It’s hard to find something not impacted by our current financial crisis. Here are 12 examples of what the recession means for specific things, from Spam to sex addiction.

1. Spam

It looks like meat, it tastes like meat, but it’s a far cheaper substitute for meat. It’s Spam! And it’s booming. Though Hormel’s share price has fallen with the overall market, Spam sales are soaring as the economic crisis leaves consumers strapped for cash. Interestingly enough, Spam, the “crazy tasty” mix of ham, pork, sugar, salt, potato starch and a sodium nitrite, was invented during the Great Depression and became a staple for Allied troops overseas in the 1940s.

2. Marriage and Divorce

Breaking up is hard to do, especially in this economy. While it may be too early to know the impact of the crisis on divorce rates, it appears divorces may have slowed down since the financial crisis began. That’s because despite most arguments being over financial issues, it may just be too expensive to pay the legal fees of a divorce and support two households. In fact, during the Great Depression, divorce rates dropped sharply, though they picked back up immediately thereafter.

3. Recycling

The plunge in commodity prices has taken a toll on recyclers. In fact, the whole movement may come to a halt as oil and metal prices fall. Used newspaper, used cardboard, and scrap metal prices have also seen a drop, partially due to dwindling home construction and slower automobile production. Some recyclers are closing their doors, and in the UK entire city councils are abandoning their recycling efforts, as they are no longer economically feasible.

4. Psychics

“There is no rhyme or reason to the way the market is trading,” says a personal trader. “When conditions are this volatile, consulting a psychic can be as good a strategy as any other.” Psychics, astrologers, palm readers and “professional advice-givers” say business is booming as clients come to them seeking financial guidance. Clients will typically pay $75 to $1000 for an hour’s worth of insight!

5. Holiday Parties

Just as you suspected, companies are cutting back on their holiday galas. ABC News announced the cancellation of its annual celebration. American Express did the same and then some – announcing the cancellation of 2009’s celebration as well.

But what about the caterers? 56% of party planners say that their corporate holiday party numbers will be off more than 10% this year compared to last. They’re scrambling to come up with innovative, more somber types of gatherings like luncheons, pot-lucks, and receptions rather than galas, caviar, and glam.

6. Used Car Sales

The used car business is flourishing! Specifically, used car companies that offer buy-here/pay-here financing for lower credit individuals who have been locked out of traditional lending.

But if used isn’t your thing, it may still be a decent time to buy new. That’s because even steady growth car makers like Honda and Toyota have seen 24% and 32% declines, respectively. Car dealers are desperate to get rid of inventory and are offering invoice and below invoice prices. Look for dealers that have a lot of inventory, because they’ll likely offer the best deals.

7. Iceland Tourism

Looking for a good holiday or spring trip? Look to Iceland!

Once an economic success story, this small country is now, well, bankrupt. If you were attune to Fannie and Freddie and the big Wall Street break-up, you may have missed Iceland’s fall. Its three largest banks were oversized and highly leveraged, and seemed ready for collapse in early October. Iceland’s currency, the krona, is essentially valueless, and foreign trade has come to a halt. Luckily, the IMF and its Nordic neighbors have stepped in, lending $2.1 billion and $2.5 billion respectively to help the country recover.

But tourism appears to be on the rise. Airfare search engines report a 400% increase in Iceland flight searches. A recent search of round-trip flights from New York found tickets at a record low of $471.

8. College Endowments

Ivy League schools aren’t immune to the financial crisis. Since many college endowments are invested in alternative asset classes, which have lost value, they’re seeing unprecedented losses. Many college and university endowments are projected to have decreased by 30% this fiscal year. For Harvard, that may mean an $11 billion drop.

That may mean a decrease in financial aid – especially because lenders can no longer sell their securitized loans in the secondary market to get new money to offer new student loans. Despite Congress’ Ensuring Continued Access to Student Loans Act of 2008, which authorizes the Education Department to buy federal student loans from education lenders for the 2008-09 and 2009-10 school years, there’s a chance financial aid may fall short.

