Students in Free Enterprise business column

For anyone following the recent trends in the stock market over the past couple of weeks, you have been taken for a rollercoaster ride.

The economy seems to be in shambles, and many people are struggling to meet day to day expenses due to the credit crunch and mortgage back securities. However, there is another underlying cause as to why various sectors of many markets are declining. Short selling of securities has driven down the price of many stocks and has caused the end of the era of investment banks.

Short-selling, which involves investors selling stock in anticipation that the price will fall, has rattled the stock market after restrictions, which have been in place since 1939, were removed in 2007.

This measure was implemented to prevent a bubble, or push in price that margin trading or trading on credit creates. In recent months, short-selling has driven stock prices to the floor and contributed in the default of companies like Bear Stearns and Lehman Brothers.

These investment banks invested in mortgages, in which there was no unification throughout the investment vehicles bunched into the sub-prime mortgages.

The result was the companies' assets and stock price became over-valued, giving investors a good reason to begin shorting stocks. After Lehman Brothers defaulted, the two investment banks left standing were Morgan Stanley and Goldman Sachs Group.

In response to the affects of short selling, the Securities and Exchange Commission (SEC) has temporarily banned short selling on about 800 financial stocks to boost investor confidence. This ban is to be in place until October 2, 2008 and may be extended ten more days after if the SEC deems necessary. The ban includes commercial banks and the two investment banks that announced a transformation in their business model last week, Morgan Stanley and Goldman Sachs.

The announcement that Goldman Sachs and Morgan Stanley are becoming commercial bank-holding companies came as a shock on Wall Street. The era of investment banks has come to an end. The change marks a shift in the financial landscape dating back to the Great Depression.

Since many people blamed the crash of 1929 on commercial banks that were too eager to put deposits at risk on the stock market, the government passed the Glass-Steagall Act, which divided banking institutions into separate entities, lending institutions and brokerages. In 1999, Congress passed the Gramm-Leach Bliley Act, which allowed lending institutions and brokerages to consolidate, however many investment banking companies were weary to do so because they did not want to be held to the regulations of the Fed.

Why bring this little history lesson up? The reason is to reveal that even though the era of investment banks has come to an end, it does not mean that it is the end of investment banking activities on Wall Street.

Goldman Sachs and Morgan Stanley will both be able to engage in investment banking activities; however they will be subject to the Fed being their primary regulator and overseer. The hope is that these changes will bring back stability into the financial markets.

As eluded to before, it is not just the financial markets that are in turmoil but also the real-estate markets forcing people out of their homes. One of the problems of the real-estate market is adjustable rate mortgages, leaving people subject to foreclosures. Students in Free Enterprise (SIFE) is an on campus organization that aims to help the surrounding community.

One of the projects being developed involves members of SIFE helping people with adjustable rate mortgages who are facing foreclosures.

In essence SIFE is an international organization that mobilizes university students around the world to make a difference in their communities while developing the skills to become socially responsible business leaders.

On campus, SIFE offers community service hours to business students needing to fill that requirement to graduate. Also, SIFE is the world's largest network of student and business leaders, and many companies who see a student has participated in SIFE have management tracks specifically for those students.

If you are interested in learning more about financial markets and changing the face of your community attend one of the meetings held this Tuesday and Thursday at 8 p.m. in Knott Hall B03.

Raymond McDonough is a member of the class of 2010 and contributes an informative column periodically to The Greyhound.