Wheel Squirrels Stumble Into Bear Nuts – An Economic Update and Forum
A couple of days ago, we discussed what really happened, and what the longer term implications might be, in the Bear Stearns forced sale/bailout over the March 15-16 weekend. There have been several things that have come out since then that are right on point with what we were all chewing on. Some are directly on point to the Bear deal, some are tangentially related and some are just general economic/financial news and thoughts. Masaccio wanted somewhere to jaw about things economic related; and what masaccio wants, masaccio gets. In no particular order then, here are some of the nuts I have stumbled on; please add any and all of your own in the comments.
1) This one I added as an update to the first post, but it still sticks in my craw a little bit. There simply is no such thing as a conflict of interest to the group currently running our country I guess (and when a Supreme Court Justice doesn’t feel obligated to be concerned over interest conflicts, why should anyone else I suppose). At any rate, turns out that JPMorgan Chase & Co head Jamie Dimon held a Federal Reserve board seat while Chase was in negotiations with the Federal Reserve over a deal to acquire Bear Stearns at an insanely low price. How convenient.
2) If there is any doubt about the fact that what is happening in relation to investment houses and the fear they sense from the financial struggles as to their continued ability to leverage and manipulate derivitive financial instruments, contemplate this:
Eight of the 10 largest donors so far to the U.S. presidential campaigns are Wall Street banks, led by Goldman Sachs, according to research Thursday from a political watchdog group. Goldman and its executives have pumped $1.7 million into the races, with 70 percent going to Democrats Barack Obama and Hillary Clinton, despite former CEO Henry Paulson’s present job as treasury secretary for the Republican Bush administration.
…
After Goldman, top-giving banks are Citigroup, Morgan Stanley, Lehman Brothers, Merrill Lynch and JPMorgan Chase, which is buying troubled rival Bear Stearns in a government-engineered bailout.
3) Remember my question as to whether this was all a one off deal or was setting up some type of revolutionary precedent? Arguably this is slightly different than the $30 billion guarantee in the Chase purchase, but still, the part where the Fed makes large loans to investment houses, sure looks like it is being set up by both parties to become the new norm:
Big Wall Street investment companies are taking advantage of the Federal Reserve’s unprecedented offer to secure emergency loans, the central bank reported Thursday.
Those firms averaged $32.9 billion in daily borrowing over the past week from the new lending facility, compared with $13.4 billion the previous week. The program, which began last Monday, is part of the Fed’s effort to aid the financial system.
On Wednesday alone, lending reached $37 billion.
The Fed, for the first time, agreed on March 16 to let big investment houses temporarily get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, will continue for at least six months. It was the broadest use of the Fed’s lending authority since the 1930s.
4) I don’t know what the implications of this one are, but the long time chairman of Bear Stearns just liquidated his holdings in the company. Ouch.
Bear Stearns Cos. Chairman James Cayne on Thursday dumped his entire stake in the embattled investment bank for $61 million as it appears closer to a takeover by JPMorgan Chase & Co.
Cayne sold 5.66 million shares for exactly $10.84 a share on March 25, according to a filing with the Securities and Exchange Commission. His stake was once valued at about $1 billion when the stock was trading at $171.50 per share.
5) You know, none of the financial collapse mechanisms that got us to where we are today came about by chance, these were features of the economic system that has been purveyed by the Republicans, and most critically, the Bush Administration. They didn’t just put these mechanisms in place, they goaded and bullied people into using them in order to fuel their otherwise pathetic and hollow economic system and tax cuts. The next card to collapse in this house is home equity loans:
Americans owe a staggering $1.1 trillion on home equity loans — and banks are increasingly worried they may not get some of that money back.
To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. In the past, when home prices were not falling, lenders did not resort to these measures.
Such tactics are impeding efforts by policy makers to help struggling homeowners get easier terms on their mortgages and stem the rising tide of foreclosures. But at a time when each day seems to bring more bad news for the financial industry, lenders defend the hard-nosed maneuvers as a way to keep their own losses from deepening.
