Hi Ms. Dee, The dynamic that is driving down the value of US real estate is the push in prices caused by easy credit. In other words, many borrowers - some who are not credit worthy - were provided means to buy property, and this increase in demand pushed prices to unsustainable levels. When it became apparent that these borrowers were not able to continue paying for these homes, many were foreclosed, became available at the same time, and the opposite effect happened - too many homes with not enough buyers. Prices will fall until buyers step in and start buying again. FNMA and FLHMAC bought mortgages from lenders, then turned them into securities (containing many mortgages) and sold them. It is, at present, unclear as to how many of these loans are “bad,” so these securities are difficult to value. FNMA/FHLMAC have always been “government sponsored” agencies, and its takeover is more of a management than an ownership issue. Together, they hold approximately 70% of all mortgages. Hope that answers your question.

“Standard & Poor’s lowered its rating on AIG to A- from AA-, and Moody’s Investors Service cut its rating to A2 from Aa3. Fitch Ratings and AM Best also downgraded AIG, MarketWatch reported at 8:25 AM Tuesday.” Even with this downgrade, AIG is well within investment grade, indicating that its balance sheet supports lending facilities necessary to meet capitalization requirements.

Credit rating agencies rate (in descending order) Investment Grade AAA, AA, A, BBB Junk BBB-, BB, B, C Default D Washington Mutual’s credit has been lowered to BB- by S&P, with the following accompanying statement, “Increasing market turmoil and the related impact from managing its concentrated mortgage franchise in this troubled housing and credit cycle led to the downgrade. It increasingly appears that market conditions could overtake credit fundamentals and leave the company with greatly diminished financial flexibility.” Washington Mutual nevertheless has “adequate capital positions from a regulatory perspective,” with a stable deposit base. Last week, the thrift said retail deposits as of August 31 were “essentially unchanged” from $143.6 billion at the start of the year. “Market conditions overtaking credit fundamentals” means that investors dumping their investments in this company without regard to the value of its underlying assets can result in worsening the condition of the company. Therein lies my assertion that market panic can be a self-fulfilling prophesy, and this is the time to look at facts - not sensational headlines.

Bond rating agencies rate bonds (from highest to lowest) as follows: Investment Grade AAA, AA, A, BBB Junk BB, B, C Default D S&P lowered AIG’s rating from AA to AA- and on its International Lease Finance Corporation from AA- to A+. Both ratings are well within investment grade, indicating that AIG’s balance sheet has sufficient assets on which to borrow (or sell) in order to meet capitalization requirement. The stock market has stabilized after an approximate 4.4% drop yesterday, which is approximately 22.7% from its late October highs. Most recent corrections preceding an economic recession have been about 30% drops, so projections of further declines are well within historic norms.

Before any of my clients married, I met with both of them to discuss their credit reports, individual debt, investment goals and strategies, their budget and each of their expected contributions to it, life insurance, will, living will, how title is held in any existing real property, living trusts and pre-nuptial agreement. After that (if they were still together), planning the wedding was a breeze…

Happy Birthday, Ms. Bacall. Mr. Kitty has a crush on you. I don’t blame him.

Hi Frannie, I agree he’s a brilliant guy. I think Alan Greenspan is brilliant, too, but I don’t agree with everything he says. I don’t happen to agree with his analogy to 1931. I think that there are a myriad of issues that are not comparable. Market shake-ups frighten people, especially when they don’t have an understanding of the root causes and historical precedent. I’ve advised people through the corrections in the mid 70’s, ‘87, ‘92 and ‘01, as well as many smaller bumps and starts - and there is one commonality. Panic causes people to behave in a way that does not contribute to their financial well being. I’ve heard the doomsday song in the 70’s with rampant inflation; valuation, program trading and illiquidity in ‘87; the recession in ‘91; LTCM in the late 90’s; and the Internet bubble in 2002. The S&L crisis was going to decouple the system. Prognosticators scared my clients to death, and I have spend hours and hours and hours telling them that this was nothing new. From the railroad crash in the 1890’s to the crash in the 1920’s, 30%+ corrections are the rule - not the exception - around the end of every economic cycle. None have destroyed our economy yet, and I am confident that this, too, shall pass. That’s not to take anything away from the seriousness of the monitization of a huge demand-push overabundance of mortgage loans that will take years to work through the system. It took years to build this problem, and it won’t be solved in a day. But times like these require a hard look, a level head and and strong backbone. Unfortunately, those who get air time are always the ones screaming that the sky is falling. So far, it hasn’t, and odds are it won’t this time either. We’re still the stongest financial power in the world, and I think that, in addition to hearing doom and gloom, this side of the issue deserves to be represented, too.

Hi Carol, After 30 years of finance, including many on Wall St., traders called me things much worse than “Comment Nazi.” Doesn’t bother me in the slightest.

Hi Rush, Thanks for re-posting my first post - twice! I’m so flattered. Note that Bear went for $10 bucks a share, so if you’d have bought it at $2, you’d have made 500%.

Hi Flora Dora, If your fund is Fidelity Cash Reserves, your investments are “high-quality, short-term securities that pay a fixed, variable, or floating interest rate. Securities are often specifically structured so that they are eligible investments for a money market fund. For example, in order to satisfy the maturity restrictions for a money market fund, some money market securities have demand or put features, which have the effect of shortening the security’s maturity. Money market securities include bank certificates of deposit, bankers’ acceptances, bank time deposits, notes, commercial paper, and U.S. Government securities. Certain issuers of U.S. Government securities, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, are sponsored or chartered by Congress but their securities are neither issued nor guaranteed by the U.S. Treasury.” You are correct that it is not FDIC insured. You might consider transferring this money to a FDIC insured MM account in a commercial bank or thrift, if you are concerned, since the prospectus does include the possibility of holding FNMA and FHLMAC securities.

Hi Phyllis, The market is down today. No question. But, if I may, your portfolio value is down $10k - you didn’t lose the money unless you sold, or think that the market will not go back up. 20%+ corrections happen about once every 8 years, and we’re in one right now. And, if you’re really selling your soul, I’ll put in a bid. I sent your post to a friend who was on the Fed’s housing sub-committee under Greenspan, and she got her first laugh of the day. Thanks for that.

Hi Rocky, My pleasure. Here’s the FDIC link http://www.fdic.gov/edie/

I thought I sent you to your naughty chair, Rush. Who told you that you were out of “time out”? Bad Rush! Back to your naughty chair, and get that nasty cigar out of your mouth.

Hi DeB, Mr. Kitty told me he understood the Irish locals (with very heavy Gaelic accents) better after a Guinness or two.

Come on, Suzanne. The market is down 2.25%.