A pervasive problem
More than a year ago, I told my wife that the mortgage crisis was going to be much like dropping a pebble in the center of a pond; the ripples would reverberate outwards in all directions. I gave her that explanation just before pulling all of the equity-based monies out of my 401(k) plans and putting the funds in cash.
The mortgage crisis has not disappointed. It has affected nearly every segment of the economy and has proved especially hard-hitting to brokerage firms, banks, insurance companies and mutual fund companies. One thinks first of all of the homeowners whose properties have been foreclosed on, but the ripples have moved like devastating waves with tsunami force in all directions.
As discussed earlier on this blog, the bailout has several components. The two major goals for providing relief to the banking system have been to inject liquidity (cash) into the credit system to unfreeze the flow of credit to companies and consumers. The second goal has been to provide banks with a buyer (the government) for their bad mortgages. These steps will restore banks to a healthier state and allow them once again to make loans.
Separate from the problems in the banking system have been the myriad problems in the financial services business with investment banks and brokerage firms. These institutions have been straddled with mortgage-based securities that have lost their value. These derivative securities have already caused the demise of at least one venerable investment banking firm and threaten others. As a by-product of the trouble financial services companies have faced, a series of buy-outs and mergers have consolidated the industry.
The handout continues
The next area of concern for the government is the insurance industry. An argument could be made that these were the folks who deserved government intervention before the brokerage industry.
Most people who invest through the insurance industry are looking for capital preservation and safety. With the exception of variable annuity subaccounts, most insurance investors are not risk takers. Unfortunately for those conservative policyholders; the insurance industry has not been spared.
Watch for Treasury to start adding other industries as the lobbyists from those industries scratch and claw their way to the front of the line for bailout bucks. The insurance industry should be next in line because of the mortgage derivatives that are playing havoc on their otherwise low-risk portfolios.
More details to come.
March 8th, 2009 at 2:18 pm
[...] reported on this blog previously, one of the problems created by the mortgage crisis has been the devaluing of mortgage derivatives. These security instruments are ‘derived’ from mortgages. Because they are financial [...]