Where's my parachute?
March 16, 2008 7:51 PM   Subscribe

Fasten your seatbelts. Late Sunday Evening, JPMorgan announced it would be buying Bear Stearns for $2 per share, less than 1/10th the traded value on Friday. The move was backed by the Fed, which assumed most of the risk, and simultaneously cut the rate for borrowing by a quarter percent. According to Alan Greenspan, the US now faces the worst financial crisis since WWII. Monday looks like a wild ride.
posted by unSane (321 comments total) 32 users marked this as a favorite

 
Good thing he's recognizing it, because it's primarily his fault.
posted by Malor at 7:55 PM on March 16, 2008 [5 favorites]


I was about to say page Malor to get his take on this, but he must have had is finger on the button.
posted by bystander at 7:59 PM on March 16, 2008


So. I'm paying taxes to kill people with bombs and to save the asses of rich white bankers who, through their greed and predation have created the largest financial mess since world war 2?

There is no movie at 11.
posted by localhuman at 7:59 PM on March 16, 2008 [33 favorites]


And since we have Malor, can Mutant also give his analysis?
posted by bystander at 7:59 PM on March 16, 2008


In addition to the financing the Federal Reserve ordinarily provides through its Discount Window, the Fed will provide special financing in connection with this transaction. The Fed has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.
posted by localhuman at 8:01 PM on March 16, 2008


My own take is Bear Sterns were exposed to the CDO fallout then taken down by effectively a run on the bank by its investors. Presumably JPM sees value in the remaining illiquid BS investments or it wouldn't even be offering $2 a share, and JPM believe their name will cool the redemptions.
posted by bystander at 8:03 PM on March 16, 2008


It's 1907 again.
posted by fleetmouse at 8:05 PM on March 16, 2008


I think that I'm going to have to lock the office door tomorrow morning, and just sit and watch this play out ... Dow/S+P/Nasdaq futures all off 2-3% already. $1 = 96Y?
posted by carter at 8:06 PM on March 16, 2008


USD is at 70.815, gold hit $1030, and silver is at $21. The rumor mill is tossing around Lehman as the next bank to get hit. Hold on to your hats.
posted by ryoshu at 8:07 PM on March 16, 2008


Yeah, I'm paging Malor too, but I think he'll have his hands full.
posted by unSane at 8:08 PM on March 16, 2008


Huh.

If anyone needs me I'll be out back, gassing up my dune buggy and shaving my hair into a mohawk.
posted by The Card Cheat at 8:08 PM on March 16, 2008 [26 favorites]


You left out the best part:
In a potentially even bigger move, the Federal Reserve also announced its biggest commitment yet to lend money to struggling investment banks. The central bank said its new lending program would make money available to the 20 large investment banks that serve as “primary dealers” and trade Treasury securities directly with the Fed.

Much like a $200 billion loan program the Fed announced last Tuesday, this program will essentially allow the government to hold as collateral a wide variety of investments that include hard-to-sell securities backed by mortgages. But Fed officials told reporters on Sunday night that the new program would have no limit on the amount of money that can be borrowed.
"Hard-to-sell" has a bit of a ring to it as risible euphemisms go, don't you think?
posted by enn at 8:10 PM on March 16, 2008 [1 favorite]


.
posted by Spacelegoman at 8:11 PM on March 16, 2008 [9 favorites]


JPMorgan is buying Bear Stearns for a third of the price at which the troubled firm went public in 1985.

Yikes!

It's been swell guys, maybe I'll catch some of you at a "best tree bark to boil into soup" seminar...
posted by jalexei at 8:12 PM on March 16, 2008 [1 favorite]


Andy Kessler thought it would be Bear of America.
posted by b1tr0t at 8:12 PM on March 16, 2008


So. I'm paying taxes to kill people with bombs and to save the asses of rich white bankers who, through their greed and predation have created the largest financial mess since world war 2?

There is no movie at 11.


Sure there is. Hope ya like Zeitgeist.
posted by fleetmouse at 8:12 PM on March 16, 2008


"Hard-to-sell" has a bit of a ring to it as risible euphemisms go, don't you think?

I've got a lot of hard to sell securities from '01-'04 or so. Too bad I never thought to back them with mortgages.


makes a note to get mortgage backed stock options next time
posted by b1tr0t at 8:14 PM on March 16, 2008


no, enn, YOU missed the best part:
Bear Stearns's profit exceeded $2 billion in 2006, yet the price JPMorgan is paying is about one quarter the value of the securities firm's headquarters building in midtown Manhattan. The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per- square-foot that comparable office space in the city is currently fetching.
posted by Mach5 at 8:15 PM on March 16, 2008 [1 favorite]


"Hard-to-sell" has a bit of a ring to it as risible euphemisms go, don't you think?

Wasn't that a Steven Seagal movie? The one where a streetwise used car dealer bought a bunch of cars at an auction but they all turned out to be lemons, so now he has to fix the cars using martial arts before the bank comes to take his Buddhist temple. And ninjas.
posted by ryoshu at 8:15 PM on March 16, 2008 [4 favorites]


Presumably JPM sees value in the remaining illiquid BS investments or it wouldn't even be offering $2 a share, and JPM believe their name will cool the redemptions.

Well, the post says "The move was backed by the Fed, which assumed most of the risk," so.. It sounds just as likely that the Fed went begging at JP Morgan's door, and after getting enough concessions JPM resigned themselves to it.
posted by Chuckles at 8:20 PM on March 16, 2008


NIKKEI is down 515... Any guesses on the Dow tomorrow?
posted by mr_roboto at 8:21 PM on March 16, 2008


JP Morgan paid $250 million for the company, and they're getting a $1.2 billion dollar office building as part of the deal. And the Fed is taking most of the risk.

Sounds like a pretty sweet deal.
posted by delmoi at 8:21 PM on March 16, 2008 [2 favorites]


In one of the linked blogs there is the statement:
"...but there’s only so much the Fed — whose resources are limited, and whose mandate doesn’t extend to rescuing the whole financial system — can do..."
How true is this? Surely with control over the money supply they can act with basically unlimited resources, assuming they are not concerned about inflation. That is, assuming they wish to see the system keep functioning even if it leads to higher inflation as the lesser evil.
posted by bystander at 8:24 PM on March 16, 2008


Anyone know where I can check the Chinese stock markets online?
posted by delmoi at 8:24 PM on March 16, 2008


Goldman Sachs to unveil $3bn write down. Can someone pass the popcorn?
posted by ryoshu at 8:26 PM on March 16, 2008 [1 favorite]


A bit of googling brings up the following:

Shanghai

Hong Kong

I don't trade or follow in either
posted by b1tr0t at 8:27 PM on March 16, 2008


delmoi: Hong Kong index at yahoo
posted by bystander at 8:28 PM on March 16, 2008


here ya go, delmoi. Nikkei 225 Index
posted by Mach5 at 8:29 PM on March 16, 2008


Nikkei is the major Japanese index, btw.
posted by b1tr0t at 8:30 PM on March 16, 2008


(well, I found this which indicates that the Shanghai Stock Exchange is off about 3% depending on the index on Monday)
posted by delmoi at 8:31 PM on March 16, 2008


I keep checking the Yahoo front page, hoping I won't see:

WORLD BANKING SYSTEM COLLAPSES

CRAZED MOBS LOOT, BURN WALL STREET

WHO WAS OUT ON LAST NIGHT'S IDOL?
posted by yhbc at 8:31 PM on March 16, 2008 [15 favorites]


PEAK OIL BABY!!!!
posted by vrakatar at 8:32 PM on March 16, 2008 [1 favorite]


Before I let this freak me out too much, how exactly is this going to affect me? I hope that doesn't sound callous -- I just need to know if I should watch out for people throwing themselves out of high rises or not.
posted by sugarfish at 8:44 PM on March 16, 2008


JP got stuck with Bear Stearns just like BofA got stuck with Countryside. It's just the big banks absorbing the over-leveraged hedge-funds-in-all-but-name and doing their part to keep things stable. They get indirectly backed by the Fed in exchange. Systemic risk is the name of the game here; these are attempts to keep down volatility and avoid a bottom-falls-out meltdown. Of course, there's only so many big players left to go 'round and things will get very bad if the Fed has to jump in directly.

The Goldman Sachs writedown is especially worrisome to me, since they've been one of the, well, least-retarded players in this whole mess. That could be just them getting out ahead of the game, though.

And please. This isn't about peak oil. It's about a systemic mis-valuation of a whole litany of securities and financial instruments that consequently can't be hedged nor their risk evaluated in any meaningful way, and the likelihood of a credit/liquidity crunch as a result. It's also about the incompetent reaction of the Fed and the government in general by not doing anything to slow the over-issuance of credit, and then by responding with a bunch of ill-advised measures like stimulus packages that did/will do precisely jack besides wasting a bunch of money that could actually be put to some productive use at this point. (Seriously, how much was the "stimulus package" for? And how much did Bear Stearns just get bought for? Uh huh.)
posted by spiderwire at 8:45 PM on March 16, 2008 [6 favorites]


Before I let this freak me out too much, how exactly is this going to affect me? I hope that doesn't sound callous -- I just need to know if I should watch out for people throwing themselves out of high rises or not.

Invest in canned foods and ammunition futures.
posted by spiderwire at 8:46 PM on March 16, 2008 [2 favorites]


cue the Plunge Protection Team
posted by slickvaguely at 8:47 PM on March 16, 2008


It's about a systemic mis-valuation of a whole litany of securities and financial instruments that consequently can't be hedged nor their risk evaluated in any meaningful way, and the likelihood of a credit/liquidity crunch as a result.

PEAK MIS-VALUATION, BABY!!!!!!
posted by vrakatar at 8:49 PM on March 16, 2008 [4 favorites]


Before I let this freak me out too much, how exactly is this going to affect me? I hope that doesn't sound callous -- I just need to know if I should watch out for people throwing themselves out of high rises or not.

The interesting thing about this crisis is that it is happening in extreme slow-motion. Don't do anything rash. Stay calm.
posted by b1tr0t at 8:50 PM on March 16, 2008


Thank you.
posted by cashman at 8:52 PM on March 16, 2008


TOKYO (Reuters) - Oil jumped to a record above $111 a barrel on Monday, as a surprise weekend cut in the Federal Reserve discount rate and the fire sale of stricken U.S. investment bank Bear Stearns sent the dollar to all-time lows.

THIS IS GOING TO BE FRACKING AWESOME.
posted by vrakatar at 8:53 PM on March 16, 2008 [1 favorite]


By the way, just as an aside... I have no idea what happens next. Four or five years ago, it was pretty obvious what to do... get out of debt, store wealth in things that aren't dollars, and stay the hell out of real estate. When seeing the storm on the horizon, the basics of lashing down and getting ready are pretty obvious.

But now that the storm is actually breaking, and big waves are starting to hit the boat... I have no freaking clue what's going to happen. This is part of why I'm so resistant to giving financial advice anymore. 'Buy gold' was very smart five years ago, but I just don't know if it still is. It could possibly be the very worst thing to do. As the financial system fights to save itself, the collateral damage is likely to be vast and very, very unpredictable.

