Market Watchers Answered Your Questions on Consumer Impact of Financial Turmoil

RICHARD SYLLA: Well, I think all assets are under pressure, downward pressure, that there's certainly the mortgage-backed securities and the securities that were built on the mortgage-backed securities. Those have fallen in value and that is the main reason why some of these great institutions like Bear Stearns and Lehman Brothers and Fannie and Freddie and even AIG are in trouble.

Now, I'm a little surprised that it's going all the way down to money-market funds because the typical money-market fund buys very short-term stuff. You know, a government one would have Treasury bills and would not have any problems.

But other ones, by commercial paper, issued by companies, and it appears that one or two money-market funds have found that their $1 shares are really only worth 97 or 98 cents now because some of the - even short-term assets that are backing those shares have gone down in value.

The great majority of money funds are still $1 a share; they haven't broken the buck. And some companies have even put money into the money-market fund in order not to break a buck. So I think most of them are safe, but it is a little surprising and it shows how deep the crisis is that even one or two money-market funds have broken the buck.

JANE BRYANT QUINN: This is Jane Quinn. Let me just add to that. I think that we have all simply assumed that money-market funds were going to be safe because they have been for so long. And no consumer has ever before lost money in a money-market fund. The last one that failed was in '94, but that was an institutional fund.

So this is a very big deal and it's going to cause consumers to take a look and say, I've been keeping it in a money fund; I've been assuming everything is fine, but now we have the primary fund - it's the first money fund that was ever created, a huge money fund. And people are losing 3 cents on the dollar that we last saw. I don't know what it will be later this week.

And this is a shock. And if you don't have an awful lot of money, you now start saying to yourself, well, is an extra percentage point in a money fund worth it? Maybe I should be in an insured deposit. And that's a fair question for people to be asking themselves. Without question the majority of the industry is going to be just fine, but these are unusual times and we're finding surprising things.

Money funds that are associated with large commercial banks, large mutual-fund organizations, when they have gotten into trouble, their parents have bailed them out. But the primary fund was a privately held company. It's a huge company, but they clearly didn't have the money to bail them out.

I might add another word and that is about people concerned with their insurance policies with AIG. I've been checking on the ratings of those insurance policies this morning and what went broke is the holding company, not all of the AIG insurance companies. And all of the AIG insurance companies are still maintaining conservative ratings. So I would not worry about going in and trying to switch out my insurance. Believe you me, that costs you more than you want to do that.

It's very expensive to switch your insurance to another company and the AIG insurance companies all are maintaining good ratings.

MARGARET WARNER: Well, I was going to get to the insurance policies, but let me ask just a little more about - because we have so many e-mails from people who feel that on their statements, they at least see AIG. For instance, there was John from Denver, Colo., says: "You know, I have retirement funds and annuities purchased from insurance companies - AIG and others. And I'm concerned." Another woman who wrote in who says she's a single mother in Baldwinsfield, N.Y., said all of her retirement savings are invested with Merrill Lynch. Again, what should she do at this point? If people have statements - if people on their statements see the names of any of these companies, how exposed should they feel?

DIANE SWONK: You know what, I'd like to jump in on this. This is Diane. This is one of the things where panic does not serve you well at all, as Jane pointed out already on the insurance firms. You know, AIG may emerge from this a smaller company with still shareholders, first of all. It will be a while, but they've got two years to sell off the subsidiaries, which will be a seamless sort of view from anyone holding a policy at the subsidiaries; they'll just see a different name.

Come on, we've gone through this in the banking industry for a long time. I spent 19 years in the banking industry where we had to continually go through bank mergers and acquisitions and, through that process, people's accounts were held up just fine.

Merrill Lynch, I mean, this is an operation that was bought into Bank of America because they see it as an extraordinary asset. None of the people who are having money managed by Merrill Lynch have a problem. And, in fact, if you had stock in Merrill Lynch, you got a 70 percent premium on what it traded on Friday and you have some upside potential for how Bank of America may perform with Merrill Lynch if you're actually holding Merrill Lynch.

