Published: September 16, 2008 12:56 am      

WALL STREET: Finances finally hit the fan, but how hard?

Folks making $12 a hour and who don’t have money to risk in the stock market shouldn’t shed a tears in their beers over the current financial crisis.

John Doe will be impacted by the tax trickle-down effect in the long run, but John Dough, who has been making money on the market over the past eight years, has reason to sweat.

“It’s a huge, huge story and will take a long time to answer,” said Scott Huntington of Bodell Overcash Anderson & Co. in Lockport. “There are a lot of ramifications. It’s about greed, the government lying about Fannie Mae and Freddie Mac. It’s been going on for a long time, and it finally hit the fan.”

Not everyone is tied to the market. The savings they may have in CDs and bonds are protected, financial analysts said Monday. However, folks who have invested in mutual funds and stocks are affected by market fluctuations, such as the dive the Dow took on Monday.

Retirees and workers who have a 401k or an Individual retirement account could have opted for high, quick returns with risk — or steady, assured growth. Gains or losses depend on a person’s risk tolerance and how assets are allocated within a person’s portfolio, analysts say.

Peter deRosa, a charter life underwriter for New York Life, referred to risk tolerance as the sleep quotient. “If you wake up at night worried, it may mean that your investments are too risky for you,” he said. “If you’re not in position to absorb risk, don’t.”

An investor should understand his objective, according to deRosa. He must know his time frame. Be prepared to change investments when your objective changes.

“There’s nothing nice and sweet and concise,” Huntington said. “Unfortunately there is not a one-line answer. For people who don’t owe or have investments, it’s real domino. It will affect everyone, it’s just a matter of degree.”

There are several factors at work causing the financial wall to be crumbling, including the war in Iraq and rise in oil prices. However, a law enacted in 2000 by Congress and authored by Phil Gramm may have set the stage for the financial flop. The Commodities Futures Modernization Act reduced regulations for banks and industries.

The Texas Observer noted: “Financial wizard Warren Buffett has labeled the risky new investment instruments Gramm unleashed ‘financial weapons of mass destruction.’ They have fed the subprime mortgage crisis like an accelerant.”

An attempt to close the loophole was vetoed by President Bush in 2008. Huntington was critical of the “bumbling fools down in Washington” who didn’t oversee the banks that were leveraged in huge fashion.

The problem showed up in the mortgage market, where people who had no equity were buying houses with money they didn’t have. Many were simply speculating, figuring the price of the house would go up.

“It’s a double-edged sword,” Huntington said. “If all’s going well and you’re working with other people’s money, it’s fun and games. The other way, money has to be paid back.”

The problems came when banks offered mortgages to people with poor credit and did not verify income. The banks then passed those sub-prime loans to someone else.

Bigger fish gobbled up those loans in big gulps as an investment. People who could not afford to pay the loans defaulted. People bought more house than they could afford, and lenders were happy to give them the money.

Fannie Mae and Freddie Mac, who had about 80 percent of the mortgages, have been pumped up by the government. Other firms are hoping to be bailed out by government money.

That money has to be paid back by someone, and that someone could well be taxpayers, financial experts are saying.

That’s where John Doe gets hit. The cost of the bailouts will trickle down in some way to the folks who never risked a dime in investments.

Contact reporter Bill Wolcott at 439-9222, ext. 6246.