Q&A: What went wrong on Wall Street?

Carolinas consumers continued to ask questions about whether the tremors on Wall Street would shake their retirement plans and household budgets, as well as who's to blame for the crisis.

Several readers shared questions with the Observer, which asked Tony Plath – a UNC Charlotte finance professor – to offer his insight. Comments have been edited for brevity and clarity. Jefferson George

Q: Are banks or consumers to blame for extending ridiculous credit to consumers, which has caused overinflated housing markets?

There's plenty of blame to go around here. Some, but not all, banks and other mortgage underwriters are certainly guilty of relaxing their credit standards so that unqualified borrowers could obtain mortgage loans far too easily. At the same time, some consumers are guilty of buying more house than they could afford using too much borrowed money. They assumed that real estate prices would continue rising without an upper bound.

The motivation on both sides comes down to a single cause: greed.

Q: How will the AIG and Merrill Lynch crises affect the state retirees' pensions?

In defined benefit pension plans, the crisis leads to investment losses that require fund managers to increase contributions in the plan to maintain the payment stream over time. This reduces profits to the defined-benefit provider, since they must allocate more money to the plan to maintain promised payments.

In defined contribution plans – such as 401(k) and 403(b) plans – the crisis leads to investment losses that diminish the value of the plan, resulting in either a lower future retiree benefit level or a longer funding horizon before plan holders can comfortably retire.

Either way, retirement plans experience losses resulting in a need for greater cash contributions, lower retirement benefits or a combination of both.

Q: I would prefer to cash out my 401(k) until I feel the crisis is over. However, it is impossible to do that without hefty penalties. Is there any fail-safe strategy for accounts that exceed the FDIC insured limit?

If your plan provider allows you to move money in and out of various investment vehicles within the 401(k) plan, you can always transfer money out of equities when you feel we're reaching the top of a market into a safer, but lower-yielding, investment category like short-term Treasury securities. When the stock market becomes more calm after a period of price contraction, you can move money back into the stock market.

Don't attempt this strategy now, however, since you'd be selling stocks at extremely low valuations to move to the relative safety of the Treasury security market. Wait until you feel that the next bull market in the equities has run its course.

Q: Is the banking downturn caused by weak regulatory oversight, aggressive banking strategies or outside factors?

It's not that we don't have sufficient regulation or a sufficiently strong regulatory infrastructure. It's that the current regulatory system is a patchwork of different laws, regulatory agencies and overlapping authorities that's confusing to understand and difficult for both regulators and regulated institutions to administer.

We need a regulatory system that can keep pace with the activities of our contemporary financial institutions. Perhaps most importantly, our current regulatory structure is in need of a senior, omnibus regulatory agency that has broad power over all aspects of financial market regulation and can coordinate the collective operation of various financial regulatory agencies.

Q: Are we close to moving from a recession to a depression? Are any banks in Charlotte close to folding?

No. I think we will successfully contain the damage caused by an imploding financial services industry, allowing an orderly decline in real estate values and the accompanying demise of several financial institutions without the severe sort of market disruption that characterizes a depression.

Still, we're going through a rough time, and it's simply not going to end in the next three to six months. Some areas of the U.S. – such as the Carolinas – will begin recovering in mid- to late 2009, while other areas of the country where real estate prices rose far too rapidly will take a longer period of time to bounce back.

Among Charlotte banks, Wachovia's exposure to the California real estate market through its acquisition of Golden West is a continuing concern, since this $122 billion loan portfolio continues to experience above-average credit losses. Right now, this position represents the greatest single risk point in the Carolinas banking industry.