There are few months in the calendar that can match September for bad financial news. This week in financial history isn't much different, as it has seen a hedge fund failure, a slippery surplus, a $700 billion bailout and much more. (Missed last week's article? Check out Wall Street History: Wamu's Collapse, Black Friday And LTCM.)
On September 27, 2000, President Clinton announced that there was a record-breaking budget surplus of $230 billion. This was just one of many surplus announcements over Clinton's time as president, making it somewhat of an annual event. With $230 billion left over, plus multiple surpluses in other years, one would assume that the national debt shrunk during his presidency. While this is true in some specific months, the overall trend was an increase of the debt year over year. So while it was technically correct that, at the time of the announcements, there was a temporary surplus, this surplus always seemed to vanish when the books were closed and the U.S. was found owing more.
Although we still refer to Clinton's reign as the Goldilocks economy, the reduction of the debt via record surpluses did turn out to be a fairytale. That said, Clinton did decrease the rate at which debt was being added from over $200 billion a year to around $130 billion.
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Hollywood Turning Japanese
On September 27, 1989, Japan was nearing the peak of its bubble and Japanese corporations were snapping up foreign assets. On this particular day, Sony bought Columbia for $3.4 billion. This was part of a buying spree that included CBS records and TriStar Pictures. These assets did fit into Sony's business model and they remain an important part of the company today, but Sony was far from the only Japanese company shopping. (Check out Dragons, Samurai Warriors And Sushi On Wall Street for more.
Mitsubishi bought the Rockefeller center, Matsushita bought MCA, Dai-Ichi bought the Tiffany building, Mitsui bought the Exxon building, Sumitomo invested half a billion in Goldman Sachs and the corporations even began buying up art when they'd filled up on foreign real estate and businesses.
They could do this because of a real estate bubble that valued Japan's land as being worth twice, three and finally four times more than the United States - despite the fact that there was much less of it. We all know by now, that the popping of the bubble lead to a lost decade filled with insolvent banks, unemployment, ballooning public debts and so on. We know because the Japanese scenario has become a rallying cry for pushing through stimulus and financial reforms that will hopefully prevent the American housing bubble from following the same pattern. (Learn more in The Lost Decade: Lessons From Japan's Real Estate Crisis.)
On September 29, 2006, investors in the Amaranth hedge fund received an unpleasant notice in the mail. The hedge fund was severely hit by $6.5 billion dollars in bad trades. Amaranth, whose name is Greek for unfading, was a $9 billion dollar fund at its peak. It made huge gains on natural gas bets after Hurricane Katrina disrupted production and refining. The trader in charge of the energy desk, Brian Hunter, may have just been lucky though, because it was a similar bet on a sharp rise in natural gas prices that sunk the fund.
The bet couldn't have came at a worse time, as the U.S. added huge amounts to their reserves with new sources like shales and better techniques for extraction. The dropping price and mounting losses forced Amaranth to close up shop and, despite the name, fade away. (Find out how this U.S.-born investment innovation became a $1-trillion industry that's both praised and vilified by the media. For additional reading, see A Brief History Of The Hedge Fund.)
Bipartisan Tax Reform
Facing the expiry of the Bush tax cuts due to a divided political landscape, it is worth looking back to September 27, 1986. On this day, the Tax Reform Bill of 1986 passed the senate and moved on to President Reagan for signing. The bill simplified many of the tax rules and lowered the tax rates for individuals - although an increase on corporations made it revenue neutral. The reason it is worth mentioning is that it received bipartisan support. A bipartisan tax bill that lowers individual rates - let's hope history really does repeat.
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Bailout Part 1
One of the reasons a big tax cut is unlikely owes to October 3, 2008. On this day, the first $700 billion Emergency Economic Stabilization Act was signed into law. This was the first attempt to end the credit crises, head off the mortgage meltdown and halt the financial crisis in general. Of course, it didn't go exactly as planned. The total bill is far from calculated as the alphabet soup of agencies - TARP, TALF, TSLF, etc. - still have cash and guarantees floating around. However, the bailout spending has went well over the original $700 billion and is somewhere in the trillions right now.
That's all for this week. Next week we finally get back into friendlier territory with a Google buy, an important birthday and much more.
For the latest financial news, check out Water Cooler Finance: The End Of The Recession.