The Independent Voice of Southern Methodist University Since 1915

The Daily Campus

The Daily Campus

The Independent Voice of Southern Methodist University Since 1915

The Daily Campus

The Independent Voice of Southern Methodist University Since 1915

The Daily Campus


SMU students will weather job market

It has been called the worst financial banking crisis since the great depression. The recent financial turmoil with violent stock market swings, bank consolidations, and a bailout plan proposed to save the U.S. financial structure, shot down by the House of representatives all could mean a broad tightening of the job market for soon to be college graduates, but will have less of an effect on SMU students according finance professor Charles Rusher.

The most recent news on the matter is on Wednesday night the Senate passed the revised bailout plan with confidence and the House of Representatives is going to vote on it on Friday. This was following on Monday the House of Representatives rejected a plan concocted by the Bush administration, a $700 billion bailout plan to help save ailing Wall Street was voted down by a vote of 228-205. This occurred mid-day Monday and was immediately followed a 777 point drop on the Dow or approximately 7.5 percent.

Many media outlets were somewhat fear mongering about this large point drop the following day, saying that it was the largest drop in the history of the market, according to business journalism professor Mark Vamos. The 7.5 percent loss on the Dow on Monday is a large figure compared to the usual hiccups in the market, but to put it in context, the 23 percent drop in the crash on October 19, 1987 was the largest single day drop in the history of the market Vamos said.

The reason the bailout by the government is necessary professor Rusher said begins with greed that initially drove the problem.

The financial troubles began, Rusher explained, when the “fat cats” on Wall Street wanted to make an extra buck and began packaging mortgages, some legitimate, and some complete garbage, as financial instruments, or what were known as mortgage backed securities.

He explained that the mortgage industry was plagued with problems. Many people who had no business getting a loan were receiving them at sub-prime rates, based solely on the notion of housing prices upward momentum. If housing process never went down, you would never owe more that you own. So underwriters were being paid commission per mortgage so it got out of hand, Rusher said.

“People with no business owning a mortgage would get one. Or you would have a construction worker making $40K a year owning a $1 million mortgage, no real hope of really being able to pay it off. They would just default and walk away from their home,” Rusher said.

The problem compounded on itself when the housing bubble burst and home prices started to decline for the first time in 10 years. With people not able to afford their mortgage payments, and now not having enough equity in their homes to pay off the loans, the homeowners began to default and the mortgage-backed securities began to fall in value.

“That was kind of the perfect storm,” Rusher said. “You have greedy underwriters who are trying to make money, greedy investors who are looking at the higher return without looking at the higher risk, and then you’ve got ignorance from the mortgage holders, that becomes the perfect storm for a crisis.”

After packaging all of the mortgages into securities and selling them to investors all over the world, many investment banks kept a large sum of the securities for themselves. As the securities continue to lose value, an accounting principle known as “Marked to Market” requires the firms to adjust their asset value on their balance sheet, essentially bringing down the total worth of their assets every quarter, Rusher said.

So with massive amounts of write-downs occurring each quarter, the banks stock values were plummeting. But with write downs the banks had to maintain capital, or more simply cash requirements, and much lower stock prices make raising capital a difficult endeavor.

This is where the bank failures began to occur. Without being able to raise adequate capital to match the plummeting value of their assets, banks were looking at bankruptcy, Rusher said.

This is where the individual bank bailouts began, in mid march Bear Stearns, a prominent Wall Street investment house received an unexpected bailout from the government in the face of bankruptcy, guaranteeing all the firms debt.

This was followed by the implicit government backing of Fannie Mae and Freddie Mac, two government sponsored mortgage holders, owning nearly half of the nation’s mortgage debt, became an explicit backing when the federal government provided another bailout. This was to prevent systemic failure in the financial world Rusher said.

” The smartest thing that they did was to basically go ahead and buarantee the debt,” Rusher said. “They basically calmed the markets, and eradicated the common stock holder, keeping the risk in the picture. Brilliant move by the government, and I don’t give out government accolades all to often.”

As more and more banks continue to fail and merge with other larger banks the government decided to step in to help ease the tightness of the credit markets and stop the banking free fall. This is where the $700 billion dollar bailout came from-to purchase these toxic assets from the banks and get them of their balance sheet and allow for more liquidity or cash for banks to able to lend and borrow.

Rusher said that the first attempt most likely failed due to the fact that “congress didn’t want to bail out the fat cats on Wall Street,” but also because of the moral hazard. If the government were to step in and bail anyone out who made a bad financial decision as these investment banks did, there would be no incentive to look at risk without the safety net of the U.S. government.

Rusher said that even if the bailout does pass that there is a good chance that there will be a recession or at least some kind of slowdown until the markets are fully able recover. This, he feels, will lead to an overall tightening of the job market but will not effect SMU students as much as he views SMU as a “top tear school.”

“In the short run [the job market] may get a little tight but certainly in the long-run SMU students should be carried by the prestige and the name of the university as a top tier school,” Rusher said. “It is the second and third tear schools that need to be worried.”

On Friday the House of Representatives will vote on the already Senate-passed revised bailout plan. President Bush and members of the Senate expressed their optimism that the revised version of the plan will be passed.

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