Wall Street was brought to its knees last week when Lehman Brothers went bankrupt and American International Group, the world’s largest insurance company, was given an $85 billion loan by the federal government to keep it from going under.
Earlier in the month, the government bailed out Fannie Mae and Freddie Mac, two companies that account for almost half the mortgages in the country.
Last Friday, on the recommendation from treasury secretary Henry Paulson and the federal reserve chairman Ben Bernanke, the Bush administration announced it would issue a $700 billion bailout to buy bad mortgage-related assets. The last time the government issued a bail out of this magnitude was right after the Wall Street crash of 1929, which eventually led to the Great Depression.
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Roy Caratozzolo III/ Suburbanite
Jason Hochstadt, left, from Jedi Managment gives financial advice to Frank Patti, senior director at Frank A. Pattie Funeral Home.
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While tensions trickle down from Wall Street to Main Street, local financial advisors offer insight on what went wrong and on how to survive the current financial turmoil.
"The problem was lack of regulatory oversight," said Chip Murray, a certified financial planner with AXA Advisors in Fort Lee. "We need more oversight by the S.E.C. [Securities and Exchange Commission] and other government bodies to keep Wall Street in line to protect consumers."
Murray said greed was also a factor. And that in a capitalist society, creative ways to create money were carried to the extreme. But he insists fear was also a driving force and it caused many investors to overreact.
"All I did this week is hold hands to prevent people from overreacting." Murray said. "I wonder how many people sold out of their equity positions and went to cash or gold in huge numbers."
As for the average consumer looking at the turmoil, Murray said contemplating if this is a bad or good time to invest depends on whether potential investors have a relationship with an advisor.
"A lot of people don't have someone "quarterbacking" for them and do it themselves," Murray said. "These are the times advisors earn their keep. Anybody can do this when times are good. It’s when times get scary that we’re really tested as advisers and clients."
Jason Hochstadt, VP of Jedi Management and an executive committee member of the Greater Fort Lee Chamber of Commerce, blames the current financial crisis on excessive leverage.
"If you have a net worth of $1 billion but took out loans equal to $30 billion, it works well on the upside but bad on the downside," said Hochstadt. "It’s the same with individuals. If everyone put low down-payments on subprime loans when property values declined and interest rates rose, it was two massive strikes. There’s not as much "skin" in the game - equity being the "skin." Whether it’s the institutions or individuals, the effect is the same, just much more magnified."
Hochstadt pointed out too many people were walking away from homes. And although risk and leverage constantly play out in the stock market, Hochstadt felt bonds, loans, and other securitizing products have changed hands too frequently, leading to the meltdown on Wall Street.
As for how the "average Joe" should invest, in lieu of current conditions, "Individual investments can be risky," Hochstadt said. "You need to plan based on your needs and objectives. And be proactive instead of reactive. My clients and I made changes, some minor tinkering but nothing significant."
If investors are hesitant to invest now, Hochstadt recommends waiting until they feel comfortable, but not to let events dictate the decision-making.
"Don’t be a "Monday quarterback,"’ Hochstadt said. "Be proactive. I see people spend more time buying televisions or a car than looking at their 401k. And they only look during a crisis. That’s the worse time to look at it."
As for the economy, Murray believes the country is experiencing a mild recession and that it would be wise for individuals and families to cutback and watch spending.
"As a planner, my advice is have a budget," Murray said. "And have a strategy for managing household finances."
As for the future, Murray believes there are great opportunities for long term investing.
"With fear and uncertainty in the market, imagine a herd of average guys running for cover, and on the same campus, Warren Buffet seeing the opportunities and ‘licking his chops,’" Murray said. "If you’re going to have fun shopping, you need a different mindset."
