I’m writing this in a packed house at Loosemore Auditorium at GVSU this morning. I think after yesterday’s and today’s meltdown in the world markets, we can assume that it is more than the free breakfast that brings them here. GVSU organized the event last week in response to the market turmoil. There are many students here but also professors, business owners, 401 K investors, and the like.

How did we get here? GVSU Economic Professor Dan Giedeman took this one on. Due Diligence – on everyone’s part, from the fat cats on Wallstreet to the homebuyers on Main Street. The glut of global liquidity. In 2001, the fed greatly reduced interest rates (the lowest rates in 40 years). Add to that the infusion of capitol from corners all over the world. “Misaliged incentives in the originate to distribute lending model, ” a fancy way of saying too many loans to people who can’t pay. “Bad information” – can’t tell what was in those bundles of bonds Wallstreet sold investors.

Fifth Third Asset Management’s Mitch Stapley comments on what happened with money market funds last week. The dollar return has always been a given. “We broke the buck” … last week, what we saw was the classic fight to quality. Investors fled to the safety of treasury bills. The demand got so great, the yield on 3 month treasury bills, the yield declined 13 basis points. T Bills were trading at a negative return. Fifth Third and others had to suspend deposits into these funds. Yields were so low they wouldn’t even cover fund fees. Purchases had to be stopped to protect fund shareholders. Also, in a crisis, short term lending rates skyrocketed.

Michael Hampton deals with the retail end of stocks at Raymond James. In 1977, there was a strong effort by the federal government to increase home ownership. He describes the process of turning junk mortgages into something that looks investment grade. Wallstreet created an image of “I know what I’m doing.” The investment banks were so clever, coming up with mathematical formulas to make their case, they fooled the rating companies. Then the derivatives market grew. It became interrnational…

My eyes are now glazing over.

New voice. Larry Blose, GVSU Finance professor goes over another chronology of events. This one two weeks of this month. Fannie and Freddie. Merrill, Lehman, AIG, Morgan, WaMu, Congress, Wachovia. Much of this stuff we know. The demise of the investment bank. Maybe the market is stronger due to these events. He sighs.

Jon Chism of Plante and Moran talks about commerical banks. What about those calling in of notes?
Is this the accountants fault? The crowd chuckles. Chism says he’s getting a lot of calls from clients asking what’s all that investment insurance for? Jon has audited banks for more than 30 years. He’s been through 4 downturns. This is the first one driven by residential lending. How does it differ from the S and L crisis? Banks have more capitol this time around. (8% of total assets in capitol). I encouraged by this presentation because there is no power point. Too many loans to contractors and builders. 120 banks in country. Most are in Georgia. Consumers have gotten smarter about their money. Banks under pressure to provide good rates. Who in the world would invest money in a Michigan bank? Regulators all over Michigan banks. Feds trying to look tough. Chism says enforcement has been inconsistant.

Final voice. An expert in the housing market. GVSU’s Paul Isely. He shows a graph of 30 year mortgage rates. Money got cheap. This was like putting the housing market on steroids. Guess what, the housing boom? Michigan never had one. Isely looks at the local job market from 07 – 08. We’re down 900 jobs, better than most places in US. We started housing decline two years earlier than the rest of the country. Now, we’re starting to see a slight rise in housing prices locally. Ah,
a bright note.

Audience Questions:

From a layman’s perspective (only)….why would I want the government to bailout banks? We need to seperate desire to punish from reality in credit markets: they not functioning. This is not a bailout. A bailout is a handout…giving outright cash to banks to get themselves on line. The federal go is going to create a “vulture fund” The US will sit on these bad loans and sell them when it’s more profitable. The feds have time, banks don’t. The vast majority of homeowners are still paying their mortgages. The hope is to create confidence which should the boost demand for these assets. The feds now own part of AIG, this could be a money maker for the federal gov.

Audience question: Weren’t we assured the Great Depression would not happen again? Dan Giedeman responds. Yes, and we still are. Bernanke is a student of the the Depression and the lessons it taught. Golden Parachutees – if you put restrictions on executive pay in the bailout, banks won’t participate. Similar to banks not participating in a plan before the depression, the act of participating may it look like you were in trouble, and banks didn’t participate.

Should investors get out of the market? Wow, the question we’ve all been waiting for. Hampton says you have to have a plan to manage your risk. Smart investors are putting money to work. Buffett did a deal with Goldman that has healthy cash flow. Think long term – don’t think speculatively. Hampton pitches hiring an investment advisor. If you’re losing sleep, you need to change your portfolio.

Blouse: Average bear market is 14 months long. We’re almost out. Market tends to turn before the economy turns up. We’ll get through this one

What about buying a house now? Isely responds. It’s not a bad time. Trick is finding funds

Stapley says if we don’t respond to crisis, we could be in economic doom and gloom for 2 to 3 years.