6) The candidates have all made major economic speeches in the last few days. Obama is here. Clinton is here. McCain is here. As masaccio has pointed out, McCain is, of course, a blithering idiot. I will leave it to you all to discuss the rest. Again, this is NOT a forum for engaging in the battle of the candidates between Obama and Clinton. Don’t violate the spirit of EW’s rules she left us with; it would make her sad on her birthday!
Anything else you all have on the finance/economic front, have at it.
UPDATE: I knew this whole Bear Stearns, slam it through on the weekend, thing looked like like a craven power play of the entitled set, and that was really my question in the Sometimes You Eat The Bear, and Sometimes The Bear Eats You post. Guess what, I may (still even odds though) not be quite as stupid as I appear! This just hit the New York Times:
The Bush administration will propose on Monday that Congress give the Federal Reserve broad authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.
The proposal is part of a sweeping blueprint to overhaul the country’s hodge-podge of regulatory agencies, which many specialists say failed to recognize rampant excesses in mortgage lending until after they triggered what is now the worst financial calamity in decades.
According to a summary provided by the administration, the plan would consolidate what is now an alphabet soup of banking and securities regulators into a trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms.
While the plan could expose Wall Street investment banks and hedge funds to greater scrutiny, it avoids a call for tighter regulation. The plan would not rein in practices that have been implicated in the housing and mortgage meltdown, like packaging risky subprime loans into securities carrying AAA ratings.
Well, what do you know? They are not only not going to clamp down on derivitives and the other Enron like aspects that have caused this mess, they are going to consolidate regulatory agencies (read see to it that there are a lot less). Wonderful; do we get a huge corporate tax cut with that I suppose?
Happy Birthday, EW, and thank you so much for, y’know, everything — and for everyone you’ve drawn here.
Same here. I read this stuff every night like a horror novel.
Thanks birthday girl and bmaz for holding the lantern high.
Treasury Secretary Paulson came from Goldman Sachs. This is all part of the revolving door. In a system where people in the industry become regulators and then go back into the industry, no one is going to rock the boat.
Good follow-up. Nit: I thought it was thirty Billion in federal aid to JPMorgan Chase in connection with its fire sale purchase of Bearish Stearns.
Anybody think Congress needs to hold some intense and detailed hearings here, and maybe, you know, legislate some rules for how to spend that much taxpayer money?
Oops. Quite right. Must fix that!
Good point. I don’t understand the entire budget system with regard to the executive branch. Where did they get the money for this? What pocket of funds do they hold with no input from Congress? The money for spying on Americans? That can’t be cheap. Printing tons and tons of money to send off for bribes in Iraq? I do not understand.
Input from Congress? Surely you jest. We don’t need no stinkin’ badges!
Seriously, this is an excellent question, but I don’t expect anyone, except us, to be asking it. I watch business TeeVee during the week when I’m on the treadmill at the gym and I swear these guys are discussing the economy like they’re in high school. There’s absolutely no discussion about the mechanics of the system or the origin. Paulson and Bernanke are treated as Gods proclaiming from the mountain top. Deals are announced with an eye solely toward the market’s reaction. And speaking of the market, on all the news, including NPR this morning, today’s market moves are somehow indicating the health of the economy. Bullshit! Today’s market moves reflect how traders are positioning to make money trading. NPR this morning used the term “possible recession”, as if it isn’t here, and that the market being up this morning pushed the “possible recession” off.
What a bunch of dweebs.
Everybody’s been behaving properly on the primary front, bmaz. Shows the respect we have for EW. Thanks, bmaz, for holding down the fort so nicely!
This quote
reminds me of a comment Digby posted last year I believe wondering aloud whether the powers that be put Democrats into the WH in order to restore the country’s financial health after a Republican administration, so that the Republicans have something to plunder again the next time they return to power.
Baucus and Grassley(finance) sent a letter to Paulson and the principals of the bare-stearns deal(my emphasis) and the implication of the 29:1 taxpayer to JP Morgan deal.
linky pdf.http://finance.senate.gov/press/Bpress/2008press/prb032608.pdf
sorry
http://finance.senate.gov/pres…..032608.pdf
And Happy Birthday, EW!
