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On Oct. 9, 2007, the Dow Jones Industrial Average closed at an all-time high of 14,164.53.
364 days, two collapsed investment banks and one bailout later, the Dow is trading under 10,000 - in four figures for the first time since 2004. Despite the headlines, students aren't feeling the heat from lenders and employers - yet.
Steve Culloo, a fourth-year finance and economics student, said he hasn't felt the impact of the economic turmoil, but is preparing for what could be a more difficult job search.
"I anticipate that it will affect me, and it's already impacted my family," Culloo said. "My dad works in food wholesale and people aren't going to eat out as much. It's just a sign the economy is slowing down."
Culloo's beliefs are supported by the Department of Labor's most recent jobs report, which showed a loss of 159,000 jobs in September, marking the ninth straight month the economy has seen a decrease in jobs. For the year, 760,000 jobs have been lost, with the unemployment rate remaining at 6.1 percent.
Steven Mann, professor of finance at USC, points out that students will feel the crunch outside of the job market.
"Students are going to have trouble getting access to credit. All of this boils down to a credit crisis or credit crunch. The ability to borrow at favorable terms is going to be much more limited," Mann said. "Borrowing for cars, student loans, credit cards - you name it. This matters because it will hit your average student right in the wallet."
Congress has responded to the credit freeze with a $700 billion bailout bill that was signed into law Oct. 3. The bill will provide up to $700 billion for the purchase of troubled assets, primarily mortgage related, from financial institutions. Of the government loan, $250 billion is expected to be available almost immediately, with the rest released in installments.
The bill was originally defeated in the House on Sept. 29 by a vote of 228-205. The revised edition, some 100 plus pages longer, includes an increase in the federal deposit insurance limit from $100,000 to $250,000. Other provisions include tax breaks, changes to U.S. Security and Exchange Commision (SEC) oversight of accounting methods and the creation of two oversight committees.
The bailout has met mixed reactions - both nationally and on campus. A CNN/Opinion Research Corp. poll released Tuesday indicated only 40 percent of Americans think the bailout was designed to rescue the economy to help ordinary taxpayers.
Second-year public relations student Jennifer Gornall said the bill fails to attack the root of the issue.
"Giving the Secretary of the Treasury $700 billion isn't going to help the economy," Gornall said. "I think the main problem isn't necessarily the fall of the stock market. We need to focus on creating more jobs so Americans can put more back into the economy."
Even with the bailout, Mann remains convinced students will need to prepare for a tightening credit market.
"It'll improve the situation, but it won't change the fact that students will have trouble getting credit," Mann said.
The Mortgage Market
The bailout primarily targets mortgage backed securities (MBSs), which Mann says are troubled by declining real estate prices and mortgages issued to borrowers with high credit risk.
"This whole thing started with a reduction in home prices," Mann said. "We overextended ourselves and lent money to people we probably shouldn't have, and they are defaulting and it goes on and on from there."
Mortgage loans are often aggregated and sold to investors in the form of MBSs - the creation of Federal National Mortgage Association (FNMA or Fannie Mae) in 1938 was for the purpose of providing increased mortgage funds to the economy.
The Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) was created in 1970 to further expand the secondary market for mortgages.
Fannie and Freddie provide liquidity to the mortgage market by buying individual loans, pooling them and selling the rights to the loan cash flows to investors in the form of pass-through MBSs.
Some intrinsic risks with purchasing the individual mortgages and selling the cash flows are prepayment risk and default risk. Prepayment risk results from refinancing mortgages or otherwise paying them off in advance, reducing the interest income from the loan. Default risk results from borrowers unable to make payments.
As defaults have ramped up over the past months, the assets have becomes increasingly difficult to sell, leaving some banks holding portfolios with drastically reduced valuations.
"They might be worth 50 cents on the dollar in some cases," Mann said.
The bailout aims to ease some of the liquidity tensions by injecting the market with cash and allowing some banks to unload the securities.
"The problem is a lack of liquidity. We are putting a large buyer in there, albeit an uninformed one, that essentially provides a floor on the price of these impaired assets," Mann said. "It gives financial institutions a way to rid their portfolio of troubled assets and keeps them from having to sell in an illiquid market."
The deeply discounted portfolios may provide taxpayers with a chance to profit, said local banker Rachel Smith, vice president and relationship manager for First Citizens Bank.
"It's, 'get Wall Street out of trouble' but the general consensus is that taxpayers will profit in the long run," Smith said.
