Voter IQ
This Week in Elder News: 20 September 2008

Elders and the Wall Street Mess

[EDITORIAL NOTE: If you have written any blog posts on political issues this week, be sure to get links to me by the end of today for the Sunday Election Issues post. If you're wondering what I'm talking about, see this post.]

A couple of weeks ago, I received an email from a 60-something reader who told me he and his wife lost all their retirement savings in one of the Enron/savings-and-loan-style financial debacles and have not recovered. They will never be able to retire.

I’ve spent most of this week wondering how many elders – those near retirement and retired – are now in the same black hole.

On Monday, the Dow dropped 504 points followed by 450 points on Wednesday. The rise yesterday doesn't help much and it is likely the volatility will continue. Even people who are conservatively invested lost dramatic amounts of money, to which I can personally attest. By the time I turned my modest savings (meant to ensure reasonably decent care should I become sick or disabled) into cash late Wednesday, it had lost 25 percent of its value in two-plus days. (Gulp) That’s after a previous four or five percent had been nibbled away over the past few months.

[Although I’m not here to discuss Social Security today, if anyone ever again tries to sell you privatized Social Security as President Bush did in 2005, just point them to this week when even big money market funds, as solid as cash for decades, have begun losing value.]

Don’t let the financial pundits or even presidential candidates try to tell you the current financial problem is complicated. It’s simple: banks with lax or barely-existent credit standards gave mortgages to millions of people who could not afford them and then sold those bad mortgages to financial institutions that bundled them into various kinds of securities instruments that they bought and sold to one another many times over, raking in big commissions on every sale.

When home owners began defaulting on the loans, money, in the form of mortgage payments, disappeared and the securities instruments became valueless, leaving the banks with more debt than assets. (It's hard to finance a takeover with a bunch of empty houses no one can afford to buy.)

Of course, there are other factors contributing to the financial mess, but that’s all you really need to know to understand what has happened. Well, except one more thing that explains how the banks were allowed to make themselves so vulnerable:

During the Great Depression in the 1930s, Congress passed the Glass-Steagill Act which created the Federal Deposit Insurance Corporation (FDIC), the organization that insures commercial bank accounts up to $100,000. It also separated banks into two types: commercial banks (the ones most of us use for our checking and savings accounts and personal, auto and home loans) while allowing investment banks – Merrill Lynch, Lehman Brothers, Bear Stearns, etc. – to operate with fewer restrictions and therefore make riskier financial deals with potentially bigger returns.

If you don’t count my mother who, in her old age, kept gold coins in tin cans around her house, Glass-Steagill restored confidence in the banks for our grandparents and parents, and it worked well for more than 60 years. By the time I was old enough for my own bank accounts, there was no question about their safety.

Then in 1999, President Clinton signed the Gramm-Leach-Bliley Act which repealed Glass-Steagill. (You remember former senator Phil Gramm, don’t you? He was Senator McCain’s top economic campaign advisor until a couple of months ago when Gramm accused Americans of being whiners.)

What Gramm’s Act did was allow investment and commercial banks to consolidate, blurring the financial lines between them, leading to the same kinds of abuses that produced the Glass-Steagill Act in the first place - abuses that have resulted in the financial troubles we have today.

In searching the web for news stories about how much ordinary people - small investors and those with their retirement money in IRAs and 401(k)s - have lost this week, I found only one from Nicholas von Hoffman in The Nation yesterday:

"For Mildred, a professional woman around sixty years of age, Great Depression II has started. I am going to have to work the rest of my life, she said. I can't retire.

"She is not a rich woman, and her retirement investments have been decimated by the perpendicular drop in the stock market. Despite a lifetime of working and saving, like a thrifty squirrel burying acorns in the backyard, she's now broke...

"According to the Securities Industry Association, over half the households of America - something like 57 million families - own stocks directly or through mutual funds. McCain and Obama might bear in mind that this block of 100 million or so Americans are the very heart of the middle classes they both cannot praise enough."

Most reporters and columnists are more concerned with job losses on Wall Street as in this story Chancy of driftwoodinspiration emailed:

“The demand for financial services will in no way disappear as the automobile pushed out the horse and buggy a century ago. Although unemployment on Wall Street will undoubtedly rise, many workers will be reabsorbed elsewhere in the industry. The current financial crisis calls out for new products and services as well as more, not less, information about what is safe and profitable in the future environment.”
Wall Street Journal, 18 September 2008 (subscription probably required)

It won’t be me calling out for new products and services. Unless the winner of the November election pushes Congress for more bank regulation (repeal of Gramm-Leach-Bliley would be a good start), I’m thinking I trust a coffee can under the bed more than any bank for the time being.

