01 October 2008

How the bailout could affect me

Right now i am torn between supporting and destroying the bailout. It will have farther reaching implications than people think.

Yes the banks lent money on mortgages that people could never repay. They simply overvalued the homes figuring that the market would grow and increase equity in the home without the homeowner paying down any principle. That and they come up with interest only loans assuming the equity growth in the same manner.

What happens if the banks have to re-write all the bad loans. It freezes the credit market and it will be harder for someone to get a loan. Doesn't seem like an issue for you and me who pay our mortgage on time and pay our other debts on time. But the issue goes much farther than that.

The companies that we work for usually doesn't require cash up front for the work that we do. They bill the customer. By the time an invoice is generated, sent, received, processed and payed, your looking at 30 days or more. The time frame from the time the work is completed until the payment is received is called Day Sales Outstanding, DSO. If your DSO gets too long, your company has a revolving loan with a local bank to cover cost such as payroll. A company usually has millions of dollars tied up in DSO.

The company that you're working for has a revolving loan to cover their expenses such as your invoice. You see where we are going with this. If the companies can not get this loan they can't cover their cost. If they must reduce cost, where is the biggest cost for any company? Their people. They cut people, we lose jobs, no one wins.

I don't want the bailout myself but we must keep the credit freed up so we can continue to conduct business. This will in fact affect all of us in the future.

The other side of the coin is your 401K. It is handled by investment bankers who bought these junk mortgages. We are likely to see out 401K's drop. I don't worry about mine because i do not have a single dollar invested in the mortgage crap. I am 100% in the stock market with companies i think will survive this crisis. Not everyone can say that.

If you have another perspective of this, i am interested in hearing it.

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