Thr US Financial Crisis of 2007 and 2008

The snowballing came swiftly in July of 2007 when the collapse of two billion-dollar Bear Stearns hedge funds shocked Wall Street into panics that rippled for seven months or so, appropriately marked by the end of Bear Sterns itself in an arranged bailout deal sold to JP Morgan backed by a spooked Federal Reserve on Monday March 16th, 2008. The initial negotiated price was $240M, or $2 per share, a far outcry from the $170 high in Jan, 2007. JP Morgan later raised the price to $10 per share to ensure the merger and to appease highly displeased Bear Sterns share holders, and CEO James Dimon looked like the smartest man on Wall Street. In contrast, the former Bear Stearns CEO Jimmy Cayne, stepped down in Jan, 2008 shortly after the fiasco, liquidated his 6 million shares stake for $61.3M in a concession gesture of the end of the company that he had been a part of for nearly 40 years. The tenure of the hapless new Bear Stearn CEO Alan D. Schwartz lasted merely 2 months.

I remember very well that captivating weekend.

It was very clear to me that Wall Street follows a system of lies and deceits for as long as it can get away with. At first the incident were claimed to be isolated, then the junk-rated subprime-based securitized assets vanished from the market, followed by all subprime-based assets of all ratings, then the short-term commercial papers were jammed, which crushed big banks' secretive off-balance sheet structured-investment-vehicles (SIVs) despite Treasury Secretary Henry Paulson's attempt to built a rescuing super-SIV, and the chain effect went on non-stop to commercial real estate market, supposedly-safe municipal bonds, etc, and it hasn't stopped.

These days, leveraged-buy-out loans and auction rates are permeating through the headlines, along with credit-card debts default, student-loans, etc. It appear that there is nothing that is not in question. Vellejo, California became the first casualty for US municipalities embattled by housing bust, lost revenues and the credit crisis. Prime mortgage defaults are also edging up higher around the nation, and that strikes fear into holders of prime mortgage securitized assets. They said that institutions can face continuing rippling effects, and money-market, pension and bonds can face more losses. So far banks and institutions have written down $300B of losses, and while some cry the end being near, there still remain over $700B of assets to survive the crisis.

I watched all these in total amazement as well as bewilderment, never heard of just about any of these financial instruments - SIV, ABCP, MBS, CDO, CLO, CFO, and on and on. The media and the commentators use phrases such as "the contagion has spreaded into...." to express the view that isolated causes are the root of the disaster that went out of control.

Perhaps MBIA, ABK etc the boring no-one-noticed bond insurers provided the greatest comedy of during the crisis, desperately fighting to keep its triple-A rating from the rating agencies Fitch, Moody's and S&P, after having squandered billions of investment capital in the high-yielding but toxic securitization. William Ackman of Pershing Capital built a little legend for himself for having gone after MBIA with relentless vigor. Laughably, as their stock price hovering around the low of $10, down from $70+ just 7 months prior, MBIA and ABK survived the rating blow and managed to keep its AAA rating from Moody's and S&P, who themselves are the targets of scorns and criticisms.

After months of following the news and reading anything I can get my hands on, I have a better grasp of reality - the ENTIRE FINANCIAL SYSTEM has been polluted and abused beyond reasons by anyone who had access to maneuver within the system, namely the bankers, the lenders, the rating agencies etc, and the fire contagion simply started at the weakest point. With that view, I have little to doubt that the contagion will necessarily spread to where ever funny-money are hiding.

The Washington bailout attempts add one more interesting different dimension with a political tint. Beyond the Bear Stearns deal, the FED resorted to openly providing virtually unlimited capital at very generous terms to financial institutions cling on to capital, and Congress, not to be outdone, is cooking up its own version of bailout rescue disguised in a housing-bill, which, fortunately, President Bush vowed to veto on the premise that it bails out the irresponsible.

But I always know of the simple consequences for the ordinary citizens, voters and consumers - inflation and higher taxes are coming for certain.

Once again there is no magic balance sheet that does not required some payers - it will be us the tax payers having to pay for these bailouts that is already adding up close to a TRILLION dollars, that is one-thousand billion dollars, or one-million million dollars, that is 1 followed by 12 zeros. Imagine gathering up the wealth of 1 million millionaires; or we can pay $30K per person in the US.

The financial landscape has warped, perhaps for the better back closer to the norm, and the "free-money" era has ended with a loud thud. There is little doubt that there will be lots of digging itself out of the pit for years before new norm emerges from the mess. All the while we should expect the usual suspects, notably taxes and inflation, to reign over the market and the consumers in this time of uncertainty.

After the recovery, we should expect a gentler, nicer and more humbled Uncle Sam and Mr. Wall Street.

If not, expect history to repeat, and get even worse.