9. Lipstick & Hosiery Sales

The Lipstick Indicator is an economic theory proposed by Leonard Lauder, the chairman of Estée Lauder Companies. The theory states that a direct relation exists between rising sales in tubes of lipstick and a falling financial market – the worse the economy, the more women indulge in small purchases, like $10 tubes of lipstick. There are conflicting reports as to whether Lauder’s theory is holding up this downturn. Perhaps hosiery sales will supplant lipstick as the indicator of choice. Overall hosiery sales rose 2.3% this year, with Spanx seeing a 77% increase in sales compared to last year.

10. NASCAR

Very few sports have been hit harder by the economic crisis than NASCAR. From ticket sales to souvenir sales to team sponsorship from large companies, racing is reeling. That’s because an average NASCAR team relies on corporate sponsors for 80% of its budget. That’s four times the percentage of an NFL franchise’s budget. And many of those corporate sponsors, including the Big Three – GM spent $578M in sports advertising in 2007, including NASCAR – are facing high-profile hard times of their own. As a result, some NASCAR teams, including Chip Ganassi Racing and Dale Earnhardt Inc., have merged in an attempt to attract corporate sponsors.

11. Personal Maintenance

According to the International Health, Racquet and Sportsclub Association, gym memberships have been on the decline since 2007. There’s no sign that these former gymrats are instead opting for cosmetic surgery – 53% of plastic surgeons of the American Society for Aesthetic Plastic Surgery say business has slowed.

12. Sex & Sex Addiction

Will the financial crisis spark a baby boom? It just might. According to the Telegraph, sales of sex toys, pregnancy tests, maternity clothes, and baby equipment are soaring. But that’s not the only place sex may have increased. Jonathan Alpert, a Manhattan psychotherapist, has seen a big jump in the number of Wall Street workers who seek help for the sex addictions. Apparently, the economic crisis has sparked “maladaptive coping mechanisms” among bankers, according to Jodi Conway, a sex addiction therapist in New Jersey.

Read more of what Diana learned today here.

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On October 29th, the Fed “slashed rates” again, reducing the key interest rate to a low 1%. Here’s some information about what it all means.

What is the Fed?

The Fed is the Federal Reserve System, the central banking system in the US. Currently Ben Bernanke is the Chairman of the Board of Governors of the Fed. The Fed has a dual mandate: to promote stable inflation and maximum employment.

To do so, it controls the Federal Fund Rate. This is the interest rate at which banks lend money that they hold at the Federal Reserve to each other overnight. The Fed actually only sets a target rate, which is where they think the interest rate should be. They don’t set the actual interest rate, because that is determined in the open market. The Fed just tries to lead everyone in the right direction.

Why do banks hold money at the Federal Reserve?

The Fed requires that each bank must have a minimum amount of reserves (money) deposited in the Fed. This minimum amount is a percent of the bank’s total receipts from customers.

Why do banks lend to each other?

Some banks have excess reserve requirements and can help out those that have insufficient funds by loaning them money. At a price, of course. These loans are typically made for one day.

Why does the target rate matter?

It basically controls the supply of money. When the interest rates are low, banks have more access to credit (because they can now borrow from other banks at a lower interest rate) and are able to loan that money out to businesses and consumers. Businesses and consumers are more likely to borrow that money, because the interest they will have to pay on the loan will also be lower. As a result, people have more money on hand and, therefore, are likely to increase spending.

Since we may be in a recession and consumer spending has plummeted (the fastest decline in 28 years), the Fed wants to stimulate consumers to spend. Consumer spending represents about 70% of our GDP, or gross domestic product, which is the most widely used indicator of the health of the economy. Basically, the economy relies on consumer spending. So it is necessary to help consumers spend in order to keep the economy going. That means cutting interest rates.

The Federal Open Market Committee meets every month and announces the target rate. They started cutting rates last September—in August 2007, the target rate was 5.25%. Their announcement from the October meeting indicates more cuts may be necessary since “downside risks to growth remain.” The last time the rate was lower, Eisenhower was in office (1958).

Read more of what Diana learned today here.