What I'm personally betting on is that the Fed, if sufficiently determined, can destroy the dollar if it wants, and it's showing remarkable ingenuity in doing so. It's bailing out its banking buddies by stealing money from YOUR pockets. I suspect commodities will become very dear, and millions of people will starve so that the bankers don't lose their mansions, but my overall certainty level is low.

Being able to see a storm and being able to ride waves are very different skills, and I haven't developed any of the latter.

bitrot's right: this is happening quite slowly. It'll continue to unfold for years yet.
posted by Malor at 8:57 PM on March 16, 2008 [10 favorites]


> Any guesses on the Dow tomorrow?

I wouldn't know, but I'll bet anyone a shiny Canadian loonie that CNN, MSNBC, Drudge, etc. will be running a lot of photos like this on their front pages.
posted by The Card Cheat at 8:57 PM on March 16, 2008


Its interesting, and barely reassuring, that Bernake's actions since last December have been so aggressive, in stark contrast to the claims of Bush and Paulson that the situation isn't that bad, and there's nothing they can do anyway ("The market now is in the process of correcting itself, and delaying that correction would only prolong the problem"). If there's a formal recession, it won't be because the Fed was too timid. Its also slightly risky, in that Bernake is really putting his own skin in the game, or at least the government's, in regards to avoiding/alleviating the credit crisis. Between this assumption of Bear Stern's risk and the trading of Treasury notes for bad debt under the TAF and now the Term Securities Lending Facility, taxpayers may be on the hook for hundreds of billions of dollars if a serious recession does break out and people start defaulting on their mortgages. If he's successful, he'll be seen as a genius, and if not, there will likely be massive political pressure for greater regulation of the financial industry in a few years.
posted by gsteff at 8:59 PM on March 16, 2008


Oh, someone beat me to the link. Thanks :)

I actually own some FXI which is a Chinese ETF. I put in a stop order for $123, and it already dropped 6% Friday (to $128), and I wouldn't be surprised to see it hit my stop tomorrow. It tends to swing pretty wildly.

I just bought into the market like last week (march 10th) and I got DXD (UltraShort Dow30 ProShares) and FXI together, thinking the two would ballance eachother out, but because I purchased FXI in the morning and DXD in the afternoon I lost some money. I was actually doing OK until Friday when FXI tanked but the Dow didn't. I also made some money off gold and silver.

I'm not too worried about it personally since I figured I was losing money holding cash anyway.
posted by delmoi at 8:59 PM on March 16, 2008


I sure picked the right time to quit my job as a developer in Bear's IT department.
posted by teferi at 9:04 PM on March 16, 2008 [7 favorites]


Bill Fleckenstein, over at Fleckenstein Capital (pay service), had this to say about the news on Friday:
Amnesty As Travesty
And, it appears that the Fed's new TSLF was set up solely to provide Bear Stearns with liquidity, as Bear cannot avail itself of the TAF. Obviously, JP Morgan can use both. Nevertheless, even the TSLF hasn't been enough, as Bear today needed help from JPM and the NY Fed. So, this is the Fed's way of attempting to bail out Bear Stearns. And that illuminates something I have railed against for some time: We have become a bailout nation.

You would think that if ever there was an example to be made of a brokerage firm that took risk-taking to its extreme, it would be Bear Stearns. Given that the company put itself in harm's way, why shouldn't it be allowed to fail? But the sad fact of the matter is that the Fed and the regulators think they can and should prevent anyone from failing. Which is how we got to this point in time -- where, notwithstanding efforts by the powers that be -- the problems are too big to bail out.

Meanwhile, the consequences of their attempts are a collapsing dollar and a higher gold price. And, at some point, it will matter to the Treasury market, though it certainly hasn't yet. The repercussions to the policies pursued by Greenspan and the Fed are now manifesting themselves. Over the course of the coming months, it will finally be clear to everyone just what an abomination and what a dangerous entity the Fed has become. Perhaps the good that will arise from the crackup ahead is a new regime at the Fed, though I am not holding my breath for when that becomes reality.
posted by Malor at 9:09 PM on March 16, 2008


Okay, correct me if I am wrong, but the Bear Sterns thing is a de facto bank failure, right?
posted by vrakatar at 9:11 PM on March 16, 2008


Fleckenstein also points out that Bernanke is going to get blamed for all of this, when it's all about Greenspan.
posted by Malor at 9:13 PM on March 16, 2008 [1 favorite]


Could anyone break down what this means in Financial Disaster for Dummies style? If society as we know it is going to collapse, I'd love to understand what's happening.
posted by the jam at 9:15 PM on March 16, 2008 [1 favorite]


Okay, correct me if I am wrong, but the Bear Sterns thing is a de facto bank failure, right?

I don't think so, because in theory people invested with the knowledge that they could lose all their money. But doesn't countrywide count as a bank failure already?
posted by delmoi at 9:15 PM on March 16, 2008


A lot of hyper-capitalist types are big Ayn Rand fans, no? I can't help but wonder if currently ongoing events aren't part of an Atlas Shrugged-style plot to fuck society up to the point where it has to be completely broken down in order to start over...
posted by you just lost the game at 9:16 PM on March 16, 2008


Okay, correct me if I am wrong, but the Bear Sterns thing is a de facto bank failure, right?

Not exactly. It would be a failure if Bear refused to enter negotiations with Morgan and really fell apart. Instead, they worked out a deal that looks pretty good for Morgan, and should be fairly seamless to Bear's customers.
posted by b1tr0t at 9:16 PM on March 16, 2008


vrakatar -- easy on the all caps there, buddy. Things haven't collapsed yet.
posted by spiderskull at 9:16 PM on March 16, 2008


I think the Bear Stearns fiasco is simply an old adage writ large: when you owe the bank $!000, it's your problem. When you owe the bank $1,000,000, it's the bank's problem. Now multiply up, and replace 'the bank' by 'the financial markets' and you see the problem.

The Fed can intervene but it can't work miracles.

If it keeps lowering interest rates, the currency dives. This makes oil rich countries want to deal in not-dollars. Ever wonder why Iraq is on the hitlist?

If it dumps in dollars, inflation soars. It already has, when measured in terms of oil and food. Ever wonder why these are excluded from conventional inflation estimates?

And so on.

No matter how hard you shake it, the last drop always runs down your leg.

The real question for me is whether the rest of the world financial system can survive this. I think there's a fighting chance they can. If so what you are certainly seeing is the demise of the dollar as the world currency, and with it the end of US hegemony over world markets.
posted by unSane at 9:17 PM on March 16, 2008 [3 favorites]


Hooray! No more annoying paychecks and trips to the bank for us .... from now on we're gonna get paid in wheelbarrows of worthless greenbacks. "How much for that loaf of day old bread?" "Two barrows and a bucket."

Awesome.
posted by Avenger at 9:18 PM on March 16, 2008


We are the cats strapped to our masters chest, and we have no parachute.
posted by blue_beetle at 9:21 PM on March 16, 2008 [10 favorites]


Yeah spiderskull, I got carried away there. I enjoy the idea of a worldwide collapse.
posted by vrakatar at 9:22 PM on March 16, 2008


If only more people had Googled Ron Paul, we could've pulled ourselves out of this mess.
posted by punishinglemur at 9:22 PM on March 16, 2008 [12 favorites]


Could anyone break down what this means in Financial Disaster for Dummies style? If society as we know it is going to collapse, I'd love to understand what's happening.

The WaPo had this cartoon. Greg Mankiw's slideshow also looks informative for people interested in getting up to speed. Malor, of course, will tell you that this has been 100 years in the making ever since we got off the gold standard.
posted by delmoi at 9:22 PM on March 16, 2008 [11 favorites]


The more people say to stay calm, the more dire the situation clearly is: The entire financial system depends upon public confidence. "Your deposits insured up to $100,000 by the FDIC". The only way the FDIC can back that up is if only a small percentage of banks fail. If there is a widespread run on banks, the whole system collapses.

Slow motion fall becomes fast motion collapse when a critical mass of people lose confidence.
posted by spock at 9:25 PM on March 16, 2008 [1 favorite]


for those wanting to follow along here's a list of some finance/econ (we)blogs, in no particular order :Pput 'em in your favorite feed reader for real time viewing pleasure schadenfreude links and analysis!
posted by kliuless at 9:25 PM on March 16, 2008 [95 favorites]


When Bush says the dollar devaluation, mortgage crisis, and credit crunch are not that big a deal. He means it. It's not that big a deal. For him. And most of his Friends.

You see they own STUFF. Like oil. Hard assets. While you own? What do you own?

Paper. Which on Monday will be worth less.

Meanwhile their stuff just goes up in value the worse inflation gets.

Suckers.
posted by tkchrist at 9:25 PM on March 16, 2008 [3 favorites]


If you are a Bear Sterns shareholder I'm sure it feels as if the bank has collapsed. These equity holders have seen 93% of their value gone, taking the punishment for the risks BS has taken. Allowing the bank to collapse hurts them very little more, but burns all the counter parties to BS transactions. The counter parties probably don't deserve to be toasted, assuming they took the opposite position to BS.
Holders of BS managed investments are already bailing c.f. "the run on the bank" so allowing it to collapse will just punish to late leavers.
posted by bystander at 9:28 PM on March 16, 2008


If there is a widespread run on banks, the whole system collapses.

No. It's way worse than that. People don't have money in banks. People don't HAVE savings. They have 401k (mostly in dollar based funds... which are already losing big), they have Mortgages and debt.

The banks are the ones that are going to run... on each other. And, then as a result, on YOUR investment accounts.
posted by tkchrist at 9:29 PM on March 16, 2008 [1 favorite]


From the post on interfluidity.
Suppose that Monday morning, Ben Bernanke is presented with a deal, under which a buyer gets Bear assets on the cheap, Bear stockholders get paid out, and the Fed (implicitly or explicitly) bears residual risk. If the Fed doesn't approve, executives say, Bear will file for bankruptcy. Dr. Bernanke will then have an unappetizing choice. He can say yes, and hope that there aren't any more rumors out there about any other firms. Or he can say no, and make it very clear that if Bear Stearns files for bankruptcy despite the Fed's continuing provision of liquidity, he will do everything in his power to hold Bear executives personally responsible for the crisis that results.

A man who by all accounts is a very nice guy may be forced to play some very hard ball.
Turns out it was Sunday night, not Monday morning.
posted by mullacc at 9:31 PM on March 16, 2008


I can't help but wonder if currently ongoing events aren't part of an Atlas Shrugged-style plot to fuck society up to the point where it has to be completely broken down in order to start over...

In the 60s, Greenspan was a big Ayn Rand follower and talked about the evils of fiat money and how a gold backed currency is the best way to go. I used to joke that after the US completely divested itself from metals backing, Greenspan worked to become the Fed chair so he could prove that gold is better than fiat.

I'm not sure if it's still a joke.
posted by ryoshu at 9:31 PM on March 16, 2008 [8 favorites]


what you are certainly seeing is the demise of the dollar as the world currency, and with it the end of US hegemony over world markets.