If you're with Merrill Lynch as an investment adviser, they're still your investment adviser. That function is still going on. In fact, even at Lehman, Barclays just bought out their investment management business at a fire sale in bankruptcy and said, we're not going to change anything; we love this part of the business. It's profitable and you're just fine.

So I think that the panic, the cascading panic that people are feeling, it's very natural, but the reality is that the bulk of consumers out there, unless they actually held these companies that are going down in their portfolio, they're going to be just fine. And if they do actually switch their money from a money-market account back into a bank, it's going to give banks more money to lend and turn around and lend.

So there's a reaction function here that is self-healing in this market, as painful as it is. The last point I want to make is, I remember, in the banking industry, in the early 1990s, when they said, we wouldn't build another office building for 80 years in Chicago. Our bank that I worked for at the time for Chicago shutdown all real estate lending and, in fact, all of the cranes disappeared from the Chicago skyline.

A man named Sam Zell came along and bought those distressed assets off of our balance sheet and became a billionaire. These are the times, if you've got the courage, to stay in the market and make smart investments that make millionaires out of millionaires and billionaires out of billionaires.

RICHARD SYLLA: I don't think there's anything special. I mean, annuity is an insurance contract and it pays you a retirement annuity for as long as you live, typically. And I think it's just like an insurance policy -

MARGARET WARNER: Which means it's safe?

RICHARD SYLLA: I think so. I mean, the - as Diane, I believe, said, that the subsidiaries of AIG, the ones who actually write these annuity policies, they're in pretty good shape; it's the holding company that's in trouble. And so I believe that people - just because the name of their financial firm is in the headlines of the newspaper, they shouldn't rush out and say, gee, I have to get rid of all of my assets in there. It will end up costing them a lot of money and there is no reason for it because most of these things are perfectly safe.

And even the takeovers of the big firms, it's the stockholders of those firms that are losing. And in general, the takeover is designed to protect the interest of the customers of the firm or the creditors of the firm.

JANE BRYANT QUINN: And if an insurance company fails, by the way, there are state guarantee funds that stand behind at least a certain amount of the annuity or the insurance policy. But at this moment, there is absolutely no reason to believe that any of the AIG insurance or annuity insurance companies - meaning, their policies and their annuities - are in any trouble whatsoever. They are all still carrying very solid conservative ratings.

MARGARET WARNER: But when Dick Sylla says only the stockholders are getting hurt, but who are the stockholders? I mean, in Fannie Mae and Freddie Mac, weren't there a lot of ordinary Americans indirectly at least invested in Fannie and Freddie?

DIANE SWONK: Well, most of the Fannie and Freddie - this is Diane - most of the Fannie and Freddie preferred shares - it's not clear. We're in suspended animation with Fannie and Freddie in conservatorship. And in fact, employees of Fannie and Freddie have been offered shares of stock on the hope that they'll come out of this as a company, as an incentive to stay.

With that said, the big shareholders in Fannie and Freddie, the preferred shareholders, were actually some big financial institutions. And one of the reasons they haven't penalized the shareholders more at Fannie and Freddie by saying, they're absolutely gone, we're taking that part away entirely, is because there is a fear that it would cause cascading effects through the financial services industry of the large banks and large investment companies that hold those preferred shares.

But the biggest issue with Fannie and Freddie was people bought these bonds as if they were government treasuries. Well, now, effectively, they've become default government treasuries, because they're now backed up by the U.S. Treasury. So the pain on Fannie and Freddie, yes, the shareholders got hurt. But to be honest with you, who benefited the most from Fannie and Freddie's shares? The senior management of Fannie and Freddie who walked away being compensated in these shares for a very long time on a government subsidy basis of at least $40 billion a year for each. It really was a Ponzi scheme of which many people tried to unwind for many years. But the lobbying environment in Washington didn't allow it. Now, they're the only game in town. And so, we have to preserve their ability to do something in the mortgage market until the market gets in better standing.