On September 8, 2008, United Airlines stock fell 76%, from $12.17 at open to about $3.00 mid-morning.  Why the collapse? Because a six-year-old story about UAL’s 2002 bankruptcy filing was somehow re-posted online on the website of the South Florida Sun-Sentinel, a paper owned by the Chicago Tribune Co. It was quickly refuted and the share price recovered after a 90-minute trading halt. Oddly enough, the story was not dated 2002, but was dated September 8, 2008. The blame has been put on Google, whose spider saw it on the Sun-Sentinel, assigned the current date, and placed it in the top results on Google News.

2. Apple I

On August 27, 2008, Bloomberg inadvertently published its running obituary for Steve Jobs. The obituary was only posted “momentarily” and was “immediately deleted,” though not before it was caught. View the 17-page obituary, the retraction made by Bloomberg, as well as notes for Bloomberg reporters here.

3. Apple II

Again, on October 3, 2008, CNN iReport, a user-generated site, reported a false claim that Steve Jobs had suffered a heart attack. The news quickly spread across the internet and the stock fell 10% in 10 minutes. An Apple spokesman had to deny the allegation. One he did, the stock picked back up within about 15 minutes.

4. Apple III

On May 16, 2007, Engadget posted a report that the iPhone launch would be pushed back from June to October. They retracted their comments, but in the meantime caused a $4 billon drop in Apple’s market value. Engaget didn’t just dream up the story; someone had passed on a fake email announcing the delay to the internal Apple staff. That letter was forwarded on to Engadget who then reported it on their site. Once the story was cleared up, the stock’s value was restored and finished down only $1.40 at the close.

5. The Dow

On March 30, 2007, the Dow fell a few hundred points (unlike now, such volatility meant something back then). The drop was a result of a false report on an Israeli website of an imminent US air strike on Iran. The site also reported that US investors in Bahrain, an island country in the Persian Gulf, were advised to pack up their business operations and leave. Reuters issued a statement disproving the stories and the markets rebounded.

Be sure to read more of what Diana learned today here.

There’s so much talk of the markets crashing, the Dow dropping, then rising, then dropping again. Under 9,000 today, over 9,000 tomorrow. But what do these numbers even mean? What is this ‘Dow’ on which investors and the media fixate themselves? And is it really comprised of only 30 stocks?

The Dow is a market index, which is a listing of stocks that share some similar characteristic; they could belong to the same industry or they could all have similar market cap (how much a company is worth).

The Dow, the NASDAQ, and the S&P500 are the three main market indexes, providing the basic signal of how markets perform. The Dow is the most widely publicized and discussed, thus I’ll follow suit.

First, some history. The Dow Jones Industrial Average was started in 1896 by Charles Dow, the editor of the Wall Street Journal’s precursor, the Customer’s Afternoon Letter. Dow had a vision to create a benchmark that would project the general market conditions. Interesting to note that of the original 12 stocks of the DJIA, General Electric remains a part of the average (though it was taken out and reinstated twice). Today it is made up of 30 of the largest blue chip companies in the US that are traded on the NYSE, as selected by the editors of the Journal. The composition of the Dow changes fairly often. In fact, here’s a list of the deletions and additions over the past 30 years.

936 points. So what? Even though it’s called the Dow Jones Industrial AVERAGE, they don’t simply add up the stock prices of the 30 companies and divide by 30. No, the average is price-weighted, meaning each stock influences the Dow in proportion to its share price. In order to account for stock splits (when a company’s existing shares are divided into multiple shares making, for instance, a $100 share worth two $50 shares, which is typically done to make shares seem more affordable when a company’s stock gets too high, or higher than that of other companies in the same industry) and stock dividends, they create a Dow divisor by which the sum of the 30 companies’ prices is divided. That divisor is constantly changing depending on the stocks in the average, the splits and extra shares issued.

Can I buy the DJIA as if it were a stock? Well, not really. You can’t buy the DJIA as if it were a security, but you can buy a Diamonds ETF, which basically gives you a small ownership of the 30 stocks in the Dow. An ETF is an Exchange-Traded Fund that puts a bunch of pieces of stock into one overarching stock. You may be more familiar with the SPDR—Standard & Poor’s Depository Receipt, or Spider—which is an ETF for stocks in the S&P500. ETF’s hedge your risk – if one stock does poorly, you have others to back you up. 