Here’s EW with her party hat on: Ệmptywheel
JUST POSTED AS AN UPDATE: I knew this whole Bear Stearns, slam it through on the weekend, thing looked like like a craven power play of the entitled set, and that was really my question in the Sometimes You Eat The Bear, and Sometimes The Bear Eats You post. Guess what, I may (still even odds though) not be quite as stupid as I appear! This just hit the New York Times:
Well, what do you know? They are not only not going to clamp down on derivitives and the other Enron like aspects that have caused this mess, they are going to consolidate regulatory agencies (read see to it that there are a lot less). Wonderful; do we get a huge corporate tax cut with that I suppose?
LINK TO NYT STORY
Shorter Treasury Secretary: “Let’s give the plunderers more stuff and ways to plunder.”
Happy Birthday, Emptywheel!! Thanks for what you have created!!
bush decides to give the federal reserve more authority and power, when these are the folks responsible for what is now going on??? is their any transparency to what the federal reserve does? my impression is they are even less transparent then bush, but both work hard to conceal their every move with smoke and mirrors… what’s it feel like having a president give more power to the bank responsible for getting into this mess in the first place??
Happy B-day, EW!
What Professor Foland said, plus a little b-day music to go with (are those a couple glasses of Beamish I see sitting on the table in this vid?):
Irish Session Birthday Bash
At least Congress is being asked to do something well within its expertise: giving Bush more power in lieu of more regulation.
What could go wrong.
I sense a parallel between what is happening on Wall Street and what is happening with Al Maliki in Iraq. Wall Street is hoping to get bailed out by a series of revolving interventions by the Fed before the Democrats (fingers crossed!) are elected and may actually pass and sign the Dodd-Frank bill, or Hillary’s proposal or some form of stricter regulation – as long as Bush and 36 Republicans in the Senate are there to prevent a veto override, there will be no Congressional action possible. McCain of course is promoting this stall tactic by praising the Fed and promising to refer the matter to a committee. Al Maliki is doing the same thing in Iraq – get the American army to do his dirty work of beating up on the Sadrists while Bush is still there to make sure that not a single soldier leaves Iraq before January 2009 except in a coffin. I think there will be a lot of these sort of things in the next 9 months while everyone is just hoping that there is no invasion of Iran.
Ishmael, per:
There’s some extremely interesting info over at IraqOilReport.com explaining that this fight in Basra is largely between Shia factions who disagree over whether Iraqi oil should be nationalized, or whether the oil multinationals should be allowed in. More at IOR, all of it fascinating (if grim).
It’s largely Greek to me. I think the monies allocated to date have been from the Federal Reserve, which is semi-autonomous and which operates under its own, separate, congressionally authorized budget.
I would be wary of this administration’s proposal. It never publicly admits to its real aims. I would be especially wary of giving the Fed “broad new authority”. This administration admits to no limit on executive authority; it’s unlikely it would willingly agree to limits on the Fed’s authority. That’s NOT what Congress should enable or pay for.
The most obvious issue is the one the executive wants to avoid. What are the spending priorities? Do we use scarce taxpayer funds to keep Fat Cats safe, while ignoring individual borrowers who are at the mercy of predatory lenders, main street lenders whose borrowing documents even lawyers can’t read, a rapidly changing economy, double-digit inflation in gasoline and food prices, job and benefits insecurities, and a federal budget crippled by bush’s tax cuts?
How much money is Congress to allocate? To be spent over what period of time? What’s the process for coming back for more? How do we define “victory” and “success”? We haven’t done it so well anywhere else.
What oversight does Congress need to ensure taxpayers funds are well spent? There’s only so much blood to be squeezed out of increasingly desperate taxpayers. The only attention Congress has given the federal deficit is to allow it to grow. What would happen if it makes Bush’s tax cuts permanent?
Is the Fed the best organization to oversee market interventions of this scale? Paul Krugman’s article in today’s Times gives the most praise to the idea of resurrecting a New Deal era Housing Authority (proposed by Mrs. Clinton). The answer to which institution is best depends, in part, on what the purposes of intervention are.
Bush purpose is predictable, but he’ll lie about it. His goal will be to use taxpayer funds to subsidize market risks entered into by resource rich, hyper-sophisticated, Wall Street financial houses. He would veto oversight, and exact no consequences for past or future performance (the most consistent theme in his maladministration). He would design interventions, in fact if not in law, as grants, not loans.
