NationStates Jolt Archive


Nightmare on Wall Street

Collectivity
16-09-2008, 00:22
With the collapse of Wall Street's investment bank, Lehman Brothers, another nail has been driven into Bush's political coffin. This scandal and its world-wide aftershocks is even more damning than the Enron corruption scandal for the White House. Who or what should shoulder the blame for this debacle?

Economic Rationalists seem strangely quiet now. Why aren't they strenuously objecting to government rescue attempts of financial institutions? Is it because they simply have no solutions to offer when their much vaunted "market forces" take a nosedive?
What do you think?:confused:
Bullitt Point
16-09-2008, 00:31
I thought we were blaming those irresponsible enough to take on loans from companies when they knew they probably couldn't afford them and the companies that drew people with low credit and few assets into subprime loans that became popular because of the driving economy.

But I guess that changed...?
JuNii
16-09-2008, 00:41
I thought we were blaming those irresponsible enough to take on loans from companies when they knew they probably couldn't afford them and the companies that drew people with low credit and few assets into subprime loans that became popular because of the driving economy.

But I guess that changed...?

didn't you know? anything negative is now Bush's fault. I'm sure there are people in New Orleans who blame Bush for forcing them to evactuate their city for Hurricane Gustav. :rolleyes:
AB Again
16-09-2008, 00:41
Who or what should shoulder the blame for this debacle?

Economic Rationalists seem strangely quiet now. Why aren't they strenuously objecting to government rescue attempts of financial institutions? Is it because they simply have no solutions to offer when their much vaunted "market forces" take a nosedive?
What do you think?:confused:

Who should shoulder the blame - in this case Lehman and Merril Lynch (separately). Market forces are working fine, they have not taken a nose dive. Or did you believe that they only produced positive results - like most of the US seems to have believed. The market is vicious, relentless and completely unsympathetic. If you get it wrong, then you can very easily end up dead (as happened here).

I am strenuously objecting to government rescue attempts of financial institutions, but as I am not in a country where the financial institutions behaved so recklessly I don't need to to do so out loud.
JuNii
16-09-2008, 00:49
Who should shoulder the blame - in this case Lehman and Merril Lynch (separately). Market forces are working fine, they have not taken a nose dive. Or did you believe that they only produced positive results - like most of the US seems to have believed. The market is vicious, relentless and completely unsympathetic. If you get it wrong, then you can very easily end up dead (as happened here).

I am strenuously objecting to government rescue attempts of financial institutions, but as I am not in a country where the financial institutions behaved so recklessly I don't need to to do so out loud.

^ This.

as for the rescue attempt? People and Businesses made bad choices. the consequences should be taken.

we, in Hawaii, lost one of our TWO major airlines. did the government help out? no. which is rather unfair especially since the only travel between islands outside private boats is the air industry. we got a ferry now, one that was forced upon us by our Gov. and it only services one or two islands... guess opponents of the ferry are now happy they got an alternative than paying the rising cost of airline tickets... :rolleyes:
Bullitt Point
16-09-2008, 00:55
didn't you know? anything negative is now Bush's fault. I'm sure there are people in New Orleans who blame Bush for forcing them to evactuate their city for Hurricane Gustav. :rolleyes:

"I had to walk through the rain to go to the bathroom!"
JuNii
16-09-2008, 00:57
"I had to walk through the rain to go to the bathroom!"

Wouldn't surprise me if someone out there is blaming Bush for that too.
Collectivity
16-09-2008, 01:08
Nah! Why blame Bush? Of course Mr President had nothing to do with it!
"There are none so blind as those that will not see!"
Who or what is responsible for regulation of the US money market?

In Australia, we have what is known as the Westminster system, which means that politicians take the blame for major stuff-ups (even when it's not directly their fault.

Back to the US, President Truman had a sign on his desk that said "The buck stops here."

But I guess that lyric has been relplaced by Shaggy's immortal one: "Wasn't me!"
DaWoad
16-09-2008, 01:14
Who should shoulder the blame - in this case Lehman and Merril Lynch (separately). Market forces are working fine, they have not taken a nose dive. Or did you believe that they only produced positive results - like most of the US seems to have believed. The market is vicious, relentless and completely unsympathetic. If you get it wrong, then you can very easily end up dead (as happened here).

I am strenuously objecting to government rescue attempts of financial institutions, but as I am not in a country where the financial institutions behaved so recklessly I don't need to to do so out loud.

what about FMN and Freddie mac?
Neu Leonstein
16-09-2008, 01:16
Economic Rationalists seem strangely quiet now.
Hmmm, this economic rationalist right here has been talking about this for something like a year now on this forum, along with a few other people.

Why aren't they strenuously objecting to government rescue attempts of financial institutions?
Lehman isn't being rescued, nor is Merril Lynch. Whether that turns out to be a good decision is yet to be determined.

But the idea behind trying to soften or prevent the collapse of banks is not new, nor even necessarily anti-market. The idea of the competitive marketplace has lots of actors, with none of them being large enough to have a material impact on the system as a whole. That's obviously not a given in the banking industry, so while you can make libertarian or moral hazard arguments, you're not going to be able to bring perfect competition/general equilibrium arguments into it.

At any rate, the logic behind the rescue of Bear Stearns was simple: Wall Street was in all sorts of strife, Bear Stearns owed a lot of people a lot of money, if it had disappeared the rest of the system would have taken a big hit. Bernanke et al were concerned that too many of the big banks wouldn't be able to survive this hit, and rather than having a mass collapse (such as the one that set off the Great Depression) they elected to organise JPMorgan to take over and act as the counterparty to the deals Bear Stearns had with anyone.

Freddie and Fannie, on the other hand, were properly bailed out (though not the shareholders, it seems). But that's because the government had had its fingers in them from Day One and was directly responsible for that particular mess.

Is it because they simply have no solutions to offer when their much vaunted "market forces" take a nosedive?
The market forces are working as ever. That financial crises tend to happen from time to time, and always have the same reason (cheap money starting to chase returns where there are none) is not a secret to anyone, including hardcore capitalists.

Of course, that has also been true for much longer than modern capitalism has been around. I direct you to the link in my signature: http://www.economics.harvard.edu/faculty/rogoff/files/This_Time_Is_Different.pdf
Vetalia
16-09-2008, 01:21
Economic Rationalists seem strangely quiet now. Why aren't they strenuously objecting to government rescue attempts of financial institutions? Is it because they simply have no solutions to offer when their much vaunted "market forces" take a nosedive?

Economic rationalism is just that, rationalism. It is irrational and foolish to view economic issues through the prism of ideology; you go with what works best, not what you think should work best. Ultimately, these bailouts, and it's hard to call them true bailouts because these companies are going under, are needed to ensure this problem doesn't spiral out of control and produce more damage than necessary. We gain nothing from doing this and now is not the time to be experimenting.

Truth is, everyone is to blame here. There is no one party that can be solely blamed and no party innocent from any culpability; for example, blaming Bush or the Republicans for this situation is as puerile as blaming Clinton for the dot-com bubble's collapse or the Democrats for the S&L crisis. All of them played a role, some much larger than others, and all have to be involved to bring it to an end.
The Romulan Republic
16-09-2008, 01:25
Welcome back to the 1930's.:(
SinepBS
16-09-2008, 01:33
Welcome back to the 1930's.:(

Uh huh. Yeah. It's that bad.

Wall Street drops 4% and the sky is about to fucking fall. :rolleyes:
Collectivity
16-09-2008, 01:34
:eek:Economic rationalism is just that, rationalism. It is irrational and foolish to view economic issues through the prism of ideology; you go with what works best, not what you think should work best. Ultimately, these bailouts, and it's hard to call them true bailouts because these companies are going under, are needed to ensure this problem doesn't spiral out of control and produce more damage than necessary. We gain nothing from doing this and now is not the time to be experimenting.

Truth is, everyone is to blame here. There is no one party that can be solely blamed and no party innocent from any culpability; for example, blaming Bush or the Republicans for this situation is as puerile as blaming Clinton for the dot-com bubble's collapse or the Democrats for the S&L crisis. All of them played a role, some much larger than others, and all have to be involved to bring it to an end.

I've always been a fan of your reasonable posts Vetalia but the "no one party to blame" is echoed in Dicken's large and famous work, "Little Dorrit" as he looks out of a Poorhouse prison window after he had become a victim of an economic collapse in financially unregulated Victorian England. Of course you can blame people in power who don't see it as their responsibility to protect their citizens from corporations who can be incredibly stupid, dishonest aqnd greedy.
If you don't insist that your government stops reckless lending and borrowing, you will doom yourseves to repeated nightmares on Wall St:eek:
Neu Leonstein
16-09-2008, 01:36
Welcome back to the 1930's.:(
Including these guys (http://www.explorepahistory.com/images/ExplorePAHistory-a0k9t8-a_349.jpg), probably. The leader of the German Left party now came out the other day in an interview arguing that a rich family should be expropriated on the basis that no one could earn 10 billion euros in a lifetime, and that this sort of wealth is unconstitutional.

Question is: have we learned anything, or do we have to go through two-odd decades of Stalin worship again?
SinepBS
16-09-2008, 01:37
:eek:

I've always been a fan of your reasonable posts Vetalia but the "no one party to blame" is echoed in Dicken's large and famous work, "Little Dorrit" as he looks out of a Poorhouse prison window after he had become a victim of an economic collapse in financially unregulated Victorian England. Of course you can blame people in power who don't see it as their responsibility to protect their citizens from corporations who can be incredibly stupid, dishonest aqnd greedy.
If you don't insist that your government stops reckless lending and borrowing, you will doom yourseves to repeated nightmares on Wall St:eek:

Are you honestly saying that the government is to blame for laissez-faire economics?

The whole idea of privatized banks is just that - they're privately owned. They took one in the ass for overextending their liquidities in a time when it looked as if the economy was continuing to grow. This is why the Fed was created. This is why Alan Greenspan was born. We have balances to these things, and I sure as hell haven't seen reason to believe that the whole economy is going to tank a la Great Depression.
Collectivity
16-09-2008, 01:44
Are you honestly saying that the government is to blame for laissez-faire economics?

The whole idea of privatized banks is just that - they're privately owned. They took one in the ass for overextending their liquidities in a time when it looked as if the economy was continuing to grow. This is why the Fed was created. This is why Alan Greenspan was born. We have balances to these things, and I sure as hell haven't seen reason to believe that the whole economy is going to tank a la Great Depression.

Well you could blame the American people for electing the government but I wouldn't do that (Hell in one election they voted for Al Gore and George W still got in!) Anyway we don't elect the bus driver when we get on the bus. We have to trust. But there is trust and there is blind trust.
In Agentinia, the locals learnt the hard way when the politicians and business leaders did a "moonlight flit" with all the US dollars that were in the vaults and they fled the country.
That was economic rationalism at work.
Why didn't the government stopped the sub prime conflagration when it first stated to smell the smoke? It's not rocket science?
Neu Leonstein
16-09-2008, 01:49
That was economic rationalism at work.
Stop lying. You know better than that.

Why didn't the government stopped the sub prime conflagration when it first stated to smell the smoke? It's not rocket science?
Because it didn't smell the smoke? On the whole, the people getting paid millions on Wall Street are better-qualified individuals than the ones getting paid 100k in government departments. That's the market at work.

The people at Wall Street made the wrong assumptions, and the regulators blindly followed them. If governments had been able to tell this was going to happen, the same had been true of these banks. The thing about financial crises is that they always follow roughly the same stages, but the actual event that triggers them is always different and can't be anticipated ahead of time.
Leistung
16-09-2008, 01:50
Well you could blame the American people for electing the government but I wouldn't do that (Hell in one election they voted for Al Gore and George W still got in!) Anyway we don't elect the bus driver when we get on the bus. We have to trust. But there is trust and there is blind trust.
In Agentinia, the locals learnt the hard way when the politicians and business leaders did a "moonlight flit" with all the US dollars that were in the vaults and they fled the country.
That was economic rationalism at work.
Why didn't the government stopped the sub prime conflagration when it first stated to smell the smoke? It's not rocket science?

Oh come on, don't give me that "Al Gore won" crap. The two most conservative counties in the state had their polls closed early, and had those people voted, it would have easily negated anything lost from "hanging chads," the recount of which was completely subjective.

And how exactly do you suggest the government should have stopped the sub-prime mortgage crisis? It's the bank's faults, not Washington's--this is how the FREE market works.
The Romulan Republic
16-09-2008, 01:51
Including these guys (http://www.explorepahistory.com/images/ExplorePAHistory-a0k9t8-a_349.jpg), probably. The leader of the German Left party now came out the other day in an interview arguing that a rich family should be expropriated on the basis that no one could earn 10 billion euros in a lifetime, and that this sort of wealth is unconstitutional.

Question is: have we learned anything, or do we have to go through two-odd decades of Stalin worship again?

I fear the appeal of Communism is as eternal as human stupidity.
Collectivity
16-09-2008, 01:53
Lying is a big word Neu Leonstein. Please watch your manners - you don't know me to be able to tell if I am being sincere ofr not. The polite phrase is "I disagee with you" or the more emphatic, "You're wrong!"
I forgive you in advance but "Go thou and sin no more!"
Collectivity
16-09-2008, 02:00
Oh come on, don't give me that "Al Gore won" crap. The two most conservative counties in the state had their polls closed early, and had those people voted, it would have easily negated anything lost from "hanging chads," the recount of which was completely subjective.

And how exactly do you suggest the government should have stopped the sub-prime mortgage crisis? It's the bank's faults, not Washington's--this is how the FREE market works.

Let's put my throwaway line about Al Gore aside for now as that will be for history to reflect on.

Whom do citizens elect, governments or the free market?
Whom do we look to for protection?
Who has the responsibility, given to them by the people to regulate finance?
Yootopia
16-09-2008, 02:05
Question is: have we learned anything, or do we have to go through two-odd decades of Stalin worship again?
No, or the various government of Western Europe and in the US would realise that letting market forces be is a Bad Idea from time to time, and that they could really do with some level of centralised planning.
Collectivity
16-09-2008, 02:09
Halleljua! Yootopia. At last some one who has heard of John Maynard Keynes!
Neu Leonstein
16-09-2008, 02:12
Lying is a big word Neu Leonstein. Please watch your manners - you don't know me to be able to tell if I am being sincere or not.
I tend to assume the best about people. There are some things which can stem from misinformation, from simply not knowing any better. But referring to the crisis in Argentina and economic rationalism both presume some basic amount of common knowledge, plenty enough to know that your statement was in fact false.

I agree that "lying" is strong language, but if nothing else, it woke you up.

Your point overall seems to be that the government is at fault for this crisis for not having had stricter regulations. Let me ask you then: what sort of regulations did you have in mind? If you had to draw up the basics of such a law, what would you write in it?

No, or the various government of Western Europe and in the US would realise that letting market forces be is a Bad Idea from time to time, and that they could really do with some level of centralised planning.
Same to you then: what sort of planning would you have in mind?
Collectivity
16-09-2008, 02:23
I tend to assume the best about people. There are some things which can stem from misinformation, from simply not knowing any better. But referring to the crisis in Argentina and economic rationalism both presume some basic amount of common knowledge, plenty enough to know that your statement was in fact false.

I agree that "lying" is strong language, but if nothing else, it woke you up.

Your point overall seems to be that the government is at fault for this crisis for not having had stricter regulations. Let me ask you then: what sort of regulations did you have in mind? If you had to draw up the basics of such a law, what would you write in it?


Same to you then: what sort of planning would you have in mind?

No, the 'lying" taunt didn't wake me up - I wasn't asleep. However the prudential authorities were asleep - on the job.

Clearly one thing that the government should do is not to allow lending institutions money to borrowers who lack security. Secondly, lending institutions that look to government protection must agree to strict accountabily measures in return and the government must police the activities of the banks to ensure that they do not overcommit themselves on lending. This was the lesson we should have learnt from Wall St 1929.

But why not ask Al Greenspan?
Leistung
16-09-2008, 02:52
Let's put my throwaway line about Al Gore aside for now as that will be for history to reflect on.

Whom do citizens elect, governments or the free market?
Whom do we look to for protection?
Who has the responsibility, given to them by the people to regulate finance?

You're using vague buzz-words to try to illustrate a point you seem to barely grasp. Unlike what some people running for government currently seem to think, snapping your fingers does not fix the economy, and at the end of the day, Washington has minimal influence on the workings of Wall Street. Yes, they can do what they did to the big M's this week, but in general the free market is left well enough alone.

When you say "regulate finance," what exactly are you referring to? The government by definition is supposed to only regulate the market minimally, that being one of the hallmarks of the free market. I don't know what goes on in Argentina, but in the US, socialism is frowned upon. It's been proven to not work.
Yootopia
16-09-2008, 03:02
Same to you then: what sort of planning would you have in mind?
Subsidies for industries which aren't doing well but which are really needed for future prosperity - in the UK, especially England, that would be house-building, which has taken an absolute beating due to people not being able to get mortgages, but which is very much needed as a labour sink and also to bring the price of housing down, which is outstandingly high here.
Gun Manufacturers
16-09-2008, 03:32
"I had to walk through the rain to go to the bathroom!"

You have a stool shed (http://upload.wikimedia.org/wikipedia/commons/b/b9/Amish_Outhouse.jpg)?
Collectivity
16-09-2008, 03:40
You're using vague buzz-words to try to illustrate a point you seem to barely grasp. Unlike what some people running for government currently seem to think, snapping your fingers does not fix the economy, and at the end of the day, Washington has minimal influence on the workings of Wall Street. Yes, they can do what they did to the big M's this week, but in general the free market is left well enough alone.

When you say "regulate finance," what exactly are you referring to? The government by definition is supposed to only regulate the market minimally, that being one of the hallmarks of the free market. I don't know what goes on in Argentina, but in the US, socialism is frowned upon. It's been proven to not work.

