December 29, 2008

BIRMINGHAM, Ala. - UAB Assistant Professor of Finance Andreas Rauterkus, Ph.D., said that 2008 is arguably the worst year for the financial industry ever. While the numbers may show previous slowdowns to be statistically more significant, Rauterkus said the financial industry's pervasiveness in today's society, from retirement plans to Internet stock trading, makes 2008 more devastating. Rauterkus is available Dec. 29 and 30 for interviews on his top five financial stories of the year, which are listed below in no particular order.

Personal Wealth Evaporates

Rauterkus said personal wealth declined at record levels in 2008. Home values in some parts of the country dropped in excess of 35 percent, meaning the home equity that owners relied on as a financial backstop evaporated.

"Beyond home values, the S&P 500 has lost close to 38 percent of its value this year, the equivalent of the Gross Domestic Product of Japan or $4.7 trillion," Rauterkus said. "So think of those who have retirement accounts tied to the stock market, they've lost another significant part of their net worth there."

Year of the Bailout

Rauterkus said not even Roosevelt's New Deal approaches the level of government intervention into the markets in 2008. The price of government's string of bailouts, loan and bank account guarantees and purchases of troubled securities totals some $4 trillion by most estimates.

"The country has always prided itself on being the world's most successful capitalist nation but that has all changed this year," Rauterkus said. "While the government's monetary intervention in the markets will end at some point, 2008 signals a seismic shift toward stiffer government regulation and involvement in the financial sector for years to come."

Record Interest Rate

In late 2008, the Federal Reserve cut its key interest rate to as low as zero percent, a move never before taken by the nation's central bank.

"This shows just how dire the economic situation is in the eyes of policy makers," Rauterkus said. "A zero percent interest rate means the government is essentially giving money away for free in an effort to encourage banks to lend money and create economic growth."

Crunched by Credit

Rauterkus said U.S. banks withheld lending in a historic way in 2008 as bad assets on banks' financial books forced many institutions to hold their cash in an effort to balance out losses and stave off bankruptcy.

"The banks and financial firms hoarded cash in 2008 as fear gripped them over whether mortgages, loans and credit cards would be defaulted on," Rauterkus said. "The credit crunch has accelerated the demise of the auto industry and forced countless other retailers and businesses to close because loans needed for operation could not be secured."

End of Investment Banks

Rauterkus said the story of the country's investment banks is truly historic because the future of U.S. investment banking will never be the same with the giants of the industry all falling by the wayside in 2008. Lehman Brothers went bankrupt. Bear Stearns and Merrill Lynch were bought out by commercial banks. Morgan Stanley and Goldman Sachs were forced to change their status to commercial banks to gain access to crucial customer deposits and government relief.

"The model of investment banking has forever changed, and now the model that the big five investments banks operated on for decades is no longer viable," Rauterkus said.