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What The Financial Bailout Means To You

This past Friday, the 700 billion dollar financial bailout was signed into law.  The bill, sold as a ‘cure all’ for America’s flailing economy, may not be the final answer to our problems.  Early reaction by the stock market seems worse than before the deal was signed into law.  The Dow Jones Industrial Average has now dropped below 10,000 for the first time since 2004.  While the economy and the stock market are not one in the same, the Dow Jones is off nearly 30% year to date.  There is no doubt that this loss of wealth will certainly affect every part of the U.S. economy.

This week, I want to highlight what is included in the financial bailout and what is not.  Most importantly, how this will affect you and your family.

1.  FDIC Insurance Increased to $250,000 From $100,000 – While this certainly is a good move, it still does not change my advice about diversifying your deposits among several different banks.  There is still a big question about how much money the FDIC has to back up these deposits, especially now with the higher insurance amount.  The nightmare scenario would be that your bank goes under and the FDIC does not have the money to back up the guarantee.  The more likely scenario; your bank fails and the government takes several months to reimburse you for your deposits.  This is why it is just not worth the risk to tie up all of your money in one bank.

2.  Help For People Currently In Foreclosure –  There is nothing in the financial bailout that directly lays out a plan to help people currently in foreclosure.  There is language that seems to encourage banks to engage in loan modifications, but there is nothing that says they have to do so.  It is likely that homeowners will be able to negotiate new loan terms, not because of this new law, but simply since banks are running out of options.  I am more excited about news that major lenders are agreeing to compensate people that have lost their homes in foreclosure, and to modify existing loans under settlements with various state regulators.  These settlements may be a greater catalyst of help for homeowners in foreclosure than any federal legislation. Countrywide Settlement

In the coming months, many Americans will be making their monthly mortgage payment to the government when the Treasury begins to buy up ‘bad loans’.  If your loan is bought by the government I would expect that you would have a very good chance of getting your loan modified under very favorable terms.  Again, there is no promise of that in the bailout legislation but seems like a likely scenario.

3.  Annuities and Insurance Policies –  The feds bailed out AIG but don’t expect them to save every insurance company that is on the brink.  There is just not enough money for the government to do that.  If you own an annuity or insurance policy, my prior advice stands.  You need to find out what the rating is of your insurance company.  Based on their rating and your risk tolerance, you may have to consider moving your funds.  Please see my prior article on this issue for details.

4. How Soon Will The Mortgage Markets Have Money To Lend? –  The financial bailout will not likely have much of an effect on the available money to lend in the marketplace for several months.  The exception to this would be FHA loans.  Most people are still having great difficulty getting mortgages, even with good credit and substantial downpayments.  I don’t expect to see this change for at least three to four months.

5.  Your Retirement Investments

– Even if you have a long term time horizon (5 years or longer), I would sit down and take a look at your investments.  If you need help, consult a financial adviser.  I recommend Robert Yetman  There seem to be two camps; one group saying to just hold everything and ride out the storm, the other group advising to sell everything and buy gold.  I think there is some wisdom on both sides.  I would divest myself from some sectors, chiefly among them would be financial stocks.  I would also take a serious look at gold and energy mutual funds.  As the value of the dollar continues to drop, it would be very prudent to have at least some of your investments in areas that will be a hedge against inflation.  The reason I have recommended Bob Yetman over the years, is that he is one of the few Christian financial advisers that seems to have a balanced perspective on all of this.  The bottom line on the bailout and your investment portolio, is that it really does not change anything for most of us.  The stock market continues to drop and I would not expect the 700 billion dollar plan to benefit your investment portfolio.  While the plan has been promoted as having equal benefit to both Wall Street and Main Street, I just don’t see much for Main Street in the details.

Helping you make the most of God’s money!

James L. Paris
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