In this issue

Jonathan Tobin: Defending the Right to a Jewish State

Heather Hale: Compliment your kids without giving them big heads

Megan Shauri: 10 ways you are ruining your own happiness

Carolyn Bigda: 8 Best Dividend Stocks for 2015

Kiplinger's Personal Finance editors: 7 Things You Didn't Know About Paying Off Student Loans

Samantha Olson: The Crucial Mistake 55% Of Parents Are Making At Their Baby's Bedtime

Densie Well, Ph.D., R.D. Open your eyes to yellow vegetables

The Kosher Gourmet by Megan Gordon With its colorful cache of purples and oranges and reds, COLLARD GREEN SLAW is a marvelous mood booster --- not to mention just downright delish
April 18, 2014

Rabbi Yonason Goldson: Clarifying one of the greatest philosophical conundrums in theology

Caroline B. Glick: The disappearance of US will

Megan Wallgren: 10 things I've learned from my teenagers

Lizette Borreli: Green Tea Boosts Brain Power, May Help Treat Dementia

John Ericson: Trying hard to be 'positive' but never succeeding? Blame Your Brain

The Kosher Gourmet by Julie Rothman Almondy, flourless torta del re (Italian king's cake), has royal roots, is simple to make, . . . but devour it because it's simply delicious

April 14, 2014

Rabbi Dr Naftali Brawer: Passover frees us from the tyranny of time

Greg Crosby: Passing Over Religion

Eric Schulzke: First degree: How America really recovered from a murder epidemic

Georgia Lee: When love is not enough: Teaching your kids about the realities of adult relationships

Cameron Huddleston: Freebies for Your Lawn and Garden

Gordon Pape: How you can tell if your financial adviser is setting you up for potential ruin

Dana Dovey: Up to 500,000 people die each year from hepatitis C-related liver disease. New Treatment Has Over 90% Success Rate

Justin Caba: Eating Watermelon Can Help Control High Blood Pressure

The Kosher Gourmet by Joshua E. London and Lou Marmon Don't dare pass over these Pesach picks for Manischewitz!

April 11, 2014

Rabbi Hillel Goldberg: Silence is much more than golden

Caroline B. Glick: Forgetting freedom at Passover

Susan Swann: How to value a child for who he is, not just what he does

Cameron Huddleston: 7 Financial Tasks You Should Tackle Right Now

Sandra Block and Lisa Gerstner: How to Profit From Your Passion

Susan Scutti: A Simple Blood Test Might Soon Diagnose Cancer

Chris Weller: Have A Slow Metabolism? Let Science Speed It Up For You

The Kosher Gourmet by Diane Rossen Worthington Whitefish Terrine: A French take on gefilte fish

April 9, 2014

Jonathan Tobin: Why Did Kerry Lie About Israeli Blame?

Samuel G. Freedman: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Jessica Ivins: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Kim Giles: Asking for help is not weakness

Kathy Kristof and Barbara Hoch Marcus: 7 Great Growth Israeli Stocks

Matthew Mientka: How Beans, Peas, And Chickpeas Cleanse Bad Cholesterol and Lowers Risk of Heart Disease

Sabrina Bachai: 5 At-Home Treatments For Headaches

The Kosher Gourmet by Daniel Neman Have yourself a matzo ball: The secrets bubby never told you and recipes she could have never imagined

April 8, 2014

Lori Nawyn: At Your Wit's End and Back: Finding Peace

Susan B. Garland and Rachel L. Sheedy: Strategies Married Couples Can Use to Boost Benefits

David Muhlbaum: Smart Tax Deductions Non-Itemizers Can Claim

Jill Weisenberger, M.S., R.D.N., C.D.E : Before You Lose Your Mental Edge

Dana Dovey: Coffee Drinkers Rejoice! Your Cup Of Joe Can Prevent Death From Liver Disease

Chris Weller: Electric 'Thinking Cap' Puts Your Brain Power Into High Gear

The Kosher Gourmet by Marlene Parrish A gift of hazelnuts keeps giving --- for a variety of nutty recipes: Entree, side, soup, dessert

April 4, 2014

Rabbi David Gutterman: The Word for Nothing Means Everything

Charles Krauthammer: Kerry's folly, Chapter 3

Amy Peterson: A life of love: How to build lasting relationships with your children

John Ericson: Older Women: Save Your Heart, Prevent Stroke Don't Drink Diet

John Ericson: Why 50 million Americans will still have spring allergies after taking meds

Cameron Huddleston: Best and Worst Buys of April 2014

Stacy Rapacon: Great Mutual Funds for Young Investors

Sarah Boesveld: Teacher keeps promise to mail thousands of former students letters written by their past selves

The Kosher Gourmet by Sharon Thompson Anyone can make a salad, you say. But can they make a great salad? (SECRETS, TESTED TECHNIQUES + 4 RECIPES, INCLUDING DRESSINGS)

April 2, 2014

Paul Greenberg: Death and joy in the spring

Dan Barry: Should South Carolina Jews be forced to maintain this chimney built by Germans serving the Nazis?