That is, I think, an absolutely safe prediction. I'd take it further: I believe we're watching the early death throes of the American Empire. The world is changing, and our time as the dominant central player is coming to a close. As England gave way to the US as the world's center of gravity, now we're giving way to China and, probably, Russia.

As the Onion so eloquently put it, our long national nightmare of peace and prosperity is finally over.
posted by Malor at 9:32 PM on March 16, 2008 [7 favorites]


tomorrow, my (US) employer will have to start paying (canadian) me in CDN$, or i'm outie.

it's been a trip, guys!
posted by klanawa at 9:33 PM on March 16, 2008


What is winding up? What is Guernsey Law?

NEW YORK (Reuters) - Investment company Carlyle Capital Corp said on Sunday its shareholders have voted unanimously in favor of a compulsory winding up.
The company said it will now start winding up and sell its remaining assets under Guernsey law.

Peak winding up, baby?
posted by vrakatar at 9:34 PM on March 16, 2008


"winding up" means they are liquidating Carlyle's holdings. Guernsey is a tax haven where Carlyle Capital is probably incorporated.
posted by b1tr0t at 9:38 PM on March 16, 2008


The company said it will now start winding up and sell its remaining assets under Guernsey law.

Its incorporated in the tax shelter of Guernsey, a little British island in the English Channel.
posted by blahblahblah at 9:38 PM on March 16, 2008


Could anyone break down what this means in Financial Disaster for Dummies style? If society as we know it is going to collapse, I'd love to understand what's happening.

The article I linked a few days ago is a pretty good primer for the situation.
posted by stavrosthewonderchicken at 9:40 PM on March 16, 2008


So, I hope the internet stays up during this great collapse, at least for the lulz.

The world is changing, and our time as the dominant central player is coming to a close. As England gave way to the US as the world's center of gravity, now we're giving way to China and, probably, Russia.

I'm seeing EU vs. China (vs. India?). Russia and the US can join the EU, maybe. The interesting bit is what happens with the US military - collapse all the finances you want, the aircraft carriers, the B2 bombers, and the ICBMs still exist.
posted by TheOnlyCoolTim at 9:40 PM on March 16, 2008


That Greenspan article just about makes me want to scream.

1. "I hope that one of the casualties will not be reliance on counterparty surveillance, and more generally financial self-regulation, as the fundamental balance mechanism for global finance."

Oh, good lord. The potential for this exact collapse scenario in the credit markets was painfully apparent when LTCM went down. (Unsurprisingly, Bear Stearns was all over that one, too.) That should have made it obvious that self-policing wasn't going to work as a means for regulating the financial industry, because -- surprise! -- there's no internal transparency and in fact a high disincentive against it (which is, after all, sort of the fucking point). Hmm, now who was on watch then? Someone remind me.

2. Even if that fiasco didn't drive the point home, the Enron debacle made it even more clear that "self-policing" couldn't possibly be an effective solution, because the financial industry (thanks in no small part to the credit-rating institutions, naturally) wasn't even capable of regulating itself and pricing appropriately even when the numbers were there for years and there should have been every possible incentive in the world to not do exactly what everyone did do by pumping Enron, and everyone got caught with their pants down. Yes, I am confident in counterparty surveillance now.

And thank god we have Sarbanes-Oxley and now all the executives have to sign a piece of paper saying that their disclosures are accurate. What an effective solution to price volatility. Or something.

3. "The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war. It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities."

Astounding. Greenspan's comforting notion here, of course, rests on the assumption that home prices are intrinsically stable, because the value of the underlying asset doesn't really change, which is precisely the mistake that got us into this mess in the first place. Few reasons why that's still really worrisome:

First, in order for home prices to provide the market anchor they're hoped to, their valuation has to systemically accurate in the first place to a certain degree, which there's actually no guarantee that they are or were -- and even if so, the assumptions that generally undergirded those valuations are now even less useful because of all the current crisis, e.g. all the foreclosures, etc. More on that in a moment.

Second, in order for this revaluation to occur and re-stabilize the economy, that systemic valuation would actually have to be more accurate than it would need to be in an otherwise stable market. Home equity has traditionally been a counterweight to volatility elsewhere in the market, but in the face of a huge liquidity crunch, even returning to that previous level of safety wouldn't fully counteract the systemic volatility that's now spread across the entire economy.

Third -- and to me, this is most important -- this notion that home prices just need to stabilize and we'll all be fine is also based on the assumption that the underlying equity itself will maintain its value, which is now clearly not the case. For example, see the Atlantic Monthly article last month discussing how many recently-built suburban developments have been abandoned in the wave of foreclosures and are turning into the functional equivalent of inner-city neighborhoods; drug wars, graffiti, vandalism, and general deterioration of the homes. Many of these homes were built cheaply, so without someone to live in them, the drywall crumbles and they simply fall apart.

Without anyone to maintain them, all the equity in those new homes is vanishing. As in, the value of the underlying assets, not their market valuations. There's actually less and less value to reclaim, sometimes because they're not even livable residences anymore. There's going to be nothing left to do but demolish them in many cases. Greenspan's talking about a "price stabilization" as if all we need is a market correction in order to re-peg the actual value of those homes, but that assumes that the actual value is going to maintained in the interim, which actually doesn't appear to be very likely.

And there's other potential negative feedback here -- for example, if gas prices go up and cars become too expensive, then the value of all those suburban McMansions becomes even lower. Suburbs also need positive growth -- the whole reason people move there in the first place is for better schools, healthy environment, etc., and if a suburbs turns into a ghetto, there's zero reason for new residents to move in and the values of those homes will only plummet further.

The bottom line is that we're not looking at a mere market correction, but at the possibility that the credit crunch is actually destroying equity, which in turn will increase the underlying valuation problem, and so forth. We're actually facing the prospect of a "Market for Lemons" situation in the housing market, and that is, frankly, utterly horrifying.
posted by spiderwire at 9:41 PM on March 16, 2008 [19 favorites]


Note that Carlyle Capital is a sub-entity of the Carlyle Group. Despite tkchrist's comments to the contrary, that is the kind of place the Bushes stuff their money. Fun times.
posted by b1tr0t at 9:42 PM on March 16, 2008 [1 favorite]


I'm seeing EU vs. China (vs. India?). Russia and the US can join the EU, maybe. The interesting bit is what happens with the US military - collapse all the finances you want, the aircraft carriers, the B2 bombers, and the ICBMs still exist.

Russia still has all their cold war equipment as well, and didn't cause too many problems even when their economy was totally hosed.
posted by delmoi at 9:45 PM on March 16, 2008


Actually, Malor, it seems to me that a credit collapse doesn't bode very well for China or India, either. Nor does a dollar collapse or a decrease in U.S. consumer spending. Both countries are in the middle of expansions right now and as I understand it pretty heavily leveraged, so a liquidity crunch potentially hits them very, very hard. Really bad timing for them.

Europe and Russia, on the other hand -- yeah, I think they're clearly in much better shape right now. Lots more hard equity, lower populations, much less import/export/debt interdependence.
posted by spiderwire at 9:49 PM on March 16, 2008


So, uh... last one to the bank is a rotten egg ...
posted by garlic at 9:50 PM on March 16, 2008


I think there is a bit of an overreaction here on the Blue. Economies can and do survive this sort of thing without turning into Mad Max zone. It is just really, really expensive. According to Krugman,

"The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P., the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 percent of G.D.P. — the equivalent of $3 trillion for the United States."

That's a lot of potential money (though the bailout hasn't been started yet), but even with some degradation of underlying assets (as spiderwire stated), what happens to the banks is not the same as the underlying asset base of the US.
posted by blahblahblah at 9:50 PM on March 16, 2008 [2 favorites]


The bottom line is that we're not looking at a mere market correction, but at the possibility that the credit crunch is actually destroying equity, which in turn will increase the underlying valuation problem, and so forth. We're actually facing the prospect of a "Market for Lemons" situation in the housing market, and that is, frankly, utterly horrifying.

spiderwire: One positive result of all that might be increasing housing density, which reduces carbon use. So that will be good for global warming.

Another big problem is the fact that the so many of those houses are poorly made and a lot of times the builders have arbitrage contracts making them impossible to sue, and even if you do win the builders will probably be bankrupt.
posted by delmoi at 9:51 PM on March 16, 2008


According to Alan Greenspan, the US now faces the worst financial crisis since WWII.


Sure. And while Helicopter Ben will take the blame, Greenspan is the only one who should take the blame since he created this incredible money bubbles.
posted by yoyo_nyc at 9:54 PM on March 16, 2008


delmoi: The problem isn't global warming, carbon use, or bankruptcy; those are all ancillary or transient effects here. It's that an economic collapse could lead to a value-restructuring that makes those homes objectively worth less, either because they deteriorate physically or simply because population shifts make them less accessible and less desirable.

But Greenspan and others are hanging their hats on the assumption that the markets are independent and simply mispriced -- on the notion that no matter what happens, the underlying value of the asset is still there and all we need to do is accurately reprice it to tamp down volatility.

But if the intervening crunch destroys the value of the asset, then we're really and truly screwed, both because that keeps volatility high and because the equity we're hoping to reclaim is actually being physically lost in the process.
posted by spiderwire at 9:59 PM on March 16, 2008


Russia still has all their cold war equipment as well, and didn't cause too many problems even when their economy was totally hosed.

Kursk, anyone? Russia was (and perhaps still is) having significant problems maintaining a standing army, fighting a war in Chechnya, and maintaining a standing navy. The sinking of the Kursk, and the completely inept rescue attempt by the Russians, and this where the submarine had an admiral's son on board?

I'm sure there are many other problems that beset Russia's military in the past two decades, and I suspect many are tied to Russia's economic woes. The military has high operating costs - you've got to procure and manufacture spare parts, fuel, and pay salaries to a great number of men. When you stop being able to do these things, your military becomes much less effective.
posted by zippy at 10:12 PM on March 16, 2008


So, for those of us with virtually no debt (I own my car, don't have a mortgage, and am about to pay off the last of my CC debt), some savings, and some retirement funds that seem about ready to implode, what now? Seriously, do I cash out the retirement fund (taking the hit, presuming that the penalty is worse than not only the short-term losses in the market but the long-term losses as well), grab the savings, and buy gold? I earn more than I spend; where do I put the surplus? I'm seriously at a loss here.
posted by scody at 10:12 PM on March 16, 2008 [6 favorites]


oh and if you had to read one thing "in Financial Disaster for Dummies style" i'd recommend james hamilton's "Asking too much of monetary policy" and if you want a prequel of sorts i'd try brad delong's "Three cures for three crises" as for the sequel, it's being written... but i think this is the worst for credibly bearish endgames (without invoking too much conspiracy -- don't attribute to malice and all ;) that i think even outdoes faber/roubini, for example -- essentially if "bretton woods II" collapses the whole global monetary 'architecture' will have to be reconstituted [viz?], presumably one in which a 'reserve' currency is not so easily (unilaterally) abused, cf. "The end of national currency" [emph multinational currencies as yet unborn].

cheers!
posted by kliuless at 10:13 PM on March 16, 2008 [7 favorites]


blahblahblah: I don't think that anyone is saying we're totally fucked (ok, chicken littles always exist)... But, I think we are saying this is probably the worst we've seen in a loooong time (certainly since I've been alive, or at least old enough to remember -- I'm only 31, so some of you have seen some pretty bad times compared to me, I think).

