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Understanding EESA

[By Staff Reporters]

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act (EESA).  It contained significant provisions that will not only impact the financial sector but is a truly “global” law aimed at establishing the stability and reliability of the American banking system and its posture to the world community.

While presenting a speech on the issue in Tampa, Florida, on Saturday, October 11, after a precipitous drop in the stock market the day before, President Bush at 8:00 a.m. (EST) held a press conference with the G-7 Finance Ministers behind him attempting to, once again, quell the fears of the global business community as to a concentrated global effort to “right the ship” of state.

Medical Professionals; et al

Physicians, healthcare administrators, financial advisors, iMBA firm clients, printer-journal subscribers to www.HealthcareFinancials.com and our Executive-Post readers seem to be all asking the same question: are we entering into another “great depression.” To answer this, one needs to review the events leading to this worldwide financial debacle.

Not the Same 

First, this is nothing like the depression of the 1930’s.  The institutions and causes are substantially different.  To prove this your self, just read the seminal work by the economist, John Kenneth Galbraith, “The Great Crash“, and the dissimilarities to the present global situation will be striking.

Second, a little known fact, but two prime catalysts were the principal culprits in this crisis.  One is a financial vehicle called credit default swaps (CDSs) and the other is a generally accepted financial accounting rule known as “mark-to-market”.

Investment Banking Meltdown

At the beginning of 2008, the United States had five major investment banking houses.  By October it had only two remaining.  What brought this major change was the so-called sub-prime debt problem.  But this is the deceptive label given it by naive journalists.  In reality, it was a worldwide market of 54 Trillion (this is not a typo – say again, 54 Trillion) dollar CDS market that collapsed.

Cause and Affect 

How could this happen?  Greed is the short answer but the business expediency of setting up a CDS is largely to blame.  Here’s how it worked.

Example: 

A party would by phone or email enter into a credit default swap contract with a bank.  This could be for an actual debt, e.g. sub-prime obligation or hedging on a non-owned instrument (cross-party) obligation.  Payment of premiums ensured the default.  In the event of default of the obligation, the bank, e.g., Lehman Brothers, would satisfy the contract.  It is a significant fact in these transactions that there was no federal or state regulatory body supervising them. Why?  Because these contracts were not per se securities and, thus, no oversight was necessary.  Of course, the facts belie this assertion — to the tune of 54 Trillion dollars!

Financial Accounting

Then there is the financial accounting rule that required businesses — including financial institutions — to mark their assets, i.e., sub-prime mortgages, to market value.  In a declining market this would require the creation of an unrealized loss on the bank’s books causing investors and others to view the bank as less solvent. 

Assessment

This accounting rule, endorsed by the International Accounting Board in London and enunciated in its International Financial Reporting Standards (IFRS), is also applied overseas.  French President Sarkosy stated that the rule is rescinded in France and the recent EESA of 2008 in the United States requires the SEC to decide whether to suspend it as well.

Conclusion

The DOW fell to 8,519 yesterday, the NASDAQ to 1,615 and the S&P to 896; all medical professionals are anxious. And so, are we entering into another great depression? Please vote.

And, subscribe and contribute your own thoughts, experiences, questions, knowledge and comments on this topic for the benefit of all our Medical Executive-Post readers.

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Filed under: Investing, Op-Editorials, Portfolio Management, Voting Polls | Tagged: great depression, Investing, Portfolio Management, wealth management |