Re: What if your house and your 401K became worthless?

On Mar 17, 2:14 pm, EskWI...@xxxxxxxxxxxxxxxxxxx wrote:
In misc.survivalism, Too_Many_Tools <too_many_to...@xxxxxxxxx> wrote:

one wonders how you will survive when the house and 401K become worthless?

Under what circumstances will this happen?  How will all publicly traded
companies become worthless?  And all residential real eatate?  Worthless?

--
The whole problem with the world is that fools and fanatics are always so
certain of themselves, but wiser people so full of doubts.
        -- Bertrand Russel

FYI...it can easily happen....read this and learn.

TMT

Debt Reckoning: U.S. Receives a Margin Call
By LIZ RAPPAPORT and JUSTIN LAHART
March 15, 2008; Page A1

The U.S. is at the receiving end of a massive margin call: Across the
economy, wary lenders are demanding that borrowers put up more
collateral or sell assets to reduce debts.

The unfolding financial crisis -- one that began with bad bets on
securities backed by subprime mortgages, then sparked a tightening of
credit between big banks -- appears to be broadening further. For
years, the U.S. economy has been borrowing from cash-rich lenders from
Asia to the Middle East. American firms and households have enjoyed
readily available credit at easy terms, even for risky bets. No
longer.

Recent days' cascade of bad news, culminating in yesterday's bailout
of Bear Stearns Cos., is accelerating the erosion of trust in the
longevity of some brand-name U.S. financial institutions. The growing
crisis of confidence now extends to the credit-worthiness of borrowers
across the spectrum -- touching American homeowners, who are seeing
the value of their bedrock asset decline, and raising questions about
the capacity of the Federal Reserve and U.S. government to rapidly
repair the problems.

Global investors are pulling money from the U.S., steepening the
decline of the U.S. dollar and sending it below 100 yen for the first
time in a dozen years. Against a trade-weighted basket of major
currencies, the dollar has fallen 14.3% over the past year, according
to the Federal Reserve. Yesterday it hit another record low against
the euro, falling 2.1% this week to close at 1.567 dollars per euro.

Lenders and investors are pushing up the interest rates they demand
from financial institutions seen as solid just a few months ago, or
demanding that they sell assets and come up with cash. Banks and Wall
Street firms are so wary about each other that they're pulling back.
Financial markets, anticipating that the Fed will cut rates sharply on
Tuesday to try to limit the depth of a possible recession, are
questioning the central bank's commitment or ability to keep inflation
from accelerating.

There are other symptoms of declining confidence. Gold, the ultimate
inflation hedge, is flirting with $1,000 an ounce. Standard & Poor's
Ratings Services, a unit of McGraw-Hill Cos., predicted Thursday that
large financial institutions still need to write down $135 billion in
subprime-related securities, on top of $150 billion in previous write-
downs. Ordinary Americans are worried: Only 20% think the country is
generally headed in the right direction, nearly as low as at any time
in the Bush presidency, according to the latest Wall Street Journal/
NBC News poll1.

"Clearly, the whole world is focused on the financial crisis and the
U.S. is really the epicenter of the tension," says Carlos Asilis,
chief investment officer at Glovista Investments, an advisory firm
based in New Jersey. "As a result, we're seeing capital flow out of
the U.S."

That is a troubling prospect for a savings-short, debt-heavy economy
that relies on $2 billion a day from abroad to finance investment. It
is raising the specter of the long-feared crash in the dollar that
could further rattle financial markets and boost U.S. interest rates.

Offsetting the Pain

Though the risks of an unpleasant outcome are worrisome, the effects
of Fed interest-rate cuts and fiscal stimulus have yet to be fully
felt by the U.S. economy. Moreover, the combination of a weakening
dollar -- which remains the world's favorite currency -- and still-
growing economies overseas is boosting U.S. exports and offsetting
some of the pain of the housing bust and credit crunch.

But while cash continues to pour into the U.S. from abroad, this flow
has been slowing. In 2007, foreigners' net acquisition of long-term
bonds and stocks in the U.S. was $596 billion, down from $722 billion
in 2006, according to Treasury Department data. Americans, meanwhile,
are investing more of their own money abroad.

Hopes are fading fast that the U.S. economy was suffering from a
thirst for liquidity that standard Fed remedies could quench. Former
Treasury Secretary Lawrence Summers, speaking in Washington yesterday,
said he sees "an increasing risk that the principal policy tool on
which we have relied -- the Federal Reserve lending to banks in one
form or another" -- is like "fighting a virus with antibiotics."

Bob Eisenbeis, a former executive vice president of the Federal
Reserve Bank of Atlanta, says the problem is more than an inability to
find ready buyers for assets. "It is time to step back and recognize
that the current situation isn't a liquidity issue and hasn't been for
some time now," said Mr. Eisenbeis, the chief monetary economist for
Cumberland Advisers. "Rather, there is uncertainty about the
underlying quality of assets -- which is a solvency issue, driven by a
breakdown in highly leveraged positions."

President Bush, speaking in New York and in a television interview
yesterday, showed little appetite for further action. Detailing the
steps the administration has already taken, the president in a speech
knocked a couple of pending proposals. "Government policy," he said,
"is like a person trying to drive a car on a rough patch. If you ever
get stuck in a situation like that, you know full well it's important
not to overcorrect -- because when you overcorrect you end up in the
ditch."