I mean, look, we made it through the Great Depression. I don't think that's an argument for "let's not worry".

I have to admit I've been reading a lot of different places, and since, probably 2005 (I think Krugman was the first place I read about the housing bubble, all the official denials notwithstanding), I've seen a lot of hand-wringing, and I usually tend to dismiss it. But it just seems to be compounding (hence the "slow crash" statements from a few people here). So lately, I'm letting myself be a bit concerned. I don't really have investments to worry about, living check to check, so I have concerns on how things'll shake out, but so much of this is abstract.

Speaking of the 2005 Krugman Housing Bubble Articles: How the fuck could Carlyle form their Mortgage unit in 2006, when it was pretty damn clear there was a bubble? Fucking irresponsible!

The Market may be rational, but the people playing it are fucking retards. (sorry for the un-PC term there).

Am I the only one who, upon learning more of how this all works, sees it as a sickening shell game of bubble-jumping, and games designed to shift money around between entities in ever more bizarre schemes? If I don't trust Amway, why the fuck should I trust any of these con artists?
posted by symbioid at 10:15 PM on March 16, 2008 [2 favorites]


Well, on the bright side, all the annoying hedgefunders who drive up the cost of living in NYC and act like they own the place will be committing suicide over final toasts with Cristal.

On the brighter side, I'm looking to buy in New York in the next year.

I can't say I'm too bothered. As the Eskimos say, eventually everyone will need to know how to hunt to survive again.
posted by fourcheesemac at 10:19 PM on March 16, 2008 [2 favorites]


... where the submarine had an admiral Naval Academy Instructor's son on board?

Carry on.
posted by zippy at 10:19 PM on March 16, 2008


Seatbelt not included
posted by hortense at 10:19 PM on March 16, 2008


Malor : The sky is falling!
Mutant : Well, the clouds certainly are dark. And it most definitely is going to rain. But don't you think that it's a bit premature to say that the sky will actually fall down?
posted by Afroblanco at 10:21 PM on March 16, 2008 [1 favorite]


...what now? Seriously, do I cash out the retirement fund (taking the hit, presuming that the penalty is worse than not only the short-term losses in the market but the long-term losses as well), grab the savings, and buy gold? I earn more than I spend; where do I put the surplus? I'm seriously at a loss here.

The fact that this question is asked and never answered in these threads should provide some indication that the entire thread is not much more than worthless speculation.

I'm sure someone else will come along and tell you about their monetary theories in excruciating detail but without concluding with any of that, you know, prescriptivist nonsense.

I mean, a year ago, you could have asked the head of Bear Stearns himself for advice but its clear that that advice is now worth about a penny on the dollar.
posted by vacapinta at 10:29 PM on March 16, 2008 [1 favorite]


scody: Some employer-sponsored retirement funds have less options than others, but you should be able to re-allocate your money into different investments without actually withdrawing them from the account. At the very least, you should be able to hold 100% cash or US Treasuries. In any case, figure out your options within the retirement account before paying a big tax penalty.
posted by mullacc at 10:30 PM on March 16, 2008 [1 favorite]


I mean, a year ago, you could have asked the head of Bear Stearns himself for advice but its clear that that advice is now worth about a penny on the dollar.

Now if it were a nickel in front of a steamroller -- well, then you're talkin'.
posted by spiderwire at 10:32 PM on March 16, 2008


Hooray! No more annoying paychecks and trips to the bank for us .... from now on we're gonna get paid in wheelbarrows of worthless greenbacks. "How much for that loaf of day old bread?" "Two barrows and a bucket."

Just remember, prices like that, and $4 gas, does wonderful things to the GDP. The next thing you know, the US will have a GDP of over 10 trillion dollars annually.
And since that's the yardstick everyone uses to show how great the economy is doing, there will be lots of hurrays all around.
posted by Balisong at 10:32 PM on March 16, 2008 [2 favorites]


Afro: it would be more accurate to say:

Malor: Oh my god, there's an enormous hurricane coming!

Mutant: Oh, well, we get tornadoes all the time, and we survive those fine. Hurricanes aren't that big a deal.
posted by Malor at 10:33 PM on March 16, 2008


Seriously, do I cash out the retirement fund (taking the hit, presuming that the penalty is worse than not only the short-term losses in the market but the long-term losses as well), grab the savings, and buy gold?

As mullacc said, you should be able to roll over your IRA (or whatever you have) and put it in something less risky then stocks (if that's what you have now). Gold and silver at are at a 20 year peak so who knows if they'll keep rising the way they have in the past few months.

Does your company have someone you can talk to about this? You might be able to move your money to savings bonds or cash just by filling out some paperwork, rather then actually transferring your funds somewhere else.
posted by delmoi at 10:35 PM on March 16, 2008 [1 favorite]


The only way the FDIC can back that up is if only a small percentage of banks fail. If there is a widespread run on banks, the whole system collapses.

This is an interesting question. Can the FDIC conceivably fail? If so, are some banks safer than others, or are they all equally fucked? Is there any safe place for my money?
posted by Afroblanco at 10:37 PM on March 16, 2008


It's bailing out its banking buddies by stealing money from YOUR pockets.

It's damned-if-you-damned-if-you-don't. If they bail them out, the taxpayer is the one doing the bailing. If they don't bail them out, the financial system fails, and taxpayers lose their savings.

In other words, we're all going to pay regardless.

My brother works for a large insurance firm. Their economists in NYC have been painting a relatively rosy picture -- 3.8% inflation, 4 quarter recession and we're in quarter 3 right now, housing market should stabilize by end of summer. He was telling me all of this today before the Bear Stearns news hit the wire. "People are panicking and they shouldn't be," he kept saying. "You lose money when you panic!"

He's so young and naive. Not a clue about behavioral economics.

And yet, even with all that... I still don't see "the end of civilization" with all of this. This is what, the seventh "OMG MARKET EPIC FAIL!" MeFi post since the crunch started in earnest seven months ago? And no one is starving because of it. The US economy is sick, but it isn't dying.
posted by dw at 10:38 PM on March 16, 2008


The next thing you know, the US will have a GDP of over 10 trillion dollars annually.

WTF? 2007 GDP was about $13.7 trillion.
posted by gsteff at 10:44 PM on March 16, 2008


Am I the only one who, upon learning more of how this all works, sees it as a sickening shell game of bubble-jumping, and games designed to shift money around between entities in ever more bizarre schemes?

When it comes to how I invest my savings, I regret that I have to play the game from the point of view of a wall street investor because it runs counter to how I think and desire to live.

and while I'm not a big gambler type, the casino mentality of the market does bring its own rush.
posted by MillMan at 10:45 PM on March 16, 2008 [1 favorite]


If they're willing to bail out private players, Afro, there's no way they would let the FDIC fail.

Yes, there are definitely banks that are safer than others. I read a book a couple of years ago that rated a number of them explicitly for their ability to survive the kind of crisis we're seeing now. I'll see if I can find it... I think maybe I lent it out. Hopefully I can remember the name.

It's damned-if-you-damned-if-you-don't. If they bail them out, the taxpayer is the one doing the bailing. If they don't bail them out, the financial system fails, and taxpayers lose their savings.

In other words, we're all going to pay regardless.


But in the first scenario, the bad players stay in business, and the risky business models prosper, so we pay again and again and again. If we let them fail, we pay only once.
posted by Malor at 10:47 PM on March 16, 2008


This is what, the seventh "OMG MARKET EPIC FAIL!" MeFi post since the crunch started in earnest seven months ago? And no one is starving because of it.

This has been building for a long time, and it's happening in slow, but punctuated, motion. Folks like me who've been watching with some interest have been doing it for years, and as far as my own personal guesses about the timetable: well, it's playing out at more or less the rate I thought it would. For what it's worth, I reckon at least a couple more years before the nadir. How long that nadir lasts, I couldn't say.

It's not the end of civilization, by any means, but I don't think it's a stretch to suggest that it's going to get a great deal worse before it gets better.
posted by stavrosthewonderchicken at 10:48 PM on March 16, 2008


Malor : Yeah, I'd definitely be interested in putting my money in the safest place possible.

I've been bearish all along - to the extreme. All my money is in an FDIC-protected savings account. I've been under the impression that this was the safest thing to do. If the FDIC fails, it's game over for me.

And as much as I'm against bailing out the bad players, they simply cannot let the FDIC fail. This would hurt the most powerless people in our economic system, and plunge the country into ruin. If the FDIC fails, god help us all. And I'm not even a believer. But then again, if such a thing happened, maybe I'd want to find a god just so I'd have someone to pray to.
posted by Afroblanco at 10:55 PM on March 16, 2008


FDIC protected accounts will be secure, even if the government had to shell out a major portion of GDP to cover it. Unless things get so bad that "where should I put my money" is irrelevant.

If you want to play the market, commodity ETFs are a good bet, unlikely to plunge anytime soon, and you aren't investing in a single commodity.
posted by blahblahblah at 10:59 PM on March 16, 2008 [6 favorites]


But in the first scenario, the bad players stay in business, and the risky business models prosper, so we pay again and again and again. If we let them fail, we pay only once.

The first scenario, in one way or another, is how the American economy has operated for over 100 years. We just move from bubble to bubble.

The second scenario, honestly, would destroy consumer interest in the markets for a generation. And after that, what happens? The bad players re-emerge with the latest bubble.

The problem with capitalism is that it requires greed to operate, and greed draws risky models and bad players. Government regulation and business ethics can keep the bad players and risky models in line, but at the end of the day, everyone wants more.
posted by dw at 11:00 PM on March 16, 2008 [2 favorites]


We have $2.12 in our bank account until next payday, so on the bright side, if the bank fails we're only out $2.12. But, on the not-bright side, are we going to have to start wondering if there will be another payday? This is scary stuff for those of us on the lower end of the economic spectrum. Our car is paid off, our house is almost paid off, and I know how to make nutritious meals on a budget, but it pisses me off that our financial stability is largely in the hands of people who seem to always come out smelling like a rose while the rest of the country deals with shitty economic policy.
posted by amyms at 11:02 PM on March 16, 2008 [13 favorites]


But in the first scenario, the bad players stay in business, and the risky business models prosper, so we pay again and again and again. If we let them fail, we pay only once.

Would were it that simple, though. The risky business models mean that if we don't bail them out we risk total meltdown. It is ridiculous that Bear Stearns (who refused to join in the LTCM bailout even though they were up to their eyeballs in it) is the one getting the golden rope today, but you only need to get bailed out once. They're already rich.

And they'll be back. Lots of guys do it multiple times -- John Meriwether was a pariah for years after Solomon Brothers, but all he had to do was scoop up some Nobel Prize winners and he was in business at LTCM! ...Doing the exact same arbitrage shell game he used to do, but now -- with computers!

