Wednesday, October 15, 2008

Massive Investment Banking Failures ...

Massive Investment Banking Failures Spotlight
a Lesson on Main Street

By Steve Marr

The current insolvency of some of the largest and oldest financial institutions has been caused by massive leveraging of assets. In simple terms, for every dollar these institutions possessed in hard assets, they borrowed 30, 40, 50 or even 60 times that amount. Once any business, large or small becomes that leveraged, trouble is brewing.

Consider Tom who bought numerous homes to initially generate rental income with plans to sell at a profit once values increased. He purchased one home for $300,000 with a 5% down payment, financing a balance of $ 285,000. As a result, Tom was leveraged 19 to 1, meaning he owed $19.00 for every dollar invested. A 10% decline in the real-estate market caused his investment to drop to $270,000 in value, wiping out all his equity and creating a $15,000 loss.

Since Tom owned many houses, the drop in value plus the loss of a few tenants resulted in him not being able to cover all of his payments. Within a few months, as his losses mounted and Tom lacked the cash to cover his obligations, bankruptcy soon followed.

Even 2,500 years ago the Prophet Habakkuk predicted what would happen when credit was allowed to mount unchecked. He wrote, “Will not your creditors rise up suddenly and those who collect from you awaken? Indeed, you will become plunder for them” (Habakkuk 2:7 NSB). The more leveraged an individual or business becomes, the greater the risk. Creditors have a way of rising up at the worst possible time for a borrower!

Tom, like some of the largest financial institutions today, made the same error; leveraging investments to the maximum. When a borrower risks and all turns out well, great profits are generated and the borrower appears to be a genius for a time. However, no market ever travels solely straight up. Even if Tom turned out to be right on the long term housing market, a short-term squeeze could push him over the edge. The same thing happened to Fannie Mae, Freddy Mac, Lehman Brothers and Bear Sterns, only on a larger scale. Unfortunately, more big names are likely to follow.

Biblically, debt was never positively portrayed. King Solomon explained, “The borrower becomes the lender’s slave” (Proverbs 22:7). King David added, “The wicked borrows and does not pay back” (Psalm 37:21). When we become highly leveraged we create potential situations where we may be unable to pay back what we owe.

Deuteronomy 28 even depicts debt as a curse. While avoiding all debt is difficult today, the key is to understand that debt is never a blessing. The more we borrow, the more we become leveraged and the more future pressure we will endure.

As Christians we can take several important steps during these turbulent times.

First, avoid highly leveraged borrowing, either personally or in business.

Second, if for any reason we cannot pay what we owe, we need to make a personal confession to the Lord and to others whom we have failed to honor with our payments.

Third, and finally, turn to the Lord just as Habakkuk did, “Though the fig tree should not blossom and there be no fruit on the vines; though the yield of the olive should fail and the fields produce no food; though the flock should be cut off from the fold and there be no cattle in the stalls; yet I will exalt in the Lord; I will rejoice in the God of my salvation. The Lord God is my strength and He has made my feet like hind's feet and makes me walk on high places” (Habakkuk 3:17-19 NASB).

At all times and in all places we need to look to God for He alone is our guiding light. Though the world may present much turmoil, God is our source; He is always faithful to see us through.

*FCCI Weekly Email*Copyright © 2008 *FCCI*, All rights reserved.

From: Doug Hunter
Subject: RE: Answer the call
Cc: "'Kristen Jones'"
Date: Wednesday, 15 October, 2008, 2:26 AM

You certainly have our permission to post this, as well as the Checklist that will follow tomorrow.
Thank you for the encouraging note!
Blessings ………..


President and CEO
Fellowship of Companies for Christ International / Christ@Work
Office: 770-685-6000
Cell: 678-358-9341
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Atlanta, Georgia 30341

You don't waste your life by where you work, but by how and why. John Piper

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