I think that much of the above seems to come into the category of "vague buzz words". I think that we can leave it up to the American people what they wish to do with their economy when they elect their new president. Hey, guys, you'd better start putting your orders in now.
America's economy, of course, affects our economies too. In Australia, the share market has crashed to a point LOWER than it was after the 9/11 attacks. The US economy is in a serious crisis here and the Government's intervention into the share market collapse - rescuing Freddie and Fannie was pure Keynesian economics.
See? The government has enormous power to intervene in the economy.
Anyway, when exactly was the US socialist? That page in my history book must have come loose. The nearest thing I know was when FDR (arguably America's greatest president) rescued US (and World) capitalism with the New Deal. He got America working again but that was Capitalism with government intervention in the economy. Pure Keynesian economics. Maybe Keynesian economics isn't sacred scripture either but I won't bow down at the shrine of Milton Friedman!:hail:
Lacadaemon
16-09-2008, 03:45
Because it didn't smell the smoke? On the whole, the people getting paid millions on Wall Street are better-qualified individuals than the ones getting paid 100k in government departments. That's the market at work.


About four (?) years or so ago the appraisers and the various states actually approached the federal government about what was going on and called for federally chartered banks to be subject to state regulation. The OCC told them to go pound sand.

Probably that was due to pressure from the two political slush funds (fannie and freddie) that masqueraded as mortgage companies.

So I don't think you can really make the argument that Wall Street knows best in this case. I think they were well aware of the risk (for example the ratings assumption that housing will never decline in value, obviously false) but didn't care.

The banking industry, because of its nature, does need completely independent oversight. Last time it was tried, it actually worked pretty well.
Blouman Empire
16-09-2008, 04:08
Nah! Why blame Bush? Of course Mr President had nothing to do with it!
"There are none so blind as those that will not see!"
Who or what is responsible for regulation of the US money market?

In Australia, we have what is known as the Westminster system, which means that politicians take the blame for major stuff-ups (even when it's not directly their fault.

Back to the US, President Truman had a sign on his desk that said "The buck stops here."

But I guess that lyric has been relplaced by Shaggy's immortal one: "Wasn't me!"

Well America politics isn't a Westminster system, and who is respoinsible for regulation of the is done by an independent authority known as The Federal Reserve. Besides there are aquite a lot of factors for the reason why this occured and to simply blame Bush is drawing a long bow and quite incorrect.

But if it makes you fell better you can continue to blame Bush and co not that it matters.
Tolvan
16-09-2008, 04:22
Why didn't the government stopped the sub prime conflagration when it first stated to smell the smoke? It's not rocket science?

The government (both parties) is partly to blame for the mess by practically forcing Fannie and Freddie to back a lot of this subprime junk under the guise of expanding homeownership. Both Clinton and Bush were proponents of this policy as well. What happened then was a perfect storm of greed and stupidity. Greedy lenders gave mortagages to foolish people who couldn't afford them (and not all of them were poor) and secured the with greatly overcalued real estate. When the housing correction started this left the loans under secured and many people simply walked away.

I won't even touch the subject of ARMs.

Also, don't forget that Fanny and Freedie are massive campaign contributors (as alluded to earlier), including both major donations to both Obama and McCain.
Lacadaemon
16-09-2008, 04:42
I won't even touch the subject of ARMs.


My personal fav. is the Negative amortization option ARM. That was a very brilliant idea. Especially b/c you can book the deferred interest on them as income and pretend you are making lots of coin :p. (Washington Mutual). It is these things which will ultimately completely destroy our banking system since they are the shittiest of the misrated shit sandwiches out there and cannot be pawned off to the newly created fannie/freddie national garbage dump.

And for all that people bang on about subprime, the vast majority of option arms were written for people with good/excellent credit (i.e. people who had 'education' and white collar jobs, not really the poor people who constantly seem to be blamed for that). Which only goes to show that FICO is virtually irrelevant and we shouldn't let out own prejudices make us jump to conclusions.
Collectivity
16-09-2008, 05:04
I don't blame all the people who buy homes and can't pay them off. There are many reasons why people default. Sometimes it is because they have "champagne tastes but a beer budget" and they buy a McMansion when they should really be looking at something affordable. Sometimes they have bad luck - job loss, illness etc). Sometimes they are screwed by soaring interest payments, inflation etc.
Yes, there is a "cavet emptor" about homebuying but I think that many people in the US has too much of a sink or swim attitude about homebuyers who get into debt. I am truly shocked at the attitude of many posters on this site that seems to be that governments should have no business here.
I can only say to them: "Well, I hope that if misfortune strikes you, you don't blame the government."
Tolvan
16-09-2008, 05:18
My personal fav. is the Negative amortization option ARM. That was a very brilliant idea. Especially b/c you can book the deferred interest on them as income and pretend you are making lots of coin :p. (Washington Mutual). It is these things which will ultimately completely destroy our banking system since they are the shittiest of the misrated shit sandwiches out there and cannot be pawned off to the newly created fannie/freddie national garbage dump.

And for all that people bang on about subprime, the vast majority of option arms were written for people with good/excellent credit (i.e. people who had 'education' and white collar jobs, not really the poor people who constantly seem to be blamed for that). Which only goes to show that FICO is virtually irrelevant and we shouldn't let out own prejudices make us jump to conclusions.

While it's true many of the people had solid credit scores and good jobs, none of that matters when you borrow more money than you can adequately pay back. One of my job functions is analyzing creditworthiness, and I've seen several people who most people would consider wealthy, but who had plenty of difficulty making payments because more than they could afford. That was product again of greed and foolishness.

ARMs are generally a bad idea regardless of how much money you make. You should never invest in something you don't understand and very few people really understood ARMs (many still don't).
Collectivity
16-09-2008, 06:14
It's interesting that neither candidate seems to have said much about this mess. Are they keeping their heads down on it do you think? They are the ones that will have to clean up the mess when one of them gets elected in November.
Barringtonia
16-09-2008, 06:26
What a crazy weekend....

Poor Lehman employees, not all of them were involved in this, one person is quoted as saying 100 people flew the company into the cliff on behalf of 17, 000.

I know a fair few Merrill Lynch people, no one's happy but then no one was before. Apparently, earlier this year, when bonuses were low across the board - some companies do bonuses per sector, some average it out across the board, Merrill's the latter - a trader smeared shit on the sole of his shoe and then went walking through the mortgage department to show his displeasure.

Jamie Dimon at JP Morgan foresaw this and pulled out of sub-prime while everyone else was piling on the profits, hard to believe no one else could, short term advantages nearly always win out over long term stability.

The Bush Presidency, if not the entire Republican mindset, of spending your way out of trouble, low taxes, easy credit, loose banking regulations, has been shown for the baseless economics it is, trickle down doesn't work where the money is kept looped in at the top, the only trickle down now is that knock-on effects of all these people out of a job and tightened credit.

Shameful really, a good kick in the butt though.
Lacadaemon
16-09-2008, 07:12
This is important.

http://www.ft.com/cms/s/0/7f7d74f0-8368-11dd-907e-000077b07658.html

See it is easier to get your money back before they file bankruptcy, so right now people who are using the last two independent big IBs (GS, MS) have to be thinking: "maybe I should be putting my money somewhere with deep pockets that is not likely to do a lehman".

I can only see this causing a run on those two. And the money will go to merril, which now seems nice and safe.
Neu Leonstein
16-09-2008, 07:12
Clearly one thing that the government should do is not to allow lending institutions money to borrowers who lack security.
That makes sense, but doesn't serve the political purpose of making sure people feel as though they're doing well economically.

Secondly, lending institutions that look to government protection must agree to strict accountabily measures in return and the government must police the activities of the banks to ensure that they do not overcommit themselves on lending. This was the lesson we should have learnt from Wall St 1929.
Sounds fine in theory, but the UK already had rules and regulatory agencies to that effect in place. What would be needed would be people with the same sort of knowledge and expertise as the bankers, but a different outlook, different assumptions and so on. Unfortunately, such people don't seem to exist.

But why not ask Alan Greenspan?
Because he had no idea this was going to happen either.

Subsidies for industries which aren't doing well but which are really needed for future prosperity - in the UK, especially England, that would be house-building, which has taken an absolute beating due to people not being able to get mortgages, but which is very much needed as a labour sink and also to bring the price of housing down, which is outstandingly high here.
The slump now would simply be the counterpart to the boom they would have experienced until now though, thanks to people getting bigger mortgages than they perhaps should have. You can subsidise now, but it would just be a band-aid to cover up that construction was bubbly and now popped.

Housing affordability is of course a good thing politically to be worried about, but structurally there are surely more valuable future industries to be looking at.

The banking industry, because of its nature, does need completely independent oversight. Last time it was tried, it actually worked pretty well.
In principle, there's nothing wrong with that. Was it Thain who said Merril would be dancing until the music stops - knowing fully well that it would?

But as I said before, the next fancy thing people will use to gear up and make more dividends and bonuses won't be covered by whatever regulatory system you set up, and governments just can't act fast enough to stop this sort of thing from happening. If the danger was clear and present enough to kick Congress into action and produce a law in a matter of a month or so, then Wall Street would already have been well aware for some time.

Ultimately, the UK had an independent body responsible solely for making sure this sort of thing doesn't happen, and it failed at preventing Northern Rock from choking on this stuff, or pretty much all the firms operating in London having been involved in it.

Better would be to have some basic rules on leverage and so on to cover the crises that already happened, just so that they won't repeat themselves, and then have plans for the ordered termination of failing financial institutions already in place, so you don't have to come up with answers on this ad hoc basis that doesn't help confidence or stability at all.
Neu Leonstein
16-09-2008, 07:21
I can only see this causing a run on those two. And the money will go to merril, which now seems nice and safe.
If Goldman gets targeted, I'm going to start worrying. This has all been an exciting exercise in following news and doing purely academic exercises with it. But if this goes on, it's going to eat into my career.
Lacadaemon
16-09-2008, 07:38
But as I said before, the next fancy thing people will use to gear up and make more dividends and bonuses won't be covered by whatever regulatory system you set up, and governments just can't act fast enough to stop this sort of thing from happening. If the danger was clear and present enough to kick Congress into action and produce a law in a matter of a month or so, then Wall Street would already have been well aware for some time.

Ultimately, the UK had an independent body responsible solely for making sure this sort of thing doesn't happen, and it failed at preventing Northern Rock from choking on this stuff, or pretty much all the firms operating in London having been involved in it.

Better would be to have some basic rules on leverage and so on to cover the crises that already happened, just so that they won't repeat themselves, and then have plans for the ordered termination of failing financial institutions already in place, so you don't have to come up with answers on this ad hoc basis that doesn't help confidence or stability at all.

Well there actually leverage rules already, though they were changed in 2004 letting leverage increase from about 10-12x to 30+, as banks were given more authority to asses their own risk. I think it's a given that there is going to be a reversion in the near future.

I actually have no problem with people coming up with crazy financial instruments per se. They always have. What I am suggesting though is that this kind of stuff is walled off from the general business of banks. In other words it becomes something that reg d type funds (like hedge funds) do, or trade as some ETF type vehicle, while the broker dealers themselves stick to the boring well understood stuff, i.e, acting as prime brokers &c. That way the risk wouldn't threaten the structure itself. (Provided the margin clerks aren't asleep).

Of course the argument gets made that this type of arrangement cuts a lot of people off from enjoying outsized returns. But I would address that by relaxing the rules on who can invest in these funds in the first place. And if they lose the money, tough.

It makes banks less profitable of course, but that's okay, that's how things were from 1932-1993, and it worked out okay for the most part. For example the failure of Drexel seems rather none event in comparison to what is happening now.

That sort of thing would be fairly easy to oversee without having to make too many judgment calls.
Trotskylvania
16-09-2008, 07:43
Including these guys (http://www.explorepahistory.com/images/ExplorePAHistory-a0k9t8-a_349.jpg), probably. The leader of the German Left party now came out the other day in an interview arguing that a rich family should be expropriated on the basis that no one could earn 10 billion euros in a lifetime, and that this sort of wealth is unconstitutional.

Question is: have we learned anything, or do we have to go through two-odd decades of Stalin worship again?

I call shenanigans. Playing the Stalin card on a group of anti-Stalinist leftists isn't going to work.
Collectivity
16-09-2008, 07:55
Well said Trot!
At least Neu Leonstein is arguing intelligently now. That could be because of Lacadaemon's good influence.
But really - we all knew about the sub prime mortgage crisis months before Northern Rock needed to be bailed out by Gordon Brown (and those scoundrels still wanted to reward their shareholders with the government's money rather than pay off their debts.)
Why weren't people allowed to yell, "I think there's a fire. I can smell smoke."
It seems to always happen that it is the "smartest guys in the room" who are listened to and they're the ones shouting "Don't panic everyone! We have things under control."

Yeah! Right! And Neu Leonstein..... we've all lost money because all the superannuation funds dipped their snouts into the sub-prime trough.
Lacadaemon
16-09-2008, 07:58
If Goldman gets targeted, I'm going to start worrying. This has all been an exciting exercise in following news and doing purely academic exercises with it. But if this goes on, it's going to eat into my career.

Most of the people at merril will still have jobs. I'm not saying goldman or morgan will disappear. They will just be absorbed. I'm sure you'll be okay.

People have to delever. The problem is there is only a finite number of institutions and they cannot delever each other because it is just passing the bag. Either new money comes in - unlikely at this point because everyone has learned that you cannot trust these people - or liabilities have to be discharged.

What will happen, as is happening with Lehman and to a lesser extent with merril and bear, is that these institutions will be carved up with the good bits going to the other levered institution at a greatly undervalued price, and the bad bits being bundled and thrown away (the bond holders being wiped out extinguishing liabilities).

Now, we can wipe out the IBs, or wipe out the commercial banks. As a policy matter it is less painful to recapitalize the commercial banks (who are probably insolvent) by giving them the good bits of the IBs and leaving all the rubbish with the bagholders, rather than vice-versa because the government already has its hands full with an insolvent FDIC and doesn't want to add to its problems. Not to mention the effect on the wider economy.
The Black Forrest
16-09-2008, 08:05
Economic rationalism is just that, rationalism. It is irrational and foolish to view economic issues through the prism of ideology; you go with what works best, not what you think should work best. Ultimately, these bailouts, and it's hard to call them true bailouts because these companies are going under, are needed to ensure this problem doesn't spiral out of control and produce more damage than necessary. We gain nothing from doing this and now is not the time to be experimenting.

Truth is, everyone is to blame here. There is no one party that can be solely blamed and no party innocent from any culpability; for example, blaming Bush or the Republicans for this situation is as puerile as blaming Clinton for the dot-com bubble's collapse or the Democrats for the S&L crisis. All of them played a role, some much larger than others, and all have to be involved to bring it to an end.

What affect do you think the changing of the bankruptsy laws had in this?

Some have argued it opened the flood gates for subprime.....
Neu Leonstein
16-09-2008, 08:11
I call shenanigans. Playing the Stalin card on a group of anti-Stalinist leftists isn't going to work.
Hey, I didn't mean it literally. But you can't deny that after the Great Depression, you had the New Deal and then a decade or so in which Stalin, as the great anti-capitalist, was actually quite well-respected. And that wasn't just in left-wing circles, but by the intelligentsia in general. McCarthy made that more difficult, but people didn't really come to their senses until the 70s, even though Stalin was dropped as the hero in the meantime.

Big crises like this might turn out to be tend to make people go a bit silly. Watch the statements by (supposedly centre-) left-wing European politicians over the next few weeks and you'll see what I mean. Both the French and German left are in all sorts of strife at the moment, this must seem like a heaven's sent to them.

At least Neu Leonstein is arguing intelligently now. That could be because of Lacadaemon's good influence.
That must be it. :wink:

Why weren't people allowed to yell, "I think there's a fire. I can smell smoke."
It seems to always happen that it is the "smartest guys in the room" who are listened to and they're the ones shouting "Don't panic everyone! We have things under control."
People have said this already from time to time, and my answer is always the same: if you knew this was going to happen, you could have made ridiculous amounts of money, with barely any money in cash to start with. A few people did, even on Wall Street (then things started going out of hand beyond any initial causes people might have foreseen).

The beautiful thing about the market is that it doesn't do binding majority decisions. Everyone is free to do exactly what they want, without having to listen to anyone. It's not that people weren't allowed to yell, it's that others didn't listen, for whatever reason.

Yeah! Right! And Neu Leonstein..... we've all lost money because all the superannuation funds dipped their snouts into the sub-prime trough.
I have no intention of relying on superannuation money to retire. At any rate, that's still many decades away, and rather than having my fund not go after the returns I'm willing to let them take a hit now and then. Though really, it's not sub-prime or securitisation which hurt them, it was the crash in equities, and that wasn't really their fault. Or, it sort of was, but it's a separate story.

As it is, I ticked the "high returns/high risk" box on my application form in the full knowledge of what it entails. Whether they have a bad year or three doesn't affect me yet - whether my future employers go belly-up, or become boring glorified accountancy groups does.
Collectivity
16-09-2008, 08:16
I ticked the high returns box too in March...thinking it would level out soon. But I never said I was Nostradamus - just a mug superannuant at the mercy of the market.
My partner just went for the cash option. She wasn't such a mug.
Lacadaemon
16-09-2008, 08:30
What affect do you think the changing of the bankruptsy laws had in this?

Some have argued it opened the flood gates for subprime.....

None. They didn't really effect purchase money mortgages which are - depending on the state - usually non-recourse.
Lacadaemon
16-09-2008, 08:34
Barclays to 'buy' lehman assets (http://online.wsj.com/article/SB122149661255536931.html?mod=special_coverage)

And this is how it will work. The holding company will keep the rubbish, and barclays gets the good stuff for next to nothing.

Hello bagholders.
Gauthier
16-09-2008, 08:39
The Bush Presidency, if not the entire Republican mindset, of spending your way out of trouble, low taxes, easy credit, loose banking regulations, has been shown for the baseless economics it is, trickle down doesn't work where the money is kept looped in at the top, the only trickle down now is that knock-on effects of all these people out of a job and tightened credit.

Shameful really, a good kick in the butt though.

Except it'll be the Masque of the Red Death, with the average American getting kicked in the crotch by the fallout while the more affluent simply weather the shitstorm out in opulent luxury.
The Black Forrest
16-09-2008, 08:41
None. They didn't really effect purchase money mortgages which are - depending on the state - usually non-recourse.