I really am starting to come around to the notion of a very temporary freeze. In that brief pause, a national crash program for very carefully reevaluating home equity, household debts, equities, assets, savings, ongoing costs, expected costs etc, to at least come up with an accurate data baseline to work with. Right now we're simply flying blind. If we're going to force the government to get involved in anything, I don't see why we don't take direct steps toward reducing volatility in home prices.
posted by spiderwire at 11:05 PM on March 16, 2008


The FDIC appears to hold investments of $52b, so it could not offer meaningful insurance in a general run on all banks. I think the assumption is the Gov would stand behind it.
Which, I guess, means they could print more money to pay you off, albeit at the pre-inflation figure, before their printing operation devalued to buying power of the dollar.
posted by bystander at 11:11 PM on March 16, 2008


And personally, I don't see why anyone would want to be president right now.

Makes me want to vote for McCain just to see the GOP crushed forever by 2012.
posted by fourcheesemac at 11:12 PM on March 16, 2008 [3 favorites]


If we're going to force the government to get involved in anything, I don't see why we don't take direct steps toward reducing volatility in home prices.

Well, in order to do that, you need capital to rewrite all the mortgages, or you need to force the banks at gunpoint to do cramdowns. And right now, there's not enough capital to go around, and there's no political will to make the banks do anything.

And the other problem is that there are bad players on every level. The guy in the backroom of Bear Stearns is just as culpable as the mortgage writer who sold the jumbo ARM to Cletus, while Cletus borrowed against his credit cards to flip an exurb mansion despite working as a convenience store clerk.

Every way out of this is just punishment for our personal and community greed.
posted by dw at 11:19 PM on March 16, 2008 [1 favorite]


If they're willing to bail out private players, Afro, there's no way they would let the FDIC fail.

Yes, I'm sure those of us with piddling retail bank accounts will be treated with just as much concern as all those i-bankers from Greenwich who play racquetball with Henry Paulson. Oh, Malor, you are a card!

I can't find references right now, but it's my understanding that, historically, in localized, minor bank failures the FDIC tends to take months or years to pay out. In the case of national bank runs, I'm thinking it's a pretty good bet that people are going to be losing their jobs and needing access to their savings sooner than that. If this takes place during a high-inflation period, a great many people are going to be fucked because the FDIC doesn't pay interest during those months or years. And, of course, if the FDIC has that much trouble with the failures of local banks, do you really trust them to pay out at all when a major national bank fails?

The FDIC was always intended as a placebo — it was supposed to prevent bank runs by making people believe that bank runs wouldn't hurt them. It wasn't supposed to ever be used, not on a national scale. Its existence was supposed to render its use unnecessary.

Oops. Maybe we ought to have kept Glass-Steagal around after all.
posted by enn at 11:26 PM on March 16, 2008 [3 favorites]


I can't find references right now, but it's my understanding that, historically, in localized, minor bank failures the FDIC tends to take months or years to pay out.

For what it's worth, the KDIC, the local equivalent in Korea, took upwards of a year to totally pay out the 40K or so to reimburse us when a local bank/credit union where we had some money failed a few years back.
posted by stavrosthewonderchicken at 11:42 PM on March 16, 2008


The risky business models mean that if we don't bail them out we risk total meltdown.

That's the argument of, "the surgery is too painful, Doctor. Let's leave the tumor in and hope for the best."

If the failure of any one player could take down the whole system, that means the system is broken and needs to be rebuilt anyway. It's really that simple. If we want the benefits of free market capitalism, then we need to accept the risks. Companies need to be able to fail. Creative destruction is the linchpin of capitalism, and by removing it, we've decoupled the financial system from the economy, and ruined both.

What we have now is socialized risk but privatized profit. It's the worst of both worlds, a giant system of serfdom. If Wall Street does famously, they keep the money. If Wall Street fails dismally, WE pay their salaries and make their losses good. So, rain or shine, they make out like bandits, while we get robbed. We never win in this situation. Never. They hold the 'system will crash!' threat over our heads, but why do we want a rigged system in the first place?

The system needs to be resilient to failure, and the only way it will learn is if we let them happen.

enn: I really don't think they'll let the FDIC fail. There's just no way that could happen in this political climate. Now, as you say, the actual payouts probably will be slow and worth less by the time you get them, but outright failure? No WAY that's gonna happen.

Afro: I think I did lend that book out, but I'm still looking for it.
posted by Malor at 11:46 PM on March 16, 2008 [34 favorites]


If the U.S. collapses into a Mad Max style violent anarchy after this, do you guys want to join up and be in my gang? We'll have spiffy MeFi-blue paintjobs on our deathcars.
posted by Justinian at 11:57 PM on March 16, 2008 [9 favorites]


If the failure of any one player could take down the whole system, that means the system is broken and needs to be rebuilt anyway. It's really that simple. If we want the benefits of free market capitalism, then we need to accept the risks. Companies need to be able to fail. Creative destruction is the linchpin of capitalism, and by removing it, we've decoupled the financial system from the economy, and ruined both.

Who's to say that free market capitalism is the way to go? Who's to say that the 'managed market capitalism' like we have now isn't a better alternative, given the very real world suffering that can be caused by the 'failure' of financial institutions? If anything, I would argue that the current failure indicates the need for even more invasive management of the economy.

Because really the entire premise of that statement is that 'free market = good' Well, I disagree. In fact, an on-the-ball congress could have prevented this entire thing by regulating sub prime mortgages more carefully.
posted by delmoi at 12:00 AM on March 17, 2008 [3 favorites]


If the U.S. collapses into a Mad Max style violent anarchy after this, do you guys want to join up and be in my gang?

Armageddon Schadenfreude (self-link, from like 8 months ago).
posted by stavrosthewonderchicken at 12:04 AM on March 17, 2008


Everyone was calling doom and gloom back in August... yet life purrs along. Everything is hunky dory, my home business is doing fine, I'm seeing more Hummers and Escalades on the road compared to 6 months ago, and in my town housing inventory on realtor.com has shrunk from 160 to 124 properties and people are still asking for the same old inflated figures. I'm not really seeing this collapse thing around here, unless it's just an overheated SoCal market thing.
posted by mr. creosote at 12:25 AM on March 17, 2008


(clarification: I'm not in SoCal but that's where I hear the trouble is)
posted by mr. creosote at 12:28 AM on March 17, 2008


mr. creosote: it's not just SoCal.

(that's a picture, the Map of Misery that was on Digg a few days ago.)

It's obviously not everywhere, but widespread real estate price drops of 25-30% since August seems pretty damn doom-and-gloomy to me. Means a recently purchased, rather average San Jose million-dollar house is 300K underwater....
posted by Malor at 12:42 AM on March 17, 2008


Because really the entire premise of that statement is that 'free market = good' Well, I disagree. In fact, an on-the-ball congress could have prevented this entire thing by regulating sub prime mortgages more carefully.

Subprime was a symptom, not a cause. You're expecting Congress to get it right when even you aren't really hip to what caused the problem. The real problem was too much money sloshing around, too much credit creation through all these fancy new financial instruments. If it hadn't come out in subprime, it would have come out somewhere else.

Further, the Fed has been loudly insisting that there was no bubble... and, in fact, "All Housing Markets Are Local" Greenspan himself was pushing ARMs quite recently, I think in 2005. How the hell do you expect Congress to figure this out when "The Maestro" is cheerleading for subprime?

What really caused this was the Fed's easy money policy, combined with globalization, derivatives, and the fact that every big player knew they had a backstop if things went really south. Congress would have been almost entirely impotent, because if Wall Street didn't speculate in subprime, it would have found something else instead.

Central planning of an economy is never a good idea. The more managed an economy is, the more poorly it does. There are too many things to know, and all forces on an economy exert pressures in strange directions and in unexpected ways. It's better to get 300 million brains working on the problem instead of 535. The role of government is to provide transparency of and accountability for financial transactions. It's not to provide a safety net for corporations. If we want the benefits of growth and prosperity, we have to embrace and accept creative destruction as well. Without the removal of bad businesses, new, better ones have much less room to grow and prosper.

I know how bad unfettered capitalism can get, and I'm not arguing to go back to the 1920s. But we've tried to do away with the second most important part of capitalism, the chance of failure. Without that destructive cycle, things get hopelessly screwed up.
posted by Malor at 1:02 AM on March 17, 2008 [6 favorites]


I'm not really seeing this collapse thing around here, unless it's just an overheated SoCal market thing.

I have no idea where you're located, but pretty much no one thinks this is "just" a SoCal thing anymore (though SoCal is certainly one of the locations where the situation is amplified). Go to patrick.net for a daily sampling of articles and blog entries detailing the national and international scope of the meltdown that's underway. Here's one from CNN -- titled Foreclosures Up 60% in February -- which mentions in part:
Nevada, California and Florida had the highest foreclosure filing rates in the nation. One in every 165 households in Nevada received a filing in February, up 68% from a year ago and more than three times the national average. [...] Outside of the sun belt, Michigan and Ohio each reported more than 10,000 properties with foreclosure filings in February. These "Rust Belt" states with struggling economies were originally at the epicenter of the housing crisis that began last year with the collapse of the subprime mortgage market.
Or here's something from USAToday: Home Debt Greater than Equity for First Time Since '45.

These are just a tiny smattering of articles in reference to the housing bubble, which is just one component of a much bigger bubble that's unraveling -- namely, the credit bubble. Which, in a way, is manifested in all those Hummers you're still seeing on the road -- most of them aren't owned outright; they were acquired either with auto loans or, more damaging, home equity lines of credit (which becomes a double-disaster when housing values fall, as they are currently -- at which point, mortgage-holders owe more than the home is worth, a growing situation known as being upside-down or under water).

Look, the fact that you haven't taken a hit in your business for the past six months is great. I happen to know other people whose businesses are doing well, too. Most people haven't lost their jobs in the past six months, either. But by themselves, such anecdotes are no meaningful indicator of which way the nation's economic wind is blowing at a macro level -- and reading the news with any diligence shows that right now, it's a pretty cold, harsh wind that's coming in.
posted by scody at 1:06 AM on March 17, 2008 [2 favorites]


It's obviously not everywhere, but widespread real estate price drops of 25-30% since August seems pretty damn doom-and-gloomy to me.

Widespread drops of 25-30%? What are you talking about? Median prices have fallen something like 6% in the last quarter of 2007. Of course they do have a ways to go before they stabilize.
posted by euphorb at 1:11 AM on March 17, 2008


Argh. You know what? That map I posted isn't prices, it's "percentages of new and refinanced mortgages into loans with payment options". I don't even know what that means. I just took the title of "Housing Bubble Map of Misery" to mean "prices" without reading the fine print. Bad me. I'm sorry.