JANE BRYANT QUINN: Can I just jump in on the shareholder question, Margaret, and that is, there's two lessons here for people. First, a lot of the people who are in Fannie and Freddie or Lehman Brothers, they had their own company's shares in their 401(k)s. And this is one of the things that we - the lessons we've learned since Enron is that if you can possibly diversify out of your own company's share in you 401(k), you should do it. Don't own any more than five percent of your company, no matter how good you think the company is, because something might fail.

The second thing is that if you are somebody who is interested in buying individual stock and you buy stock in Fannie or you buy stock in AIG, you are taking an investment risk. I'm a huge fan of mutual funds because I just don't think that individuals are good enough and analyze enough and know enough about these companies to know who will succeed and who will fail.

I mean, if you went and bought a stock of AIG, how did you know that any of these things were going on? So I think that individual - if you buy individual shares like this, you take a huge risk. And this is the reason not to do them, to go with a mutual fund and let you mutual fund manager worry about it.

MARGARET WARNER: Not surprisingly, there were lots of questions also reflecting this anger at the CEOs who ran these companies. And I mean, I'll just quote one - Patricia from Middleton, Wisconsin: "Are the CEOs of the companies they bankrupted going to walk away with bonuses and golden parachutes? What consequences will they and their boards of directors faced? And why are taxpayers saddled with this debt when no one is going to jail or being called to account?"

JANE BRYANT QUINN: They're going to walk away with it, Margaret.

(Cross talk.)

JANE BRYANT QUINN: And they write and they complain. And you know, here and there, maybe somebody loses $10 million or $20 million. But the fact is, by and large, they walk away with it.

DIANE SWONK: I would argue even further though that I do think this is really awakened one of the Achilles' heels of the U.S. capital markets. And that is, one, CEOs are paid on a quarterly basis, based on how they do on quarterly profits, not how they make decisions over the long strategic basis, which is just plain wrong. We've also seen CEO tenure has gone down, in some cases, from multiple years to three years. I had six CEOs in 19 years that I worked in the banking industry, all with the same phone number that I had. And as a result of that, what we've seen is CEOs negotiate 30-year contracts for a three-year tenure. And that's what's got to end.

And I think you are going to see - although I don't think you can regulate per se- but the backlash from shareholders in the fact that we do have shareholders suing the boards now very directly. I think we are going to see - we see CEOs fired. That was the big news in the '90s that we actually fired CEOs. Well, now, we're not just going to fire them; we're also not going to give them their bonuses if they don't perform. And I think the compensation of CEOs is going to change quite dramatically as a result of this, that instead of getting compensated on how you did this quarter or how you did this year, it's going to be a multi-year contract, where you actually have to be accountable for the decisions you make over a period of time. And so I do think we will see -

JANE BRYANT QUINN: I have to say that I hope you're right, Diane, but we've been through this before. And they always talk about revamping the pay-for-performance rules and we're going to pay CEOs differently so they won't have so much money. But it hasn't changed yet. And I earnestly hope you're right. But the fact is, I think they're going to get away with it.

RICHARD SYLLA: Well, I think that this is the worst financial crisis since the Great Depression, but so far it's not anything like the Great Depression. In the Great Depression, 1930 to 1933, something like seven or 8,000 banks failed in the United States. And we only have about seven or 8,000 banks today. And so that gives you a basis for comparison. Now, many of these were small. I guess, in the Depression, we went into it with 21-22,000 banks; seven to 8,000 failed.

But you know, the big difference between then and now is that the bottom fell out of the economy. The financial troubles the country had dragged the U .S. economy down. And in 1932, '33, we had 25 percent unemployment. The gross national product had fallen by about a third. The country was really in trouble.

And so far, I have to give some credit to our financial leaders such as Ben Bernanke and Hank Paulson that all these things they've done - and they've taken criticism for it - have prevented the financial problems from dragging down the economy. You know, we've been talking about a recession for more than a year. But so far, we haven't declared a recession. And that's really a tribute to the financial leadership we're getting.