Mayra Bitsko: Save me! An alien took over my child's personality

Frank Clayton: Get happy: 20 scientifically proven happiness activities

Susan Scutti: It's Genetic! Obesity and the 'Carb Breakdown' Gene

Lecia Bushak: Why Hand Sanitizer May Actually Harm Your Health

Stacy Rapacon: Great Funds You Can Own for $500 or Less

Cameron Huddleston: 7 Ways to Save on Home Decor

The Kosher Gourmet by Steve Petusevsky Exploring ingredients as edible-stuffed containers (TWO RECIPES + TIPS & TECHINQUES)

Jewish World Review Feb. 4, 2008 / 28 Shevat 5768

Preventing a Panic

By Mort Zuckerman

Mort Zuckerman
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http://www.JewishWorldReview.com | The fireworks of the primary season, climaxing on February 5, are like having a carnival on a beach while a tsunami gathers force offshore. "Hope" and "Change" as slogans may make people feel good, but they have the same relevance to the financial complexities threatening us as the clueless castaways on Lost, the quirky ABC melodrama.

The castaways are truly lost because they don't understand their new world. Understanding our new world should be the first requirement of all the White House hopefuls because what we are facing is a credit crisis so severe that it threatens the working of the economy. And so deep that it may take as long as two years to unwind — even assuming the top policymakers understand how the new world works. The problem is so complex that nobody can give the right answers before knowing the right questions and gathering the right information. This is a much tougher task than Congress applying band-aids of tax and investment relief. The financial community itself is bewildered, unsure of its risks and liabilities and taken by surprise almost daily. The story of the 31-year-old trader at Société Générale, one of France's largest banks, reads like the script of a movie thriller. He bet $73 billion of the bank's money that European and German stock indexes would go up. When they turned down, the bank discovered the unauthorized trades and unraveled them — at the stupefying cost of $7.2 billion.

Questions: How could one junior trader have bet so much without senior management knowing? How could the bank fail to monitor properly the sophisticated trading techniques and the computerized analyses that underscored the bets? How could it not be aware of the risks inherent in the incredible leverage by which banks borrow 80 to 90 percent of every $1 they invest?

Oversight failure. These failures are shared by many American investment and commercial banks. Merrill Lynch held subprime mortgages exceeding the net worth of the firm. Citigroup had $80 billion of sub-prime mortgages held off its balance sheet in so-called structured investment vehicles. In effect, this meant Citibank had guaranteed the financing to support a massive investment literally unknown to the financial community and much of its management. This at the same time it was holding an additional $50 billion of subprime paper on its balance sheet.

These and other banks invested heavily in all this paper because big profits come from borrowing inexpensively in the short term and reaping higher returns from longer-term securities (many of which earned AAA and AA from the rating agencies). Nice, but just as profits are magnified by leverage, the 1-to-9 ratio of cash equity to borrowing, so are the losses. If the price of the longer-term securities grew by 5 percent when the security had been financed to the tune of 90 percent credit, the result was a 50 percent return on the equity. But if the prices fell by 5 percent, there was a loss 10 times greater in the value of the equity. Your original dollar was worth 50 cents. In many cases, the equity was wiped out. The way up is also the way down.

The markets provided easy, almost unlimited financing to buy securities. But this bubble depended primarily on another bubble — the one in housing. The assumption had been that house prices would continue to rise, enabling overextended borrowers to refinance the growing equity value in their homes. But when prices began to fall in 2007, mortgagees went into default. Bad enough — it was the first time house prices had fallen year over year since the Great Depression. But worse, the defaulters, like falling dominoes, took down with them the institutions that had invested in subprime mortgages bundled into bondlike securities (collateralized debt obligations or CDOs).

The risk in these securities was supposed to be reduced and dispersed by a variety of bond insurance mechanisms (credit default swaps or CDS) — but the rising tide of defaults in CDOs and corporate bonds has imposed heavy burdens on the insurers. The insurers can get the bond they guaranteed, but it is now worth much less than its face value. If the insurer can't afford these losses or goes bust, the bond bounces back to the "original" holders of the CDOs, who bear the losses they thought were guaranteed not to happen. The result can be a fire sale of billions of dollars or securities.

