On Sunday, lawmakers unveiled a bill to rescue the nation’s troubled financial system. The $700 billion bailout is the largest in U.S. history and won support from both presidential candidates. The House will vote on the bill on Monday, and the Senate is expected to vote Wednesday. On Saturday, the Senate approved $25 billion in loan guarantees for the auto industry, which will hopefully be used to spark automotive innovation.
In a statement issued Sunday evening, President Bush said “this is a difficult vote, but with the improvements made to the bill, I am confident Congress will do what is best for our economy by approving this legislation promptly“.
House Minority Leader John Boehner told reporters, “Nobody wants to have to support this bill, but it’s a bill that we believe will avert the crisis that’s out there.”
The $700 billion will be disbursed in stages, with $250 billion made available immediately for the Treasury’s use. Unless Congress grants an extension, authority to use the money would expire Dec. 31, 2009. Taxpayer cost is not expected to be near the amount the Treasury invests because the government plans to buy undervalued assets. If the government overpays, it could be left with a net loss which would require the president proposing legislation to recoup the money from the financial industry if net losses to taxpayers occurs five years following the plan’s enactment. Additionally, the Treasury would be able to take ownership states in participating companies.
The bailout is intended to unfreeze the credit markets caused by bad real estate loans that have led to record foreclosures. In the past few days, Wall Street and the banking world have endured collapses and corporate mergers. With New York’s heavy reliance on the financial sector, Mayor Michael Bloomberg has already warned residents to brace for the worst. He ordered all city agencies to cut spending by a total of $1.5 billion over the next two years, and he even introduced the idea of a 7 percent increase in property taxes.
These next few weeks are going to be quite interesting, to say the least. Be sure to stay tuned to Concrete Loop for the latest info as this story continues to unfold.
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As the country’s financial system teeters on the brink of disaster, you need a game plan to minimize the damage.
1. Check that your bank accounts are federally insured.
The Federal Deposit Insurance Corp. (FDIC) guarantees deposits up to $100,000 per person. If you have to hold more than that, spread it across multiple banks. As a taxpayer, you are paying for this insurance, so use it.
DO – 2. Make sure your brokerage accounts are federally insured, too.
The Securities Investor Protection Corp. (SIPC) guarantees you at places like Lehman Bros. (LEH, news, msgs), Merrill Lynch (MER, news, msgs) and E-Trade Financial (ETFC, news, msgs) up to $500,000, including $100,000 in cash. The same rules apply: If you have more to invest, spread it across multiple firms. Note that the SIPC only makes sure you get your shares and bonds back if a brokerage fails. It does not, obviously, guarantee those investments’ value.
3. Put money in thy purse.
If this market and this economy get any tougher, cash isn’t going to be just king anymore. It’s going to be king, queen, emperor, lord high chamberlain and the whole court. The easiest way to make or find a buck is to save it. So take an ax to those family budgets — the restaurant meals, the Superduper Everything Cable package, the rip-off checking account with the high fees and low interest. It’s all costing you.
4. Set up a home-equity line of credit while you still can.
Normally it would not be advisable to take on more debt, but if access to ready cash might be a lifesaver, it’s best to line it up now. That’s true especially if you are worried about your job. Credit is already tight, and it may get a lot tighter.
D0 – The panic on Wall Street just caused a collapse in the interest rate on long-term U.S. Treasury bonds, as lots of investors rushed there for safety. And that usually leads to a fall in long-term mortgage rates.
6. Don’t wait for your worst investments to “recover.”
If you ever saw John Cleese and Michael Palin perform their famous skit about the dead parrot, you know exactly what I mean. No, your Fannie Mae (FNM, news, msgs) shares aren’t “resting.” They’re lying at the bottom of the cage with their feet in the air. What more do you need to know? Stop waiting for them to “recover” before you sort out your portfolio.
7. Don’t panic.
Journalists, like markets, tend to move in herds. And by the nature of their jobs, they write about the plane that crashes instead of the thousands that land safely. Remember, too, that pundits want to seem really wise by putting on serious expressions and saying things like “We don’t know how this thing is going to play out” and “The situation could get a lot worse.” Bah.
Guess what. We never know how things are going to play out. And the situation could get a lot better, too.
DO – 8. When it comes to your short-term money needs, nothing has changed.
Any money you might need within the next year or two should be held in cash or equivalents. That was true two years ago, and it is true now. The stock market is no home for money you may need urgently. It could fall 30% or jump 30%. Nobody knows. You can get a one-year CD paying 5% right now, and it’s federally guaranteed.
9. If you are investing for five years or more, buy some stock.
The investment outlook is much, much better today than it has been for several years, because shares are much cheaper. World markets overall have fallen 27% from last year’s peak. They’re not a steal at current levels, but they are not particularly expensive either. Invest globally. Vanguard Total World Stock (VTWSX) gives you the whole world and low fees.
If you are looking for a value, Morningstar analyst Bridget Hughes likes Oakmark Global (OAKGX). Another good one is Tweedy, Browne’s new Worldwide High Dividend Yield Value (TBHDX).
This list is not comprehensive. Remember: I am not trying to call the bottom of the market. Things could fall quite a bit further. No one knows. So invest little, often and broadly.
10. If you want to worry about anything, worry about your taxes.
The worse this crisis gets, the more the feds will end up putting taxpayers on the hook to prevent a meltdown. Taxes will go up sooner or later anyway, no matter who wins the election, because of our gigantic federal deficit. If you think Lehman Bros. was bad, you should look at Uncle Sam. You can forget about any talk of tax breaks. Oh, and if you want a break from worrying about taxes, worry about Treasury bonds. Deficits won’t do anything good for them.
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