DIANE SWONK: And to underscore that, I really want to underscore what Dick has said. This is the worst financial situation but not nearly as bad. And although the macro-economy feels really bad because wages are lagging, more people have jobs. They're just not getting paid as much. And that's very difficult. But I grew up in Detroit. And when I first took economics, 40 miles north of me in Flint, Mich., the unemployment rate was 25 percent in 1982. So I remember what it was like when my best friend went into poverty.

And the fact that we have Ben Bernanke, who is the foremost expert on the Great Depression, one of the foremost experts in the world, is an asset. I don't always like the way he executes things, but he is a brilliant man. And many of his solutions have in fact averted the spillover from Wall Street to Main Street as much as it could have been.

As bad as this economy is, can you imagine? If you had given me the numbers and the reality that we face today, most economists would have had double-digit unemployment rates in their forecast and would have expected a much more severe situation for Wall Street. So it's not good, but it's not nearly as bad as other real economy events we've experienced just in the recent post-World War II period.

MARGARET WARNER: Jane, how sanguine are you that we're not sliding that way?

JANE BRYANT QUINN: Oh, we're not sliding into a depression. I concur with what everyone has said about Ben Bernanke and his expertise. And also, you know, we're going through - we're being bailed out by the world. You know, the United States is too big to fail from a world point-of-view. So as we need more capital here, as we're selling more Treasury bills to try to keep the credit going, to keep our banks running, the world keeps buying our Treasury bills because they know that they want to keep us afloat just as much as we want to keep afloat.

And I think that getting back to individuals for a moment, one of the main things we've said here is your insurance policies are okay. Your money funds are probably OK. Your bank accounts are OK. What you need to do, I think, is think about reducing your own debt and figuring out how you're going to live within a certain constraint, because I do think that the recession is creeping on us, so we may have a few difficult months. But those are the kinds of things to focus on. And don't think that you're going to lose all of these basic things that you have in terms of your insurance and your savings. You're not.

DIANE SWONK: Well, and just to underscore that, Jane, I think it's really important. As you know, globalization has gotten a very bad rap recently, with many people talking about protectionist policies. Populism is on the rise. Everyone blames free trade for our problems. I would argue it's the economic linkages we have around the world and the fact that we're so tied together is one reason why the rest of the world needs us even more than we need them. And I kinda like that.

MARGARET WARNER: But do you all agree with Jane, Dick and Diane, that the best advice for the ordinary American to weather this storm is essentially not to panic and, if anything, try to reduce your own debt, but otherwise sit tight?

DIANE SWONK: Panic is always your greatest enemy, especially in investing. And unfortunately, conditions in the economy are going to get worse before they get better. This holiday season is going to be particularly hard. So buckle down, be conservative, and you'll get through it.

RICHARD SYLLA: Yes, I would say that this is very typical of financial crises. When you're in the middle of them, you think the world is coming to an end. And the TV, the radio, the newspapers are filled with scary stories. But this is not unusual in a financial crisis. And I would recommend that people keep a cool head and not worry that much. And you know, raise a little cash but don't sell everything you have and ride out the crisis. And the bad thing about these things is that they happen. The good thing about it is that they always come to an end.

MARGARET WARNER: Jane, final thought?

JANE BRYANT QUINN: I couldn't agree more with what Dick just said. I think that you need to pay a lot of attention to your spending, to your debt, to how you're going to live through these next three months or six months or whatever it takes to get us through this recession. There will be more unemployment. There will be difficulty. But the world is not coming to an end. And you really don't want to panic.

MARGARET WARNER: Well, on that upbeat note, we'll have to leave it there. I want to thank all of our guests, Richard Sylla, of New York University, Diane Swonk of Mesirow Financial, and Jane Bryant Quinn of Newsweek and Bloomberg.com. And I want to thank all of you, our viewers and online visitors, for submitting so many questions. We couldn't get to all of them, but we hope we have helped answer many of the most pressing ones. Be sure to check our Web site for more on upcoming guests and topics. Until next time, thanks for listening. I'm Margaret Warner.