That said, 6% median in three months, in housing, which is generally a very slow market... that's a big deal. And I know it's still dropping. In Las Vegas, there are many $500k houses now selling at $300k, and a lot of the drop has been over the last couple months.
posted by Malor at 1:28 AM on March 17, 2008


Why did Cheny go off to the middle east in the middle of all this. Apparently he's not too worried or is he?
posted by Xurando at 1:39 AM on March 17, 2008


Xurando: Probably to try and convince the oil producing countries to keep on selling oil in USD.
posted by PenDevil at 1:44 AM on March 17, 2008


I assume the price JPM is paying is basically a token as they will be assuming all of Bear Stearns liabilities. Is there any indication yet of how much those liabilities are?
posted by PenDevil at 1:47 AM on March 17, 2008


But on the long term, wouldnt a devaluation of the dollar in fact be a good thing for the US ? Because for example China has so many US$, it makes sense to devalue the US badly, with job losses and so on, so that you can restart after some years with better "starting positions" (wages down, export attractive enough) and so on. The Chinese will be pissed off of course (lesson nr.1 in capitalism: numquam est fidelis cum potente societas).
Something like the boom in the 50/60's, but without bombing out half of the world beforehand.
In some way I still think that the Fed is doing the right thing - they know that they need to go back to the basics (lots of penniless population with frugal standard of living eager to get up to the mcMansions, exports instead of imports) so maybe burning the current generation to the altar of capitalism is the answer.
I mean it will be tough and so on, no more expensive holidays, new car every 3 years or so, but look at what happened in WWII, it sure beats being bombed or sent to fight the Germans.
A crash of the primary food market will not happen, maybe you cannot afford to buy "mini-vegetables packed in Honduras and flow in" at 6.50 for a small package, but basic (and more to basics) items will be there.
posted by elcapitano at 2:21 AM on March 17, 2008


It seems the Bear Stearns homepage hasn't been updated recently.

"Never an unprofitable year—Bear Stearns' primary emphasis is on creating long-term value for shareholders."

Famous last words...
posted by iviken at 2:23 AM on March 17, 2008 [1 favorite]


At this moment, none of the top ten most popular stories on CNN are this one. In fact, the top story is still the Charles Manson compound.

I wish there were a nice Brittney Spears acting crazy story there to completely distract me from the fact that I'll likely be eating out of a trash can lid by Election Day.
posted by Joey Michaels at 2:54 AM on March 17, 2008


I am by no means financewhiz kid, but the Indian markets here today fell more than 5%. They have broken some important support levels (technicaly analyst's words, not mine)..and most analysts and brokers (including mine) are betting that indices will plunge another 5-10% from here.
As for me I am a freshie investor. I entered the market at the worst possible time, right at the peak of bubble late-Dec, early Jan. Thankfully I didn't had much invested in stocks..lost a couple of thousand rupees in Jan. Since then I am short on the markets and it's paying out quite well. I have almost recouped my earlier losses, from gains in short-selling and if everything goes south from here as expected...I might end up making some profit as well.
posted by forwebsites at 3:25 AM on March 17, 2008


Ugh... the South African Rand also suffers when the Dollar drops because people move their money into Euros or Pounds. So even though the Dollar gets hit, 'volatile' currencies like the Rand get hit as well. My US trip in June is getting more expensive by the day.
posted by PenDevil at 3:53 AM on March 17, 2008


It is all jujst as JK Gaibraith said years ago: socialism for the very wealthy and capitalism for the rest of us.
posted by Postroad at 3:56 AM on March 17, 2008 [4 favorites]


I've been watching CNBC all morning - I'm hoping to see some stern bears on tv, but all I see are the talking heads.
posted by blahblah at 4:12 AM on March 17, 2008


Dow Jones futures are about 200 points down, which I think is surprisingly mild considering the news and yet another hail mary rate cut. If the Fed keeps cutting rates they will run out of room to move, a la Japan in the nineties.
posted by bystander at 4:13 AM on March 17, 2008


socialism for the very wealthy and capitalism for the rest of us.

From each, in inverse proportion to his ability; to each, in inverse proportion to his needs.
posted by PeterMcDermott at 4:26 AM on March 17, 2008 [12 favorites]


Yeah, I want to know why the hell the US government is taking money from my pocket to give to the insanely wealthy? I mean, I don't recall getting any checks from Bears. I didn't share in their profits, why should I share in their loss?

It seems to me that they want private profits, but socalized risk.

At the time of the last big financial shakeup I was in the "well, it sucks that we have to bail out these assholes, but if we don't it might destabalize the economy" camp. Now I say fuck it, and fuck them. The economy is looking like its going to go through very hard times regardless of whether we bail out the insanely wealthy parasites or not, so I say let's spend the money on stuff other than bailing them out. Let their investment company fall, or let some private group save it, but include the taxpayers out.

Because, as it stands, it looks like we're going to get more of the same that we got with Enron and all the other "financial crisis" stuff: golden paracutes for the thieves who caused the problem in the first place and a big middle finger for everyone else.
posted by sotonohito at 4:54 AM on March 17, 2008 [2 favorites]


What I'm personally betting on is that the Fed, if sufficiently determined, can destroy the dollar if it wants, and it's showing remarkable ingenuity in doing so.

It does that, and you're going to see foreign ownership of our tasty T-bills come to an abrupt halt, followed by a rapid reversal as the world starts dumping our sorry-ass currency. You think it's bad now? Wait until none of your friends will loan you money. THAT'S when the hurting starts hurting.

What I'd like to know is this: so Bear Stearns holds a shitload of mortgage backed-securities, right? And we all know a lot of that paper is never going to get paid back. So the Fed comes in and offers ten cents on the dollar for all the worthless crummy paper it can get its hands on, right? Now please tell me, why not offer to sell off the mortgages for... say... twenty cents on the dollar? Shit, why are we rewarding a bunch of financial bastards for playing it hard and loose when they should be crashing and burning right now?

If a fisherman suddenly finds out he couldn't sell his three hundred boxes of fish, he doesn't have the Fed come in and say, "Oh, how sad, clearly you deserve to get the full amount you think these fish are worth, so until you can sell them all for the price you think they should cost, we'll give you a huge loan you can coast on." No, how about, you have to sell your fucking fish at a fucking loss and them's the fucking breaks?

The housing bubble needs an enormous escape valve to let some of the air out: dumping homes to their pre-1990 price would be just the thing. Instead we're letting them keep their fucked-in-the-head system intact, it's just going to cost all of us a little more sleep each night. FUCK THAT.

This country deserves the fucking storm.
posted by Civil_Disobedient at 5:20 AM on March 17, 2008 [3 favorites]


But on the long term, wouldnt a devaluation of the dollar in fact be a good thing for the US ?

Well, if you're hoping for U.S. manufacturing salaries to be competitive with, say, Brazil or Indonesia, then sure.
posted by gimonca at 5:20 AM on March 17, 2008


I don't think paying Bear Sterns pennies on the dollar is going to help any of the big wigs at Bear Sterns, and most of Bear Sterns investors have already lost most everything they had with theim. Seems like what it does is keep unpricable investments still supported by a bank till at some future point they become pricable again.
posted by garlic at 5:27 AM on March 17, 2008


blahblah: It's news outlets like CNBC that have been so far behind the curve on this that it is laughable.

If you want funny - and I wish I could find it - Neil Cavuto was interviewing Peter Schiff, who has been on top of this for over a year now, and told Schiff to "stop it, you're boring me, you're boring America" when Schiff tried to explain why the government CPI (inflation) numbers are useless when trying to measure true inflation.

God forbid we have some intelligent discussion or something...
posted by tgrundke at 5:34 AM on March 17, 2008


It's a darn good thing I converted all my assets to Ron Paul dollars.
posted by Krrrlson at 5:45 AM on March 17, 2008 [2 favorites]


Median prices have fallen something like 6% in the last quarter of 2007.

6% per quarter = 22% p.a. In Philly I've seen a lot of prices go off by about 20% since last summer, and this is supposed to be a stable market. It's roughly gone from high 200s > mid 200s; high 300s > mid/low 300s. An established realtor here invited us to make a 5% underbid on a place, just to get things moving. Stuff on our block has been for sale for 9 months.
posted by carter at 5:48 AM on March 17, 2008


In a new interview with Krugman, worth reading, he says this recession is likely to last well into 2010 or 2011.
posted by beagle at 5:57 AM on March 17, 2008


And, by the way Krugman says "My preferred metric is the ratio of home prices to rental rates. By that measure, average home prices nationally got way too high. We'll probably basically retrace all that. So that's about a 25% decline in overall home prices. Only a fraction of that's happened so far. Of course, it varies a lot. In places like Houston or Atlanta, where home prices have not risen much compared with underlying rents, the decline will be relatively small. In places like Miami or Los Angeles, you could be looking at 40% or 50% declines."
posted by beagle at 6:05 AM on March 17, 2008


I can't even tell if I'd be more nervous or less if I understood a single word of all this.
posted by DU at 6:08 AM on March 17, 2008 [6 favorites]


When do the zombies come?
posted by kirkaracha at 6:29 AM on March 17, 2008 [1 favorite]


Here we goooooooooooooooo....!
posted by Jacqueline at 6:30 AM on March 17, 2008


CNBC is having a conversation about the dollar becoming the new carry trade currency. What say you Fed? Cut 100 basis points tomorrow?

It's a good thing we have a strong dollar policy.
posted by ryoshu at 6:41 AM on March 17, 2008


Capitalism rocks, and is absolutely nothing like communism with added fuck yous.
posted by Artw at 6:46 AM on March 17, 2008 [2 favorites]


If I could figure out a way to borrow US dollars, I'd do it like a shot.
posted by unSane at 6:52 AM on March 17, 2008


How much is your house worth?
It's worth as much as anyone will put in your hand TODAY, and that's all.
It's not worth how much the comparable house around it are worth, it's worth the amount someone would cross your palm with TODAY, and nothing more.
Once this concept can be understood and followed, we will return to a much more realistic real estate market based on REALITY.

And that reality isn't too prety today...for once I'm happy I rent.
posted by GreyFoxVT at 7:01 AM on March 17, 2008


The housing bubble needs an enormous escape valve to let some of the air out: dumping homes to their pre-1990 price would be just the thing.

You want to put every mortgage in this country underwater. Wonderful. So, how you going to fund the 60%+ cramdowns you'd be looking at here in Seattle?

Seattle's housing prices are actually relatively stable right now. They're only down 1% from this time last year. Of course, no one is buying, and the banks won't write mortgages for people with less than excellent credit, but it's much better here than in California and Florida.
posted by dw at 7:08 AM on March 17, 2008


Malor writes:
what you are certainly seeing is the demise of the dollar as the world currency, and with it the end of US hegemony over world markets.

That is, I think, an absolutely safe prediction. I'd take it further: I believe we're watching the early death throes of the American Empire.


Er, or the failure of one very small overleveraged financial services company. Jesus.
posted by felix at 7:09 AM on March 17, 2008


"one very small overleveraged financial services company"

Very small? Bear Stearns is (was?) you call the 5th largest investment bank in the US. There are already rumours that Lehman Bros is in the same position.
posted by PenDevil at 7:13 AM on March 17, 2008


I'd take it further: I believe we're watching the early death throes of the American Empire.

Pass that hyperbole over here, man, I need a toke.
posted by psmealey at 7:22 AM on March 17, 2008


felix: in denial much?
posted by unSane at 7:23 AM on March 17, 2008


[Your house is] worth as much as anyone will put in your hand TODAY, and that's all.