The Dow: Now and Then

Last week, the Dow almost crashed. Almost, but not quite – because by common definition a market crash is a 20% decline in a single day or several days. Last week, the Dow fell 18.2% or 1,874.19 points, making it the worst week in market history (prior to last week, the largest weekly percentage drop was the week ending July 22, 1933, when it fell 17%).

We saw a brief rebound, when history was made again. Monday, the Dow rose 936 points, the largest single day gain in market history. Then down again. Then back up. Then…

After the market crashed in 1929, it took twenty-five years to return to the pre-crash peak of 381.17 (late 1954). But this is not 1929. We have stronger governmental agencies to help fix the mess (The Fed has more power, and the FDIC provides deposit insurance.) We are coming down from an all-time high (14,164.53 a year ago). We acted fast and have allocated over $1 trillion (of our tax dollars) to fix this up. Despite these differences, however, history may not bode well for us.

Ever order the second-cheapest wine on the menu while dining out? You don’t want to spend very much, but you also don’t want to look like a cheapskate ordering the cheapest bottle on the whole menu. Well, one in four diners do (in the UK, at least). In the marketing world, we can define this as a choice set effect with respect to reference pricing—using the cheapest bottle of wine as a standard of comparison against which the other wines are compared.

But did you know that the second-cheapest bottle is usually the worst value?

From the Harvard Law Record: “Restaurant owners will often price the wine they buy cheapest at wholesale as the second-cheapest wine on the menu. Why? Because people generally don’t order the cheapest wine and thus often turn to the second cheapest. Price that one higher, and you get a bigger marginal profit. Presto—restauranteur as microeconomist!”

The Wall Street Journal recently took it a step further and cracked the code of wine pricing. They found that the standard markup at a restaurant is about three times the wholesale cost, or twice the retail cost. However, restaurants employ what’s called “progressive markup”—a cheap bottle could be priced three to four times wholesale, while an expensive wine may be marked up only 1.5 times.

Wine by the glass is even more of a rip off, as it carries the biggest markup. Typically, the first glass of wine sold pays for the cost of the entire bottle to the restaurant! But wine isn’t the only thing with a high markup. Liquor and beer often carry a 500% markup.

So if you’re looking for the biggest bang for your buck, consider a more expensive bottle, whose restaurant retail price is more closely aligned with its actual price. But if you can’t go that high, then order the cheapest bottle. Be sure to tell your date about the “second-cheapest syndrome,” though. That way you appear smart and savvy, instead of cheap. [Image courtesy of The Inn & Spa at Cedar Falls.]

Be sure to read more of what Diana learned today here.

Alan Greenspan
He had interest rates too low for too long, which resulted in the housing bubble. But what is too low too long? I don’t blame Greenspan, though he did push subprime lending, lauding the “innovation and structural change in the financial services industry … critical in providing expanded access to credit for the vast majority of consumers, including those of limited means.”

Consolidated Supervised Entities Program
In 2004 the SEC changed the rules under which banks with at least $5 billion of capital calculate their gross leverage ratios. It basically raised the leverage ratio to 30, from about half that. A leverage ratio measures the amount of debt a company has compared to its total capital. A leverage ratio of 30 means that 30% of a bank’s total capital is debt. The banks could take on more debt, which was good when times were good because it allowed them to make more transactions. However, high levels of debt means it takes only a small decline in the value of the firm for the bank to go bankrupt.
Five investment banks fell under the program: Goldman, Merrill, Lehman, Bear, and Morgan Stanley. It is noted that at the time of decline, Merrill had a leverage ratio of about 40, Lehman of 36.

Goodbye, Uptick Rule
In 2007, the SEC eliminated the “uptick rule,” which prohibited sellers from shorting a share when the stock was selling for lower than the previous trade. This rule was instituted after the Crash of 1929, as shorting was alleged to be the culprit of the crash. After research and assessment of the rule, the SEC suggested the uptick didn’t matter and lifted the ban. Now, shorting has been blamed for today’s crisis and has been put on a temporary ban.

Hedge Funds
Hedge funds aren’t as highly levered as investment banks, but they do a lot of shorting. Perhaps their ubiquity spurred the financial decline. They’ll pay whether or not that is the case. About 90% of hedge funds are currently losing money and that’s sure to increase with the advent of the short selling ban.

