Over 100 million Americans own stocks. So, if you watched any of the local news, national news or business news this week – you probably noticed that this will probably be the most memorable week for the stock market this year.  By the end of Tuesday, hundreds of billions of dollars were wiped out of the market. That same evening, the government stepped in to stop a world economic crisis by saving a global financial company (AIG) from bankruptcy. If the government didn’t step in – the entire global financial system/stock market – would have simply crashed.

If you read my previous blog below – you’ll understand how in some cases, this week became a complete crisis for every publicly traded company. Hedge funds and short sellers took advantage of the fact that fear existed in the market. Therefore, rationalism was out of the picture and fear resonated in everyone’s mind. The lack of governance and rules in the financial system are largely to blame.

Hedge funds began to create pessimistic views about the economy and individual companies by massively shorting their stocks. This caused the average stockholder to begin making decisions on emotion rather than fundamentals. People started to wonder if their money was even safe and millions of people began to lose sleep with endless questions. Is the world going to crash? Where was the economy going? What can we do to actually revive it, and how do we finally move forward?

To put things in perspective, the stock market is down 26% this year. That means if you were “diversified” in an index fund – you lost 26% of your money. But, if you were heavily invested in “banks and financials” – you basically lost your shirt. In some grave instances, if you were a shareholder of AIG, Lehman Brothers, Bear Stearns, Freddie Mac, and Fannie Mae – you saw your entire investments hit either zero or close to zero.  A very big scare to any type of investor.  What’s even scarier? If you were an employee for 10, 20, 30 years in any of these companies, you even saw your retirement go to zero. It was definitely a sad day for many New York Wall Street employees. Many even lost hope.

In the last 24 hours – the government finally stepped in. If they would have acted a few weeks faster on these initiatives, things could have been a lot less fatal for these companies and the market. So what did the government do? In the 1990s we faced a similar type of crisis. So, the government decided to mirror that strategy and begin discussions to create an RTC (Resolution Trust Corporation) type bail out. In this case, the government will create a new entity that will house the bad mortgage back securities from all of the banks – and allow the banks to start getting their fundamental business back on track without having bad assets in their balance sheet. This was a much needed move – as this basically gave a big “reset” for the entire financial system.

The second initiative, which I applaud (finally) – is that the US government copied a strategy that the UK government began on Thursday. Basically, they posted a ban on “short-selling” for all financial related stocks until October 2nd. The hedge funds and the individuals that began driving these securities downward – are banned from doing it further. I’ve always had a negative feeling on short-selling, I guess live in an imaginary world – where I don’t think you should profit from someone else’s demise.

Hopefully, in the coming weeks, we can rekindle the hope lost in many Americans and begin to get our economies and world financial system back on its feet. Only time will tell.

Tags: Dow Jones, financial system, NASDAQ, resolution trust corporation, RTC, stock market crash, world economy