It is now clear that the assumptions underlying the pricing of CDOs and the like were based on over-optimistic computer-based evaluation models or on untested historical patterns — especially during periods of acute market distress. Computers can make fast, accurate mistakes: garbage in, garbage out. The rating agencies too often relied on the information provided by the companies issuing these new securities. Now it is clear that this was a blunder, even by the rating companies themselves, a top official at Moody's rating service acknowledged.

The net effect is that instead of transforming risks and disbursing them widely, the derivatives have turned out to be a liability. Banks have had to take back tens of billions of dollars of lending onto their balance sheets — bonds that are declining in value, either because the credit of the guarantor has declined or in response to market expectations of more defaults as equities continue to evaporate in home prices. Quite simply, a lot of smart people took a lot of foolish risks. The result has been a bursting of the credit bubble and a dramatic tightening of credit in the financial system.

Nobody runs faster than a sophisticated banker who gets scared. Banks are calling in loans or boosting the amount of collateral required to secure financing. Even interbank lending, the core of the financial system, was hobbled because banks had to preserve their liquidity and had lost confidence in the finances of other banks. So, today, the credit system has been virtually frozen. Lending across the economy is plummeting as banks undergo a huge deleveraging, with central banks almost powerless to control this contraction. This poses a grave risk to our financial system since few people even know where the liabilities and losses are concentrated, and they may not know until it is too late. Everybody fears more skeletons will be coming out of the banks' closets.

Fed limits. Lower interest rates promoted by the Federal Reserve Bank cannot fully counter the forces of credit and liquidity contraction created by these large losses, which in the case of banks may require them to reduce their loan portfolios by a multiple of 10 times those losses. Further, lenders are disinclined to lend when credit markets are in turmoil. Many companies, especially small and midsize companies, will now find it much harder to get the money they need to fuel their businesses as banks seek higher rates and more collateral. This freeze will not be corrected until the bad debts and losses work themselves through the financial system.

In other countries where a banking crisis was transmitted through to the economy, it took an average of at least two years for growth to return to normal trend lines, and sometimes even longer. It is hard to see how the U.S. economy will bounce back more quickly.

The crisis has prompted the president and the House of Representatives to agree to a package of stimulants. By no means will it be adequate to the hour. The depreciation allowances will help only at the margins since lack of demand is the issue, not lack of capacity. Businesses won't develop more capacity until they know their customers are capable of purchasing their products. The tax rebates won't have effect until the summer, and then are most likely to be used to pay off debt rather than be spent in the marketplace. Many older people, having lost substantial equity in their homes, and who will lose more as home values continue to shrink, will now begin to save out of income and thus reduce their consumer spending. The December unemployment rate hit 5 percent, the clearest harbinger of the future. Other labor market indicators are similarly negative, including initial and continuing job layoffs and the assessment of job availability. Now some 23 states are estimated to be in a recession, and seven more are verging on a recession.

Quite simply, this financial crisis is the worst since the panic that led to the Great Depression. As a result, the recession may well be deeper and/or longer than any since the end of WWII. No one knows where the bottom is. That is why the level of confidence in both consumers and producers has declined — and must be restored if the financial fiasco is not to turn into a crisis for the broader economy.

The first pressing issue — and there is no time to lose — is to get more equity into the bond insurers before the rating agencies downgrade them, or they go bust, and create a devastating financial panic. As former Secretary of the Treasury Lawrence Summers pointed out in the Financial Times, "Their failure or loss of an AAA rating is a potential source of systemic risk."

The prime official responsibility for getting the repairs started swiftly falls on state insurance regulators. The New York state insurance superintendent, Eric Dinallo, has led the way in asking banks and big investors like Warren Buffett to inject fresh equity. But clearly there should be a national policy with the Fed involved.

The second pressing issue is to see what more can be done to rebuild confidence in the financial system. There is one imperative that should drive these reviews. The amount of bank borrowing and leveraging and its inevitable deleveraging must never be allowed again to convert a banking crisis into an economic crisis. The Federal Reserve and the Congress will have to improve, directly or indirectly, scrutiny of the activities of the financial industry that migrated outside normal review. New financial instruments, including default swaps, will have to be regulated and so, too, will the rating agencies that almost literally took the place of the Federal Reserve in controlling lending capacity through securitized obligations.

We have yet to see the problems emerging from the securitization of credit card debt, auto loans, and consumer debt, which will also have to be reviewed and incorporated into a reasonable regulatory system.

It would be revealing to see — before February 5 — how the candidates in either party respond to the knotty issues. Our perilous times require expert knowledge and managerial abilities, in addition to uplifting rhetoric.

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JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here.


© 2005, Mortimer Zuckerman