Ratings Agencies
It’s not the Fed’s job to allocate or assess risk, so we can’t truly blame Greenspan. But the job is someone’s responsibility. Whose? The ratings agencies, these government sanction oligopolies like Moody’s, S&P, and Fitch. See, the ratings agencies slapped high ratings on all of the Mortgage Backed Securities. An MBS is a bundle of a bunch of loans, some dodgy, some not, that are all rolled into one tradable security, like a stock. The Ratings Agencies rate all securities based on their level of risk. Again, the ratings are a lot like school grades: A good, B okay/bad, C junk. The Ratings Agencies aren’t regulated by the SEC, and so were not really watched throughout this whole game. So they were able to slap high ratings on risky MBS’ last year, and then downgrade AIG last week, putting the onus of bailing them out on you and me.

The SEC
The SEC was created in 1933 to protect small investors against securities fraud. It doesn’t have robust oversight over all financial entities, ratings agencies included, and is not really equipped for our financial world.

The Deregulatory Financial Modernization Act of 1999
In 1933, Congress established a set of banking regulations under the Glass Steagall Act. Thinking commercial banks (ones that take deposits from everyday citizens) caused the Crash of 1929, the act separated the commercial banks and the investment banks. This way investment banks would take on risky investments, and commercial banks could protect its members by not doing that. Before 1933, there were few investment banks and the Glass Steagall Act spurred Wall Street as we know (ahem, I mean knew) it.

The Glass Steagall Act was repealed, however, in 1999 under the Deregulatory Financial Modernization (Gramm-Leach-Bliley Act) Act. This allowed the commercial banks to take on the same risky bets that investment banks did. A commercial bank (one that sells to you and me, like Citigroup or WaMU) could trade Mortgage Backed Securities, Collateralized Debt Obligations, and other Structured Investment Vehicles. So basically, it allowed the guys that are usually safe and who hold my life savings to take on risky investments and get all mixed up in the mess too.

The Glass Steagall Act of 1933
Or you could blame the Glass Steagall Act of 1933 (mentioned above) itself, for really creating the stand alone investment bank in the US.

Be sure to read more of what Diana learned today here.

When to sell short. You sell short when you think that a certain stock price is going to fall, and you’d like to profit from that premonition.

How to sell short. Say you know something about a certain stock that nobody else does. Let’s use Apple. You were a tester for the new iPhone, which you found malfunctioned. You know that upon release of the phone tomorrow, Apple’s stock price will fall. You want to profit off of this, but you don’t own any AAPL shares. Or you do, but not as many as you’d like.

So you borrow AAPL stock from someone else’s account. Let’s call him Joe. Your broker can help you do this – take 100 AAPL shares out of his client, Joe’s, account (without Joe knowing about it) and give them to you. You sell those 100 shares at $140.90 each, today’s share price. The next day the new iPhone comes out, it bombs, and as you thought, shares fall to $100. (Dramatic, yes, but go with it). The next week, you think Apple’s share price will rise, so you buy back those 100 shares at $100 and give them back to Joe’s account. You’ve just made a sweet $4,090 in profit. To sum it up: you borrow shares of stock from someone else’s account. Sell them. Then buy them back at a (hopefully) lower price and return them to the account from which you borrowed.

Why sell short? One reason, as described above, is to speculate. If you think a stock or the market as a whole is overpriced, you can make money off of it. A second reason is to hedge – to protect yourself from unexpected losses. That is, if you’re long AAPL but want to take a little less risk, you might want to short another security in the computer industry, which includes risk inherent to Apple.

You probably shouldn’t sell short. Now I’m not recommending you actually do this, unless you are well versed in the markets. It’s pretty risky. If Joe decides he wants to do something with these shares, he can call you on it. At that moment you’ll have to cover, which means you’ll have to buy back the shares you borrowed from him and put them back into his account. So – say AAPL price actually rose and you were called when it was $160.90. Then you would have lost $2,000.

Even if you want to, right now you can’t. I also don’t recommend you do this, because right now you can’t. The SEC just put a ban on short-selling. After allegations that short sellers have led to the failures of Lehman, Bear, and the like, the SEC stepped in last Thursday and issued a temporary ban on short selling for 799 financial stocks. It’s alleged that short sellers often use false information and conspire to drive down the price of the stock.