Mann isn't quite as optimistic.
"It's two different questions," Mann said. "Are the assets undervalued relative to the price in a liquid market? Yes. Will the government make money from it? I'm afraid they will find a way not to."
The Job Search
The financial woes haven't drastically impacted recruiting on campus, according to the Career Center. Aside from one cancellation - Wachovia - the recent Career Fair Blitz featured every employer that originally committed to attend, said Tracy Powers, director of employer relations for the Career Center.
Currently, she does not foresee a noticeable decline in campus recruiting.
"We just had a job fair with record attendance," Powers said. "We have another fair coming up which we anticipate will have record attendance."
The USC career center is a member of the National Association of Colleges and Employers (NACE). NACE prepares an annual job outlook, and projects strong prospects for 2008.
Its projections were published prior to the collapse of Bear Stearns and Lehman Brothers; however, no update has been made to the document.
"Some indications from NACE show that hiring will still be strong," Powers said. "Students may have to work a bit harder, but there will still be a lot of opportunities."
The recent labor report indicating a 159,000 net job loss shouldn't necessarily panic students, either. While the report does indicate a general downturn in employment, Powers said new hires aren't always first on the chopping block. Often firms will choose to eliminate jobs in higher pay brackets or choose to focus on a critical needs area for the firm.
Still, Smith warned that financial sector jobs may become highly competitive.
"Unfortunately, no one really knows how this will shake out. Banks will streamline and that will probably mean less jobs in the sector," Smith said. But there are other industries providing opportunities. "For example, the green movement has created growth while the financial sector has lost jobs."
And while Powers said salary data has yet to become available from this recruiting season, past experience leads her to believe salaries probably won't drop much, although bonuses could be reduced. The reduction may not be due to lack of cash available at employing firms, however.
When employers know the job market is becoming fierce, they are less inclined to offer aggressive incentives to sign on, Powers said.
"It could be economic conditions [cutting into bonuses], but it's possible there is just a stronger market for new hires," Powers said.
Credit crunch and Student Loans
Mann's credit forecast has already manifested itself in the private lending sector.
"Absolutely, banks are being very cautious about loans we are making," Smith said. "Credit standards are definitely going to tighten. Nobody ever knows what rates will do, but changes are definitely on the horizon."
While bankers and financial experts agree that students will have greater trouble using debt to finance cars, homes and credit cards, Director of Student Financial Aid and Scholarships Ed Miller believes USC's relationships with lenders will enable students to continue to access financial resources, barring an unanticipated collapse of extreme magnitude.
"If the bottom drops out of this, everything will be a mess," Miller said. "But the government has taken steps to ensure liquidity in the student loan market."
The bailout bill provides the government the power to purchase student loan backed assets, and follows a bill signed by President Bush on May 7 which allowed the secretary of education to buy student loans from lenders.
The legislation follows recent news of Wachovia announcing the termination and liquidation of the $9.3 billion Short Term Fund, which serves approximately 1,000 colleges and universities.
Wachovia is trustee of the Commonfund, and originally told investors they could only remove 10 percent of their money immediately, although that figure was later increased to 37 percent. The bank is currently at the center of a takeover struggle between Citigroup and Wells Fargo.
Despite the general banking industries woes, Miller said the university's traditionally strong relationship with several major lenders has helped weather the credit storm.
"USC has a favorable student body as a whole based on a long history as a high-volume loan market," Miller said. "Our default rates are low, 1.1 percent for USC while the national average is closer to 6 percent."
The historically low default rate has kept capital available to students, but not all educational institutions benefit from such favorable relationships.
"Lenders may not be willing to lend to other post-secondary institutions with students with high default rates or traditionally weaker job placement," Miller said.
According to his office, university students receive a bulk of funds from a few lenders: South Carolina Student Loan, Bank of America, Chase, Citibank and Regions.
Miller said most of the major lenders to USC students were in favorable financial positions. This sentiment is echoed by Smith, who said that South Carolina banks have taken a slighter blow from the credit crunch than some lenders in other areas.
"Some local banks are feeling the crunch," Smith said. "But a lot of South Carolina-based banks aren't in the same mess and have taken a more conservative approach than some other banks."
Despite the economic impacts of the financial turmoil, Miller remains confident students will be able to access money needed to fund education.
"Unless something much more dramatic occurs, the primary lenders we work with have positioned themselves to provide funding," Miller said. "I don't have a sense any of them will stop lending immediately."
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