Where Has All the Money Gone?

Where Has All the Money Gone?
by Houghton and Atkeson 09/29/08

One thing Wall Street doesn't like is a surprise. That's why the biggest ratings firms in the world hire analysts by the thousands, who predict down to the penny what publicly held companies will earn per share each quarter, whether a stock soars or slumps (i.e., by issuing ratings like "Buy," "Sell," "Underperform," etc.), and otherwise provide an objective third-party opinion on a company's upcoming products or performance.

So, it may not be nice to say, but since a lot of people are thinking it anyway: Wall Street blew it with the banking crisis.

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And now they're in Washington, waiting for Capitol Hill to offer to print up billions in taxpayer dollars to rescue financial giants that were once thought to be "fail-safe," as now those that are left standing (some, albeit barely) are considered to be "too big to fail" and must be rescued at almost any cost.

SURVIVING THE SMACKDOWN

As traders and, well, big fans of making profits in the equities and options markets, of course we want to see the markets thrive. But for the stock market and the overall economy to stop the bleeding and start healing, what about those who are losing more than just their tax and investment dollars in the grand-scale cleanup of the credit mess?

Many Americans and legislators are asking why the taxpayer should bail out Wall Street types with $700 billion when it is the homeowners who need help. They're basically saying, "Who cares if a bunch of investment banks and other complex financial institutions mired in complex transactions fail? Let them fail. Let's take our medicine and get on with life."

Perhaps that's why the bailout plan failed to pass Congress in its current form. But with more than 40,000 Wall Street jobs already lost or otherwise on the line before all is said and done, is there really enough that can be done to turn the beat-down around?

WHERE HAS ALL THE MONEY GONE?

To understand the extent of the crisis, we have to know how much leverage we are talking about. This requires that we look at debt both on- and off-balance-sheet. We also have to delve into the nuts and bolts of how American companies fund their daily operations.

America's total on-balance-sheet debt (i.e., household, business and financial, and government sectors not including unfunded pensions and medical promises) is now at about $53 trillion -- the highest debt ratio in history. Eighty percent of the total debt was created since 1990.

That sounds high.

But wait -- you haven't heard anything yet.