financial crisis will end.