The consequence for American taxpayers of a Bush-designed “broad new authority to intervene” would be hundreds of billions of dollars more in public debt. Its purpose would be to keep markets “stable”, which means allowing Muffy to keep her home in the Hamptons instead of Hartford.
“The consequence for American taxpayers of a Bush-designed “broad new authority to intervene” would be hundreds of billions of dollars more in public debt. Its purpose would be to keep markets “stable”, which means allowing Muffy to keep her home in the Hamptons instead of Hartford.”
Isn’t that exactly what Cheney meant when he told then Treasury Secretary Paul O’Neill that “Reagan proved that deficits didn’t matter” ? Except, you know, for the 99% of the population that has to worry about stagflation and unemployment and stuff…
Post no. 22 responded to Loo Hoo’s at no. 7.
bmaz, thanks for the thread, sorry about the horrible OT in that thread, but I was taking a breather from a large brief to read McCain’s silly speech, and just had to vent.
I recently raised a question about the exact nature of the Fed guarantee of $29bn of the toxic portfolio of Bear Stearns. Maybe we have an answer to that question:
This is from the amended merger agreement:
In that quote, Company is Bear Stearns, Parent is JP Morgan Chase. So, pending the merger, the Fed is managing the portfolio. Unfortunately, we don’t get to see the portfolio. The reference to the “related hedges” on securities in the Scheduled Collateral list is a hint of toxicity.
I am trying to verify the statement that the Fed has the possibility of profit on this portfolio. I guessed that the portfolio had a face value substantially in excess of $30bn, leaving the possibility of profit, and the first quote says that.
I haven’t read the Sales Agreement, but on this clause it looks like the Fed is only the Escrow Agent for the collateral. You are quite right to point out the limits on the Fed as the “manager” of the collateral. Can the Fed execute against the collateral in the event of default? What are the defined events of default? Is the collateral completely without recourse? Does JPM have the right to choose to make good the default and keep the collateral? There must be some good mortgages and assets in the Bear collateral, can JPM basically get to take a flyer on how this turns out, with the Fed backing up any risk? I supported the Fed’s action at the time, I didnt think it was a good idea to play chicken with the market when there was so much uncertainty, but it sure seems like a sweet deal for JPM the more I hear about it.
Can’t remember where I read it, but is my understanding that the Fed DOES have a profit interest in the portfolio and that is something that is just not really in their charter or whatever their enabling mechanism is.
Ishmael, I’m pretty sure the Fed has management authority beginning now: “have custody of and the right to manage the Scheduled Collateral Pool and Related Hedges, with such custody and management rights to be delegated to the Federal Reserve Bank of New York effective as of the date hereof.”
I think the Fed has the right to deal with the portfolio as it sees fit, which raises the right of the Fed to deal with the home mortgages tied up in CDOs, or other kinds of pools, in a manner favorable to the homeowners and in ways that the current owners won’t. That’s why I mentioned the point about the hedges: that may interfere with the ability of the Fed to manipulate the pools.
I guess that is really the issue – do they only have the right to “manage” the portfolio in accordance with the terms of the instruments in the portfolio – ie collect the payments, foreclose in accordance with the terms of each defaulting instrument, etc.
I think the UK government’s recent takeover of the defunct Northern Rock bank is a creditable standard, one which takes seriously the government’s duty to use scarce taxpayer funds efficiently while intervening in a limited way to maintain market stability.
The Northern Rock example is also useful because it represents precisely the kind of thing the Bush administration desperately wants to avoid discussing, much less doing.
1. First thing the UK government did was sack Northern Rock’s management and board. That laid the consequences of management’s excess and failure where it belonged – with managers and their board.
2. Shareholders’ equity was reduced to zero. Zero. That’s what happens when an investment fails. If you doubt it, check the value of your 401(K) in a bad year. Any upside from the use of taxpayer funds is intended to repay the taxpayers for their “save the company’s arse” bail-out.
3. Taxpayer funds were NOT used to pay retention and performance bonuses to managers. (See item 1.) The money was used to meet Northern Rock’s obligations to its customers, suppliers and creditors. That promoted market stability – at the least cost and most upside to the taxpayer.
