> 5 Myths of the Financial Crisis

http://www.foxbusiness.com/story/markets/market-overview/myths-financial-crisis/

Tuesday, September 23, 2008
5 Myths of the Financial Crisis

There are so many things swirling in the economy and the markets right
now, it?s hard to keep track of what?s what. But there are a few ideas
in particular that have bounced around in recent days that are simply
incorrect.

Here are five myths you may have heard about the financial crisis --
and an explanation of what?s really going on.

Myth #1: The U.S. government?s Triple-A rating is in imminent danger.

It?s true that the federal government looks set to take on a lot more
debt, with the economic rescue package, the bailout of Fannie Mae
(FNM: 1.56, -0.27, -14.75%) and Freddie Mac (FRE: 1.80, -0.20,
-10.00%), the loan to American International Group (AIG: 2.50, -0.65,
-20.63%) and more. But even the immense dollar amounts being thrown
around aren?t endangering the U.S.?s credit rating.

?I do not think [these actions] are going to cause our credit rating
to shift. I wouldn?t even put it as a ?low? probability,? said David
Ader, head of government bond strategy at RBS Greenwich Capital. ?The
expanding deficit is a situation we know about, and our ability to pay
the deficit is something we know about.?

In a recent report titled ?The Unshaken Foundations of the U.S.
Government's Aaa Rating,? ratings company Moody?s outlined the reasons
the credit rating is safe.

Pierre Cailleteau, managing director of Moody's Sovereign Risk Unit
and author of the report, cited ?the U.S.'s exceptional economic and
financial resilience, its flexible and competent policy-making and its
high level of balance-*** flexibility? as reasons to maintain the
rating.

?As a Aaa-rated government, the U.S. faces very limited liquidity risk
and is therefore able to manage its balance *** in the best interest
of what matters the most from a rating standpoint: the protection of
its power to tax. Allowing gross public debt to increase, even
materially, poses less of a risk to the rating of a Aaa government
than would an impairment in the vitality of the economy and ultimately
the tax base," Cailleteau said.

Rival rating company Standard & Poor?s expressed similar sentiments
recently. So, unless the situation gets a lot worse, it looks as
though the rating is here to stay.

Myth #2: Money-market funds are unsafe.

Money-market funds, which are historically some of the safest
investments, got a lot of attention last week because one of them --
The Reserve Primary Fund -- ?broke the buck,? meaning that it was
worth only 97 cents on the dollar.

That news sparked massive concerns about money-market funds overall,
and the reaction may have been one of the factors that shocked
officials into action on a rescue package. They certainly came through
quickly with a plan to backstop these funds, estimated to be around
$50 billion.

But the Primary Fund was one of the highest-yielding, and therefore
one of the riskiest, funds. It encountered the problems because it had
exposure to Lehman Brothers notes, and of course Lehman filed for
bankruptcy protection. In addition, it had no parent company to help
shore up its funds.

Peter Crane, president of money market fund data firm Crane Data, told
FOXBusiness.com?s Dunstan Prial last week that the Primary Fund
problem seemed ?to be an anomaly,? and that ?it?s hard to find anyone
else who fits that profile.?

The fact that the Primary Fund was down a mere three cents on the
dollar -- and that it was so exceptional in this loss -- is actually a
pretty good testament to the stability of money market funds overall.

Myth #3: FDIC insurance is simply $100,000 a person.

Saying that bank deposits are insured up to $100,000 a person is the
simple answer, but FDIC insurance actually has some complicated rules.

The good news is that the complexity is in your favor -- not only can
you have $100,000 of your own insured at your local bank, but you can
have up to $250,000 insured in an IRA, as well as money in living
trusts.

Also, the limit is $100,000 per person per bank, so you can have money
in different banks. If that sounds like it?s too complicated to
arrange, check out the CDARS service, which spreads your deposits
around to different banks and can get up to about $50 million insured
by the FDIC.

Myth #4: ?I can call the bottom in the stock market.?

Take it from longtime NYSE floor trader Doreen Mogavero, president and
CEO of Mogavero, Lee & Co.: ?It is very hard to call a market bottom
or top.?

Study after study has shown that people who try to time the market
almost always fail. It isn?t pretty to watch the value of your 401(k)
decline, but unless you need to take money out of the markets right
away, your best bet is just to hold on for the ride.

In addition, individual investors have a tendency to pull money out of
the markets when they?re down, and to put money in when markets are
high -- the exact opposite of what?s ideal -- because they?re reacting
more emotionally than logically.

Bottoms are ?typically done during periods of great uncertainty and
stress,? said Alan Gayle, senior investment strategist at Ridgeworth
Investments. ?That?s assuming you have tremendous foresight and can
sense the bottom when it?s there? if you really don?t want to spend
the time playing that game, you should maintain a diversified
portfolio and stay fully invested.?

Myth #5: Short sellers are inherently evil.

Short sellers are kind of the ?Debbie Downers? of the markets. They
bet that stocks will go down in price, when most investors just want
stocks to keep going up. But even if it?s hard to love the short
sellers, they also provide an important balance in the system.

For one thing, short sellers are often the ones who spot frauds and
other problems at companies. The firm founded by famed short seller
James Chanos, Kynikos Associates, was one of the first to raise
questions about Enron.

Chanos wrote recently in The Wall Street Journal that ?short sellers
act as ?safety valves.? Their transactions help to bring share prices
to levels supported by the fundamentals, decreasing the likelihood of
price bubbles. Short selling also improves market quality and
efficiency by narrowing spreads, improving the speed of price
adjustments based on new information, and pumping liquidity into the
market.?

?When the markets aren?t functioning well, short selling can add to
the down pressure,? said Ridgeworth?s Gayle. ?But typically, short
sellers are trying to find value, just like the long buyers.?

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