4 Market-Meltdown Myths

It's a nerve-racking time, but the end isn't nigh.

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Even if you're not the panicky type, the chaos in the financial markets sure is unnerving. Household names are disappearing, central banks are doing extraordinary things, and suddenly no company or investment seems safe.

But take a deep breath. There are still some reasons to be reassured—if the doomsaying and hyperbole doesn't send you in search of a ledge. Here are some of the misconceptions making the market turmoil seem even worse than it is:

It's the Great Depression. Not by a long shot. The Depression began with a two-day stock market decline of about 24 percent. Stocks rose and fell for awhile before plunging by almost 90 percent from peak levels. Unemployment eventually hit 25 percent, trade nearly ground to a halt, and it took years for government intervention to make a difference.

Over the past year, the markets have fallen about 25 percent from record highs of last fall. That's steep, but in line for a bear market. And many fundamentals remain strong. Corporate profits are decent, inflation is declining, and technically, we're not even in a recession yet. Most economists expect slowing or slightly negative economic growth over the next several months—but nothing like the double-digit declines in the early 1930s.

It's unprecedented. Nope. The demise of big companies like Bear Stearns and Lehman Brothers is startling, but remember WorldCom, Enron, and Arthur Andersen? The economy has survived just fine without them. And the recent spate of bankruptcies and liquidations is still mild compared with the late 1980s, when the government took over more than 5,000 insolvent savings and loans and other uninsured banks. According to economist James Barth of the Milken Institute, total losses from the S&L crisis were about $408 billion in 2007 dollars, compared with about $510 billion in losses in the current financial meltdown. That number is sure to go higher, but this time around, more of the losses are likely to be borne by investors rather than taxpayers. One other thing to keep in mind about the S&L crisis of the 1980s: It didn't even cause a recession.

Big companies are crumbling. Not exactly. AIG might have been forced into bankruptcy if the government didn't loan it $85 billion in taxpayer money. But not because its business is in the tank. Operationally, AIG is in relatively good shape, especially its main insurance divisions. The company got into trouble when losses on arcane investments triggered a downgrade in its debt rating, which automatically meant the company had to come up with additional cash to cover possible losses. The only way to do that would have been by hastily selling massive and complex assets, like its aircraft leasing business, which would have generated havoc, if it were even possible. The federal loan effectively gives AIG time to sell off assets properly—by carefully valuing them and finding the highest bidder.

Lehman Brothers might also have survived if it had had more time to unload troubled securities that nobody wants to buy right now. But the government decided Lehman, unlike AIG, could fail without bringing down the broader markets. So it declined to extend a lifeline. There are probably other big companies in AIG's position: operationally sound but hamstrung by financial problems.

The government is bailing out billionaires with taxpayer money. Funny, the billionaires don't feel that way. One of the biggest losers in the AIG bailout is Hank Greenberg, the company's former CEO, and its biggest individual shareholder. Greenberg's 355 million AIG shares were once worth nearly $25 billion. Today, they're worth less than $1 billion. As a whole, AIG current officers and directors have lost about $140 million since September 1. Same goes for Lehman and before that, Bear Stearns: The biggest losers were top executives who owned big chunks of company stock.

Taxpayers may actually end up getting a pretty good deal. For starters, government bailouts are probably preventing even worse pullbacks in the stock market and banking system, which helps protect retirement portfolios, pension funds, and home buyers seeking a mortgage. And because the government is essentially buying corporate assets at fire sale prices—with the ability to hold them until prices go back up and buyers emerge—it could end up selling for a profit.