When you think about it, that’s the process at work in ANY bail-out: the white knight comes up with the cash and gets the lion’s share of the profit from having taken the risk of funding and reorganizing a failed company. The only difference is that it’s the taxpayers’ money, not John D. Rockefeller’s.
What Bush proposes to do with taxpayer money is sleight of hand: heads I win, tails you lose. Sadly for America, it’s worked all his life – for him only – and he’ll veto any other course. Which means we’re talking about one more mess that Bush will leave for a competent successor to clean up.
EW: I’m usually a lurker, but I’ve come out of hiding to wish you a happy Bday and to thank you for having this blog; it means a good deal to me.
Bmaz: Wheel squirrels? It’s plain that you didn’t get called to house-sit only because of a high probability for showing up. Good work.
Um, Happy Birthday, EW! Live long and Prosper! and keep on blogging!
(warning: emptywheeling can be habit-forming.)
Bob in HI
Well, FWIW:
1. Economic assumptions built on the fanciful fiction that ‘markets’ and ‘traders’ are rational are pure foolishness with no basis in reality. Nevertheless, elegant mathematical models of ‘market behavior’ rely on these foolish assumptions. (FWIW: the advertising industry, for all its faults, at least recognizes the ‘rational actors’ meme as a bogus fraud.)
2 ‘Computer assisted liquidity’ depends on computers to execute rapidly, without human intervention, based on the mathematical models that are built upon the flawed assumptions about ‘rational’ traders and ‘rational’ markets. These mathematical models rely on the Black-Scholes formula.
3. ‘Portfolio insurance‘, which appears to raise risk because everyone feels safer (or, at least, ’safe enough to be reckless’). Might we call this ‘the Condomless Porfolio Approach to Financial Insecurity’?
Here’s one of my favorite ‘tea leaves’:
.
Shorter: we’ve outsmarted ourselves, and trading happens faster than we can track it. We’ve outstripped our cognitive capacities.
I think that is about right. I would paraphrase you erudite explanation to say that the formula requires a substrate of rational and logical actors, not gambling addicts on crack. Who the hell thought it was a good idea to turn family’s mortgages on their homesteads into a freaking leveraged commodity like oil futures or something anyway? And then to gin up the bogosity by selling “insurance” on it? Jeebus.
Earl @32 – I pretty much agree with everything you said; however, in some fairness, Bear was not truly a bailout like Northern Rock. It appears to me that the government went out on a precarious limb with what they did and how hastily they did it, without a lot of concern for all kinds of critical implications; but in the long run I doubt they are going to lose any money and, as I said @29, may even make money.
I think that’s right. I don’t believe the Fed was set up to do what it did with BS, and it may have acted outside its charter, whereas I think the UK government had more established authority, experience and political legitimacy to do what it did.
Which begs the questions that Bush’s proposal seems designed to sidestep. What should the government do, with what resources and under what authority? What do we expect should happen if it does it well? Bush’s proposal seems to be just give the Fed blanket, undefined authority with no oversight and whatever money it wants. Sorta like how Bush defines his authority as Codpiece-in-Chief.
IMHO, taxpayers would be unwise to agree to such authority or unregulated use of their money.
Heh heh…
I think you answered your own question when you referenced: gambling addicts on crack. Enron ‘mark to market’ thinking applied to home mortgages and equity in an overheated market. It’s just that the gamblers were wearing $5,000 suits, and possibly booking the same hookers that Eliot was boinking.
I can’t stand many more episodes of The Smartest Guys in the Room.
One thing further. The Northern Rock transaction was a takeover, with the UK government as white knight. With BS, I believe the Fed intervened to persuade a private party to takeover a failed company; it did that by using taxpayer money to subsidize the buyer’s risk of loss.
I imagine the agreement the Fed entered into to was nominally a “loan agreement”, but that it gave (or ought to have given) the Fed management powers that would be unusual in an ordinary loan. That fits better into the laissez-faire, the market is always right mythology.
