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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (146872)	9/16/2008 8:40:41 AM
From: Les H	Read Replies (1) \| Respond to of 306849

Former Fed chairman Volcker sees 'failed financial structure' By JOSHUA BOAK Chicago Tribune miamiherald.com NAPLES, Fla. -- As chairman of the Federal Reserve almost three decades ago, Paul Volcker grappled with inflation that threatened to suffocate the American economy. He now sees a much greater crisis. "We have a failed financial structure," Volcker said Monday, a day of tumultuous events that included a 500-point plunge in the Dow Jones industrials. "It's been held together in recent months only by really, truly, extraordinary official actions, actions without any real precedent that go right to the edge of their legal responsibilities. Those actions are necessary." Of the five independent investment banks that presided over American capitalism, three now have been swept aside by the bad bets in the mortgage industry that spawned the housing crisis and credit crunch. Lehman Brothers declared bankruptcy Monday, while Merrill Lynch agreed suddenly to sell itself to Bank of America; their fates were foreshadowed months earlier by the demise of Bear Stearns. Shaken up by the news about Lehman and Merrill, and concerned that an enormous insurer, American International Group Inc., was struggling to raise capital, investors fled, the Dow Jones Industrial Average crashed 4.42 percent Monday to close at 10,918. For every dollar invested in the stock market since October, investors have lost 22 cents. "What we've been seeing really is a wrenching reversal of the exuberance that only a few years ago sent stock markets and then residential values through the roof," Volcker said at a financial conference sponsored by the CME Group in Florida. "And now we have a kind of reversion, very sharply. It's not uncharacteristic of financial markets, moving from exuberance to fear, from greed to fear." Wall Street bundled home mortgages into bonds, a strategy designed to spread risk that ultimately concentrated it. The bonds had a degree of complexity that could not account for the defaults on sub-prime mortgages, freezing markets that were once liquid and forcing investment banks to write-down their holdings by hundreds of billions of dollars. "The markets are built on liquidity," said William Floersch, chief executive of Fortis Clearing Americas LLC. "And liquidity is built on confidence. And when confidence goes, liquidity goes right behind it." CME Group Chairman Terry Duffy acknowledged that the crisis has hurt trading volume for the exchange operator, but he expects activity to recover over time as financial institutions eventually will regain their equilibrium and become better able to borrow. "I just don't see credit becoming a thing of the past," he said. To fix the crisis, Volcker, his words scrawled on a yellow legal pad, suggested the government establish a temporary entity with broader powers than what the Federal Reserve and Treasury Department enjoy. He said that other former government officials support such a move in order to better manage the fallout, adding that other aspects of the American economy separate from the financial sector remain strong. But in a news conference Monday, Treasury Secretary Henry Paulson predicted that the worst aspects of the credit situation could be over shortly. "I believe there is a reasonable chance that the biggest part of the housing correction could be behind us in a number of months," Paulson said. Paulson said he did not consider a government bailout for Lehman Brothers. He emphasized that the bank system is a "safe and sound one," saying that Americans can be "very confident" about their accounts with commercial banks. Financial adviser Mark Kollar is less than optimistic about the situation, recommending that clients check the status of their banks and divide their assets evenly between stocks and bonds for what he anticipates will be an extended downturn. "Not bailing out Lehman is a good thing - we need to flush the garbage out of the economy," said Kollar, who runs Kollar Financial Strategies in Rosemont, Ill. "You're going to see more of this, unfortunately. We anticipate 1,000-2,000 banks failing in the next year."