There is no telling how many Americans have been wiped out, or close to it, this week. As bad as it is for younger people, they have two or three decades to recoup. Old people, like Mildred, retirees who rely on small investment portfolios to supplement Social Security and the man who wrote me two weeks ago, do not.

But don’t expect any help. There is bail-out money – borrowed from China – but only for banks, along with golden parachutes for their executives who created this train wreck. The rest of us are on our own.

ADDENDUM: Although, as I said above, today's post is not about Social Security, this video arrived in my inbox this morning from Jan Adams of Happening Here who writes the Gay and Gray column for Time Goes By. It is pertinent:

[At The Elder Storytelling Place today, Brenton "Sandy" Dickson tells of his adventures with Yoga (Stretching and Bending at 70).]

Comments

Hello, it's me again. Sorry about my style in yesterday's comment. Even though I'm way past menopause I still seem to suffer occasional PMS without the "M".

First,it is terrible about the seniors who have lost their life savings in the Stock Market. We have taken quite a hit ourselves, but we considered our stock investments our gambling money. No one should ever put 100% of their assets in stock.

A good rule of thumb in investing is to use your age as your guide. If you are 20 years old, you can put 20% of your savings in zero risk investments and gamble on stocks with 80%. At my age, 62, I should have 62% in zero risk and 38% in stock.

Bank deposits that are FDIC insured are safe -- well, as safe as our dollar bills. If FDIC cannot keep it's guarantee to depositors, then we haven't done any good saving cash under our beds because it will be worthless too. No one has ever lost one penny of FDIC insured deposits.

I don't know what the video says because I can't open videos with my slow dial up computer. Bah!

In the past several months, and in particular, in the past week, we have seen our retirement investments dwindle in value by almost a half. Now it looks like we will have to rely heavily on Social Security, but if McCain has his way, we won't have that, either.

The way things are going, it looks like our dreams of full retirement are drifting away like smoke in the wind.

How many millions of other Americans are saying the same things this morning? How many others are seeing what little they have been able to accumulate for retirement being snatched away by an economy that is "fundamentally sound?"

Like everyone else who has their money in the great casino on Wall Street, I've lost a lot this week. And I can only hope that it doesn't get worse. And it might.

That last bit is important. In addition to understanding that politicians (of both parties) made choices that led to irresponsible deregulation of what financial outfits can do with our money, we need to understand that if we lose a lot of money, it may NOT be because we personally made bad choices. A lot of people at the bottom of the finance industry had a lot of incentive and pressure to sell us a lot of junk. Hardly anyone involved (at the working levels) understood that it was junk because as far as they could see, it was working. Wall Streeters have zero memory and little sense when they smell a quick killing.

So we can have exercised due diligence and tried to diversify and all those things we are supposed to do -- and still have gotten hammered. As individuals, we can not entirely protect ourselves from a system gone rotten. We need broad societal protections for the little guys who will always be vulnerable to the manipulations of the big outfits.

Losing money in this is NOT an individual failing.

Good point, Jan, and I hope I didn't imply that losses are necessarily the fault of individuals.

I too did all the due diligence, diversification and stuff you're supposed to. After all, aside from my home, that money is all I've got.

Several months ago, I asked my advisors about a certain bond they had bought from Lehman Brothers that paid excellent interest. My question was, what can go wrong with this? What can happen that would cause me to lose my initial investment?

I was told that it was nearly as good as gold. That if anything happened in the financial markets that would affect my investment in the Lehman bond, so much else would be wrong for everyone that it would be catastrophe.

Now I'm told it will be months before Lehman Brothers figures out who gets paid what, but that I'll be lucky to get 30 or 40 cents on the dollar of my initial investment.

I guess what has happened this week is the definition of catastrophe.

Yeah -- as with your bond, Ronni, my partner who is our church treasurer put a major bequest into some financial instrument sold by UBS that was supposed to be "cash equivalent." It wasn't. The church may or may not get its money out.

My partner is no dummy -- she was the CFO of a multi-million dollar foundation back in the day. But even the people who sold these things don't really know what they are. So now we are supposed to worry about the disappearance of their jobs?

