Full disclosure, my children…this ain’t Snarkista’s first Wall Street Rodeo. No, she got to live Black Monday: October 19th, 1987 up close and personal as a rookie portfolio manager. And she’s lived through everything that’s happened in the markets since. At the time of Black Monday, many “investors” were actually “gamblers”. The same is true today, from individuals to institutions.

Investment firms will allow a client to borrow money against the value of his or her portfolio. Depending on the investments held in that portfolio, the firm will loan the client 50-80% of the portfolio’s value, to buy more investments. This worked great when the market was going up, like it had been for a good long time. The leverage you had by having the dough to buy more stocks amplified your gains. Alas, as ALL bubbles eventually do on Wall Street, it burst.

When your account that’s leveraged out the ass starts to lose value, you get a “margin call”. This is brokerese for “immediately send us more money.” At (R.I.P) Bear Stearns, where Snarkista worked at the time, margin calls were given to the brokers on orange paper.

Black Monday was one of the most surreal days of my life. The market was falling so fast that the ticker was over 3 hours behind. No one could get a true picture of how bad things were in real time. Trades we tried to do weren’t getting done, even ones that were to sell “at market”, which is an order to sell at whatever the market price for the asset at that time. The traders on the floor were stroking out. And the next day the office was covered in a SEA of orange paper. All of those margin calls were on the desks. It looked like an early Halloween party had barfed all over the office. The people who had leveraged themselves to the max had to pay up big, many by selling stocks in their accounts. This selling, of course, forced the market lower in the following weeks. One of my colleagues later committed suicide.

Many safeguards were put in place after Black Monday, things like stopping computer program trading after the S&P, Dow and other indexes fell- or rose by a certain amount. Part of what caused the meltdown was that the automatic programs used by mutual funds and other large institutional investors had kicked in, causing a snowball effect on the market. Sell point after sell point were triggered.

The point to Snarkista’s lesson is this: people who HADN’T maxed out all of their credit, or weren’t trading using credit, and DIDN’T panic and sell, turned out okay fairly quickly. Those who had the balls to BUY after the drop when the news was the WORST, had some very nice gains by the end of the year.

ALWAYS on Wall Street, when the news is the worst, and the sky is falling, the first thing you should do is not follow the lemmings who are freaking out and selling. Hold on, take a deep breath and press pause. If you have enough cash in your portfolio to buy some solid stocks or mutual funds that have been unduly hammered- you will probably be glad you did when things settle down.

The big bailout deal failed today. It failed for mostly political reasons. Nancy Pelosi’s idiotic speech right before the vote, that pointed the finger solely at the Republicans for the problem, pissed them off. Then, when the jittery pols, who have elections in 40 days saw Pelosi’s best buds in the House voting no on the deal, they saw no reason to stick their necks out for a yes. The deal was not ideal, and much of the haggling was over shizz some of them tried to tack onto the bill, and stick that crap on us too.

Bottom line: Cash is King right now, and debt is death. Every dollar you pay off on a credit card with a 16% interest rate, immediately gives you a 16% return on your money. So first, your BEST investment is to kick the credit habit for good. They are gonna pull your credit limits down anyways, trust me. If it hasn’t happened to you already, it will. Read some Dave Ramsey and start on your way to freedom from the succubus credit industry. Dave actually has a VERY sensible rescue plan of his own on his website. You can send it to your congressman!

This is the lesson the large banks and institutions are having to learn too.
They put bad loans and good loans into big pools that investors bought small parts of. This whole crapfest started racing downhill because nobody can really figure out who holds the bad loans. The real answer is, everybody owns the bad loans. They’re hidden in giant pools and owned by banks, mutual funds and individual investors. Estimates are that maybe 5-10% of all mortgage loans are truly bad. Does this sound like a reason for a Great Depression?

The frozen credit markets are the big problem at the moment. This money, which moves at the large institutional level is the facilitator for the money that’s needed to move through our economy. Companies borrow money on short-term basis…sometimes even for only a day or two to have the cash flow for operations, salaries, etc. The seized-up credit markets are a far bigger problem than the stock market. THIS is what will affect Main Street much more than what the stock market does.

The government has to stop printing more money to try to band-aid this crap. It’s made the dollar plunge, and hurt our economy worse. They ARE going to cut some kind of bailout deal. The market may get beat up some more while they actually try to improve it for the taxpayers, rather than going with the “high pressure, sign here, the sky is falling” deal that was first offered up. The fast and secretive nature of the bailout is what has unsettled both politicians and citizens.

The water is going to be choppy for a while. We may have a “dead cat bounce” today (morbid brokerese for an upturn after a big downturn in the market…even a dead cat will bounce if you drop it from high enough). Even so, don’t let the Federal Freakout and Hurricane Wall Street cloud your judgment. Yesterday’s drop in the Dow was the largest in POINTS, but hardly the largest drop percentage-wise. It was the 17th largest in history. So trim your sails, batten down the hatches, keep spending on needs and cut back on the wants. Don’t keep more than $100,000 in any one account at a bank, so you will be insured by the FDIC. The SIPC insures brokerage firm accounts, usually up to several million dollars. No matter how hard the Politicians and pundits try to scare Main Street, eventually it will settle. Unless you’re one of those fat-cat CEO’s who are gonna lose their golden parachutes. Those guys are pretty much effed.

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