Frequently Asked Questions about the Financial Crisis

The housing and financial crisis has created panic among many Americans. I thought it would be a good time to answer some of the more frequent questions and maybe quell some misconceptions about the 2008 financial crisis, the credit markets, and the status of the U.S. housing market today.

Q. I didn’t have any money before the crisis. Do I have less money now?
– S.G., Colorado

A. Theoretically, yes. Additionally, you may now owe on your neighbor’s defaulted mortgage.

Q. My financial adviser told me to buy low and sell high. I don’t trust him because I’m paying him to give me advice. I want to sell low. Is this a good time?
-G.M., California

A. It’s actually pretty easy to time the market if you want to sell low. Depending on your financial goals, income, age, risk tolerance, and a number of other factors, this may in fact be the best time to sell low and lose money long term. Good luck!

Q. I want to write a strongly worded letter of complaint to who ever is responsible for this mess. Who should I write to?
-J. B., Delaware

A. That’s a great question and, truthfully, a question many people who are a lot smarter than me are trying to figure out. I’ll take a stab at it, though.

Generally, there’s a consensus that there are a large variety of people from all walks of life to blame – sub-prime homeowners and lenders, Wall Street investment bankers, congress, regulators, and so forth. As far as an actual number of people to blame, and consequently the amount of letters you may have to write, I personally would throw out the 2000 election as an “oops”, and start licking 62,040,610 envelopes to encompass the 2004 election. You can probably subtract one envelope and stamp because I’m guessing you are one of those idiots who voted to re-elect Bush. Thanks for the great question.

Q. Why can’t people roll over their negative equity to a new home like they can with a car? Wouldn’t that help stimulate the housing market, even as a temporary program, and provide an alternative to foreclosure while maintaining high home ownership because people could trade up or down in properties based on their individual financial situation? Wouldn’t people pay a slightly higher coupon for the “negative equity” portion if it meant moving to a house they could afford or relocating to a better job? Couldn’t the government guarantee the negative equity portion in a show of confidence for long term American property values and a show of faith in a real estate recovery for about the same cost as buying and reworking loans from people who have already defaulted?
-I.S., Georgia

A. I know, right?

Q. In light of Alan Greenspan’s recent congressional testimony concerning his mistake in assuming financial institutions would regulate themselves in order to benefit and protect their own shareholders, my question is a two-part question regarding the consequences of the lack of regulation and/or deregulation of potentially hazardous financial instruments.

First part: Assuming Bear Sterns’ and Lehman’s stock prices declined in relation to the pressure of short sellers, which ultimately led to credit downgrades justified by lack of potential to raise capital, and thus subsequent margin calls, what regulation would have had the greater impact to sustain the foregoing stock prices more in line with historical valuations given their earnings and balance sheets - a reinstatement of Rule 10a-1, i.e. the up tick rule (which was thrown out in 2004, i.e. the last presidential election year) or enforcement of naked short-selling rules, rules which haven’t been enforced by Bush-nominated SEC Chairman Christopher Cox?

Second part of the question: As the SEC’s mandate largely concerns the protection of investors, shouldn’t the SEC have been regulating the counterparty risk that grew over the last eight years in mom & pop mutual funds because of mutual fund holdings in complex financial instruments such as collateralized debt obligations, credit default swaps, and structured investment vehicles?
G.W., Washington

A. Hold on, hold on. Wow. You’re talking about economic policies and using big words that I don’t really understand, but I’ve got a simple response for you, pal: 9-11. Have you forgotten already that we are in a war against terrorists? Terrorists who killed thousands of folks who worked for investment banks? And now you want to tell all these people who have lost their jobs at firms like Bear Sterns because of this financial crisis that their co-workers and friends died for no reason on 9-11? That sure doesn’t make a lot of sense to me.

Q. With so much being made lately of the “mark to market” accounting standards, I’m wondering if I should write down the value of my 1989 Upper Deck Ken Griffey Jr. rookie card and record a tax loss until we know whether he’ll report to spring training next year. Any advice?
-M.R., Florida

A. Thanks for your question. What complicates the issue is that spring training begins after the end of the year but prior to the tax-reporting deadline, so I’d suggest consulting a qualified tax adviser or a sports memorabilia expert.

Q. I’ve heard the stock market has been plunging. I went to a stock show and none of the animals looked like they were down. What gives?
-R.W., Texas

A. Your confusion is pretty common, so I’m glad you asked. The losses are what we call “paper” losses, so you should be just fine.

Q. I moved all of my trust fund into an “ultra short” ETF of the S&P 500 last year. My question is this: suck on it.
-F.R., North Dakota

A. That’s not really a question.

Wonderful questions, everyone. Now go out and slaughter those paper losses!