But if taxpayers are going to be asked to pony up hundreds of billions of dollars, at a time of unprecedented claims on their resources, I’d say they deserve a bigger stake in the game than whether they get their money back. They ought at least to have a goodly say in limiting the target’s ability to throw money at those oh, so essential and rare talented managers. That’s the debate we should have and which Bush wants to foreclose before it happens.
I am getting way beyond my pay grade on things financial; so everybody should take what I have to say with a grain of salt here. I don’t know what the answer to all this stuff is. I do think that the Fed has exceeded it’s bounds from the looks of it, and I don’t think it was the Executive Branch’s right or place to literally force the “sale” that occurred between Bear and Chase. I am not even positive that the situation was as critical as everybody made it out to be; although I have no information to the contrary. I guess what bugs the crap out of me is this feeling, and I can’t get rid of it, that kind of like using 9/11 to invade Iraq and unleash big brother, they were looking for a pretext to force all their sick pet theories and plans, that they have been scheming and dreaming of, down out throats before a new administration takes over. Regardless of what the original merits were or were not, I think we are having a con run on us by flim flam men.
I should add that having sacked Northern Rock’s management, the government hired a new one. I’m not familiar with the details, but the action respects the obvious logic: why bet your money on a turnaround managed by the same “talent” that created the mess in the first place?
Thanks, EarlofHuntington.
For those not familiar with Black-Scholes’ use in compensating Fortune 500 managers:
The formula was co-opted and used to calculate the deemed cash value of stock options as of the date they were given to managers. Managers took them in lieu of cash in sometimes complex deferred compensation plans. The purpose of options was nominally was so that managers ”had skin in the game”. They were also a way to retain managers and to defer accounting for the actual compensation costs. In effect, I give you a promise today to keep you working for me, one which I only have to account for years later when you redeem them for cash. Accounting rules today may be less forgiving.
The option device worked as long as they received favorable accounting treatment, and as long as options were generally ”in the money” years later when the options could be exercised and turned into cash, or, more rarely, used to purchase stock outright at the option price. Where options consistently failed to be ”in the money”, management found themselves re-valuing options so that they were, or substituting stock or cash.
I have located some figures on the portfolio here. It looks like book values are as follows:
Commercial Mortgage Backed Securities: $16bn
Prime and Alt-A Mortgages: $15bn
Sub-Prime Mortgages: $ 2bn
It looks like this pool is $20bn for purposes of the Fed guarantee. Then there is $8.9bn in something called “leveraged lending funded and unfunded commitments … a portion of which could be pledged against the non-recourse facility.” So, it looks like there is some possibility of profit.
Must stop hacking around in the weeds.
Cripes, step out of the house for a few hours and somebody announces the End of the World As We Know It! I’ll be a-reading for awhile …
Oh,
I don’t know what the implications of this one are, but the long time chairman of Bear Stearns just liquidated his holdings in the company.
This is being interpreted as Cayne accepting that he’s used all the leverage he had to drive up the price on the bailout deal, and taking his marbles and going home. It’s way more than he deserves, but way, way, way less than he’d have got 3 weeks ago, let alone what he expected when he set up the arrangement.
Black-Scholes system was used in long term capital management – the fiasco from 98.. anyone want to try to explain the federal reserves mandate??
folks like cayne operate in another stratosphere… what is the dif between 61 million, or a few billion.. these folks are not real.. they are not going to be spending it… it is funny money the federal reserve likes to print and as you can see, the folks whose pockets it lands in, are often a part of the same group of insiders who like to keep this charade going..
The Northern Rock takeover works just like it would work here. The FDIC steps in, seizes the assets, and sells what it can for what it can get. If there is anything left after payment of the FDIC insured deposits, the other deposits and the liabilities of the bank, it goes to shareholders, but that doesn’t happen.
Yeah, but as I understand it Northern Rock was a bank.
WTF is the Bush Admin doing bailing out investment firms that were
gamblingleveraging at 30:1? How are there ‘assets’ in THAT scenario…?Unless you call ego, avarice, stupidity, insolence, arrogance, greed, and denial ‘assets’.
Color me confused.
Heh heh; indeed, I think they probably do. They want to package up digital images of those concepts and sell you securities on them too. Would you like to make that purchase on credit?
Definitely assets: I’m sure there are blanks in the employee evaluation forms for those qualities.