I don't know. The two prime reasons for bankruptcy are medical catastrophy and job loss with either no job or a new job with significant job loss. A nice subprime loan looks good when things are bad and it's significantly hard to go bankrupt. As such more subprime loans.....
Lacadaemon
16-09-2008, 08:56
I don't know. The two prime reasons for bankruptcy are medical catastrophy and job loss with either no job or a new job with significant job loss. A nice subprime loan looks good when things are bad and it's significantly hard to go bankrupt. As such more subprime loans.....

That's a fair point. I was looking at it from the perspective of making the loan, not asking for it. And from that standpoint, it really didn't effect the risk on the banks side.

But I can see that people would have looked at it as a way out, so quite probably there were people who cashed out equity who shouldn't have under those cirumstances.

Still, by and large the real problem was realtors and mortgage brokers jamming people with mortgages they couldn't afford and didn't understand - regardless of their employment. (In fact, very few people actually understand mortgages, which is why even the most highly educated professionals sometimes fall into the refi trap, even if they know enough to get a conforming mortgage). And the market was adding about a trillion dollars a year in new origination/refi; far too rapidly to really be effected by bankruptcy changes I would imagine.
Lacadaemon
16-09-2008, 09:00
People have said this already from time to time, and my answer is always the same: if you knew this was going to happen, you could have made ridiculous amounts of money, with barely any money in cash to start with. A few people did, even on Wall Street (then things started going out of hand beyond any initial causes people might have foreseen).


Knowing something is going to happen is easy. Making a buck from it is the real skill. Early is wrong and broke. Lotsa people lost big on the 2006 headfake.
BunnySaurus Bugsii
16-09-2008, 11:34
Are you honestly saying that the government is to blame for laissez-faire economics?

The whole idea of privatized banks is just that - they're privately owned.

To "privatize" something, it must be Publicly owned in the first place.

They took one in the ass for overextending their liquidities in a time when it looked as if the economy was continuing to grow. This is why the Fed was created. This is why Alan Greenspan was born. We have balances to these things, and I sure as hell haven't seen reason to believe that the whole economy is going to tank a la Great Depression.

If we're going to trawl right back to Adam Smith, let's remember that "banks" weren't a government idea to start with.

Personally, I think they're a crap idea. Keep it under yer mattress or lend it out, I say. Locking up "wealth" in a fortress with private security to guard it -- pretty much The Enemy right there.

Don't rob a bank. Burn the fucker to the ground!
Rambhutan
16-09-2008, 12:31
Time to take the Rambhutan millions out of the US markets, I wonder if the Chinese are thinking the same?
Barringtonia
17-09-2008, 06:53
Time to take the Rambhutan millions out of the US markets...

Surely the straw to break the camel's back.

So there were arguments that saving Fannie and Freddie was okay since they were essentially government-backed companies anyway.

The US government was on the brink of a deal to take control of the world's largest insurance company, AIG, in a last-ditch intervention to avert a potentially disastrous corporate collapse.

After a day of emergency talks, congressional leaders were briefed last night that the Federal Reserve had agreed in principle to lend $85bn to AIG in return for an 80% stake in the struggling company.

The arrangement was sure to prove contentious because it renders AIG's shares virtually worthless. The Bush administration is likely to face tough questions about why it is willing to rescue AIG while allowing Lehman Brothers to go bust.

This company is probably more central to the global economy than any other, seems crazy to be in this situation.
Lacadaemon
17-09-2008, 07:29
So there were arguments that saving Fannie and Freddie was okay since they were essentially government-backed companies anyway.


Actually they weren't government backed. It clearly said on the prospectus that their debt was not guaranteed by the federal government and defaults, if any, were entirely your own problem. People talked about an 'implicit' government guarantee, but it was never there.

What happened though is a whole bunch of foreigners (the chinese mostly) became unhappy with the prospect of default - which actually wasn't all that likely at the point of takeover, and a bit two faced because they had been enjoying higher yields for lo these many years - and so they threatened to stop purchasing treasuries, possibly even liquidating some of their holdings - which would spike interest rates in the US. So the US government caved and stepped in a guaranteed the agency debt.

Fannie and freddie are all a bit of a nothingburger though.
Collectivity
17-09-2008, 09:01
Well, the first round may go to Obama - maybe he should push this more?
Financial storm may blow McCain off course
Anne Davies, Washington
September 17, 2008
http://www.theage.com.au/world/financial-storm-may-blow-mccain-off-course-20080916-4hwg.html

US Republican presidential candidate SenatorJohn McCain. Photo: Jonathan Ernst
IF THE political adage "it's the economy, stupid" applies in the US, then the Democrats will be buoyed by the financial crisis that has convulsed Wall Street.
Democratic presidential nominee Barack Obama had no qualms yesterday about blaming President George Bush. Deepening turmoil in the US economy — the No. 1 issue among voters despite the wars in Iraq and Afghanistan — could resonate in Senator Obama's favour as he tries to link Republican presidential nominee John McCain to Mr Bush, whose stewardship of the US has left him with near-record disapproval ratings.
The presidential campaign continues its focus on the faltering US economy and the crisis on Wall Street.
Senator Obama yesterday went on the attack against the Bush Administration, saying: "The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store."
But for Senator McCain, who has been a member of Congress for 26 years, the issue proved more complicated. He initially declared yesterday that "the fundamentals of our economy are strong", despite the carnage in the banking, housing and employment sectors.
He soon backtracked from that position after both Senator Obama and his running mate, Joe Biden, declared it more proof that Senator McCain was out of touch with the American public.
In a Gallup poll last week, 48% of Americans said Senator Obama could better handle the economy, while 45% chose Senator McCain — a significant gain for the Republican nominee. In late August, Senator Obama had a 16 percentage point margin over McCain on the economy.
Senator Biden led the charge against Senator McCain, saying: "John McCain has confessed, and I quote, 'It's easy for me to be in Washington and frankly be somewhat divorced from the day-to-day challenges people have.' Well, he's right. If all you do is walk the halls of power, all you'll hear is the wants of the powerful … I believe that's why John McCain could say with a straight face, as recently as this morning, the fundamentals of the economy are strong."
Later, Senator McCain modified his message, saying he knew how terrible it was for ordinary people.
His running mate, Sarah Palin, knew who to blame.
"Our regulatory system is outdated and it needs a complete overhaul. John McCain and I, we're going to put an end to the mismanagement and abuses in Washington and Wall Street that have resulted in this financial crisis," she said at her solo rally in Golden, Colorado.
The McCain campaign is particularly vulnerable because one of Senator McCain's economic advisers, former Texan senator Phil Gramm, was a key proponent of economic deregulation during his term in Congress.
On Monday, Senator Obama reminded voters of Mr Gramm's recent comments that the US was in a "mental recession" and it was "a nation of whiners".
"Senator McCain, you can't run away from your words or your record," Senator Obama said. "When it comes to this economy, you've stood firmly with George Bush and a failed economic theory, and what you're offering the American people is more of the same."
Treasury Secretary Hank Paulson also faced questions over who was to blame, neatly avoiding blaming his boss by pointing to his review of America's patchwork regulation of its financial and securities markets. The blueprint, a year in the making, was released four months ago for comment and has no hope of being in place in time to assist in this crisis.
With AGENCIES
Neu Leonstein
17-09-2008, 09:18
http://www.cnbc.com/id/26748060
Morgan Stanley Ponders Staying Independent

Morgan Stanley officials are weighing whether the firm should remain independent or merge with a bank given the recent turbulence in the company's stock, CNBC has learned.

As of late yesterday (Tuesday) Morgan officials were not in merger discussions, according to people close to the matter. But senior people at Morgan concede that further zig-zags in the company's stock price could and possibly will force the company to change course and seek a merger partner, probably a well capitalized bank.
Collectivity
17-09-2008, 09:28
So the corporations are:
going under
merging
being taken over by the government (John Maynard Keynes would be happy).

What is this crisis telling us?
What will be the long term political and economic fallout?
Lacadaemon
17-09-2008, 10:07
http://www.cnbc.com/id/26748060

It is the way of the future. But seeing how Barclays, Bain Capital and Hellman & Friedman are picking over lehman, I think it will be more complicated than just a straight purchase for stock. (Unless MS stock falls amazingly much further before anything happens).

Remember, Merril had already written down lots of its problem assets and had been aggressively raising capital before Ken Lewis 'bought' them.
Velka Morava
17-09-2008, 10:26
Truth is, everyone is to blame here. There is no one party that can be solely blamed and no party innocent from any culpability; for example, blaming Bush or the Republicans for this situation is as puerile as blaming Clinton for the dot-com bubble's collapse or the Democrats for the S&L crisis. All of them played a role, some much larger than others, and all have to be involved to bring it to an end.

Ahem... Why would you blame the Democrats for the S&L crisis?
AFAIK the presidents at the time were Reagan and Bush.
Neu Leonstein
17-09-2008, 13:16
being taken over by the government (John Maynard Keynes would be happy).
Not necessarily. He'd be busily writing volumes to expand on chapter 24 of the General Theory, but he was himself an avid investor, so maybe he'd be licking his wounds himself. :tongue:

Just make sure you don't confuse Keynesianism with state socialism. Occasionally he'd favour state control over the unpredictabilities of the animal spirit, but not as a matter of principle because he felt things needed to serve certain purposes, as a socialist might insist. He was pretty good at keeping his personal views away from the economics.

What is this crisis telling us?
Not what you seem to hope it to be.

What will be the long term political and economic fallout?
That rather depends on how the effects on the real economy will pan out. I retain enough faith in the system to know that once the immediate injuries are patched up and the regulatory reforms would have removed all the excitement from investment banks, nobody is going to go any further to seriously change the structure of the economy.

If some sort of nasty and lasting recession were to occur of course, more and more nutty ideas get listened to, until you end up with the New Deal. Question is: how much more intelligent and educated is the US voter now than he was back in the thirties?
Intestinal fluids
17-09-2008, 13:35
The nightmare just got $85 Billion dollars worse. I could personally do without AGI and keep my $85 Billion in taxpayer money.
Vetalia
17-09-2008, 14:17
Ahem... Why would you blame the Democrats for the S&L crisis?
AFAIK the presidents at the time were Reagan and Bush.

They were in control of Congress by a significant majority, more than significant enough with Republican support to override Presidential vetoes.
Vetalia
17-09-2008, 14:19
The nightmare just got $85 Billion dollars worse. I could personally do without AGI and keep my $85 Billion in taxpayer money.

The thing is, it's more of a loan than anything; AIG gets the money, but they have to pay it back through asset sales and the government gets an 80% stake in the company, effectively bringing it under conservatorship status. It's likely most, or all of that money will ultimately be repaid as AIG is dissolved under the auspices of government conservatorship.
Intestinal fluids
17-09-2008, 14:27
The thing is, it's more of a loan than anything; AIG gets the money, but they have to pay it back through asset sales and the government gets an 80% stake in the company, effectively bringing it under conservatorship status.

Problem is asset sales of what and what is it really worth? Did the US just buy a paper house? And what banks are going to be lending out an extra 85B in loans in these economic times to buy parts of AIG ? For the same reason that who knows what parts of it are worth?
Lacadaemon
17-09-2008, 16:37
Problem is asset sales of what and what is it really worth? Did the US just buy a paper house? And what banks are going to be lending out an extra 85B in loans in these economic times to buy parts of AIG ? For the same reason that who knows what parts of it are worth?

It's not going to work that way. The problem with AIG is that it has 500 billion outstanding in credit derivatives. Now, a few months ago it's stock price was high and it had easy access to the capital markets to raise cash either through issuing stocks or bonds so it had a triple A rating. This meant that it did not have to secure the derivatives it wrote with very much cash. Because its stock price has fallen so much it has lost easy access to raising cash in the markets and so it lost its AAA ratings and so now it is forced to raise collateral to secure some of the derivatives it wrote. About 85 billions worth or thereabouts.

The problem is that AIG just doesn't have 85 billion in cash or liquid assets, and because of the ratings downgrade, nobody wanted to lend the money to it - at least not on terms acceptable to AIG. So it has had to rely upon the Fed to issue it a line of credit to cover its obligations and prevent a bankruptcy filing.

But that does not mean that AIG is actually insolvent. It's balance sheet is worth over a trillion dollars. The real problem is that these assets cannot be liquidated quickly enough to meet its short term needs to raise cash, at least not at a reasonable price. It's a bit like having a lot of money tied up in a house. If you have to sell the house in the next hour, you probably won't get a very good deal, so you take a bridge loan or line of credit secured against the property to give you time to set up a proper sale.

In all likelihood AIG won't have to draw on the whole 85 billion, just a portion of it to meet its short term needs. As the valuable assets of AIG - such as the aircraft leasing business worth about 10-15 billion - are sold off, the needed money can be raised, until all of AIGs obligations can be met and any money borrowed can be paid off.

At the end of the process, AIG will have repaid the FED with interest, and the FED will own 79.9 of whats left. Probably it will be run off at that point.

It's actually not a bad deal for the government. Because AIGs balance sheet is so huge, even if it is sold off at a substantial discount, the FED still won't lose out. (Provided there has been a modicum of honesty in the accounting). Of course the shareholders are screwed. But there definitely will be interest in AIGs assets because they are going to be sold off cheap.
Gravlen
17-09-2008, 21:31
Aaaaaaaaand the shares keep a-fallin'...
Vetalia
17-09-2008, 21:51
Problem is asset sales of what and what is it really worth? Did the US just buy a paper house? And what banks are going to be lending out an extra 85B in loans in these economic times to buy parts of AIG ? For the same reason that who knows what parts of it are worth?

The difference between AIG and Lehman/Bear Stearns is that they have some very strong assets on their balance sheet. Their insurance business is the core of their operations and is healthy, and many segments of their commercial and investment banking sectors are also strong; compared to those two, they had some strong core operations that likely could have saved them had they not pursued these foolish investments with rapacious greed.

I don't know if they'll be able to raise all of the $85 billion, but much of it will ultimately be repaid.
Lacadaemon
17-09-2008, 21:58
I don't know if they'll be able to raise all of the $85 billion, but much of it will ultimately be repaid.

Run off. It's obviously in the interest of the new owner to split up the units and sell them.

And to be fair to Lehman, it had lots of good assets too. Leverage killed it. Not so much of a problem with AIG.
Vetalia
17-09-2008, 22:02
Run off. It's obviously in the interest of the new owner to split up the units and sell them.

And to be fair to Lehman, it had lots of good assets too. Leverage killed it. Not so much of a problem with AIG.

Leverage is a bitch if you're not careful. Speaking from an accounting perspective, there needs to be massive changes in accounting for SPEs; the current concept of off-balance sheet entities has given these companies a free pass at overleveraging themselves far beyond what would be tolerated by investors were they aware of them. Personally, I'd go so far as to require the inclusion and true mark-to-market valuation of the assets held by SPEs on the company's balance sheet. There really should be no means for companies to hide debt by pushing it to the fringes of financial disclosure...it already brought down Enron, and now it's collapsing the financials.
King Arthur the Great
17-09-2008, 22:28
Leverage is a bitch if you're not careful. Speaking from an accounting perspective, there needs to be massive changes in accounting for SPEs; the current concept of off-balance sheet entities has given these companies a free pass at overleveraging themselves far beyond what would be tolerated by investors were they aware of them. Personally, I'd go so far as to require the inclusion and true mark-to-market valuation of the assets held by SPEs on the company's balance sheet. There really should be no means for companies to hide debt by pushing it to the fringes of financial disclosure...it already brought down Enron, and now it's collapsing the financials.

Aye, but now instead of indicting their chief execs, we're bailing them out. Fannie, Freddie, and now AIG (though that's basically a loan from the FED) are probably not going to see subpoenas or indictments served to their BoD's.
Tolvan
17-09-2008, 23:17
Aye, but now instead of indicting their chief execs, we're bailing them out. Fannie, Freddie, and now AIG (though that's basically a loan from the FED) are probably not going to see subpoenas or indictments served to their BoD's.

Making greedy and unwise decisions is not illegal. I've yet to see anything to suggest that anything ilegal was done.
Marrakech II
17-09-2008, 23:21
Aye, but now instead of indicting their chief execs, we're bailing them out. Fannie, Freddie, and now AIG (though that's basically a loan from the FED) are probably not going to see subpoenas or indictments served to their BoD's.

This right here is what galls me. These executives are going to walk without any real repercussions. Yeah sure they lost a bit of cash but the sheer negligence is criminal. Funny how some real minor crimes can send you to prison for years but these fools get to walk Scott free. I always say white collar crime pays.
Cosmopoles
18-09-2008, 02:01
Aye, but now instead of indicting their chief execs, we're bailing them out. Fannie, Freddie, and now AIG (though that's basically a loan from the FED) are probably not going to see subpoenas or indictments served to their BoD's.

What crime did they commit?
Vetalia
18-09-2008, 02:04
Making greedy and unwise decisions is not illegal. I've yet to see anything to suggest that anything ilegal was done.

It appears like there may have been some dubious accounting for these assets, playing around with the definition of special purpose entities and using various tricks to hide their riskiest investments from investors. Chances are, we'll probably see at least some people indicted for accounting fraud before this is over. It's hard to believe that everyone could have been entirely hoodwinked without any kind of trickery on these companies' part. However, given the sheer amounts of greed and arrogance combined with basically laissez-faire regulatory practices it's not necessarily implausible that people simply didn't know or, more likely didn't want to know the truth as long as the money kept flowing in.
Marrakech II
18-09-2008, 03:18
What crime did they commit?

Negligence is one however if a prosecutor really wanted to after them there are all sorts of rules that apply to executives.
Trans Fatty Acids
18-09-2008, 03:24
If some sort of nasty and lasting recession were to occur of course, more and more nutty ideas get listened to, until you end up with the New Deal. Question is: how much more intelligent and educated is the US voter now than he was back in the thirties?

I should think you know as well as anybody that that's not the way politics works, at least not in the US. Support for free-market capitalism has very little to do with education or intelligence per se. When people don't believe that they're stakeholders, they don't support the system, and that belief has just much rationality behind it as any other deeply held belief -- not much.
King Arthur the Great
18-09-2008, 03:34
This right here is what galls me. These executives are going to walk without any real repercussions. Yeah sure they lost a bit of cash but the sheer negligence is criminal. Funny how some real minor crimes can send you to prison for years but these fools get to walk Scott free. I always say white collar crime pays.