I had this discussion with friends last night and co-workers this morning. I was counting down to my retirement already figuring I would have to work a "little" longer than I planned and retire at 68 or 70. Now with this loss, I will have to work longer than age 70. Maybe not be able to retire at all. Very depressing and very motivating to make sure my voice, your voice is heard this election year.
I live in Baltimore and Constellation which owns our gas and electric company was failing also...then in stepped Warren Buffet who just saved the day on this one. How may bail outs can sales will it take? How long will this last. Even if the election was held tomorrow, Bush is still a lame duck (in more ways then one) president and nothing really new will happen till after the end of January 2009. Then we have to rely on congress. We need divine intervention.

I watch this and all I can think is that I am lucky to be as young as I am, so that I can afford to wait for the hopeful recovery, and for things to stabilize. There's no guarantee they will, but at least if they do, I can afford the wait. So many others can't. Deregulation is not a universal good, folks. At all.

I miss my parents still (they died in December 2006), but watching this I wonder - what would THEIR financial position have been? Dad was already retired, and they had enough money but they didn't have extra to throw around. He had a 401k as well as a pension plan and social security, but the 401k was part of his planning and would have been (well, is, since I inherited it) caught up in this mess. And where I can weather it, what would they have done?

(Probable answer: we'd have helped them until the market stabilized, or longer. But not everyone has children who can do that and will - emphasis on the "can" since in many cases the children are just having a time supporting themselves, if there even are any children.)

I feel so very, very bad for everyone who is a victim of this. (My sympathy for the risk-taking higher-ups in some companies is practically negative, I must admit.)

Ronni,

I am so glad you are writing about this!

The entire 55-plus group alone does NOT have enough time to recover from the various failed schemes that now threaten everyone's future. It's a nightmare.

I was by most lights "too conservative" for much of my life, and I'm glad for that now. But even I am looking closely at the FDIC insurance limits and wondering which investment is going to blow up next.

For the last 20 years, pundits have been yelling at us to "save, save, save," and some actually did...only to have it all put at risk by a cadre of criminals.

Where are the indictments and arrests for the ringleaders of the mortgage schemes that the bedrock of these now-rotten securities? Nowhere in sight that I can see. They've successfully (apparently) plundered the honest and hard-working with no resistance whatever from our government.

What I wonder is: Where are the Angelo Mozilos, et al, going to put the money THEY stole? After all, the banks and securities markets aren't exactly safe these days--thanks to them.

Thanks for taking the time to explain this all so clearly and in such intimate terms. Very sorry to hear about the bond from Lehman Bros. So many people must be in the same boat, across the country. I enjoyed hearing Jack Cafferty's comments, which I had missed. This crisis emphasizes how important the upcoming election is. I have no retirement myself, due to choices made earlier in life, but I really feel for those seniors who worked so hard for so many years, only to see their retirement whittled away. How desperate they must feel!

I'm more worried about the inflation caused by the printing of bales of money by the federal bank to cover the bad mortgages and mortgage-based financial vehicles than I am about the dip in the stock market. In the early 1980s, the DJA was about 2000, as I recall, and it is (this minute) at 11,388--569% of what it was (well, 352% if one allows 25% of the increase for taxes and fees). This is more than is needed to make up for the 212% inflation since 1982. Inflation, however, should it return to the levels that prevailed in Jimmie Carter's time, will eat older people alive--especially if they have invested their age-percentage in fixed assets, as is advised.

I'm not too financially savvy (airplanes and hadrons make more sense to me); but, I don't put more than 5% of my money into any investment vehicle--and not more than 20% or 25% into any one type of vehicle. My parents thought I had lost my mind when I laughed at the dip in the market (in 1987?) and did nothing; but, it was the right strategy. In the long run, sitting on my investments paid off. Time will tell if the same strategy works as well this time.

Good luck to us all--all of us owners of AIG, Freddie, and Fannie. Never thought I'd live long enough to be turned into a socialist.

This is a really good recap. Have heard some discussions describing the formation of some problems beginning with Nixon and Reagan administration actions. Clearly the Glass-Steagill Act was singularly destructive in laying the groundwork for the legal abuses precipitating our current debacle.

Am truly sorry so many have lost so much and that more may lose additional dollars. Reminds me of some Enron horror stories. Trying to keep up with, or even beat inflation, can really challenge the level of risk we are willing to take. Sometimes a wise posture can be willingness to gain little growth while maintaining a break-even position when the financial picture is so unreal as it has been for many years.