I'm no economist, but isn't it worth as much as it's saving me in renting? In your scenario, if there are no buyers, then the house is worthless. In mine, I'm still avoiding paying $N/month to keep the rain off. (Actually, it should be worth the greater of the two numbers, because if someone offered me more than $N/month, it would be worth THAT.)
posted by DU at 7:27 AM on March 17, 2008


It's sure going to be handy to have all those KBR detainment camps, ain't it? And bringing the military back from Iraq, where they've been trained to deal with civil uprising, that's gonna be handy, too.
posted by five fresh fish at 7:35 AM on March 17, 2008 [1 favorite]


It's worth as much as anyone will put in your hand TODAY, and that's all.

I don't think that's really true. There are lots of things that are very valuable, but are hard to sell. Rare art, for example. It could take years to sell, but when it does...

Hmm, I wonder if there are any rare-art ETFs out there.
posted by delmoi at 7:37 AM on March 17, 2008


I'm no economist, but isn't it worth as much as it's saving me in renting?

Perhaps, but when there's a housing glut, renting gets cheap.
posted by Western Infidels at 7:38 AM on March 17, 2008


Here is what I don't understand. This MAJOR crisis was essentially caused by mortgages in which silly lenders made silly loans to people who were silly enough to go with an Adjustable Rate Loan. When the rates start adjusting upwards, lots of people can't pay and you have this huge domino effect that requires bailing out these silly lenders.

It seems to me that the simplest and less expensive solution to the problem would be to FREEZE the adjustable rate mortgages at the rates at which the silly homeowner could continue to make their payment. Yes the silly mortgage lender is not making his additional interest rates (his profit is not keeping up with inflation) but SO WHAT? Isn't that reduction of profit is going to less than what Stearn just experienced? Yes, you are rewarding the silly homeowner with a great deal on a mortgage, (that his credit rating did not deserve) but keeping him out of foreclosure has lots of stimulus benefits for both his household and all his neighbors — essentially all of us.
posted by spock at 7:39 AM on March 17, 2008 [2 favorites]


I'm no economist, but isn't it worth as much as it's saving me in renting? In your scenario, if there are no buyers, then the house is worthless. In mine, I'm still avoiding paying $N/month to keep the rain off. (Actually, it should be worth the greater of the two numbers, because if someone offered me more than $N/month, it would be worth THAT.)

And you also can itemize the mortgage interest on your taxes. But at the same time you're also paying household maintenance you wouldn't have to pay if you're renting.

Right now, there's no question that renting is better than buying. But if you hold a mortgage that's at least five years old, you're probably OK. You're just not moving any time soon.
posted by dw at 7:40 AM on March 17, 2008


delmoi: The Art Fund.
posted by PenDevil at 7:41 AM on March 17, 2008


I'm no economist, but isn't it worth as much as it's saving me in renting? In your scenario, if there are no buyers, then the house is worthless. In mine, I'm still avoiding paying $N/month to keep the rain off. (Actually, it should be worth the greater of the two numbers, because if someone offered me more than $N/month, it would be worth THAT.)

Well, it depends on how you treat the house.

If you use it primarily as a home, then yes, it's worth what it saves you in rent.

If you also use it as collateral for loans you can't afford — loads you'll someday have to pay back — then no, its market value really is the number you have to pay attention to. You can sell a house to pay off a loan. But brag all you want to the bank about avoiding $N/month in rent — it won't get the loan forgiven.
posted by nebulawindphone at 7:44 AM on March 17, 2008


dw, my point was not that owning is better than renting. If owning is worse, then maybe $N/month is a negative number.

The point is, that I need somewhere to live. The value the house isn't "what I can get for it", the value is "what's the differential compared to my other options".
posted by DU at 7:48 AM on March 17, 2008


Right now, there's no question that renting is better than buying.

Well, it may not be a great idea to buy a property that is going down in value, but remember that it is only going down on paper. By buying it and making the payments you have a roof over your head, which is worth something, even if it isn't a good investment. Hell, your CAR isn't a good investment. It's going down in value every day, but you make the payment because you need to get to work every day.

If you rent, (and say it is better than buying) you are assuming that your landlord is immune from the economic situation and your rent is going to stay the same. In fact, you have no idea whether or not your will be hit by inflation of your monthly rent, or will sell the property to someone who will raise the rates (etc.)

Even from an investment standpoint, real estate isn't a great option when it is going down, but you can say with 100% certainty that 100% of your rent check isn't returning you anything.
posted by spock at 7:48 AM on March 17, 2008


Rumors are particularly damaging when they develop the annoying habit of turning out to be true.
Why? Because then they feed on each other until they are no longer necessarily true, but DO become self-fullfilling prophecy.
posted by spock at 7:53 AM on March 17, 2008


So. I'm paying taxes to kill people with bombs

people with bombs deserve to die.
posted by quonsar at 7:53 AM on March 17, 2008 [2 favorites]


Bear Stearns had a market cap on Friday, before the bad news, of ~ $5B.

By comparison, a big competitor, Citi, has a market cap even after all the markdowns of ~ $95B.

JPM: $135B.

Goldman: ~$58B.

Even Legg Mason has a $7B market cap.

So yes, a very small financial services company.

I reiterate:

Malor writes:
what you are certainly seeing is the demise of the dollar as the world currency, and with it the end of US hegemony over world markets.

That is, I think, an absolutely safe prediction. I'd take it further: I believe we're watching the early death throes of the American Empire.


is the ludicrous hyperbole of a short scam artist.
posted by felix at 7:54 AM on March 17, 2008


Seriously, do I cash out the retirement fund (taking the hit, presuming that the penalty is worse than not only the short-term losses in the market but the long-term losses as well), grab the savings, and buy gold?

Uh, you don't intend to retire for 25-35 years, right?

So... hell no.
posted by ROU_Xenophobe at 7:56 AM on March 17, 2008


Wow! Princeton economist Paul Krugman says: I think home prices will fall enough for us to produce about 20 million people with negative equity. That's almost a quarter of U.S. homes. If home prices are rising, or if there's positive equity, you can refinance or sell. But if you have negative equity, you can end up being foreclosed on, and then some people will just find it to their advantage to walk away. We're probably heading for $6 trillion or $7 trillion in capital losses in housing.

That's actually... terrifying...
posted by Guy_Inamonkeysuit at 7:57 AM on March 17, 2008


That's actually... terrifying...

are you kidding? all that means is there's a bargain basement McMansion in my future! goodbye pup tent and coleman lantern!
posted by quonsar at 8:01 AM on March 17, 2008 [3 favorites]


the lead story on the CNN website is Paul McCartney's divorce settlement. wheeeee!
posted by quonsar at 8:04 AM on March 17, 2008


Actually my portfolio is up $7 today. In the morning it was actually down about $30 but it's climbed back up into the positive territory.
posted by delmoi at 8:10 AM on March 17, 2008


Here's a rule of thumb I find helpful in these situations - everyone is wrong. Everyone in this thread (including me), everyone in all the other threads, everyone on Wall Street, the Fed, The Treasury, every banker in China and Europe, Warren Buffet and Bill Gates, absolutely everyone everywhere who has opined on this is wrong. Even when two people contradict each other, both are wrong.

If the world is ending, how is my local Apple store selling out of ipods? How the hell does freight railroad CSX raise guidance. How is the Burlington Northern Railroad up at the time I'm writing this? How is Freeport McMoRan Copper and Gold down 5% when gold hit nearly $1030? There is no excuse for railroads to do well going into a recession and an inflationary environment, if that assumption is to be believed. If people are buy less of things that are getting more expensive, you don't invest in the companies that move those things around.

What I also find odd is how British and European banks and brokerages were failing months ago. Why are foreign banks on the receiving end of this junk? And if SocGen is any indication of what is happening in traditionally tight lipped Europe, I can only imagine the cthonian horrors sitting on the books of Chinese banks that have more cash than financial experience.

So I don't know what is going on, but I know that the world isn't ending. I see a line at the register of the apple store on a Friday night, and I know there are some Americans not hurting all that much. Yeah, we all probably got shafted on our houses in the short term, but they give you 20 year mortgages for a reason.

In fact, If I had to bet (and in a way I sort of am) I would say that this is the early stage of the US screwing over the rest of the world to our own advantage and to their detriment. It wouldn't be the first time it's happened.
posted by Pastabagel at 8:17 AM on March 17, 2008 [7 favorites]


I'm no economist, but isn't it worth as much as it's saving me in renting? In your scenario, if there are no buyers, then the house is worthless. In mine, I'm still avoiding paying $N/month to keep the rain off. (Actually, it should be worth the greater of the two numbers, because if someone offered me more than $N/month, it would be worth THAT.)

Add property taxes and upkeep back into that equation, and it just about absorbs what you'd save in rent. I am so freaking glad that we own outright, right now I can't tell ya. So long as I can keep the county assessor/collector at bay, I'll survive.

I've begun to ponder sending all my cash to a good friend in New Zealand, just for safekeeping.
posted by Devils Rancher at 8:18 AM on March 17, 2008


JPMorgan announced it would be buying Bear Stearns for $2 per share, less than 1/10th the traded value on Friday.

JP Morgan got a great deal, and The Market agrees. As of 11:03 A.M., JP Morgan is up 10.26%.

Jamie Dimon has done it again!
posted by Fuzzy Monster at 8:25 AM on March 17, 2008


There is no excuse for railroads to do well going into a recession and an inflationary environment

sure there is - they're more energy efficient than trucks

So I don't know what is going on, but I know that the world isn't ending.

there will be a bottom for the housing market eventually - people forget that with 300 plus million people in this country that it's still crowded and demand can only grow - and in some areas, like mine, we've already seen bottom or close to it

i see a couple of tight years - it's going to take more than just what's happened so far to cause disaster
posted by pyramid termite at 8:31 AM on March 17, 2008


unsane: "If I could figure out a way to borrow US dollars, I'd do it like a shot."

How about shorting UUP or buying UDN? They're a bit thinly traded.
posted by A-Train at 8:31 AM on March 17, 2008


In your scenario, if there are no buyers, then the house is worthless.

In terms of valuing the house for the purpose of extending a mortgage, that is indeed true. Of course, in reality, there is nearly always a buyer at some price, unless the house is on a toxic dump. But if it is, then yes, there are no buyers, it has no value, and you can't get a mortgage.

The problem we have is that for years banks have issued credit backed by real estate on the basis of inflated appraisals, which in turn have generated nearby sales based on those inflated appraisals, which in turn have generated even more inflated appraisals, etc. Appraisers by and large do not act in a truly arm's length, neutral value. I've had at least 10 appraisals done in the last 30 years, and in every case, the appraiser asked "what's the purpose of this appraisal?" Usually the answer was, to finance a purchase or to refinance, so the next question would be, "what's the amount you're looking to finance." As the buyer/owner, this was fine with me, it got me, in every instance, exactly the appraisal I needed.