Yes, I meant to say that’s how the FDIC liquidates a bank. Of course, if Bear Stearns failed, it gets liquidated in bankruptcy, but under a different set of rules, designed to protect assets of investors held by brokers, and to protect the interests of certain kinds of counter-parties to transactions by brokers.
The avoidance of a Chapter 11 reorganization here is huge imho.
I was trying to say here, IMVHO, that the FED might have been wiser to guarantee certain parts of the process once BSC went into Chapter 11. Under this theory the FED would have allowed the credit markets to continue unfrozen, while the Chapter 11 would have allowed for greater transparency. Forcing BSC to file Chapter 11 would have also sent a much stronger message to the rest of Wall Street about fiscal discipline and capital requirements.
I have no real clue what I am talking about really, but I just can’t shake the feeling that what has been done didn’t fix anything, and may have made it all worse by further ingraining the enron like stuff and putting control of it in fewer and more inbred hands. This wasn’t exactly what I had in mind…..
Exactly, and then before we know it, privatizing Social Security will come back into the picture. We’ll lose our shirts and become destitute while the elite walk away laughing and calling out, “Chumps!”
China and India MUST be thrilled!
You know, I am a numbskull on this stuff to a large degree, but there is a part of me that thinks that we ought to just let the whole kit and kaboodle fail and go down the tubes and reset the whole gig as opposed to artificially propping stuff up, going further in the deficit tank and just waiting for the next bubble to take us on a short ride to hell. A little humility and hard times, especially if it could chop the robber barons down to size and make them part of regular citizenry, instead of above it, might not be a bad thing. I know this is stupid, but this country is headed down the tubes the way we are going; and fast. We missed, really not so much missed as were forcefully denied, the perfect opportunity with 9/11 to reset the national discourse and ethos. Something is going to have to give sooner or later, and the longer it is put off, the worse it will be.
Total collapse would take out many of the rich, true, but it would also completely wipe out the middle class, cause riots of a magnitude to engender serious police and military pushback, and lead to the rise of a Strong Leader/dictator who will lead us back to…somewhere. And I don’t think this leader is going to be a progressive.
So yeah, other than that, it’s a cool idea.
Yeah, well, I was not really advocating a nuclear option on the economy per se, I tried to convey that; but I also don’t think we can just blithely put a band-aid on this crap and keep on truckin either. There are too many facets that we are flat fucked on to just spring out of it in dandy shape. That is certainly possible in the short run, but not the long run. In all of this discussion, there has been no mention of the long term deficit, the trade deficit, the percentage of cash reserves in other, not necessarily friendly country’s hands, the inevitable oil-dollar depegging and, as critical as any of the preceding but hardly ever discussed, the current account deficit. There are real problems extant; and a wing and a prayer ain’t gonna solve them. Oh, and by the way, our government refuses to tax as it should.
Agreed. We’re going bankrupt rather quickly as a nation, and we are losing our sovereignty in stealth. We will have few resources left soon, and other people are going to be telling us what to do and how to live.
I think there is a lot to think about here. Regulators like Bernanke are very risk-averse. It is hard for them to face the unknown risks associated with failure of a big investment house. The regulators cannot predict the fallout because so many of the transactions, like credit swaps, are unknown to them, and to other market players. As egregious points out, there are real world risks to be considered.
Bankruptcy lawyers tend to be risk-averse too, and I am. That is why my focus has been on the nature of the Fed guarantee, which I haven’t found yet. When I see that I may have a stronger opinion.
Essentially, you’re advocating the “discipline of the markets,” a very reasonable opinion imo. I’ve heard estimates as high as 20 – 30% of GDP.
Per masaccio, if I am interpreting correctly, this deflationary cycle has to be done, but it also has to be done prudently. We’re involved in a very high stakes game of “hot-potato,” who gets stuck with the worthless paper?
With trillions on the line, Wall Street contributions to the GOP and Dems into the hundreds of millions to “socialize their losses,” are peanuts.
OT, is this “term security lending facility” a back door way to trade TBills for worthless securities?
Major U.S. investment banks and broker-dealers submitted bids for 28-day loans of $86.1 billion of Treasurys from the Federal Reserve’s new term security lending facility on Thursday, with the Fed accepting $75 billion, for a bid-to-cover ratio of 1.15.