Of course it does. White collar crime is what certain marxists and marxist posters call 'Capitalism.' And yes, karl marx does not get capital letters in his name.

What crime did they commit?

It wasn't so much acts of malice as it was negligence due to stupidity on a magnitudeso great it should be criminal. Much like the idea behind criminally negligent homicide, but here we should be looking to see if the due diligence was being met.

Seriously, read my sig. Hanlon's Razor is not merely the work of a cynic. The shame here is that these executives made bad decisions, but now they're getting golden parachutes that only long-time politicians can aspire to. Meanwhile, John Q. Public gets to foot the bill in tax dollars (Fannie, Freddie), and the U.S. government has essentially grabbed 80% of AIG in ownership, leaving the small-time investors in that company subject to the Fed's decisions since Uncle Sam now has veto power over the means by which AIG tries to recuperate.
Lacadaemon
18-09-2008, 03:40
Making greedy and unwise decisions is not illegal. I've yet to see anything to suggest that anything ilegal was done.

Well there is the whole fraud and lying about asset quality thingy.

In any event, guilty or not, when this shakes out there will be plenty of calls for scapegoats (our congressmen have to prove they were 'duped' too after all), so there will be plenty of folks going to the big house. Maybe we let the marijuana dealers go to make room for them, I don't know.

Right now, everyone still has jobs, so we are all forgiving. When people are living in Obamatowns/MacShamevilles, the people will be less forgiving. Heads will have to go on pikes. People are very concerned about moral hazardy stuffs after they lose their moneys.
German Nightmare
18-09-2008, 03:43
Just how many big banks are there left in the U.S. that can still crash?
Trans Fatty Acids
18-09-2008, 03:55
Just how many big banks are there left in the U.S. that can still crash?

Chase, Wachovia, Morgan, Goldman, WaMu -- that's just off the top of my head, roughly in the order of least- to most-likely.
King Arthur the Great
18-09-2008, 03:56
Just how many big banks are there left in the U.S. that can still crash?

Not too many. WaMu is probably on hospice, Lehman is setting its affairs in order, and now we need to see who ends up owning most of the U.S. financial market. Oh, and oil is still (relatively) high (for the U.S.), so that's gonna keep hurting.
Lacadaemon
18-09-2008, 04:16
Just how many big banks are there left in the U.S. that can still crash?

From a certain perspective probably every bank in the US (or the west!) is insolvent.

So, all of them I would say.
German Nightmare
18-09-2008, 04:19
Well well... Let's just hope that some people learn a valuable lesson from that and the market will eventually do better.

However, I do believe that some serious overhaul of the oversight system is needed!
Lacadaemon
18-09-2008, 04:35
Well well... Let's just hope that some people learn a valuable lesson from that and the market will eventually do better.


The children of the people who did this will learn a valuable lesson, and it won't happen again until they die. Then their kids will run out and pull the same bullshit.

Plz start planning the safest route for you and your family.
Lacadaemon
18-09-2008, 04:40
Art Cashin is just on TV talking about how he is afraid. It is lollercaust. Fucking pussy.

It's a bear market, and there are only two kinds of traders in a bear market. Teh quick and teh dead.
Tolvan
18-09-2008, 04:55
Well there is the whole fraud and lying about asset quality thingy.

In any event, guilty or not, when this shakes out there will be plenty of calls for scapegoats (our congressmen have to prove they were 'duped' too after all), so there will be plenty of folks going to the big house. Maybe we let the marijuana dealers go to make room for them, I don't know.



I hadn't heard anything about fraud at the time. Of course, I freely admit that I haven't kept up with this as much as I would like. I came back vacation only to have to deal with a a office full of paperwork so I've been buried in loan concentration reports and loss reserve adequacy calculations all week.
Lacadaemon
18-09-2008, 05:11
I hadn't heard anything about fraud at the time. Of course, I freely admit that I haven't kept up with this as much as I would like. I came back vacation only to have to deal with a a office full of paperwork so I've been buried in loan concentration reports and loss reserve adequacy calculations all week.

Lots of misstatements about losses and future earnings.
Rejistania
18-09-2008, 07:59
If these people has committed fraud, then they are responsible alone, but even if they didn't, it was still them who mis-speculated quite awfully.
Collectivity
18-09-2008, 21:26
Pne thing is sure - people in compulsory superannuation funds ought to hold their fund managers accountable. When did they suspect that the sub prime bubble was going to burst? When, if ever, did they direct the investments to safer options?
Vetalia
18-09-2008, 22:04
Word on the street is that the government's going to create a new entity to take over these banks' debt. I think we're going to be in for a surprise once this entity reports just how much bad debt is out there; the RTC back in the 1980's handled something like $400 billion worth of assets, and considering the extent of bad credit default swaps and other collapsing derivatives out there it's likely trillions of dollars of bad debt floating around.

I think it's a necessary move that will help stop the credit markets' hemorrhaging and with any luck initiate the process of major structural reform in the regulatory environment. Bernanke had the balls not to cut interest rates so it's likely we may actually see a tough stance on this issue, in particular if Obama is elected. Of course, the concern with that is that the stance will be too tough, prompting some future process of deregulation that will end up repeating the problem.

Who knows, though? Maybe we'll get it mostly right this time like we did back in the 1930's.
Ohshucksiforgotourname
18-09-2008, 22:13
With the collapse of Wall Street's investment bank, Lehman Brothers, another nail has been driven into Bush's political coffin. This scandal and its world-wide aftershocks is even more damning than the Enron corruption scandal for the White House. Who or what should shoulder the blame for this debacle?

Economic Rationalists seem strangely quiet now. Why aren't they strenuously objecting to government rescue attempts of financial institutions? Is it because they simply have no solutions to offer when their much vaunted "market forces" take a nosedive?
What do you think?:confused:

The banks, mortgage companies, and lending institutions themselves are to blame for being stupid enough to lend money to people whom they knew didn't have enough money to pay it back ("sub-prime" mortgages and that sort of thing).

And, of course, the borrowers are to blame for knowingly borrowing beyond their ability to repay.

As for those who thought when they borrowed that they would have no problem paying it back but things changed, well, I don't know who or what to blame except maybe NAFTA for sending our jobs and manufacturing operations out of the country, so that borrowers become unable to pay back their borrowed money, because they have no job, therefore, no income, therefore they default on their mortgages. Multiply that by millions and you have the USA's current economic situation.

I thought we were blaming those irresponsible enough to take on loans from companies when they knew they probably couldn't afford them and the companies that drew people with low credit and few assets into subprime loans that became popular because of the driving economy.

But I guess that changed...?

Well, if we aren't blaming them (and the borrowers and/or NAFTA (see above reply to Collectivity)), then we SHOULD be.

didn't you know? anything negative is now Bush's fault. I'm sure there are people in New Orleans who blame Bush for forcing them to evactuate their city for Hurricane Gustav. :rolleyes:

You know, it wouldn't surprise me if they DID blame Gustav on Bush.

Wouldn't surprise me if someone out there is blaming Bush for that too.

Yeah.

ATTENTION ALL BUSH-HATERS: NOT EVERYTHING IS THE FAULT OF GEORGE W. BUSH, ESPECIALLY NOT NATURAL DISASTERS.
Vetalia
18-09-2008, 22:19
As for those who thought when they borrowed that they would have no problem paying it back but things changed, well, I don't know who or what to blame except maybe NAFTA for sending our jobs and manufacturing operations out of the country, so that borrowers become unable to pay back their borrowed money, because they have no job, therefore, no income, therefore they default on their mortgages. Multiply that by millions and you have the USA's current economic situation.

Honestly, though, manufacturing has been in decline for decades prior to NAFTA. Most of the people still working in the manufacturing sector have been there for a while and already own their homes; the bulk of people who lost them never had the kind of income to justify their mortgages in the first place, and once interest rates went up the party was over.

I think the number one culprit to blame is the obsession with home ownership that arose in the past decade; rather than tell people to wait to build a solid financial base before buying their homes, the attitude was "owning a home is an absolute necessity and everyone should try to do so regardless of whether or not their long term finances support it". Even worse, you had many people encouraging to buy them not on the basis of living in those homes but using them for speculation or as an ATM to finance spending they couldn't afford.

When Alan Greenspan is telling people to get ARMs because of his excessive liquidity policies, you know something is seriously wrong with the country's attitude towards financial responsibility.
Trans Fatty Acids
18-09-2008, 22:41
Speaking of Alan Greenspan, another way to look at the housing bubble is monetary policy interacting with good ol' supply and demand. When you have an abundant supply of X, the price drops. People selling X will try to create demand by finding new uses for X and new ways to sell X. In the case of US Agriculture, "X" is corn -- couple that with price supports for sugar and you get the high-fructose corn syrup industry. In the case of the housing bubble, "X" is money -- couple that with pro-ownership government policies, and you get "ninja" 3/1 ARMs.
King Arthur the Great
18-09-2008, 22:49
I read an article in the New York Times today by Nick Kristof basically detailing that for driving a huge, economically important giant corporation off a cliff, a CEO can get paid pretty handsomely. I guess the trick here is to give everybody that is losing their money, and normally only makes $30,000 per year, a day as the CEO of one of these corporations. The only thing that changes is that some of the execs already working there and getting huge bonuses will lose a few hundred thousand off their million-dollar base pay.
Mystic Skeptic
19-09-2008, 00:39
Nah! Why blame Bush? Of course Mr President had nothing to do with it!
"There are none so blind as those that will not see!"
Who or what is responsible for regulation of the US money market?

In Australia, we have what is known as the Westminster system, which means that politicians take the blame for major stuff-ups (even when it's not directly their fault.

Back to the US, President Truman had a sign on his desk that said "The buck stops here."

But I guess that lyric has been relplaced by Shaggy's immortal one: "Wasn't me!"

Here is a glorious example of Australia' Westminster 'Buck Stops Here' system;
http://www.youtube.com/watch?v=WcU4t6zRAKg
Mystic Skeptic
19-09-2008, 00:41
Word on the street is that the government's going to create a new entity to take over these banks' debt. I think we're going to be in for a surprise once this entity reports just how much bad debt is out there; the RTC back in the 1980's handled something like $400 billion worth of assets, and considering the extent of bad credit default swaps and other collapsing derivatives out there it's likely trillions of dollars of bad debt floating around.

I think it's a necessary move that will help stop the credit markets' hemorrhaging and with any luck initiate the process of major structural reform in the regulatory environment. Bernanke had the balls not to cut interest rates so it's likely we may actually see a tough stance on this issue, in particular if Obama is elected. Of course, the concern with that is that the stance will be too tough, prompting some future process of deregulation that will end up repeating the problem.

Who knows, though? Maybe we'll get it mostly right this time like we did back in the 1930's.

I'm not certain - but I believe that the RTC netted a PROFIT for the government after it was all unwound...


Meanwhile, the crisis we are in is a multi-dimensional issue - not a soundbite - which is why both major candidates look so foolish when they try speaking about it.

The components include naked shorts, no uptick rule, investor and depositor panic, difficulty in pricing certain securities, unethical borrowers and unscrupulous loan officers, extremely poor risk management in loan product development, extremely poor transparency in packaging mortgage securities, partisan gridlock when attempting to address the problem by congress, coincidental low interest rates, irrational pricing of real estate assets by buyers, appraisers and salespeople, high cost of building materials and labor..... and George Bush.
Mystic Skeptic
19-09-2008, 00:47
Read an article in the New York Times today by Nick Kristof basically detailing that for driving a huge, economically important giant corporation off a cliff, a CEO can get paid pretty handsomely. I guess the trick here is to give everybody that is losing their money, and normally only makes $30,000 per year, a day as the CEO of one of these corporations. The only thing that changes is that some of the execs already working there and getting huge bonuses will lose a few hundred thousand off their million-dollar base pay.


I agree that executive (at least higher level) has gotten out of control. I do not think the solution is to scrap the entire capitalist system, nor do I feel the solution is to do nothing. I would rather see two steps taken to fix this;

1) With retirement plans there is a formula (called testing) for HCEs (Highly compensated employees). if too many HCEs benefit from a plan and ot enough others do, then the plan becomes 'top heavy' and can lose some or all of it's tax sheltered status. I feel that corporate tax rates should remain progressive, but a similar 'testing' should be done for payrolls and corporations which are 'top heavy' should be exposed to additional taxes. If they want to pay ridiculous amounts let them - but incent them not to.

2) Those on the board of directors should be elected solely by shareholders. Employees/unions should also have an ELECTED position on the board. None of them should be appointed by the CEO - ever.
Marrakech II
19-09-2008, 00:50
I'm not certain - but I believe that the RTC netted a PROFIT for the government after it was all unwound...

The likely hood of the new one will is high I believe.
Neesika
19-09-2008, 01:08
Now's the time to show the world whether you're really committed to the free market or not.
Gauthier
19-09-2008, 02:42
Now's the time to show the world whether you're really committed to the free market or not.

It never was 100% committed to Free Market Economies. It's a Corporate Welfare Nation where profits are privatized but losses are always socialized in the form of govenment bailouts and rising taxes.
Gauntleted Fist
19-09-2008, 05:21
So...why are we bailing out AIG, now? I thought the whole point was to let them sink or swim on their own? Does anybody understand the reason for the flip-flop?
Zombie PotatoHeads
19-09-2008, 06:19
So...why are we bailing out AIG, now? I thought the whole point was to let them sink or swim on their own? Does anybody understand the reason for the flip-flop?
at a guess, due to the sheer size and nature of AIG. letting this company go under would seriously screw up the World Economy.
Lehman is primarily concerned with one aspect of the economy, so it's demise can be isolated somewhat. AIG on the other hand has its fingers in so many pies that the fallout from it's demise would be too great.
Gauthier
19-09-2008, 06:23
at a guess, due to the sheer size and nature of AIG. letting this company go under would seriously screw up the World Economy.
Lehman is primarily concerned with one aspect of the economy, so it's demise can be isolated somewhat. AIG on the other hand has its fingers in so many pies that the fallout from it's demise would be too great.

In other words, intrinsically entwine yourself in world affairs that when it starts looking like you're slipping everyone has to bail you out.

And yet people howled and bitched when Kim Jong-Il did it with nukes instead of American money.
Arroza
19-09-2008, 06:34
Kim Jong-Il never paid a dividend.
Collectivity
19-09-2008, 07:29
It never was 100% committed to Free Market Economies. It's a Corporate Welfare Nation where profits are privatized but losses are always socialized in the form of govenment bailouts and rising taxes.

Damn right. All the piggies with their snouts in the trough - the urgers known as "financial advisors" take investors' money, invest it in some basket of shares with some corporation who gets a rake off, then the government gets its share.
And then the basket of shares loses a shitload of money because all the porkers with their snouts in the trough have found ingenious ways to make themselves rich out of the bubble they've managed to blow up between them, which then bursts and the investors lose their shirts.
In Australia, we have a name for such investors - mug punters.
I have been a mug punter and, by virtue of the superannuation I have, I guess I still am.
I wish there was a St George to rescue me from the dragon of Corporate "Yada! Yada!" greed. However, George W is no St George.
But I do think it was sensible to bail out AIG because my life insurance is with them - as a previous wise poster said, "They have many fingers in many pies".
Arroza
19-09-2008, 07:41
If AIG goes down, then who will sponsor ManUre's shirts?
Gauthier
19-09-2008, 07:43
But I do think it was sensible to bail out AIG because my life insurance is with them - as a previous wise poster said, "They have many fingers in many pies".

Yes, but it has the distinct impression of a hostage situation where AIG is holding on to a Dead Man's Switch that'll blow up the world economy if it slips. Unregulated Free Market Capitalism has a penchance of allowing certain corporate entities to spread to such points like a cancer (Enron and Tyco certainly aren't the first or last examples either, goes all the way back to the 1920s). The world should not be held hostage by individual greed to this severe a scale.
Vetalia
19-09-2008, 07:44
The components include naked shorts, no uptick rule, investor and depositor panic, difficulty in pricing certain securities, unethical borrowers and unscrupulous loan officers, extremely poor risk management in loan product development, extremely poor transparency in packaging mortgage securities, partisan gridlock when attempting to address the problem by congress, coincidental low interest rates, irrational pricing of real estate assets by buyers, appraisers and salespeople, high cost of building materials and labor..... and George Bush.

Don't forget Bill Clinton and the Republican Congress of the 1990's, with their passage of the Gramm-Leach-Bliley Act that paved the way for the now collapsing companies we see today. After all, allowing companies to invest the money they receive from mortgages and insurance policies and to sell securities backed by those mortgages and insurance policies and then sell derivatives worth multiples of the original debt is a great idea, right?

Of course, considering said bill was passed in 1999, the year when dot-coms were being thrown more money than they could spend and all of the stock markets were soaring to new highs (including that stratospheric 84% rise in the NASDAQ), perhaps it's understandable to see how irrational exuberance could impact political decisionmaking. Excessive deregulation is always a product of excessive exuberance, and vice versa.
Zombie PotatoHeads
19-09-2008, 08:04
Don't forget Bill Clinton and the Republican Congress of the 1990's, with their passage of the Gramm-Leach-Bliley Act that paved the way for the now collapsing companies we see today.
To be fair to Clinton, the bill was veto-proof, so he could do little else but sign it.
And of course, let's not forget it was a Republican-driven bill supported by none other than the original MaverickTM himself who now says he knows exactly what to do to get us out of this mess: Setting up a 2 year-long study commission into the matter.
Barringtonia
19-09-2008, 08:12
If AIG goes down, then who will sponsor ManUre's shirts?

It's not a bad point overall, the effects of this spread everywhere - the actual buy-out of Man U. was, in my opinion, a farce. It placed Man U in debt, the interest of which requires them to pretty much have to win the EPL and CL every year, to need to find new sponsorship as well...I wonder if Man U might be bankrupt in a couple of years.

Yet that's a minor insignificance. There was a report on the effect on the New York economy with the enormous amounts of highly-paid bankers, people who support high end restaurants, luxury goods, theatre and more through their salaries, being laid off.

