 
A Crisis of Confidence
Staten Island Advance - Monday, March 17, 2008
The stunning demise yesterday of a premier Wall Street bank leaves
the bleak economic landscape very clear: No one is immune to the
subprime implosion rocking real estate and stock markets.
For the average Staten Islander, the bargain-basement sell-off of
Bear Stearns to JPMorgan Chase & Co. means it's time to reassess
investment portfolios, tighten belts and take some heart that
interest rates will fall again, experts said yesterday.
"I'm afraid I'm going to lose my house," said a Staten Island woman,
who called the Advance to say her husband works at Bear Stearns and
she feared for her economic survival.
The couple is heavily invested in the firm's stock. The woman said
there were no assurances her husband would keep his job at the bank,
which employs 14,000 people.
Shockwaves were still being felt on The Street after Bear Stearns
sold its stock for $2 per share in a deal guaranteed by the Federal
Reserve. In April last year, the bank stock traded at a record $170
per share.
Shortly after yesterday's gubernatorial swearing in of David
Paterson at the statehouse in Albany, Sen. Charles Schumer (D-N.Y.)
called the collapse of Bear Stearns "the most worrisome thing we've
seen, frankly, since the Great Depression," and he said he believes
the state and the country are in a recession.
"It feels like the fall of Eliot Spitzer ... it's very shocking,"
Simone Wegge, an economics professor at the College of Staten
Island, said of the Bear Stearns sell-off.
Ms. Wegge said Islanders with a cash reserve and job security will
fare best during these rocky times. "It doesn't matter what is
happening in the markets, you should always have some cash on hand.
But these days, you should have more than usual," she said.
John Coffee, a business law professor from Columbia University, said
that less mortgage money would be available with the market for
mortgage-backed securities discredited.
Bear Stearns is largely believed to have failed when the value of
its mortgage-backed securities, which included an unknown number of
problematic subprime loans, plunged. Skittish clients began taking
their business elsewhere, essentially creating a $17 billion run on
the bank.
"Less credit to borrowers means lower prices to sellers and some
decline in home prices. This may in turn reduce consumer spending as
homeowners subjectively feel less wealthy," Coffee said in an email
from Paris, where he is lecturing at a business school.
"But no one can quantify the magnitude of these changes and the
market is likely to be volatile for some time," he added.
And other Wall Street firms suffered big drops in stock prices
yesterday amid fears that they could go the way of Bear Stearns.
Stock in Lehman Brothers Holdings Inc. plunged more than 40 percent.
But Mario Giammarco of Bernard Herold & Co., a Grasmere investment
firm, was hoping the Bear Stearns buyout would be the worst of the
bad news. And several analysts said it was unlikely other banks
would fail, because they are more diversified.
Giammarco said Islanders should reach out to the managers of their
investment or retirement funds to find out how and if they were
invested in Bear Stearns. He said it's also a good time to
reallocate stock portfolios, with an eye toward investing in
commodities such as natural resources and precious metals like gold.
"What we are telling people is to stay the course and look ahead.
You always want to have liquidity and incrementally add to that
portfolio, and take advantage of some lows in the market," he said.
Lou Berardocco is trying to do that and he said he has no plans to
sell and get out of the market.
An investor who also owns Dynasty Real Estate and Power Point
Mortgage Inc. in Port Richmond, Berardocco is feeling the housing
and credit crunch from both ends.
"It's just not worth what it was worth a year and half ago, but that
is the highs and lows of dealing with the investment market," he
said of his portfolio.
Berardocco is hoping for a silver lining -- that mortgage rates will
drop down again below 6 percent.
The Central Bank is expected at a meeting today to cut the federal
funds rate, or the interest rate banks charge each other on
overnight loans.
Those cuts typically result in drops in the prime interest rate on
credit cards and other short-term debt, but they can translate over
time into cuts in the mortgage rates.
"If the prices on houses continue to come down, I think it's the
perfect opportunity to invest in real estate," said Berardocco.
By Karen O'Shea and Sally Goldenberg
Reprinted here with permission
from the
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