A financial system in FREE FALL

The financial crisis that took place on Wall Street last week can be summed up in one word: chaos.

Lehman Brothers, one of the top investment banks in America, filed the largest bankruptcy claim in U.S. history after going $613 billion in debt. 

One of Lehman’s main rivals, Merrill Lynch, nearly suffered the same fate before being bought out by Bank of America. 

And in the largest government bailout ever, insurer AIG was given an $85 billion loan from the Federal Reserve after plummeting share prices and credit downgrades caused investors to sell shares.

Now, President Bush is requesting that U.S. lawmakers pass a $700 billion bailout plan to help financial institutions holding large amounts of bad mortgage debt.
The turmoil leaves students with plenty of questions.

First: What happened?
In an effort to make more money, large financial institutions lowered their standards and made bad loans to home owners who couldn’t afford to pay their mortgages, said David Hays, president of the Bloomington-based firm Comprehensive Financial Consultants.

Companies that sold those loans then packaged them into investments called mortgage-backed securities, which were sold to investors to earn interest over time.
Investors didn’t know what those assets were worth, which led to problems, said John Boquist, finance professor in the Kelley School of Business.

“They reacted by selling their shares,” he said. “Basically the values reported were not trusted.”

How did everything get so bad?
Boquist said much of the turmoil last week came from a lack of trust in the financial system.

“Some people lost confidence in big banking institutions and insurance companies,” he said, “and sold their stock as quickly as they possibly could, causing a severe decline in stock prices.”

Should the government have bailed out these struggling companies? Who’s paying for this?
Hays said there was no other option but a bailout.

“My fiscal and conservative ways say ‘no,’ but my practical side says ‘they didn’t have any choice,’” he said. “If they didn’t do it, it would have been like the Great Depression ... people were making a run on the bank. It would have been a crash of our system.”
Although he agreed the government was right in rescuing these companies, Mark Brostoff, an associate director of Kelley’s Undergraduate Career Service Office, said the American citizen will be the one helping out in the end.

“Eventually the taxpayers are paying for it,” Brostoff said. “Whenever the government picks something up, ultimately the funds come from us. I would rather see the company allow the market correction to occur, rather than putting the billion-dollar burden on the taxpayer.”

So, should you invest in the market right now?
Boquist said with stock prices so low and other parts of the economy still growing, it could be a good idea to get into the market now. Still, he said that consumers need to be cautious. “Though most stocks have recovered nicely, it is still a very risky game,” he said. “I think if you are selective, it is a great time to buy.” 

How will all of this impact business students?
The issue of greatest concern for college students studying business is the effect the recent market crash has on potential employment. Students geared toward finance may have a more difficult time finding jobs due to the uncertainty of companies and the stock-market turmoil.

Junior Timothy Bowker, a student in the Kelley School of Business, said some of his classmates are talking about a possible change in their specific concentration.

“I think that a lot of people who were considering doing finance, specifically investment banking, are considering changing their major or what they want to do in their future,” Bowker said. “I hear a lot of professors who were once high on investment banking are now trying to push consulting for finance majors.”

Can you get a job on Wall Street any time soon?
Though he thought there would be a drop in employment, David Haeberle, an investment-banking professor in the Kelley School of Business, said he is still confident students will be set for the future.

“For the next year or two placements with Wall Street firms will be down relative to prior years, but by the time a freshman, sophomore or a junior graduate and start their full-time job on Wall Street, things will pick up,” Haeberle said. “Students are generally excited with the change that we are undertaking and encouraged to jump in and participate.”