Unstable Wall Street potentially leads to financial crisis

Christina Moran

Hang on for a minute...we're trying to find some more stories you might like.

Email This Story

September 15 opened as a bleak day on Wall Street, following the sale of the nation’s largest brokerage firm, Merrill Lynch, to the Bank of America, as well as the news of Lehman Brothers, an investment firm, filing for bankruptcy protection.

The DOW Jones Industrial Average plummeted over 500 points, setting a record not seen since “Black Friday.”

Adding to the panic, on September 17, the insurance corporation American International Group (AIG), who was suffering from devastating credit losses, and was granted a $85 billion loan from the federal reserve, over double what they had sought two days earlier.

Further destabilizing the already shaky economy, Washington Mutual (WaMu), the nations largest savings and loans institution, reported losses of $6.3 billion in the last three quarters and began to look for a potential buyer. Contenders include JP Morgan Chase & Co and Wells Fargo. It looks like it’s close to the next stage for WaMu.

The $85 billion granted to AIG is only part of the money the government has been spending on troubled moneylenders lately. At the beginning of September, the Federal Reserve paid $200 billion for mortgage giants Fannie Mae and Freddie Mac.

With news of a potential bailout on September 16 for AIG, stocks saw a brief rise of one percent. Over the preceding weekend, the Bush Administration had refused point-blank to bail AIG out until JP Morgan Chase & Co declined to help privately finance the deal. Currently, Fannie and Freddy have majority of their assets controlled by the government, a likely outcome for AIG.

If WaMu were unable to find a buyer and needed the Federal Reserve to help solve it’s current problem, economists estimate the Federal Deposit Insurance Fund would be half the size what it is now. Scary, right?

The Federal Deposit Insurance Corp. controls the fund, which is used to prevent taxpayers from losing their hard earned dollars in case of a bank failure, up to $100,000. “FDIC Insured” sound familiar to anyone? Any bank that advertises being FDIC insured will help protect your money from falling victim to lost money like so many did almost 80 years ago.

Fortunately, the ten largest banks in the nation hatched a plan. They will create their own reserve of $70 billion to lend to troubled corporations if necessary, meaning fewer taxpayer dollars will go to private businesses with bad investment.

Hopefully with government help, taxpayers and stockbrokers will be able to sleep easy in their beds soon with the government bailout of AIG. If not, Americans are in for a rough time.

Print Friendly, PDF & Email