A red flag has been flying in the financial world for quite a few years catching my attention. I've watched periodic booms and busts in the crazy West Coast housing bubble markets and especially the most recent one which hasn't boded well for real estate and mtg. loans.

I've also been alarmed for years with the prevailing philosophy to borrow, borrow, borrow, charge, charge, charge, and the inability of many to delay gratification on purchases. These behaviors by so many have simply added fuel to a smoldering financial world fire.

Add to that the fact that for so many years the amount of individual savings in this country has been tragically low. Wall St. actions (not their words) have indicated potential losses for years. There have been individual cries in the wilderness from some trying to warn us.

Given the failure of both political parties to protect the interests of the majority of American citizens, we, the general public now reap the consequences of their betrayal.

I hardly qualify as a monetary expert, but I don't assume those who claim to be, and present themselves as investment advisers, can usually surpass good old common sense when it comes to what's best for my investing -- despite their lovely track records of gains with which they impress.

I think diversification is always wise outside Wall Street, however limited the funds are to invest, and especially whenever the market is brilliantly bright and shining -- even over a several year period.

As if there weren't enough WS woes, the last I heard there were still anywhere from 90 to 300 "troubled" banks. I know of at least three in my area. One was fortunate enough to find salvation with a partner. I wonder what institutions are left who can partner with the others if need be? FDIC says they cover bank funds within certain limitations. Also, guess the Treasury can rev up the Mint to print some more paper money. Perhaps we may still have some gold bars stored at Fort Knox, or elsewhere -- or other precious metals in reserve we can sell. Now all we need is for other countries to release the usual supply restraints on gold to decrease that value.

I just hope we come out of this still owning our own country, that we don't become indebted to the International Monetary Fund like some third world country we seem to be fast becoming. Does our future hold a few financial gurus owning the world any more than they already do?

I'm sure joared misspoke in her second sentence that "Glass-Steagill was singularly destructive."

To be clear, Glass-Steagill, during the Depression, created the FDIC and created banking regulations that restored confidence in the banks.

It was the Gramm-Leach-Bliley Act that repealed Glass-Steagill, removing those regulations.

I was forced into 403bs because defined income pension plans do not exist anymore. My main plan is AIG. Public service employees from Florida to California have money in AIG 403b retirement plans. I believe this is what journalists are referring to as the AIG "holding funds" that are in trouble. Earlier this year, the Jacksonville Firefighters sued AIG for misrepesenting its solvency --or, as the rest of say, lying. I am trying to pull my money out, but I was told that tens of thousands of people are trying to do so, and it will "take time." I don't know if I will ever see a penny of my savings. I wish I had had that facelift, bought a Lexus, and taken a number of world tours. I'd still be broke, but I'd have better memories than knowing a broker somewhere is driving a Ferrari I unwittingly bought for him or her. Journalists are not covering this part of the story because we elders are invisible in our society. I apologize for sounding so angry, but I am.

Thank you for presenting the clearer facts on the repeal act....Most of us had no idea...

Thanks, Ronni, for catching my wording mix up -- I got my bills twisted. I guess that's because my underpants have been in a knot over this whole financial situation.

The point obviously is that allowing the mixing of banking and all these financial businesses by repealing Glass-Steagill was singularly destructive. When I think about learning the lessons of history -- I'm reminded how quickly they're forgotten or just plain ignored.

So far I have not been directly overly harmed as a consequence of the long term financial shenanigans pawned off as sophisticated investments. Indirectly we've all been clobbered and will experience the repercussions for years to come, at best. This certainly isn't a legacy I want for my children, either. Despite all the announced governmental repair efforts, I feel as though I'm waiting for another shoe to drop from a creature with a never-ending number of feet and legs.

Thoughts of ageism challenges have come to mind as I think of anyone who is moving beyond just desiring to work to needing to work because of what has happened.

The financial state of this country is discouraging. As A 43 year old middle class women, I fear for the future of my family. I see the affects on my parents who are working past 65 and what my Boomer generation siblings are facing today. It appears we have to take matters into our own hands by reinventing ourselves as we age. There are people creating communities geared specifically for networking purposes to assist all generations with Health issues, Insurance needs, Financial planning and Job Opportunities. Check out http://over60exchange.com
Lot of great networking information to help in these difficult times.

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