The Tumultuous Economy, Explained
SCOTT SIMON, Host:
A lot of big numbers got thrown into news accounts this week. Seven hundred billion dollars in investments gone, 85 billion dollars to bail out AIG, 50 billion to prop up money market mutual funds, a 450-point drop in the Dow and nearly 400-point rise in the Dow. Where does all this money come from? How can it just disappear? Who gains? Who loses? I'm joined now in the studio with New York Times columnist, our friend Mr. Joe Nocera. Joe, it's so nice to be with you in the studio.
JOE NOCERA: It's so nice to be in the studio. And Scott, doesn't that AIG news seem like last year's news?
SIMON: What was it? Three days ago?
NOCERA: It was Wednesday, I think.
SIMON: Wednesday. You know, the one number I didn't mention is one that obviously has been invoked this week, and that's 1929.
NOCERA: Oh, this is the worst week in the markets since 1929. Period. And it's not even about stocks, really. I mean, the stock market goes up and the stock market goes down this week, but that's a symptom. That's not the root cause. This is about nobody wanting to do business with anybody else because they don't know how much toxic stuff they have on their books.
SIMON: How does 700 billion dollars disappear?
NOCERA: The same way, by the way, it disappears on your personal balance sheet. You take out too much debt. You can't pay it back. You have to write it off. Now for people, it's bankruptcy. But for these companies, they've been taking monstrous write-offs as the value of these securities has declined. And so they take write-off after write-off, which messes up their balance sheet, and so to shore up their balance sheet they have to raise capital. Nobody wants to give them capital anymore because they don't trust that the pain is over.
So that's why Lehman folded because they couldn't get anymore capital. That's why AIG had to be rescued because they couldn't get any more capital. That's why Fannie and Freddie had to be rescued because they couldn't get anymore capital. There's a complete lack of confidence in the system, and it has basically caused the financial system to melt down. If that's not '29, I don't know what it is.
SIMON: I promised to ask a question for a listener in California who wrote me on Friday. He says, as a taxpayer who's about to be a co-owner with 300 million other Americans in large alternative investment fund made up of toxic assets, can you please tell us how the government will set the price of acquiring these toxic assets and how fund owners can feel confident that sellers won't take advantage of us?
NOCERA: We don't even know the answer to that. Let's assume a company, a firm, has a portfolio mortgage-backed securities that they're valuing at 50 cents on the dollar. One of the reasons they can't sell that now in the marketplace is because everybody knows that valuation is baloney, OK? But they don't want to go lower than that because they'd have to take write-off so they're sort of making believe that that's the real value.
So what is the government going to do? Are they going to pay 50 cents on the dollar, thus giving a completely unjustified bailout to millionaires who have screwed up in the first place? Or are they going to pay the real value, which, let's say it's 20 cents on the dollar, which will cause these firms to have to take yet more giant write-offs, which will cause them to have to raise capital which they may or may not be able to do?
If they can, if this is what causes big money to come back into the system, then you know what? Hats off to Mr. Paulson. If it doesn't, then we're right back to where we started. I would say that this is one of the greatest rolls of the dice in American financial history.
SIMON: Has the U.S. essentially nationalized the financial system?
NOCERA: It certainly looks that way. We really are now in a situation where you have three giant financial institutions remaining in the United States: JPMorgan Chase, Citicorp and Bank of America, which just bought Merrill Lynch.
SIMON: I want to ask you about what the government's doing to short sellers, as I understand it, banning anybody who's selling short.
NOCERA: Right. I just think this is the greatest waste of resources and time. I just can't believe that the SCC, which is supposed to be regulating these firms that are vaporizing, is instead chasing around short sellers as if that matters. It's politically expedient to do so. But it's completely wrong-headed, misses the point and allows people to kind of point a finger at somebody who really had nothing to do with this. I mean, short sellers didn't buy toxic securities.
SIMON: Joe Nocera, who writes the Talking Business column for the New York Times. Thanks for making time for us. Busy week for you.
NOCERA: It certainly is. Thank you, Scott.