OT, who is watching the FED? It seems to me that with them “accepting” collateral
that no one else wants, the opportunities for fraud at the taxpayer’s expense are just massive.OT, GOP has every reason to postpone the inevitable deflation until January 2009, so they can blame it on the Dems. Can someone please explain this to Harry and Nancy?
I think hot potato is the right analogy. I want the losses visited on hedge fund investors, officers, directors and a couple of layers of management and top producers of brokers, mortgage originators, and a slew of other people who are, as a group, responsible for the disaster. I don’t want to bail any of them out, and I want them to pay.
These greedheads think the world owes them a huge return on their leveraged dollars, and that the rest of us can suck eggs. The Fed is using low interest rates and inflation and a weak dollar to save these scumbags, and in the process it is destroying the resources of savers and financially conservative investors. It really makes me incredibly angry.
Of course, we have no recourse. There are no agencies to protect us, and we have no private right of action to protect ourselves from these thieves. We are well and truly f—d.
A lot of you think you have FDIC-insured bank accounts, but you don’t. This would be a good time to find out. [ok it can wait til Monday]
Many bank accounts are actually investments in money market funds which are zero percent covered in case of a financial collapse. The government will not bail you out.
Of course, FDIC has its own problems, having what is probably too little to deal with even the bank closings in 08, but that’s a different rant.
Absolutely. Read the prospectus on your money market fund. When you see securities from the X Funding Co. LLC, you know your money market fund is holding the big shitpile. Check the footnotes. One of them is for “security in default”. Then you know you have a particularly loathsome piece.
I fail to see what is systemically wrong with the Black-Scholes formula. Like any formula, it applies in a particular set of circumstances–random-walk Gaussian prices of known standard deviation–and if you misapply it to a non-random walk, or to a Lorentzian random walk, or misestimate the standard deviation, well: that’s not the formula’s fault. That’s the fault of the people who didn’t know how to use the formula.
Similarly, options may have gotten favorable accounting treatment, but again, that is not a problem with the Black-Scholes formula, but with the conventions set forth by the FASB.
I am the last one to want a flame war about our Democratic candidates, but I wanted to point out something about the economic speeches the candidates gave. This is from HRC:
This is from Obama.
Our candidates speak with an essential seriousness about a serious problem. They put it in context, and tell us what the problem is, and then offer solutions. Now, compare our candidates to the other guy:
Republican in trouble? Passive voice to the rescue. Whenever you see that formulation, you can be sure that there won’t be a plausible response. It looks like someone forgot to say what the “motivations and behaviors that caused the current crisis” were, or maybe it got deleted. My earlier comment shows the futility of looking to that group of squirrels for answers.
I like Obama’s description of the problem better than HRC’s, because Obama puts corporate dominance of government up front as a cause, leading him to demand better regulation as the first step, where HRC diffuses the cause issue over several fronts, including the homebuyers, and doesn’t point to the anti-regulatory fever that swept over DC during the last 30 years.
Both of our candidates say what they are doing now to deal with the mess, by supporting the Dodd-Frank bill, and other things. This is weak, but these bills aren’t going to get anywhere anyway with the roadblock republicans essentially running the Senate. They both support regulatory change, and that will make a difference in the future. Obama talks about principles in a way that suits my temperament, while HRC wants to get advice from the likes of Greenspan, the bubble king. I particularly don’t like her calling a gathering of Greenspan, Rubin and Volcker “non-partisan”. This is as rabid a group of free marketeers as you will ever see, and Greenspan in particular had every non-partisan atom in his body removed and replaced with an equivalent Randian particle.
Your candidate’s speech reflects the campaign of your candidate extremely well, and it is worth reading not-your-candidate’s speech to see a good picture of just how competent not-your-candidate is, especially as compared to the other party’s candidate.
when it comes to the federal reserve, what it is and what it does – no one knows very much if anything about it… that is the way they like it… i still see no one able to take up my earlier questions…
OT, along with Wall Street, the residential housing industry and its suppliers will be hammering Congress for a bailout. Based on what I know, we need to shift public investment into infrastructure.