This isn’t the first time we’ve placed a ban on short sellers. Short sellers were blamed for the Wall Street crash of 1929. Congress reacted by enacting a law, referred to as the “uptick rule,” which banned sellers from shorting during a downturn. Sellers could not short a share when the stock was selling for lower than the previous trade. This kept short sellers from adding downward momentum of a stock when it was already sharply declining. After almost 80 years, the ban was lifted in 2007, when the SEC determined the markets were orderly enough that they didn’t need the restriction (this is despite the fact that just two years prior in 2005, the SEC sought to restrict short-selling outright).

The history of short-selling takes us back earlier than the Great Depression, however. In 1609, Isaac Le Maire, a Dutch trader, made the first short. He was concerned about threats of attack by English ships and shorted shares of the Dutch East India Company, the first multinational corporation and the first company to issue stock. The Dutch stock exchange did not approve of Le Maire’s actions and temporarily banned short-selling.

Later, during the Dutch depression of the 1630s, speculators saw short-selling as a means to profit off of the economic downturn. The English reacted by banning short-selling completely.

Be sure to read more of what Diana learned today here.

First of all—what is AIG?

AIG is American International Group, the largest insurance company in the world. It’s not just an insurance company, however; its business is divided into four divisions: general insurance, life insurance and retirement services, financial services, and asset management. It was started in 1919 in Shanghai.

How did it (almost) collapse?

Like many other banks, AIG lost a lot on its mortgages, including $18.5 billion in the past three quarters—all part of the subprime collapse. Its share price has dropped 79% this year. But bad became worse this Monday when AIG received a downgrading of its credit rating. What’s a credit rating? All securities are given a rating that tells you how much risk is associated with your investment into that security. Depending on the rating, the company must have a certain percentage of money on hand. The ratings, given by agencies like S&P and Moody’s, are a lot like school grades – A’s are good (need less money on hand), B’s are okay/bad (need more money on hand), and C’s are junk (need even more money on hand). So S&P & Moody’s downgraded AIG, which meant it needed to post $14.5 billion in collateral to support its trading contracts. AIG couldn’t sell its assets off quickly enough to get that money. Seeing its impending doom, AIG tried to rally the rest of the banks (JPMorgan & Goldman) to lend them the money.

That didn’t work, so the Fed had to step in order to keep it from total collapse. The Fed has promised to lend up to $85 billion to AIG.

But I thought the Fed wasn’t going to bail anyone out anymore.

Well, yes, that’s what they said. And they definitely stuck to their word when they let Lehman slide to its demise this weekend. However, AIG is more than just an investment firm. It’s such a huge insurer (the largest in the world in terms of assets), and was such a huge player in the Credit Default Swaps (CDS) market, selling off risk to other financial players around the globe. If it collapsed, it would have shaken the global financial world.

What are Credit Default Swaps?

Okay, say I invest $10M into a bond for General Motors, but I’m now afraid that GM may see financial trouble. Instead of just selling my bond off, I can enter into a sort of insurance policy with a big bank, say AIG. I pay AIG a small premium every quarter. If GM remains fine, then AIG does nothing. If GM does see financial trouble and I lose money on my bond, AIG will pay me what I lost on my bond. Likely, this will be a lot of money, relative to the small premiums I pay. Once this happens, the contract of the “swap” terminates. This is all fine and great, except for the fact that the CDS market isn’t regulated—thus I could enter into a contract with a bank that doesn’t have the resources to cover the loss of my GM bond. The CDS market totals $62 trillion, in which AIG plays a central role. Since just about every bank, insurer, and institutional money manager has some sort of exposure to CDS, they all have some sort of exposure to AIG. Hence, the necessary bailout.

How does the bailout work?

Well the Fed doesn’t just hand over the money when they do these bailouts. It has promised a two-year loan for up to $85B. In return, it gets a 79.9% equity stake in the company in the form of warrants (a warrant is basically a call option issued by the corporation—allowing the Fed the option of buying common stock in AIG at a specific price) called equity participant notes. Interest on their loan is at Libor (the London Interbank Offered Rate—it’s basically the London equivalent of the US Federal funds interest rate, and is often used as a benchmark for short-term lending) + 8.5 percentage points. That’s about 12% (now), which is very high interest.