Other financial centres will also be hit, on and on it goes.

I doubt we'll understand the true effects of this for another 6 months to a year, not much was apparent in 1929 either, it took until 1930 for real pain to hit and, once again, we're sleepwalking through history on this one.
Vetalia
19-09-2008, 08:14
To be fair to Clinton, the bill was veto-proof, so he could do little else but sign it.

And of course, let's not forget it was a Republican-driven bill supported by none other than the original MaverickTM himself who now says he knows exactly what to do to get us out of this mess: Setting up a 2 year-long study commission into the matter.

That is true, a veto would've probably been overridden considering it passed with a vote of 90-8 in the Senate. However, I think it was one of those cases where the idea was great (financial regulations needed to be desperately updated) but the implementation ended up being shoddy because the regulatory backbone needed to make it work as well as intended wasn't there.

Truth is, though I don't think many people really knew what was happening until the situation had long surpassed any attempt to preempt it. This was a true fuckup and it's going to take a lot more than a commission to bring us back to financial stability.
Barringtonia
19-09-2008, 08:16
In other words, intrinsically entwine yourself in world affairs that when it starts looking like you're slipping everyone has to bail you out.

And yet people howled and bitched when Kim Jong-Il did it with nukes instead of American money.

Actually the real grumblers should be South Korea, along with other countries who were told that no money would be forthcoming to bail them out in 1997 unless their government guaranteed that it would not bail out failing companies, any company.

Seems funny now, almost but not quite.
Zombie PotatoHeads
19-09-2008, 08:39
That is true, a veto would've probably been overridden considering it passed with a vote of 90-8 in the Senate. However, I think it was one of those cases where the idea was great (financial regulations needed to be desperately updated) but the implementation ended up being shoddy because the regulatory backbone needed to make it work as well as intended wasn't there.

Truth is, though I don't think many people really knew what was happening until the situation had long surpassed any attempt to preempt it. This was a true fuckup and it's going to take a lot more than a commission to bring us back to financial stability.
The idea was okay, just totally lacking in the concept that people are greedy, especially bankers, and it would only be a matter of time before someone would find a way to exploit any loopholes in the legislation.
The problem lies more with the current administration, who ignored all the warning signs there was an impending downslide. There were some major investors and analysts - including some inside the Fed itself - warning us more than 4 years ago that this was coming.
Neu Leonstein
19-09-2008, 09:11
Actually the real grumblers should be South Korea, along with other countries who were told that no money would be forthcoming to bail them out in 1997 unless their government guaranteed that it would not bail out failing companies, any company.
The US doesn't have a currency peg.

The problem in South Korea was that the whole banking system was basically operating like Fannie and Freddie were: being fairly sure that the government would help them out. And more than that, the legacy of a regulatory system aimed not at preventing crises, but at building globally competitive conglomerates. If you think there was a moral hazard issue involved here, you should have seen what was going on before the crash in the Tiger economies.

At any rate, once these businesses started hurting, and the banks attached to them were in real trouble, the government wanted to bail them out. But because their debts were dollar-denominated, it had to use its own foreign reserves to do it, with the result that the peg was looking vulnerable and came under attack from investors. Trying to stabilise the situation required the government to stop spending all this money.

Still, you're right, there are interesting parallels. I suppose that's the benefit of not having to ask the IMF for help. Believe it or not, if the US government had to, they'd have similar rules imposed on them as the various developing countries did over the years.
Zombie PotatoHeads
19-09-2008, 09:17
Big difference between Korea & Japan to the USA is that the banks did their best to hide their debts as long as possible and the respective governments were only too happy to turn a blind eye to what was going on. Only thing this really did was prolong the depression into a decade-long affair.

It wasn't until 2000 (iirc) did the Japanese government finally stand up and demand the banking industry clean out all the bad loans. It hit the Japanese economy pretty hard, but it was able to actually start recovering soon afterwards.
Barringtonia
19-09-2008, 09:44
*snip*

*snip*

Thanks for further enlightenment, I'm not sure Japan has really recovered as such but then I'm not overly sure I include Japan in terms of the Asian Tigers crash in '97.

Essentially we saw the same thing, property speculation was rife built on the idea that growth was unlimited, all sorts of risky bets were made off the back of this including banks over-investing and leaving themselves short of liquidity.

In Asia, banks were propping up essentially fraudulent companies, mostly through government connection pressures, in the US, banks were propping up fraudulent guarantees, mostly through phantom profits (though real bonuses).

Both were due to short term profiteering over long term stability, both were allowed, if not encouraged, by governments who, in the case of the US, eased laws, CGT rates and etc., and, in the case of Asia, simply ignored, if not participated in illegal dealings.

Yet when Asia crashed, the countries were simply left to die, capital controls were not allowed, and only Malaysia and China ignored that, and were both better off for it, no bail outs were allowed and the idea was that a short, sharp shock would, in the long run, lead to better financial stability.

The difference in the case of AIG, of course, is overall effect on the economy, yet really it's protecting American financial interests because economics also abhors a vacuum, the danger is that it will be filled by a non-US company, reducing influence and damaging America's economic interests.

America was easily the dominant force on the IMF, it was American economic philosophy that calls for pure capitalism that ignored the needs of millions of living people.

It seems hypocritical, entirely understandable, justifiable even, but hypocritical.

I could be wrong, I'm of the ABC school of economics so my understanding my be based on wrong assumptions.
Abdju
19-09-2008, 09:45
Believe it or not, if the US government had to, they'd have similar rules imposed on them as the various developing countries did over the years.

I doubt in practice it would work that way, even if technically it should. The US effectively has veto power in the IMF due to the way voting power is dished out, and so threatening other countries into changing, or just outright ignoring, the rules to go along with your wishes wouldn't exactly be difficult.
Barringtonia
19-09-2008, 10:04
Check it out, the UK FSA has banned short-selling, or at least will no longer tolerate anonymity in short-selling.

http://www.guardian.co.uk/business/2008/sep/19/marketturmoil.stockmarkets

The market was also pushed higher by last night's unprecedented move against short-sellers - people who sell shares they do not own on the hopes of pushing the price lower and buying them back at a profit.

New rules brought in by the Financial Services Authority banned new so-called "short positions" being taken - or existing positions being increased - in financial services stocks, from midnight last night.

Anyone with an existing short position - essentially betting that a stock price will go down - has until next Tuesday to close down that position by buying shares, or they must disclose their positions to the regulator.

This rule opens the way to naming and shaming of short-sellers, who as a rule prefer to retain some degree of anonymity, and as a result many have been closing their positions by buying shares in the market this morning, which has helped boost stocks.

The Irish financial regulator also banned short positions being taken in Bank of Ireland, Allied Irish Banks, Irish Life and Permanent or Anglo Irish Bank.

What do we think of that?

To me, it's quite serious market intervention.
Moon Knight
19-09-2008, 10:09
Check it out, the UK FSA has banned short-selling, or at least will no longer tolerate anonymity in short-selling.

http://www.guardian.co.uk/business/2008/sep/19/marketturmoil.stockmarkets



What do we think of that?

To me, it's quite serious market intervention.


Didn't the US do the same thing?:confused:
Barringtonia
19-09-2008, 10:11
Didn't the US do the same thing?:confused:

I don't think so, not yet anyway.

EDIT: It's being considered.

http://www.businessweek.com/bwdaily/dnflash/content/sep2008/db20080918_184680.htm?chan=rss_topStories_ssi_5
Moon Knight
19-09-2008, 10:59
I don't think so, not yet anyway.

EDIT: It's being considered.

http://www.businessweek.com/bwdaily/dnflash/content/sep2008/db20080918_184680.htm?chan=rss_topStories_ssi_5



I knew I heard about it somewhere. Typical, drag their feet on everything.
The Infinite Dunes
19-09-2008, 12:10
Check it out, the UK FSA has banned short-selling, or at least will no longer tolerate anonymity in short-selling.

http://www.guardian.co.uk/business/2008/sep/19/marketturmoil.stockmarkets



What do we think of that?

To me, it's quite serious market intervention.The banning short positions is intervention. But not allowing anonymity in short positions just seems like a sensible idea. One that prevents the manipulation of the market into a direction it might not otherwise take.

"Oh look, someone's shorting such a share again. Oh wait, it's only a hedge fund trying to get us to panic, never mind."

It seems like it would give traders a more informed view of what was happening in the market so they could make better decisions.
Moon Knight
19-09-2008, 12:19
I don't think so, not yet anyway.

EDIT: It's being considered.

http://www.businessweek.com/bwdaily/dnflash/content/sep2008/db20080918_184680.htm?chan=rss_topStories_ssi_5

http://news.yahoo.com/s/ap/20080919/ap_on_go_ot/sec_short_selling

Yeah, SEC did ban it.
Mystic Skeptic
19-09-2008, 13:14
So...why are we bailing out AIG, now? I thought the whole point was to let them sink or swim on their own? Does anybody understand the reason for the flip-flop?

First - most capitalists believe the governments role is to maintain an orderly economy / marketplace. (think - like traffic lights) Intervention is not at all contrary to capitalism when it is done to maintain order. It is inaccurate and absurd to believe that capitalism is against government participation to the point of anarchy.

The short term issues (my prior post outlined more comprehensive troubles) is that people with deep pockets (hedge funds in particular) were 'shorting' stocks aggressively and with few constraints - which puts very considerable downward pressure on them. It is not the same as betting against a sports team. It can be far more destructive because of the technical way it operates.

This caused the stocks to drop quickly and created a PERCEPTION that the company was in trouble. Many were, but most not so sever as to lead to imminent collapse...

... until selling and business pressure (due to the PERCEPTION there was trouble) mounted and their customers started demanding their deposits back - essentially creating a run on the bank or brokerage. At this point the business suffers because though they have the assets to cover withdrawals, some of their assets are not as liquid as others (think medium and long term bonds) The need to pay off the depositor investor trumps the need to hold the issue full term, so it ends up being sold for less, often FAR less, than it's actual value. (Imagine if you HAD to sell your house by tomorrow - you could, but not at a fair price - which would exacerbate your financial woes even further)

When this happens to one company it is unfortunate, but when it becomes systemic it now is no longer an issue of the fundamentals, it is an issue of perception and confidence. This is when government intervention becomes necessary and prudent.

The governments proposal sends the short sellers packing (I personally think an uptick rule would have been adequate) and it creates a marketplace for securities to be sold at a fair discount - not at firesale prices.

The government will end up buying billions, if not trillions, of dollars of hard to value securities at a reasonable discount. What isn't reported is that most of these securities will be unwound at a leisurely pace for full market value - netting the government a tidy profit over the next few years - which they will spend with their usual prudence and discretion (sarcasm).


Now - politically - the issue is hilarious because both parties are trying to condense the issue into soundbites - and phail is written all over them. The sad part is that the issue is a complex financial circumstance and most people in the US (I am starting to thing that includes all presidential candidates and staff) just don't understand it. So instead they turn to what psychologists call superstitious behavior (not to be confused with superstition). Adding to the sadness most individuals buy in because they don't get it either. The scary part is that this can result in public policy - which would do little, if anything, to actually address the problem and could actually make it worse.

There is little doubt that the government could have done more sooner, (not to mention the private sector and even individual citizens) but we make that observation with the benefit of hindsight. If you are one of the many people who overpaid for your house then you can relate to the understanding of how hindsight makes the obscure look obvious. It is important to remember that always...
Barringtonia
19-09-2008, 14:56
*snip*

...and the human results...

The vultures have been circling gleefully. The abrupt collapse of Lehman Brothers and this week's fast-moving banking crisis have generated unedifying smirks of mirth among the short-sighted, the ignorant and the dim-witted.

In the Guardian this week, the Pulp singer Jarvis Cocker opined that it was "really nice seeing capitalism getting its comeuppance". Over at the Daily Mail, Allison Pearson declared that her heart did not bleed for "the Lehman's man whose idea of economising was to fire the dog-walker that escorts his poodle for a daily wee in Kensington Gardens".

Personally, I'm getting bored of arguing with ostensibly sensible friends who seem to think that it's good news when many of Lehman's 25,000 employees lose their jobs overnight. Thousands more are likely to go in Merrill Lynch's takeover by Bank of America, about 6,000 were laid off when Bear Stearns went belly up – and that's before you even consider Northern Rock, HBOS, Washington Mutual. The list goes on.

I'm no fan of top bankers' ridiculous salaries. It was utterly ludicrous for Goldman Sachs' Lloyd Blankfein to get $68.5m last year – the boards of top banks have proven themselves to be spineless in cracking down on this obscene phenomenon. Even Morgan Stanley's boss, John Mack, once admitted as such, telling an interviewer: "Let's whisper it, but the truth of the matter is that all of us are overpaid."

That doesn't apply, though, to the legions of cleaners, caterers, drivers, secretaries, mailroom workers and maintenance men who work at banks – or even to the massed ranks of middle-ranking salarymen who make a good living but aren't in stratospheric cocaine and caviar territory.

More importantly, critics are confusing banks' excesses with their underlying roles. Banks aren't inherently evil – they're not there to destroy mankind or to steal from anybody. They were invented to look after our money, to invest in businesses and to make our savings, pensions and insurance policies more valuable. Over the last few years, they've gone over the top by taking too many risks. That means they need to change. Their behaviour needs to be modified, probably by greater regulation. Their management needs a shake-up and their culture needs to become less aggressive. But it certainly doesn't mean it's good news when they go bust.

Perhaps I'm biased because I have a brother who worked at Bear Stearns – and because I've been talking to various Lehman employees this week. For most of them, redundancy doesn't mean economising on staff to walk their poodles. It means worrying about where they'll find the money for next month's mortgage payment.

A friend who works at Lehman in London described Monday as follows: "We arrived in the morning and we were told what had happened. Our line managers held brief meetings, they passed on the information they had. That, for me, was that all parts of the business relevant to us were in administration. That basically means it's all over and that we should basically clear out our desks. We started to disentangle our lives from Lehman. I was sorting out my emails, sending any relevant ones to a personal account ... there was no need and no desire to have us hanging around."

It's a fairly brutal end – and the immediate pre-occupation for Lehman staff in London was whether they would be getting their September pay cheques, due at the end of this week, in time for direct debits to pay personal bills. It looks as if they will – although it'll be the last month.

"It was surprisingly calm," says the Lehman's banker I spoke to. "There was a kind of blitz spirit, in the sense that we were all in it together. A lot of us have been working in areas that were doing fine - my group was making money. We don't feel personally responsible for what's happened."

It is perfectly natural that shipyard workers, miners, firefighters, teachers and nurses should engender more immediate public sympathy than those who do less visible jobs in comfortable offices. I'm not suggesting anybody should go on a march to support jobless bankers – it is an inherently insecure profession in which people are at the mercy of the markets.

But when bad things happen, anybody with an ounce of imagination ought to feel a degree of compassion for those affected and for their families, irrespective of political leanings. And as for Jarvis Cocker, who used to sing about the common people, how does he think Pulp sold all those records? Wasn't that mass marketing, aggressive promotion and capitalism?
The Smiling Frogs
19-09-2008, 15:03
With the collapse of Wall Street's investment bank, Lehman Brothers, another nail has been driven into Bush's political coffin. This scandal and its world-wide aftershocks is even more damning than the Enron corruption scandal for the White House.

First, why is this "another nail" in Bush's coffin? Go back to September 11, 2003, five years ago, when Bush proposed the agency that Congress set up to monitor the mortgage industry. The New York Times called it the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis. But who pooh-poohed that initiative? The Democrats of Congress. They cried foul and said Fannie Mae and Freddie Mac were not facing any kind of financial crisis. Even though, under Clinton, the House Banking Committee called for an investigation into the investment practices of Freddie Mac, the Congressional-chartered, shareholder-owned mortgage finance company, saying it had abused the preferential borrowing terms it enjoys through its ties to the Government by getting low financed loans and investing in Philip Morris. Yes, Big Tabacco(!).

So again, how is this Bush's fault? Also note that the former head of Fannie Mae, Franklin Raines, is now Obama's economic advisor. Raines made around 100 million dollars over seven years working at Fannie Mae while running it into the ground.

The second question is: why is Enron a Bush scandal? Enron requested a bailout and Bush said no. The excesses of Enron did not occur under Bush but under Clinton. Clinton isn't to blame for Enron either though, the execs of Enron are to blame for Enron. Although Bush's administration holds the record for prosecution of corporate criminals.

Who or what should shoulder the blame for this debacle?

I know most here would like to blame Bush or Republicans but this is a Congressional, and mostly Democrat, debacle. Government should not be in the home loan business. Ever.

Economic Rationalists seem strangely quiet now. Why aren't they strenuously objecting to government rescue attempts of financial institutions?

They are. You just have to leave this little echo-chamber to hear them.

Is it because they simply have no solutions to offer when their much vaunted "market forces" take a nosedive?
What do you think?:confused:

This is exactly what should be happening. The Government has distorted the market and the market is now adjusting as it should and always does. There should be no bailout and Fannie Mae and Freddie Mac should be liquidated. This is a Government-induced "crisis" and the markets are just fine.

So all in all the premises behind this thread are illogical, economically illiterate, and just not very well thought out. But I am sure many of you will ask for sources so I will provide some groundwork:

http://query.nytimes.com/gst/fullpage.html?res=9F01EFDE103CF932A25757C0A961958260

http://www.investors.com/editorial/editorialcontent.asp?secid=1501&status=article&id=306545173352598

Have fun!
Hydesland
19-09-2008, 15:29
They are. You just have to leave this little echo-chamber to hear them.


Nope, the overwhelming consensus among economists has been supportive of the governments moves actually (albeit reluctantly). They even support the ban on short selling.


This is exactly what should be happening. The Government has distorted the market and the market is now adjusting as it should and always does. There should be no bailout and Fannie Mae and Freddie Mac should be liquidated. This is a Government-induced "crisis" and the markets are just fine.


Wow, all moralising rhetoric, nothing of substance.
Barringtonia
19-09-2008, 15:35
*snip*

The Republicans have pulled every trigger.

