Banks pump billions to calm the markets

Investors are on edge about the state of the stock market, with many questioning whether it's time to pull out. Banks are trying to assure investors that everything is fine; JP Morgan Chase and Goldman Sachs have both announced a pledge of $1.5 billion each in investments in order to stabilize markets. Banks across Europe have also pledged billions of dollars' worth of investments in order to ease concerns that had been stirred up by Greece's recent bailout deal. This post will discuss how banks are using this money, what this means for the stock market and investors, and more importantly why we should care about any of this. <br><br>

<a href="http://www.marketwatch.com/story/big-banks-to-pump-billions-into-market-2012-06-21">MarketWatch's</a> Joe Bel Bruno reported that JP Morgan Chase and Goldman Sachs have both announced a pledge of $1.5 billion each in investments in order to stabilize markets. Banks across Europe have also pledged billions of dollars' worth of investments in order to ease concerns that had been stirred up by Greece's recent bailout deal, which many people think will fail to decrease the country's debt. The investments will be used to make "a major purchase of distressed corporate debt, according to the <a href="http://online.wsj.com/article/BT-CO-20120620-701810.html">Wall Street Journal</a>."<br><br>

<strong>To Recap:</strong> Banks are trying to assure investors that everything is fine by announcing a pledge of $1.5 billion each in investments in order to stabilize markets, and banks across Europe have pledged billions of dollars' worth of investments in order to ease concerns that had been stirred up by Greece's recent bailout deal.

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<strong>Where's the Money Coming From?</strong> In this case, the money that banks are investing in assets was already previously owned by other investors. The <a href="http://online.wsj.com/article/BT-CO-20120620-701810.html">Wall Street Journal</a> reports that "JPMorgan and Goldman Sachs bought some $15 billion of bonds issued by European banks that were hobbled by private debt rather than the bonds of European governments." These bonds were an enticing investment for investors because they were rated AAA, meaning they provided a high level of security and a low level of risk. The <a href="http://www.marketwatch.com/story/big-banks-to-pump-billions-into-market-2012-06-21">MarketWatch</a> article reports that these bonds were also cheap, meaning they were less valuable because of the high risk and low level of security associated with them.<br><br>

<strong>What's It Mean for Investors?</strong> By taking over these risky European bonds and offering a payout to the investors who sold them, JP Morgan Chase and Goldman Sachs have taken away the security of these bonds and replaced it with their own money. This means that investors who purchased these bonds are guaranteed to receive their money back, but it also means that they will not be able to receive the payout that was promised. By purchasing the risky bonds, banks were essentially telling investors to "go somewhere else because we've already taken your money" – in effect breaking their promise.</p><p>Investors should worry about this decision because it shows how precarious banks believe the stock market has become. Buying European bank debt is one way for banks to encourage investors to invest and invest quickly because, by purchasing the debt and promising a payout, they're essentially taking away what little security was left in order for them to get something out of it themselves. This may work out for them in the long run, but banks are also taking a great risk, and it could definitely have a negative impact on the stock market as well.</p>

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<strong>Why Should We Care?</strong> Banks are constantly buying and selling debt and bonds to make a profit. By purchasing European bank debt that's considered to be risky and low-quality, banks are essentially telling investors that they will no longer purchase these kinds of assets – they're going to sell their assets quickly because they see how shaky the stock market is right now.<br><br>

<strong>Isn't This Normal?</strong> Yes – banks buying assets is definitely normal. However, the fact that they're buying assets that they don't like and they're paying out money to investors who have invested in them is not normal. Banks are essentially saying that the stock market is getting too shaky for them. Investors should be concerned about this because it shows how serious the situation has become and how much banks think that things may get worse.<br><br>

<strong>So Is This Good or Bad for Stocks?</strong> It's hard to say whether this makes stocks better or worse. It's definitely a warning sign for investors, but it may also mean that banks believe the stock market isn't going down anymore, meaning that these investments will actually work out for them in the end. It's hard to tell whether this is good or bad, but it certainly isn't a good sign that the banks are taking over assets that they know aren't going to pay out and offering a payout to investors. <br><br>

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<p><a href="http://feeds.feedburner.com/~r/blogspot/TheAQD"><img src="http://feeds.feedburner.com/~r/blogspot/TheAQD/~4/SJU6Sh_xjKw" height="1" width="1" alt="" /></a></p><i>Posted by <a href="http://www.blogher.com">BlogHer</a>.</i>

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<h2 style="text-align: center;">Do You Want to Buy the Next Big Thing?</h2></div><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/-l6eNU6y-U8k/TglTv27NVdI/AAAAAAAAIzQ/RmWV7wQ-L28/s1600/1.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/-l6eNU6y-U8k/TglTv27NVdI/AAAAAAAAIzQ/RmWV7wQ-L28/s320/1.

Conclusion From the above developments and analysis, it is clear that the market’s confidence in the Eurozone is waning. The Greek debt crisis has now entered a new and more serious phase – one in which the EU has no good choices left to make, each one of which has potentially disastrous consequences. The crisis may force Greece out of euro, which could lead to other countries leaving and other crises developing elsewhere. The banks have been invested in paper bonds and Greek debt as they are considered safe investment options as they are a part of the sovereign wealth fund. These investments have been hit hard due to lack of liquidity. All this spells doom for Europe.