So AIG has to make good on the loan in the two-years either through general operations (not likely) or through sale of its various assets or branches of business. AIG has about $1.1 trillion worth of assets, and the Fed plans to sell them off in an orderly manner.

Why so much money?

Though AIG only needed $14.5 billion after the credit downgrade this week, the $85B loan was designed so AIG would be left with little debt and it could take on whatever the next few quarters has in store.

Does this matter to me?

Yes—now you own part of AIG! Well, kind of. That $85 billion is comprised of your tax dollars. Yep, your tax money is now going to protect bad investments. Investments that packaged up your debt into various securities, and sold it off to another party, who sold it off to another party, who sold it off all over the world.

However, since the Fed is LENDING the $85B to the corporation (unlike the Fannie & Freddie deal) the government could make some serious money off the high interest rate. That is if, by some sort of divine intervention, the market, and thus AIG, rebounds. The Fed is making it clear that the taxpayer will only see positive effects of the bailout.

But will the taxpayer be affected?

Who knows. It may be true – the Fed and the Treasury may make some money off AIG due to the high interest rate, but will I ever see that money? . It’s certainly a good way to assuage the public’s fears.

Will the bailout work?

It should. See, certain branches of AIG are doing just fine. Its aircraft leasing business, for example, is the second largest in the world and is estimated to bring in between $7 and $10 billion.

And who’s to blame?

That’s for next time.

Be sure to read more of what Diana learned today here.

The big bailout of Fannie Mae and Freddie Mac has been big news this week. But what does it mean to you?

GSEs —> TSEs?

Well, the Government Sponsored Entities just became Taxpayer Sponsored Enterprises. The Treasury “bailed” them out, changed their leadership, and is putting Fan & Fred under the management of the Federal Housing Finance Agency. It’s the most radical regime change in global economic and financial affairs in decades, and as economist Nouriel Roubini states “the greatest nationalization in the history of humanity.” He now likens the USA to the USSRA, The United Socialist State Republic of America.

For you, the borrower:

This could mean (slightly) lower rates and greater availability of credit. F&F will now have the cash to buy mortgages from other banks and create more mortgage backed securities to sell off to investors. That means those other banks will have the money to create more mortgages—that way there’s more money moving about the system. So that’s good for a borrower. If you’re a current mortgage holder with a fixed rate, however, you’ll likely see little change.

For you, the homeowner:

Though home prices will continue to fall, the bailout is a potential sign for future stabilization of prices. That’s good for the 1 in 3 mortgage holders whose current mortgage is worth more than his home. Some economists project the market to bottom out as early as the first quarter of 2009; most project early-mid 2010.

For you, the F&F shareholder:

We’re not sure yet. Though Treasury Secretary Hank Paulson did make it clear that the TSE’s “will no longer be managed with a strategy to maximize common shareholder returns.” Sure, change the policy now that U.S. taxpayers are the real shareholders…

For you, the national Federal Debt:

The cost of government intervention has yet to be determined, but it will be huge. Upon takeover, we’ve already immediately injected F&F’s $6 trillion into the national debt. Allegedly, a memo that has been recently circulating among economists at the Federal Reserve projects that Federal debt could reach $23 trillion by mid 2010. (It’s currently $9.67 trillion.)

For you, the everyday taxpayer:

Uh oh. As a taxpayer, you’ll be footing the bill. The bailout basically means Fannie and Freddie will have an unlimited taxpayer-funded credit line. This doesn’t mean our taxes will be increased to bail them out—at least not yet. But it does mean that now our government is further in debt—now indebted to hedge funds, domestic and international banks, foreign central banks, etc. The government already put in $1 billion to F&F, and may put in up to $200B more.

And what if the bailout doesn’t work?

If the bailout does not succeed—that is, it doesn’t help the housing or credit markets—well then we’re in big trouble. If our government can’t inject liquidity into the market, guess who can?

Be sure to read more of what Diana learned today here.