From the Republican pushed, 90-8 voted in, Gramm-Leachy-Bliley Act, to the Republican pushed drop in CGT from 29%-20% in '97 and then from 20%-15% by George W., every sign from the Republican government has been about 'we'll lower tax and interest rates, you invest like crazy, that way we'll spend our way out of excessive...amm...spending.

The Republicans push the idea that if the rich get richer, the poor get richer too, this philosophy clearly has limits yet regulation after regulation was dropped to make it easier to invest beyond means. The disparity between the average wage and the top wage grew and grew.

Much of economics might be out of reach for a President to influence, but the general leeway given for particular theories is influenced by dominance of airtime, a president has some priority and weight in attention given.

Low taxes and extreme open financial systems aren't perfect for a nation of 300+ million diverse people, not when it's so open to a world where market transparency differs between nations.

The idea that America can dominate the economic table through sheer size and influence in a world divided between by far more than just 'the enemy of my enemy' is wrong. 9/11 was the most visual symbol of the world crashing into America.

Investment into education and health should be paramount, and in education, for it to be bound by traditional opinions in a world growing ever more competitive, for creationism to be even considered...

This is the wrong time for America to be bound by tradition, it really needs to show the world that it's progressive in outlook.

I'm waxing lyrical this evening :)
Hydesland
19-09-2008, 15:39
-snip-

I have to disagree with this as well, although the US's policy may not be fair enough to the lower paid, and too generous to the rich, I don't think it had anything to do with the current economic crisis at all.
The Smiling Frogs
19-09-2008, 16:03
I have to disagree with this as well, although the US's policy may not be fair enough to the lower paid, and too generous to the rich, I don't think it had anything to do with the current economic crisis at all.

In fact, nothing in that post has anything to do with the current economic situation.
Vetalia
19-09-2008, 17:57
In fact, nothing in that post has anything to do with the current economic situation.

Except Graham-Leach-Bliley. Of course, that wasn't a failure of the act itself but rather a failure of existing regulatory agencies and their rules to update their operations to the same standard as the financial services covered by the act. I think the key lesson learned here is that all aspects of the financial industry need to be consistent in order to prevent these kinds of problems from occurring. I think you could even maintain this kind of deregulated system quite well if all aspects of the regulatory structure are up to date and consistent.
Neu Leonstein
20-09-2008, 00:09
Essentially we saw the same thing, property speculation was rife built on the idea that growth was unlimited, all sorts of risky bets were made off the back of this including banks over-investing and leaving themselves short of liquidity.
Yeah, but the thing that made all the difference was that the bad bets made in Tiger economies were denominated in foreign currencies. When the collapse happened, that meant not just banks going belly-up, but the currency crashing as well. And since the countries had pegs, that dragged governments down with them.

Yet when Asia crashed, the countries were simply left to die, capital controls were not allowed...
They had decided capital controls weren't the way to go because they wanted all this money to flow into the country in the first place. Capital controls are a very bad thing, which also happen to have the effect that they can slow (not stop - Argentina had them too) massive outflows.

...and only Malaysia and China ignored that, and were both better off for it, no bail outs were allowed and the idea was that a short, sharp shock would, in the long run, lead to better financial stability.
The others could have ignored it too, except they needed to borrow money from somewhere. The IMF's rules are aimed at making sure that countries are able to repay the loans, and that they won't need to borrow again. After the Japanese in the early nineties refused to face up to their own banking collapse, and the result was a recession that dragged on for like a decade, there was reason to assume that this was the best, and indeed only, way to remove the moral hazard problems that caused the crisis in the first place.

The difference in the case of AIG, of course, is overall effect on the economy, yet really it's protecting American financial interests because economics also abhors a vacuum, the danger is that it will be filled by a non-US company, reducing influence and damaging America's economic interests.
AIG is more than likely not going to survive. It'll be kept around under government control to sell off its assets and make sure it pays back the loan, and whatever will be left will be privatised as a fraction of the firm it once was. It may be that political forces will try to influence who gets what, but given that foreigners have already played a huge role in propping up hurting institutions on Wall Street, I don't think it's about that at the moment.

America was easily the dominant force on the IMF, it was American economic philosophy that calls for pure capitalism that ignored the needs of millions of living people.
There are plenty of articles written by people in charge with the IMF about how they dealt with the crisis and what they could have done better. Those are technical, not philosophical, issues. There really wasn't anything wrong with the intention of the IMF programs tied to the loans, as I said the goal was to shorten the crisis, allow countries to come back quickly and prevent a repeat of the Japanese experience.

I doubt in practice it would work that way, even if technically it should. The US effectively has veto power in the IMF due to the way voting power is dished out, and so threatening other countries into changing, or just outright ignoring, the rules to go along with your wishes wouldn't exactly be difficult.
That's not how the IMF works. Believe it or not, it's not some imperialistic outgrowth of US foreign policy, it's a big building with a lot of economists in it who try to fix the economies of those countries broken enough to have to come to them while also making sure they're not going bankrupt themselves.

If the US had to come to them, the process would be no different.
Barringtonia
20-09-2008, 07:31
Yeah, but the thing that made all the difference was that the bad bets made in Tiger economies were denominated in foreign currencies. When the collapse happened, that meant not just banks going belly-up, but the currency crashing as well. And since the countries had pegs, that dragged governments down with them.

Ah, thanks, I get it now whereas I hadn't really understood the significance before.

Overall, I'm not really commenting on right or wrong, I believe, generally, the right steps have been taken over the last week. I'm simply aware of the disparity in pushing the doctrine of free markets but not necessarily when it's your own, certainly a natural instinct but I still feel the Asia crisis was seen as come-uppance that deserved no help compared to the current situation.
Collectivity
20-09-2008, 08:06
I can't comment too much on the corruption of many of the ASEAN "tiger economies" (however, the Suharto regime in Indonesia was a stand-out example of it) but Japan's corruption in th e80's and 90s was notorious. The Yakuza (Japanese type of Mafia) had a stranglehold on business and politics - via the ruling party and the banks had a huge number of bad debts caused by the borrowings of these mobsters who virtually sent Asia's powerhouse economy broke.
Intestinal fluids
20-09-2008, 16:16
Yay the pricetag just went up another $700 Billion. Congrats taxpayers your the proud new owner of legions of bad loans!
Collectivity
20-09-2008, 21:23
In Australia, the government is moving to ban short selling. Makes on ethink of an old saying about horses bolting and barn doors, doesn't it?
Collectivity
21-09-2008, 05:29
NEW YORK TIMES EDITORIAL
Hard Truths About the Bailout
Published: September 19, 2008
The fifth major federal bailout this year — after Bear Stearns, Fannie Mae, Freddie Mac and the American International Group — is now in the works. Taxpayers have every right to be alarmed and angry. The latest plan is not necessarily a bad one, and officials had to move quickly to prevent credit markets from seizing up.
But make no mistake, this crisis could have been avoided if regulators had enforced rules and officials had dared to question risky lending and other dubious practices.
If done right, this bailout could succeed where the others have failed and remove the threat of a systemwide financial collapse. But the upfront cost will be enormous. So will the risk of losses in the long run — on top of the risks already incurred.
The new plan would commit taxpayer money to buy hundreds of billions of dollars of troubled loans and other mortgage-related securities from banks and Wall Street firms. It is based on the reasonable premise that as long as institutions are stuck with those assets, the flow of credit, the economy’s lifeblood, will be constrained, or as in the past week, all but frozen.
Congress, with one eye on this week’s volatile Dow and the other on November’s election, could authorize the plan as early as next week.
It is painfully clear that the financial system will not rebound on its own from the excessive lending and borrowing of the Bush years and the credit collapse in their wake. The one-bailout-at-a-time approach hasn’t worked. And modest steps are no longer an option.
Lawmakers and administration officials must be prepared to tell Americans the full, hard truths about this plan:
¶ What is this going to cost the taxpayers and who decides? It’s generally believed that many of the troubled assets that the government would buy will, in time, be worth more than they can fetch in today’s chaotic markets. That’s far from a sure thing. The assets are tied to housing, so their value will depend on how far prices fall, how many people end up defaulting and how long it takes before housing rebounds — all big unknowns.
For those reasons, it’s important for Americans to know who is going to decide what is the right purchase price for these assets. Wall Street will have a role, of course, but outside experts should be allowed to analyze the results. Americans also need to know how the process will be monitored to ensure that taxpayers’ interests are protected. If the government gets the price right, the upfront outlay could be recouped when it later sells. If it overpays, the taxpayer is stuck with the loss.
¶ How will Congress balance the bailout of Wall Street and the needs on Main Street? If financial markets stabilize, all Americans will benefit. But Congress must do more to provide direct help to struggling American families. Lawmakers should use the bailout legislation to also extend unemployment benefits, bolster food stamps and provide aid to state and local governments to provide health care and other services that are especially important during tough times.
¶ The administration and lawmakers also need to tell Americans that the era of cheap and easy money is over and that there are more tough times to come. Whose taxes will have to go up? How will the government help to create the jobs of the future? How will the most vulnerable Americans be protected? And they need to explain that the cost of the bailouts will compete with other spending.
¶ Finally, Americans need to be told a more fundamental truth: This crisis is the result of a willful and systematic failure by the government to regulate and monitor the activities of bankers, lenders, hedge funds, insurers and other market players. All were playing high-stakes poker with the financial system, but without adequate transparency, oversight or supervision.
The regulatory failure, in turn, was grounded in the Bush administration’s magical belief that the market, with its invisible hand, works best when it is left alone to self regulate and self correct. The country is now paying the price for that delusion.
If lawmakers and administration officials really want to restore confidence, the bailout must be only a first step. The hard work of establishing and enforcing the regulations that are needed for a truly trustworthy financial system, still lies ahead.
Zombie PotatoHeads
21-09-2008, 07:24
First, why is this "another nail" in Bush's coffin? Go back to September 11, 2003, five years ago, when Bush proposed the agency that Congress set up to monitor the mortgage industry. The New York Times called it the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis. But who pooh-poohed that initiative? The Democrats of Congress.
Let me get this straight: A REPUBLICAN President with a REPUBLICAN majority Senate and a REPUBLICAN majority Congress couldn't push through legislation because of the Democrats?
Yeah, that makes perfect sense.
Elaborate Design
21-09-2008, 14:57
Nice little detail: A rather large Chinese bank, CIC I believe, is currently talking about taking a 49% share in Morgan Stanley.

Now the game is on.

It did seem a matter of time before China decided to cash in on the crisis of their greatest economic rival...

http://www.ft.com/cms/s/0/f563019c-8595-11dd-a1ac-0000779fd18c.html
Collectivity
21-09-2008, 16:03
Good find Elaborate! That's what happens when the bubble bursts - the carpetbaggers move in!
Neu Leonstein
21-09-2008, 21:49
Good find Elaborate! That's what happens when the bubble bursts - the carpetbaggers move in!
CIC already owns a stake in Morgan Stanley. Given that every financial needs capital right now, it makes a lot of sense to approach them first. So it wasn't the Chinese moving in, but the other way around.

More up-to-date: http://news.xinhuanet.com/english/2007-12/22/content_7295154.htm

The good news seems to be that the Chinese aren't showing any serious indications of doubting the US as a place to put their spare cash.
Collectivity
22-09-2008, 01:23
CIC already owns a stake in Morgan Stanley. Given that every financial needs capital right now, it makes a lot of sense to approach them first. So it wasn't the Chinese moving in, but the other way around.

More up-to-date: http://news.xinhuanet.com/english/2007-12/22/content_7295154.htm

The good news seems to be that the Chinese aren't showing any serious indications of doubting the US as a place to put their spare cash.

That's a good point and a great insight NL
Lacadaemon
22-09-2008, 03:04
Morgan Stanley and Goldman Sachs have just converted their status to bank holding companies.

They are probably on the lookout for a suitor, but in a tail wagging the dog sort of fashion.

Not long now boys!
Neu Leonstein
22-09-2008, 03:11
Morgan Stanley and Goldman Sachs applied to change into holding companies, and the Fed approved the application.

http://www.businessspectator.com.au/bs.nsf/Article/Goldman-Morgan-to-become-commerical-banks-JQ47B?OpenDocument&alerts&loc=center
Lacadaemon
22-09-2008, 04:00
So liquidity - read loan - to be given by the fed until this clears anti-trust and they can fund like a regular bank.

This tells me they were both days away from failure. Things were even worse than I suspected.

Now they will have stricter capital requirements and direct supervision. In five days the US investment bank as we know it will cease to exist.

No real surprise, except the speed at which the end came once things broke down. The writing was on the wall once the commodity boom started after bear stearns.

In any event, not only is their business model broken, they can't even use it anymore. Depending on how the RCTII works out - the friends of hank scheme - most likely Goldman is now extremely overvalued. Don't see either company doing well going forward.
Moon Knight
22-09-2008, 06:12
Morgan Stanley and Goldman Sachs applied to change into holding companies, and the Fed approved the application.

http://www.businessspectator.com.au/bs.nsf/Article/Goldman-Morgan-to-become-commerical-banks-JQ47B?OpenDocument&alerts&loc=center



I'm no economist, is this a bad thing that happened?
Neu Leonstein
22-09-2008, 07:14
I'm no economist, is this a bad thing that happened?
It's a sign of things being bad, but really just a confirmation of what was already known. Even though Morgan Stanley and Goldman Sachs didn't get hurt too badly in the trading involving actual subprime mortgages, the fact that their competitors and sources of quick funding (since the banks are all supposed to lend to each other) disappeared led to a big breakdown in confidence. So they can't get cash from anywhere, and the leverage (ie the amount of debt they used to do business) has become unsustainable in this brave new world.

As a result, Merril Lynch for example got together with a commercial bank, because that means access to cash from deposits, which is cheap and safe (in that it won't suddenly disappear). MS and GS are now under pressure to do something similar, since people don't think the concept of a stand-alone investment bank is viable anymore. Immediately this announcement doesn't change a lot: they get access to the emergency funding the Fed provides to commercial banks, but an exception had been made already to allow investment banks access - now it's just a permanent arrangement. In the longer term, that means there'll be fewer things standing in the way of these two firms getting access to some sort of deposits. Since they're strapped for cash, it's unlikely they'll buy anyone, and I have a hard time imagining many people would actually want to put money into deposits from these firms anyways - chances are it's a formality that will make a fusion with a retail bank easier. On the other hand, with the access to emergency liquidity and government-provided deposit insurance also come stricter guidelines on how much debt you can take on and how much cash you need to have ready at any given time. Investment banks would have laughed in your face a year ago if you'd told them they'll be scrambling to submit to that sort of regulation now.

But as Lacadaemon says, the way it was rushed through shows they're in a hurry, which means they know they can't last for much longer as they are now.
Lacadaemon
22-09-2008, 09:28
It's a sign of things being bad, but really just a confirmation of what was already known. Even though Morgan Stanley and Goldman Sachs didn't get hurt too badly in the trading involving actual subprime mortgages, the fact that their competitors and sources of quick funding (since the banks are all supposed to lend to each other) disappeared led to a big breakdown in confidence. So they can't get cash from anywhere, and the leverage (ie the amount of debt they used to do business) has become unsustainable in this brave new world.


Goldman and Morgan actually do have significant real estate exposure, just not so much in the subprime space. So it is more than just a funding problem for them. Some form of consolidation would have to have happened anyway: though had funding issues and the potential for runs on them not become so acute, it might have taken a different form to the marriage of commercial/IB we are seeing now.

Part of the problem - and why I have been saying short financials since like forever - is that RMBS was a huge part of everyone's business. Yet despite this they never really got to grips with the product they were packaging. This is why the illusion that 'subprime is contained' which I found laughable, lasted for so long.

Hell, fannie and freddies death warrant was basically signed by the government because they didn't understand what was going on. Que sera sera.

I'm curious to see what actually is going to transpire from this bailout. It's an extremely problematic situation as far as I can see. And actually completely unlike the original RTC where the physical assets were dumped unencumbered in the governments lap. For example, how do they decide who gets what? Are the weakest banks going to be allowed to take lesser haircuts than the stronger ones? That would set an extremely bad precedent. Or is it going to turn into a tarpit. Then once the gov has these things, are they going to try to do a work-out with the debtors, and if so, how are they going to deal with the other parties who are creditors? Why should they be punished for basically being the victims of fraud? And, there is the whole issue of handing out punishments, which predictably, Paulson is against.

As long as they remember the primary purpose of this is to keep the CP market turning. (Though the government insurance for MM funds, which was part of that effort, has now been pulled since there were fears that it would suck banks dry of deposits. I suppose an interesting stress point to look for in the short term will be the interplay between MM and demand deposit funding which are both critical and could potentially cause more blow-ups).

Should be an interesting few months. High end retail probably the next shoe to drop. Commercial real estate is already in trouble, but not yet priced in.
Cameroi
22-09-2008, 12:13
blame is meaningless. at some point emotional attatchment to symbolic value will very likely colapse entirely. this may have tragic consiquences for a time. what is most likely few still are willing to believe, even thier own eyes in front of them.

still likely and inevitable are two seperate species, though they freequently interbreed.
Rambhutan
22-09-2008, 12:15
blame is meaningless.....

And whose fault is that?
Neu Leonstein
22-09-2008, 12:49
I'm curious to see what actually is going to transpire from this bailout. It's an extremely problematic situation as far as I can see. And actually completely unlike the original RTC where the physical assets were dumped unencumbered in the governments lap. For example, how do they decide who gets what? Are the weakest banks going to be allowed to take lesser haircuts than the stronger ones? That would set an extremely bad precedent.
http://www.informationarbitrage.com/2008/09/paying-for-the.html

One option looking good seems to be a reverse auction, and you let the banks fight it out amongst themselves. It's not like the market process itself would suddenly stop working, so if you create a situation like this with all the external pressures removed (to a degree, anyways), maybe they'll come up with some half-decent valuations.
German Nightmare
22-09-2008, 15:19
I'm glad that Chancellor Merkel has denied chipping in German tax payers' money into a problem that the U.S. government has partially created by not overseeing its people's dealings, ignoring the problem for too long, and doing too little way too late.