But few in markets and elsewhere are convinced that the worst is over
for the U.S., as each player moves to protect its own interests
against potential calamities seen as improbable just a few months ago.
Bear Stearns reassured investors earlier this week that it was
solvent, but speculation that Bear faced a liquidity crunch had some
traders and hedge funds moving to limit their exposure to it.
Yesterday, J.P. Morgan Chase & Co. and the Federal Reserve Bank of New
York offered emergency funds to keep the troubled investment bank
afloat.

The loss of confidence is now spreading beyond the biggest banks, with
their well-publicized losses on subprime and other risky assets, to
regional and small banks. In the fourth quarter, U.S. banks reported
their smallest net income -- a total of $5.8 billion -- in 16 years,
according to the Federal Deposit Insurance Corp.

There's little sign yet that the worst is past. The "moment of
recovery" is when forecasters turn out to be too pessimistic, says Mr.
Summers. That point hasn't likely arrived. A Wall Street Journal
survey of more than 50 economic forecasters in early March found a
profound shift toward pessimism: About 70% say the U.S. is currently
in recession, and on average they put the odds that this recession
will be worse than the past two mild, short recessions at nearly 50%.
Most expect house prices to decline into 2009 or 2010.

This couldn't come at a worse time for U.S. homeowners. American
household debt has more than doubled in a decade to $13.8 trillion at
the end of 2007 from $6.4 trillion in 1999, the vast majority of it in
mortgages and home equity lines, according to Fed data. But the value
of U.S. householders' biggest asset -- their homes -- is now falling.

Federal Response

The response of the Republican White House, Democratic Congress and
Federal Reserve have been substantial. President Bush and Congress,
with remarkable speed, agreed to a $160 billion fiscal-stimulus
package that will put money in consumers' wallets soon. The Fed
already has cut interest rates by 1 1/4 percentage points this year,
and markets anticipate another 3/4 point cut on Tuesday. The Fed has
moved to buy $400 billion worth of mortgage-backed securities for its
$800 billion total securities portfolio in an effort to jolt that
crucial market back to life and prevent rising mortgage rates from
further depressing the U.S. housing market.

While there is continued debate about how to treat the current
disease, there is a consensus emerging on the causes. "Soaring
delinquencies on U.S. subprime mortgages were the primary trigger,"
the heads of the Treasury, Federal Reserve and Securities and Exchange
Commission said in a lessons-learned report. "However, that initial
shock both uncovered and exacerbated other weaknesses in the global
financial system."

Kenneth Rogoff, a Harvard University economist, says the current
difficulty has many mothers -- the housing bubble, the subprime
problem and the fact that the value of U.S. imports has long
outstripped the value of exports. The current account deficit -- the
broadest measure of the trade deficit -- burgeoned, and the U.S.
needed to borrow ever larger amounts of cash from abroad to fund it.

For years, Mr. Rogoff and like-minded economists harped that the U.S.
current account deficit was unsustainable. But despite the belief that
it would necessarily reverse, it kept growing through the first part
of this decade, going from 3.6% of gross domestic product at the end
of 1999 to a record 6.8% at the end of 2005. Lately, the deficit has
seen a slight narrowing, but the combination of credit crisis and the
economic downturn may have proved the catalyst for a faster, and
potentially more dangerous, adjustment.

Pressures in one market spread rapidly to other, often more distant
markets. "The dollar and subprime -- they're two sides of the same
coin," says Princeton University economist Hyun Song Shin. Many U.S.
hedge funds and financial institutions were speculating in mortgage-
related securities with money that was ultimately borrowed in Japan,
where interest rates have been low for years. He notes foreign banks'
net liabilities in the yen interbank market surged between April 2006
and April 2007. As investments bought with money borrowed in Japan get
sold and converted back into yen, he says, "we see both a fall in
asset prices and a fall in the dollar."

Crossing a Line

The resulting blow to confidence threatens to further weaken lending,
borrowing, spending and investment in the U.S. economy. "Hedge fund
blowups have so far been one-off situations. One worry is that we'll
cross some line and there'll be a systemic wave of fund failures. It's
a reason why the market is so nervous," says John Tierney, credit
derivatives strategist at Deutsche Bank.

Banks also are increasing the collateral they demand when they lend to
hedge funds that hold municipal bonds. One hedge fund manager
described what appears to be a coordinated effort by big investment
banks to reduce their risk as they faced quarter-end pressures to
cleanse their balance sheets. Lenders declared "by fiat," he said,
that municipal-bond-fund managers needed to post more collateral to
back their borrowings.

As a result, funds run by Blue River Asset Management, 1861 Capital
Management and others circulated lists of assets to raise cash. The
sell-off flooded the market with municipal bonds, making it more
expensive for municipalities to borrow and upending the traditional
relationship between tax-exempt municipal bonds and taxable U.S.
Treasury bonds. For the first time in memory, yields on tax-exempt
municipal bonds jumped above yields on taxable U.S. Treasury debt.

Now, many hedge fund managers say, access to borrowed money, essential
for many of their investment strategies to work, has become virtually
impossible.

Mohamed El-Erian, co-chief executive officer of Allianz SE's Pacific
Investment Management Co., says the hedge-fund community is unwinding
its leverage. "This will push more of them into 'survival mode,'
further accentuating distressed sales and nervousness among the prime
brokers," he wrote to his colleagues Thursday morning. "In such a
world, the quality of the assets matters less than whether you can
finance them [or] how liquid they are."

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