For 20 years H.Craig Rappaport has been helping individuals with retirement income planning. The author of Live Long Live Rich—Creating Your Retirement Paycheck, Rappaport has appeared in the Wall Street Journal, Fox News, CNN Headline News, and The Dow Jones News Service, among other news outlets. He can be heard daily in the Northeast on KYW News Radio 1060 AM. 

H. Craig Rappaport--

Bought any credit default swaps lately? For most of us the answer is, “No, and what is a credit default swap?”

But just because you haven’t purchased any doesn’t mean that it isn’t going to affect you. In fact given the press the financial markets have been getting, all of us are feeling the heat one way or the other. Whether you are concerned about your bank going bust or a decline in your 401K or your business being able to tap a line of credit you’ve had for years, we have all felt the negative effects of this crisis.

We are all to blame from those that pushed for more home ownership to those that profited from it, to those that didn’t make their mortgage payments. We can, as a group, each share some of the blame. Wall Street further exasperated the problem by packaging these mortgages up into groups and selling them off to customers as safe investments backed by the property and in theory they were, unless you added in the possibility that home prices might decline, then you have a problem.

Many borrowed against this mortgage bet from home equity to hedge funds but when the value of those mortgages fell apart and those that borrowed had to pay it back, well they just didn’t have enough to do it and the whole shebang started to unzip.

Investment banks and traditional banks were left holding the bag. They tried to sell the investments but nobody wanted to buy them. They were too risky and nobody could figure out what they were really worth.

Banks are required to mark to market. Which means if the bank has a billion dollars worth of bonds and I sell $10,000 worth at .50 cents on the dollar because I just wanted out, the bank would have to mark down their portfolio to 50 cents on the dollar, and take a half a billion dollar hit. Hardly seems fair but yet those are the rules.

This has been going on now for months and the values have just been dropping and dropping to the point where the mortgage bonds are worth practically nothing. Not because the properties are worth nothing, but because nobody is willing to buy the mortgages. The banks are afraid to part with any money incase they might need it for themselves. Here is where Main Street feels the heat.

Since the banks are hording cash to protect themselves, they don’t have enough money for home loans, further depressing home prices making the problem worse. They won’t loan for autos causing the car market to implode. They won’t give home equity loans or loans to start a new business.

If you are a business that has a line of credit that you tap from time to time as you wait to collect receivables, that line of credit has been shut down. If you can’t fund your business with short-term loans, then you go out of business. Your employees become unemployed as do you.

This inability for business to borrow short term is choking off the businesses themselves. Your pensions are gone, your income is gone, your children’s education is threatened, and there is no one to borrow money from.

By helping the banks free themselves of the mortgage mess they created may seem like it is helping Wall Street, but the one who pays for it in the end is Main Street. For those in retirement now, that have watched their investments deteriorate, it is especially unnerving. They are not in a position to recoup what they have lost.

In this case, even if it goes against your beliefs and infuriates you very last nerve, this bailout in the end might just keep the “For Sale” sign off of your home or business. You can cry all you want, that’s just the way it is. 

Related--

The Looming Retirement Crisis--It's For Real!

Is Your Insurance Policy Safe From The Meltdown?

Update on Oct 3, 2008 by At Basil & Spice

Wall Street Journal!