Remember how much money would've been needed to give every person in the U.S. decent health care? I believe it's only a fraction of those $ 700 billion they're now handing out in a jiffy.
Intestinal fluids
22-09-2008, 15:41
Is it almost a better idea at this point to let the economy bottom out on its own and find its own basement and then we can pick ourselves up dust off and start over with a rationally priced market. This slowly tearing off the Bandaid approach is almost worse.
Moon Knight
22-09-2008, 15:58
Goldman and Morgan actually do have significant real estate exposure, just not so much in the subprime space. So it is more than just a funding problem for them. Some form of consolidation would have to have happened anyway: though had funding issues and the potential for runs on them not become so acute, it might have taken a different form to the marriage of commercial/IB we are seeing now.

Part of the problem - and why I have been saying short financials since like forever - is that RMBS was a huge part of everyone's business. Yet despite this they never really got to grips with the product they were packaging. This is why the illusion that 'subprime is contained' which I found laughable, lasted for so long.

Hell, fannie and freddies death warrant was basically signed by the government because they didn't understand what was going on. Que sera sera.

I'm curious to see what actually is going to transpire from this bailout. It's an extremely problematic situation as far as I can see. And actually completely unlike the original RTC where the physical assets were dumped unencumbered in the governments lap. For example, how do they decide who gets what? Are the weakest banks going to be allowed to take lesser haircuts than the stronger ones? That would set an extremely bad precedent. Or is it going to turn into a tarpit. Then once the gov has these things, are they going to try to do a work-out with the debtors, and if so, how are they going to deal with the other parties who are creditors? Why should they be punished for basically being the victims of fraud? And, there is the whole issue of handing out punishments, which predictably, Paulson is against.

As long as they remember the primary purpose of this is to keep the CP market turning. (Though the government insurance for MM funds, which was part of that effort, has now been pulled since there were fears that it would suck banks dry of deposits. I suppose an interesting stress point to look for in the short term will be the interplay between MM and demand deposit funding which are both critical and could potentially cause more blow-ups).

Should be an interesting few months. High end retail probably the next shoe to drop. Commercial real estate is already in trouble, but not yet priced in.



And why would High end retail fall apart? Is there something wrong with bad debt?
Moon Knight
22-09-2008, 16:01
I'm glad that Chancellor Merkel has denied chipping in German tax payers' money into a problem that the U.S. government has partially created by not overseeing its people's dealings, ignoring the problem for too long, and doing too little way too late.

Remember how much money would've been needed to give every person in the U.S. decent health care? I believe it's only a fraction of those $ 700 billion they're now handing out in a jiffy.


Who asked you to give anything? Aren't these american companies, did anybody ask you to save them? And I believe the sum was $500 billion or so, we can't afford that and we can't really afford the $700, but we have to pay it.
German Nightmare
22-09-2008, 17:18
Who asked you to give anything? Aren't these american companies, did anybody ask you to save them? And I believe the sum was $500 billion or so, we can't afford that and we can't really afford the $700, but we have to pay it.
The U.S. government did.
Yes, the U.S. Treasury Secretary Paulson did. He asked to contribute to solve a crisis he helped create.
No, the sum was and is $700 billion.


"THE AMERICANS SAID, 'WE WON'T'"

Merkel Says Washington Helped Drag Europe into the Credit Crisis

Response to Washington's multibillion-dollar Wall Street bailout has involved a lot of skeptical grumbling in Germany and the UK. German Chancellor Angela Merkel says the Bush administration has mishandled Wall Street, and that its refusal to adopt stricter rules led to the current crisis.

[...]
Over the weekend the US said it would provide $700 billion to cover bad debt on Wall Street and ensure the survival of some financial institutions. On Sunday US Treasury Secretary Henry Paulson then called on foreign governments to launch similar bailouts for their own banks. "We are talking very aggressively with other countries around the world and encouraging them to do similar things and I believe a number of them will," Paulson told ABC News.

But the governments of Germany and Great Britain have shaken their heads.
[...]

http://www.spiegel.de/international/germany/0,1518,579707,00.html

So he did call for us bailing out financial institutions (many of which also have dealings in the U.S.) for something that the U.S. created. It's not hear-say I'm posting...
Moon Knight
22-09-2008, 17:55
The U.S. government did.
Yes, the U.S. Treasury Secretary Paulson did. He asked to contribute to solve a crisis he helped create.
No, the sum was and is $700 billion.


"THE AMERICANS SAID, 'WE WON'T'"

Merkel Says Washington Helped Drag Europe into the Credit Crisis

Response to Washington's multibillion-dollar Wall Street bailout has involved a lot of skeptical grumbling in Germany and the UK. German Chancellor Angela Merkel says the Bush administration has mishandled Wall Street, and that its refusal to adopt stricter rules led to the current crisis.

[...]
Over the weekend the US said it would provide $700 billion to cover bad debt on Wall Street and ensure the survival of some financial institutions. On Sunday US Treasury Secretary Henry Paulson then called on foreign governments to launch similar bailouts for their own banks. "We are talking very aggressively with other countries around the world and encouraging them to do similar thingsand I believe a number of them will," Paulson told ABC News.

But the governments of Germany and Great Britain have shaken their heads.
[...]

http://www.spiegel.de/international/germany/0,1518,579707,00.html

So he did call for us bailing out financial institutions (many of which also have dealings in the U.S.) for something that the U.S. created. It's not hear-say I'm posting...


Yeah, seems they asked you to bail out your own banks, not ours. I am ok with them bailing out American banks, but non-american ones shouldn't get a dime. Americans shouldn't bail out poorly run Non-American banks. The banks made the mistakes, nobody forced them to do what they did, they knew it was a bad practice and did it anyway.


$700 billion? Provide some proof because I am not getting that number, I am getting into the trillions.
German Nightmare
22-09-2008, 18:28
Yeah, seems they asked you to bail out your own banks, not ours. I am ok with them bailing out American banks, but non-american ones shouldn't get a dime. Americans shouldn't bail out poorly run Non-American banks. The banks made the mistakes, nobody forced them to do what they did, they knew it was a bad practice and did it anyway.
Yeah, bail out our own banks and their subsidiaries in the U.S. which are directly affected by what's been going down in the U.S. - pretty impudent when you consider that other nations have urged the U.S. time and again to do something about the lack of oversight that the U.S. financial market has experienced in recent years and the U.S. government has simply rejected that notion - but dares ask for help now.
$700 billion? Provide some proof because I am not getting that number, I am getting into the trillions.
Aside from the article I provided?

http://www.aleksey.com/xmlsec/images/bart.gif

How about taking a look at what the U.S. treasury says?



http://www.treas.gov/press/images/banner_pr-535pix.gif
September 20, 2008

FACT SHEET:
Proposed Treasury Authority to Purchase Troubled Assets
[...]
Funding. Funding for the program will be provided directly by Treasury from its general fund. Borrowing in support of this program will be subject to the debt limit, which will be increased by $700 billion accordingly. As with other Treasury borrowing, information on any borrowing related to this program will be publicly reported at the end of the following day in the Daily Treasury Statement.
[...]

http://www.treas.gov/press/releases/hp1150.htm
Moon Knight
22-09-2008, 23:27
Yeah, bail out our own banks and their subsidiaries in the U.S. which are directly affected by what's been going down in the U.S. - pretty impudent when you consider that other nations have urged the U.S. time and again to do something about the lack of oversight that the U.S. financial market has experienced in recent years and the U.S. government has simply rejected that notion - but dares ask for help now.


They are still your banks, we are not responsible for their bad loaning practices. We are asking you to bail your banks...But you expect us to bail out yours and ours? You want us to fix the screw ups of your banks? We are not asking for help but for you to fix the mess of your banks. Are you sure you know what the US is asking? Those banks are your responsibilty not ours, they are owned and run by companies outside the US and saving them is not our job but the job of the nation they are owned in.

Look, nobody forced them to do what they did. It's not our fault they abused the power and made bad business practices and got hammered, it's theirs for making ninja loans. So your banks screw up and you want us to clean your mess? If those banks made bad decisions it's not our job to fix it. Even if they didn't and just had a side effect, those are the risks of investing in another nation, just have to deal with it.


We tried to make stonger oversight, the boys in blue no like it.

Aside from the article I provided?

http://www.aleksey.com/xmlsec/images/bart.gif

How about taking a look at what the U.S. treasury says?



http://www.treas.gov/press/images/banner_pr-535pix.gif
September 20, 2008

FACT SHEET:
Proposed Treasury Authority to Purchase Troubled Assets
[...]
Funding. Funding for the program will be provided directly by Treasury from its general fund. Borrowing in support of this program will be subject to the debt limit, which will be increased by $700 billion accordingly. As with other Treasury borrowing, information on any borrowing related to this program will be publicly reported at the end of the following day in the Daily Treasury Statement.
[...]

http://www.treas.gov/press/releases/hp1150.htm

:rolleyes: I meant the health care claim you made, not the bail out. Jeez.:rolleyes:
Neu Leonstein
22-09-2008, 23:41
So your banks screw up and you want us to clean your mess?
Don't go too far here - this is ultimately an American mess, made with American loans. The originators of the loans were almost all American, but foreign banks were of course very involved in the trade in the securities created from those loans afterwards.

I think Paulson was just asking for the approach to be universal and global, which sorta makes sense given that it is a global industry and though the problem originated in the US, it has also spread globally. Deutsche, UBS, Credit Suisse and any number of UK institutions have taken hits as well, though their structure allowed them to survive them better than the pure investment banks did. So Merkel can probably get away with not doing something, with the UK I'm not so sure...a lot of banks are going to get under a lot of stress over there with falling house prices, especially in commercial real estate. But that will call for a different type of bail-out, not the US model.

And now for some further explanations regarding the transformation of Morgan Stanley and Goldman Sachs (and I'm quite impressed with this guy, he seems to know what he's talking about): http://www.informationarbitrage.com/2008/09/on-bank-holding.html
Moon Knight
22-09-2008, 23:49
Don't go too far here - this is ultimately an American mess, made with American loans. The originators of the loans were almost all American, but foreign banks were of course very involved in the trade in the securities created from those loans afterwards.

I think Paulson was just asking for the approach to be universal and global, which sorta makes sense given that it is a global industry and though the problem originated in the US, it has also spread globally. Deutsche, UBS, Credit Suisse and any number of UK institutions have taken hits as well, though their structure allowed them to survive them better than the pure investment banks did. So Merkel can probably get away with not doing something, with the UK I'm not so sure...a lot of banks are going to get under a lot of stress over there with falling house prices, especially in commercial real estate. But that will call for a different type of bail-out, not the US model.

And now for some further explanations regarding the transformation of Morgan Stanley and Goldman Sachs (and I'm quite impressed with this guy, he seems to know what he's talking about): http://www.informationarbitrage.com/2008/09/on-bank-holding.html


I know where it started and how it started, I don't find it reasonable or fair to expect us to bail out the world. In the long run they should have known the risks and taken steps to protect themselves from it along with the banks following the rules and regulations of their home nation while not doing anything illegal here. Were they not paying attention to all loans written by their bank? Seems they would have.
Neu Leonstein
23-09-2008, 00:21
I know where it started and how it started, I don't find it reasonable or fair to expect us to bail out the world.
That's not going to happen, rest assured. Currency markets are already looking at the US with a hint of worry, the dollar absolutely tanked at the prospect of an extra $700 billion worth of debt and bond prices must surely follow.

The US is first and foremost trying to bail itself out. Other than in the UK, the follow-through from the financial crisis into the real economy probably won't be as strong. The problem will be the lack of demand from the US, which will hurt exporters - but those countries know perfectly well that the US can't make a credible threat that it won't do anything in its power to stop that from happening, overseas support or not. And in some cases, like Mrs Merkel or German Nightmare here, there is a good portion of "told you so" involved as well.

In the long run they should have known the risks and taken steps to protect themselves from it along with the banks following the rules and regulations of their home nation while not doing anything illegal here. Were they not paying attention to all loans written by their bank? Seems they would have.
You have to understand that these big global banks aren't really foreign as such. They have subsidiaries in Wall Street that are just as central to the system as the ones with HQs in the US. Just because UBS happens to be Swiss doesn't make it any less of a Wall Street bank, really. And if you don't do anything about it if it's looking like it'll collapse, the Americans it owes money to aren't going to care what their CEOs first language is.

What you're saying applies pretty much universally (though you have to understand that the loans you're talking about are not the home loans it all started with) to all actors in financial markets (at least those with proprietary trading positions). If the reason a bank needs to be bailed out is to save the US economy from the impact of its collapse, then that holds true regardless of the bank's country of origin.

All that being said, the US banks are hurting the most, and the majority of the stuff the taxpayer will be taking onto its own balance sheet will come from US institutions. UBS, Credit Suisse or Deutsche Bank may have taken subprime hits, and will have been savaged because of funding costs and a loss of sharemarket confidence, but it hasn't reached a stage where it will bring down the Swiss or German economy. Their core businesses there are still functioning, and as such it's understandable that the German or Swiss governments aren't going to hand them money to save Wall Street (especially since that would be oh so unpopular with the voters).

EDIT: http://news.bbc.co.uk/2/hi/business/7629516.stm
Morgan Stanley in 20% stake sale

Morgan Stanley shares surged after Japanese banking giant Mitsubishi UFJ Financial Group said it would buy a stake in the bruised Wall Street bank.
Well, there's a lesson. After the collapse in Japan the banks took a decade to get their balance sheets back in order, but the bonus of that was that they largely stayed away from anything they didn't fully understand. That meant few investments outside Japan, including in subprime. As a result, all of a sudden they're now looking quite healthy, and where there's a bargain to be snapped up, they're ready for it.
German Nightmare
23-09-2008, 01:56
You want us to fix the screw ups of your banks?
Exactly my thought. Only the other way around. You guys are asking our banks to chip in. Which they better don't.

Mind you, I never asked for the U.S. banks or government to compensate our banks for their mis-investments.
I do, however, oppose our financial institutions paying additional money for the mistakes made by the U.S. ones. That's what I was getting at.
:rolleyes: I meant the health care claim you made, not the bail out. Jeez.:rolleyes:
I asked whether someone remembered how much UHC would cost... But I believe that $700 billion would get you a long way.
And in some cases, like Mrs Merkel or German Nightmare here, there is a good portion of "told you so" involved as well.
Huh. Now there's something I never imagined seeing: The Chancellorette and I mentioned in one sentence. :tongue:
Lacadaemon
23-09-2008, 03:56
And now for some further explanations regarding the transformation of Morgan Stanley and Goldman Sachs (and I'm quite impressed with this guy, he seems to know what he's talking about): http://www.informationarbitrage.com/2008/09/on-bank-holding.html

See, he's thinking what I was saying a while back, huge conservative behemoths tied to large stable capital bases that do the vanilla well understood stuff, and smaller boutiques and funds that work on the high risk exotic stuff. So risk is spread where risk is high, and all the low risk can be glommed together to extract efficiencies. Makes sense to me, at any rate.

Also, orthogonal risk? LOL.
Glorious Freedonia
23-09-2008, 20:03
With the collapse of Wall Street's investment bank, Lehman Brothers, another nail has been driven into Bush's political coffin. This scandal and its world-wide aftershocks is even more damning than the Enron corruption scandal for the White House. Who or what should shoulder the blame for this debacle?

Economic Rationalists seem strangely quiet now. Why aren't they strenuously objecting to government rescue attempts of financial institutions? Is it because they simply have no solutions to offer when their much vaunted "market forces" take a nosedive?
What do you think?:confused:

I am an economic rationalist and I do not know that I am silent about opposing this governmental intervention in the economy. I think that the government should stay out of the financial markets unless we are going to invest tax dollars in securities to beat the interest we are paying on our debt to help get out of debt. Even this is not regulation it is just participation.
Lacadaemon
23-09-2008, 21:47
People should be aware that if the bailout package is going to work, there can be no silly talk about the federal government getting shares from these companies and such. The money actually does just have to be given to wall street gratis. Adding strings makes the whole thing a trillion dollar waste of time, because it will just push everything further down the spiral of doom.
Neu Leonstein
24-09-2008, 00:12
And in other news, Warren Buffet just put $5 billion into Goldman Sachs.

http://money.cnn.com/2008/09/23/news/companies/goldman_berkshire/index.htm?postversion=2008092318
Goldman (GS, Fortune 500) will sell $5 billion of preferred stock to the insurance and investment giant, which will also receive warrants to purchase $5 billion of common stock with a strike price of $115 per share, the company announced Tuesday. Berkshire (BRKA, Fortune 500) has five years to exercise the warrants.

"Goldman Sachs is an exceptional institution," said Buffett in a statement. "It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance."

In addition, Goldman said it will raise at least $2.5 billion through the sale of common stock.

"This investment will further bolster or strong capitalization and liquidity position," said Lloyd Blankfein, Goldman's chief executive.
Lacadaemon
24-09-2008, 00:53
And in other news, Warren Buffet just put $5 billion into Goldman Sachs.

http://money.cnn.com/2008/09/23/news/companies/goldman_berkshire/index.htm?postversion=2008092318

I heard about it too. 10% div. Callable at 10% premium. Also he gets about a billion and a half worth of warrants gratis.

Wow. Talk about kicking a guy when they are down.
Collectivity
24-09-2008, 01:29
Naomi Klein, bless her cotton socks, author of "The Shock Doctrine" and "No Logo" and Canadian intellectual extraordinaire, has this to say:
Free Market Ideology is Far from Finished
by Naomi Klein
September 19, 2008

Whatever the events of this week mean, nobody should believe the overblown claims that the market crisis signals the death of "free market" ideology. Free market ideology has always been a servant to the interests of capital, and its presence ebbs and flows depending on its usefulness to those interests.

During boom times, it's profitable to preach laissez faire, because an absentee government allows speculative bubbles to inflate. When those bubbles burst, the ideology becomes a hindrance, and it goes dormant while big government rides to the rescue. But rest assured: the ideology will come roaring back when the bailouts are done. The massive debts the public is accumulating to bail out the speculators will then become part of a global budget crisis that will be the rationalization for deep cuts to social programs, and for a renewed push to privatize what is left of the public sector. We will also be told that our hopes for a green future are, sadly, too costly.

What we don't know is how the public will respond. Consider that in North America, everybody under the age of 40 grew up being told that the government can't intervene to improve our lives, that government is the problem not the solution, that laissez faire was the only option. Now, we are suddenly seeing an extremely activist, intensely interventionist government, seemingly willing to do whatever it takes to save investors from themselves.

This spectacle necessarily raises the question: if the state can intervene to save corporations that took reckless risks in the housing markets, why can't it intervene to prevent millions of Americans from imminent foreclosure? By the same token, if $85bn can be made instantly available to buy the insurance giant AIG, why is single-payer health care – which would protect Americans from the predatory practices of health-care insurance companies – seemingly such an unattainable dream? And if ever more corporations need taxpayer funds to stay afloat, why can't taxpayers make demands in return – like caps on executive pay, and a guarantee against more job losses?

Now that it's clear that governments can indeed act in times of crises, it will become much harder for them to plead powerlessness in the future. Another potential shift has to do with market hopes for future privatizations. For years, the global investment banks have been lobbying politicians for two new markets: one that would come from privatizing public pensions and the other that would come from a new wave of privatized or partially privatized roads, bridges and water systems. Both of these dreams have just become much harder to sell: Americans are in no mood to trust more of their individual and collective assets to the reckless gamblers on Wall Street, especially because it seems more than likely that taxpayers will have to pay to buy back their own assets when the next bubble bursts.

With the World Trade Organization talks off the rails, this crisis could also be a catalyst for a radically alternative approach to regulating world markets and financial systems. Already, we are seeing a move towards "food sovereignty" in the developing world, rather than leaving access to food to the whims of commodity traders. The time may finally have come for ideas like taxing trading, which would slow speculative investment, as well as other global capital controls.

And now that nationalization is not a dirty word, the oil and gas companies should watch out: someone needs to pay for the shift to a greener future, and it makes most sense for the bulk of the funds to come from the highly profitable sector that is most responsible for our climate crisis. It certainly makes more sense than creating another dangerous bubble in carbon trading.

But the crisis we are seeing calls for even deeper changes than that. The reason these junk loans were allowed to proliferate was not just because the regulators didn't understand the risk. It is because we have an economic system that measures our collective health based exclusively on GDP growth. So long as the junk loans were fuelling economic growth, our governments actively supported them. So what is really being called into question by the crisis is the unquestioned commitment to growth at all costs. Where this crisis should lead us is to a radically different way for our societies to measure health and progress.

None of this, however, will happen without huge public pressure placed on politicians in this key period. And not polite lobbying but a return to the streets and the kind of direct action that ushered in the New Deal in the 1930s. Without it, there will be superficial changes and a return, as quickly as possible, to business as usual.

This article first appeared on The Guardian.
Barringtonia
24-09-2008, 02:48
Naomi Klein...

One might wish...

Depressing really, good article, thanks for posting.
Desperate Measures
24-09-2008, 03:26
Are we going to die of no money?
Collectivity
24-09-2008, 04:14
Are we going to die of no money?

People never die of no money. They die of no love, no food, no water, no adequate health care, no shelter (sometimes because their house got repossessed). Sometimes they just die and there's not an awful lot anyone can do about it.
I just hate the fact that lots of people die because the system sucks. Some people get mega rich at other people's expense. Some multi-millionaire capitalists get rich because they are on a board of directors and they pay themselves millions of bucks even if the shares plummet.
Flim flam and corruption - yet some people argue that this is the way it has to be. WHY??????:confused:
Lacadaemon
24-09-2008, 04:45
Are we going to die of no money?

Some people will. Look, there is going to be a rebalancing of the global economy the likes of which haven't been seen since the 1930s. What comes out the other side, I don't know.

But whatever happens, as consequence of the rebalancing, many people are going to find out that everything they thought was so wasn't. At some point there is bound to be a level of social unrest.

Take away the credit bubble and all of a sudden the emphasis shifts from wants to needs. All of a sudden people who thought they were top of the pile A number 1 hotshots are going to find out that they aren't worth a bucket of warm spit. And, paradoxically, vice versa.

The exact nature of the shakeout depends, of course, upon the political changes that happen. Just remember don't vote for the guy that tells you that the freedom to starve isn't freedom. He's the devil in disguise. Had society been less forgiving, more callous, more self-confident and less willing to be brow beaten by fools and charlatans, this wouldn't have happened in the first place.

Personally I'm hoping that it ends up like the glass bead game, but I doubt that will happen.
Glorious Freedonia
24-09-2008, 14:09
People never die of no money. They die of no love, no food, no water, no adequate health care, no shelter (sometimes because their house got repossessed). Sometimes they just die and there's not an awful lot anyone can do about it.
I just hate the fact that lots of people die because the system sucks. Some people get mega rich at other people's expense. Some multi-millionaire capitalists get rich because they are on a board of directors and they pay themselves millions of bucks even if the shares plummet.
Flim flam and corruption - yet some people argue that this is the way it has to be. WHY??????:confused:

So then perhaps the best answer is a policy change that gives shareholders more power to protect themselves against self dealing directors?
Lacadaemon
24-09-2008, 23:41
This article is a good insight into why this is more than just an American problem.

http://www.ft.com/cms/s/0/41960e1c-8972-11dd-8371-0000779fd18c.html
Neu Leonstein
25-09-2008, 02:59
This article is a good insight into why this is more than just an American problem.

http://www.ft.com/cms/s/0/41960e1c-8972-11dd-8371-0000779fd18c.html
That article shouldn't really be buried here where too few people will read it.

And here's another interesting one:
The US is defaulting by stealth (http://www.businessspectator.com.au/bs.nsf/Article/Deceptive-yields-JSSTY?OpenDocument&src=sph)
Lacadaemon
25-09-2008, 03:54
article shouldn't really be buried here where too few people will read it.

And here's another interesting one:
The US is defaulting by stealth (http://www.businessspectator.com.au/bs.nsf/Article/Deceptive-yields-JSSTY?OpenDocument&src=sph)

Yes sir! I will endeavor to provide more transparency in the future. :p

I wouldn't take the PIMCO article too seriously. PIMCO is short treasury/long agency, so it's utter book talking in my opinion, because Bill Gross damn well knows that the agency guarantee is not permanent, unlike treasuries which have full faith and credit, and he has been killed in the recent flight to safety.

So unless someone can explain to me how we are going 'inflate' with the general collapse of credit, and the consequent impairment of all types of collateral, I don't see how all of a sudden banks are going to start issuing loans above the rate credit lines are being pulled.

The only good debtor left is going to be the US, if you are playing in dollars, and there is a hell of a lot of money that is going to move there. (Yah, I know the foreign buyers will stop, but that's going to happen anyway as the economy contracts and they export less. Nevertheless, there are huge amounts of dollars to be repatriated which are going to run right into the safest vehicles as other economies collapse. Further, commercial credit will continue to collapse, even with the bailout, diverting dollars to the treasury).

Absent monetization, which hasn't really happened yet and I don't think it will, its deflation all the way, so long term yields will be further depressed. There might be a brief dislocation, while everyone figures this out, but that is where we are going.
Lacadaemon
25-09-2008, 04:51
As an aside, did you see Bernanke begging for a bailout. HA! I thought he had proved that all this could be avoided with monetary policy: "yes, you're right, it was our fault, but we won't do it again".

And now he comes begging for fiscal intervention. The man understands nothing.

Also he is a liar. Today he talked about the ongoing liquidity crisis. Lets examine a chart shall we. FED liquidity additions (http://www.gmtfo.com/RepoReader/OMOps.aspx)

Now what does that tell us? Well it tells us that as the EFF is around 150 bps, but instead of cutting rates (because nobody is borrowing at the target level) he is instead draining liquidity to defend the target rate. Let me say that again, he is draining liquidity from the system. Now, his thesis was always that the way to deal with situations like this - or at least ameliorate the outcome - was that you should throw cheap credit at the problem. In other words drop the target rate and inject massive amounts of liquidity in order to force the banks to lend. But now he is doing the exact opposite of what he always stated was the 'cure'.

I can speculate about the various reasons for his abrupt change of thesis. Maybe it's spite after the commodities gambling, maybe he's frightened himself and he is trying to engineer a collapse in equities - lot of treasury demand this week - in order to scare congress into fiscal action, maybe he doesn't even understand how the fed actually works.

Whatever the reason, it's clear that the man has no idea how to manage the credit cycle however - though I did say this, for lo these many years. Moreover he is a coward, because absolutely the right thing to do right now is drop the target rate.

And don't say I'm being to harsh on him, because his own actions condemn him.
Lacadaemon
25-09-2008, 05:52
Of course, I'll take it all back if there is a 75 bps rate cut in the morning. But I don't think it is going to happen, not with the drain. Usually the EFF leads with no drain. Looking at IRX 100bps is doable here.

We'll see. Still doesn't negate the disingenuous nature of his testimony though,
Neu Leonstein
25-09-2008, 07:20
I'm gonna have to confess that you've reached the limits of my understanding of the Fed's inner workings. I've probably seen the concepts in my monetary policy course, but they were all called different stuff because the RBA says it's so...

Where do you get the 150bps EFF from? Isn't EFF the overnight interbank lending rate?
Lacadaemon
25-09-2008, 08:01
I'm gonna have to confess that you've reached the limits of my understanding of the Fed's inner workings. I've probably seen the concepts in my monetary policy course, but they were all called different stuff because the RBA says it's so...

Where do you get the 150bps EFF from? Isn't EFF the overnight interbank lending rate?

Yah. EFF is the actual rate that banks are lending to each other, as compared to the target. To be honest I have no idea how the RBA works, if it pays interest on reserves then you are in a totally different situation. For example quantitative easing is possible there, while it isn't here. (At least not yet. Coming soon, interest on non-borrowed reserves).

In any event, the fed sets a target rate, which normally banks follow because well, it's the fed. If they don't the fed has the ability to add or drain liquidity in return for collateral in order to defend the target. (But this is all sterilized from printing because the fed has a defined balance sheet, and has to sell or buy treasuries to maintain it's cash position: alphabet soup stuff aside because it's not germane to normal non-bernanke paulson fed operations).

Right now, nobody wants to borrow at 200 bps. The overnight rate is 150bps (or thereabouts). So the logical thing for the fed would be to lower the interest rate, and thus preserve the amount of liquidity in the system. However, Bernanke wants to defend the 200bps target, so he is removing liquid reserves and putting collateral back on the bank. (This is all different from the discount window, which is *usually* higher in rate to prevent arbitrage).

To be honest, I'm not very good at explaining things. I will look around for something that says it better. I'll talk to a few guys I know and maybe they can rustle something up, because I know you are interested in this kind of stuff.

Bottom line though, and this is the important part, the fed can either target interest rates, or it can target liquidity in the system. It can't do both. Nor in fact can it do anything other than smooth out interest rates in the long run. A great deal of the fed's interest rate setting ability is set through the demand for short term commercial credit, i.e. what banks charge for short term loans. And a good proxy for this is looking at the IRX, which shows you where people are parking cash with the least risk. Generally the fed follows the IRX - 44bps right now, follow your own conclusions.

Naturally, the massive current account deficit and demand for ten year notes created a lot of problems for the US, and greenscum and bernanke were never able to deal with the inverted yield curve that resulted because of the relatively small balance sheet of the fed. Hence all the problems now. :mad:
Lacadaemon
25-09-2008, 08:10
Though I say all this, but things are totally screwed up right now, because everyone is terrified that JPM is about to go TU. Far to massive for the FDIC, and the derivatives nightmare. All goes back to Bear Stearns.

So everyone is hording cash, look at the TED spread. By the pricking of my thumbs, something wicked this way comes!!!
Neu Leonstein
25-09-2008, 08:15
Right now, nobody wants to borrow at 200 bps. The overnight rate is 150bps (or thereabouts).
I think this is just the thing that tripped me up...I would have thought the banks would be lending to each other above the target rate (and they are, for longer periods), but overnight it seems not.

The RBA works the same way, by the way. They did reserve requirements for a while, then fiddled about with the interest, but freed the whole thing up when they floated the dollar.
Gauthier
25-09-2008, 08:20
While browing through this topic I got bored and looked it up on Google.

Here's something to put a lighthearted spin:

http://www.worth1000.com/entries/33500/33823muqo_w.jpg
Collectivity
25-09-2008, 08:28
While browing through this topic I got bored and looked it up on Google.

Here's something to put a lighthearted spin:

http://www.worth1000.com/entries/33500/33823muqo_w.jpg

Gauthier, it didn't work. Maybe you had an inadvertant space in the second last word:confused:
Lacadaemon
25-09-2008, 08:33
I think this is just the thing that tripped me up...I would have thought the banks would be lending to each other above the target rate (and they are, for longer periods), but overnight it seems not.


Yah, well there is a lot of hoarding going on right now. Because there is massive short term uncertainty with the bill. So banks are sort of overstuffed with cash and have no need to borrow overnight but that said they don't want to look into the near term future.

You are one of the few people who 'gets' it. The chances of this bill working are about fifty/fifty if it passes, and that will really depend upon letting people put their ideology aside and how the final thing comes out. (Personally it makes me puke, but I hold my nose and support it for pragmatic reasons).

If it doesn't, there is going to be a galactic meltdown, the likes of which have never been seen before. I shit you not. Epic. All naked swimmers will be revealed &c. i.e. everyone.

Wild ride tho'. Amirite?
Gauthier
25-09-2008, 08:33
Gauthier, it didn't work. Maybe you had an inadvertant space in the second last word:confused:

Heh, it's picky. Sometimes it works, sometimes it doesn't.
Collectivity
25-09-2008, 08:37
It worked when I opened up Internet Explorer and pasted in the site. Very clever graphic!
Neu Leonstein
25-09-2008, 08:40
Wild ride tho'. Amirite?
Yep. I'd be incredibly bored at the moment if this wasn't going on, I literally have nothing to do but think about a potential thesis topic.

And for the time being it at least looks as though my future employer is going to be left standing, so there we go. Though from the contact I've had I got the impression that a few holidays are going to be in order to calm some nerves over there. :tongue:
Collectivity
25-09-2008, 08:50
This article raises serious doubts about the propriety of Paulson's rescue attempt. Could it be simply throwing good money after bad or would it stop the crisis? In the absence of any serious market regulation to come, I would guess that it might be throwing good money after bad. Is Congress right to balk at approving the bail out?

Paulson blows away 500 years of jurisprudence for bankers' club

David Hirst
The Age, September 23, 2008

The US Treasury's monetary revolution takes it well beyond the rule of law; it's a financial coup d'etat.
BEFORE we even think about the inevitable passing of a banking licence to Goldman Sachs and Morgan Stanley - previously they held only gaming licences - let us learn by rote the following: "Decisions by the Secretary (Henry Paulson) pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
If the actions of our rulers are beyond the rule of law then those who usurp that rule are presumably above it. To paraphrase the English playwright Oliver Goldsmith, Herr Comrade Paulson has not just offended the law but done something far more terrible - he hath put the law out of office.
And when "the Act" is authorised, does the authority above "any court of law of administrative agency" include international law?
Is the US, in a dominant position as a military power, where it spends more than the rest of the world combined and acts unilaterally and in defiance of international law and convention, extending this authority to itself as the nation that once controlled 59% of the world's gross domestic product but now is an absolute irredeemable basket case?
Let us accept that Paulson sold this pig in a poke and did so as the financial markets were coming to a screeching halt, that Armageddon was upon us, that without this massive and historic intervention, the Dow would have collapsed completely, money would have dried up, businesses would close around the country and the whole house of cards would have collapsed.
Does any of that make these moves any less reprehensible?
The Treasury's actions are beyond the rule of law. This is a financial coup d'etat, with the only limitation the $US700 billion ($A842 billion) balance sheet figure a mere balance sheet figure.
We all know what happens to them when "Hurricane" Henry is up and about.
Do we need to throw 500 years of jurisprudence out the window so the old private bankers' club that Paulson serves can be maintained in some form?
"Yes, and stop asking questions - no one else is." And in the US they are not.
The above statement has been lost on the "Hooray Henries" of the market who wouldn't know a moral hazard from Sarah Palin's moose. I finally found it buried in the bottom of Bloomberg: "The proposal would prevent courts from reviewing the Treasury's actions while raising the nation's debt ceiling."
But it was lost in the cries of "troubles all round" that accompanied a new play (goal posts moved again) with the announcement of the quid pro quo: "The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies."
And so on.
"To provide increased liquidity support to these firms … the Federal Reserve Board authorised the Federal Reserve Bank of New York to extend credit to the US broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley…"
Perhaps that's enough, except … "In addition, the board also authorised the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged".
Surely that's enough.
At least the language is short and brutal.
These giant leaps for mankind are being made on an hourly basis. They are dead in line with Planet Wall Street's suspicion that, as the private broker-banks' downfall has long been evident, the predictions of New York University professor Nouriel Roubini that there was no place left for them was stunningly accurate. The big five are no more. When Roubini first began talking about this inevitability earlier this year, I admired his boldness but figured it was a way off, for the big boys like, well, GS and MS.
But it is not the job of the Fed to bail out insolvent non-bank financial institutions.
Instead we learn their job is to turn these same worthless enterprises into legitimate banks, fund them through the back door, panic the politicians and, in a mite longer than the creationist view of creation, remake Heaven and Earth.
Could take a month.
David Hirst is a journalist, documentary maker, financial consultant and investor. His column is syndicated by News Bites, a Melbourne-based sharemarket and business news publisher.
Lacadaemon
25-09-2008, 08:53
Yep. I'd be incredibly bored at the moment if this wasn't going on, I literally have nothing to do but think about a potential thesis topic.

Seriously, do where Bernanke went wrong. He basically took the position that September 1929 was desirable, and thereafter wasn't. Obviously that is not the case, and that is why the current crisis unfolded the way it did.

Yah, easy target, I know, but you will be gold with that kind of shit.

And for the time being it at least looks as though my future employer is going to be left standing, so there we go. Though from the contact I've had I got the impression that a few holidays are going to be in order to calm some nerves over there. :tongue:

Hey, last man standing is the important part. In any event, you should have no problem picking up boutique work, which will probably be better paid in the future anyway.