But if I were a banker, I'd want appraisers to guarantee, on every appraisal, on a bonded basis, that they had not asked these kinds of questions, that they had not looked at the asking price on the real estate listing -- basically that they had done nothing to influence them toward a pre-established valuation. If all bankers started doing that, the housing market would be far less susceptible to the kind of bubble we've seen that's causing the current meltdown.
posted by beagle at 8:36 AM on March 17, 2008 [2 favorites]


On the other end of today's deal:

British Billionaire Joseph Lewis, Bear Stearns's second-largest shareholder, lost 1.6 Billion dollars.
posted by Fuzzy Monster at 8:36 AM on March 17, 2008


JP Morgan got a great deal, and The Market agrees.

The one thing I'm left wondering is why the Fed even had to be involved. JPMC is buying a $2B company for $250M. That's walking around money for upper management. Is the Fed going to cover Bear Stearns debt while JPMC dismantles the company and sells the pieces? And if they are, what does the Fed get in return from JPMC?
posted by dw at 8:39 AM on March 17, 2008


Meanwhile, critics (1, 2) of George Bush don't like him fiddling while Rome burns.
posted by Dave Faris at 8:45 AM on March 17, 2008


The Fed is now a speculator in the loans business like everyone else. It is hoping that the illiquid assets it is lending against (non-recourse loans in the case of JPM) will turn out to be undervalued, which means that in the case of defaults it will turn a profit. That was a line running earlier on CNBC anyway.
posted by unSane at 8:54 AM on March 17, 2008


Global Financial System Collapse! Film at 11!

er...wait, no. Somebody has been watching to much TV...

Or what felix said.
posted by sfts2 at 8:54 AM on March 17, 2008


The Fed is now a speculator in the loans business like everyone else. It is hoping that the illiquid assets it is lending against (non-recourse loans in the case of JPM) will turn out to be undervalued, which means that in the case of defaults it will turn a profit. That was a line running earlier on CNBC anyway.

That is the most idiotic thing I've read this week. Ben Bernake seriously doesn't give a shit whether the Fed turns a profit.
posted by gsteff at 8:56 AM on March 17, 2008


from dave faris' first link:

“I think 2008 is going to be a fabulous year for the Republican Party!” he said, sounding like Rachael Ray sprinkling paprika on goulash. That must have been news to House Republicans, who have no money, just lost the seat held by their former speaker, and are hemorrhaging incumbents as they head into a campaign marked by an incipient recession and an unpopular war.

If only they could see things as the president does. Bush, who used his family connections to avoid Vietnam, told troops serving in Afghanistan on Thursday that he is “a little envious” of their adventure there, saying it was “in some ways romantic.”


yep. drinking again.
posted by quonsar at 8:56 AM on March 17, 2008


Accusation of idiocy directed at CNBC, not unSane.
posted by gsteff at 8:57 AM on March 17, 2008


Jim Cramer on Bear Stearns last week.
posted by unSane at 8:59 AM on March 17, 2008 [2 favorites]


There is no excuse for railroads to do well going into a recession and an inflationary environment...

From today's news:
... while rocketing fuel costs hurt trucking companies in particular, other, less-fuel-hungry modes of transport are seen benefiting from their pain ... Trains can move one ton of freight approximately 423 miles on a gallon of diesel fuel, which is almost three times more than the 140 miles trucks can operate.
posted by Western Infidels at 9:06 AM on March 17, 2008 [2 favorites]


When it finally happens (since today is apparently not that day) it's going to be a crushing blow, because each post on this desensitizes a little more than the one before it. Or maybe that's a good thing.
posted by cashman at 9:06 AM on March 17, 2008


Pastabagel:

Good point - the world is not ending...yet. Remember, this is a trickle-down effect that has yet to really hit main street full force. Last year it started as people realized, "oh shit, my house is declining in value", this instilled some concern. Next, people realized, "shit, I'm upside down on my mortgage", this created some more concern, next the banks realized, "shit, we hold lots of crap mortgages" and more concern grew.

Things really started to pick up speed when the banks started to curtail lending and the bond market went all wacky. Now we see state pension funds getting squeezed, state tax revenues plummeting (California, Arizona, New York, Mass, Florida, Illinois, etc.) and service cuts (California announced 20,000 teacher cuts the other day).

With credit restricted a lot of construction projects were cancelled or put on hold. People have been unable to refinance.

Now the biggie is that home equity lines of credit and credit cards- for a long time the source of all this "iPod wealth creation" are being curtailed: Countrywide and other lenders are telling people that their HELOCs are being limited or revoked. Chase and Citi have started to close credit card accounts, reduce available credit limits and deny access to new credit, even for the most creditworthy. As one with a 796 credit score, hardly any revolving debt and a good chunk of equity in my house, I was surprised when two banks told me that they wouldn't extend a HELOC for a new roof and garage repairs (legitimate uses!) because of declining property values and foreclosures in my neighborhood. Awesome.

Now that these lines of credit to consumers are being restricted en masse you can expect to see a coming downturn in consumerism. This is one reason for the almost 50% fall in shares of Apple since January 1 - word was leaked that Apple had "significantly reduced" orders from Asian factories due to concerns about slowing growth. That's all the jittery stock market folks need to hear.

Long story short: the implosion of the financial system is slowly trickling down to the street, especially now that credit is being more tightly regulated versus giving a credit card to anyone who could fog a mirror.
posted by tgrundke at 9:06 AM on March 17, 2008 [3 favorites]


Without anyone to maintain them, all the equity in those new homes is vanishing. As in, the value of the underlying assets, not their market valuations. There's actually less and less value to reclaim, sometimes because they're not even livable residences anymore.

Maybe the gub'ment should subsidize some squatters to help maintain equity.
posted by brevator at 9:11 AM on March 17, 2008


Thank god all my money is tied up in frozen concentrated orange juice.
posted by papakwanz at 9:15 AM on March 17, 2008 [4 favorites]


Add property taxes and upkeep back into that equation, and it just about absorbs what you'd save in rent.

When you consider that we haven't made a mortgage payment in 5 years, and our house can drop to 25% of it's current value, and we'll still be ahead of the game, it's old people FTW!

Now get offa my rapidly-declining-in-value lawn.
posted by PeterMcDermott at 9:34 AM on March 17, 2008 [1 favorite]


There are times when I am glad to be too poor for any of this to matter to me.
posted by Astro Zombie at 9:36 AM on March 17, 2008 [1 favorite]


Remember, this is a trickle-down effect that has yet to really hit main street full force

This financial crash is taking so long, it reminds me of Aunt Bunny falling down the stairs (at 3:50).
posted by anthill at 9:40 AM on March 17, 2008 [1 favorite]


scody: "I earn more than I spend; where do I put the surplus? I'm seriously at a loss here."

I'm utterly unqualified to give financial advice to other people, but I'll just say that for me -- and for my Chicken Little peace of mind, if perhaps not my wallet -- the best move was to get all of the larger of my two investment accounts out of the stock market and put the money into short-term United States Treasuries. Treasuries currently have a shitty interest rate, but the only way that money would go away is if the US government itself folded up. You can get treasuries through your broker or through the TreasuryDirect.gov website (clunky web interface, but it works and it's free!). I plan on jumping back into stocks with that account late next year, at which time it should hopefully be better to go bottom-fishing. Yes, there will be some up periods in the market this year. Yes, I may miss some great bargains. Yes, I know how compounding interest works. But at this point, based on my own personal risk tolerance, I would rather be concerned with return of capital than return on capital.

However, for my IRA account, which I rolled my 401(k) into after I left my job, I'm willing to be a little more adventurous. While I put part of it into CD's at various banks (yes, an IRA can hold CD's), I put most of the other part of it into various ETF's. Check out the ProShares series of ETF's and inverse ETF's; they have ones that short financial companies (SKF), ones that short commercial real estate companies (SRS), ones that short the S&P (SH), etc. In other words, even though they're going against the market, they trade like a stock -- so you can hold them in an IRA, even though an IRA isn't usually allowed to be short anything. For example, if Hillary wins the Democratic nomination, I'm buying RXD, which is 2x the inverse of a bunch of health care companies (i.e. RXD would go up as the health care companies go down). But do note that these new-fangled ETF's can only exist through swaps with counterparty financial companies, so if it looks like too many of the financial companies are going under in MadMax fashion, then I'm selling all those too and moving to safer ground.

Again, I am not qualified to give financial advice. At all. Just mentioning my own possibly foolhardy positions.
posted by Asparagirl at 9:44 AM on March 17, 2008 [6 favorites]


I'm no economist, but isn't it worth as much as it's saving me in renting?

Not necessarily. It really depends on the market. There are a lot of other costs associated with owning a house - maintenance, association dues, PMI, taxes, interest (deductible, yes, but that doesn't completely eliminate it as a non-equity expense). Not all of these apply to everyone (or every market) of course.

Where I live, the rental prices are so low relative to sale prices that I'm paying less than 60% of what I would for mortgage, taxes, and association dues on the place I'm renting. For buying to make sense, the local housing market would have to sustain a 5-7% yearly increase for the forseeable future for me to make as much money on this condo as I am by investing the money I'm saving in the market.

Many people (in this country at least) have the attitude that you only rent if you can't afford to buy, but it does make good financial sense in many cases, especially recently. Affordability is not an issue, it's all about the return - and "throwing away money on rent" gets me a higher return right now.
posted by chundo at 9:49 AM on March 17, 2008 [2 favorites]


scody, vacapinta: A self-link for you.

Joey Michaels: "At this moment, none of the top ten most popular stories on CNN are this one."

Issue #1 on CNNMoney: America's Money.

The first link is currently an interview with Paul Krugman. Pretty informative, but only one man's viewpoint. One thing he mentions is: "I look at the prices on subprime-backed securities. Even the AAA-rated tranche is selling for barely over 50 cents on the dollar, and the rest is essentially worthless, which amounts to a prediction that you're going to get really very little on this stuff. Even if every subprime borrower walks away from his house and a lot of money is lost in foreclosure, it's hard to get numbers that bad." I have a feeling this is also the sentiment at the Fed, and part of the reason they stepped in in this deal. Things just aren't that bad, on paper. Psychologically, it's a different story. Record oil prices and rising food costs (thanks, ethanol!) are exerting a pressure that it's hard to overcome with math.

Re: The FDIC; my understanding is that the FDIC does not back your money. Huh? Let me elaborate. The FDIC is not only a guarantor, but also a regulatory agency. They review the financials of major financial institutions to verify things like reserves and liquidity. They plan ahead for failures and the like. They do not issue cash. In the event of a bank failure, the most likely outcome is an acquisition. I saw this happen with Fleet Bank of Boston; they had 2 negative quarters and were snapped up by BoA. I saw it when I was working at Countrywide as well. If no one can come up with a deal to buy East Tennessee Podunk Bank (est. 1906, valued at $30MM), the FDIC brokers the sale. They may subsidize the purchase, reducing the selling price to, say, $25MM, but that is a small fraction of the actual value of the institution (and don't conflate assets with deposits when valuing a bank; Countrywide Bank had about $107B in assets when I left, but less than a quarter of that in deposits). The FDIC-assisted transaction assures your assets are never really illiquid. For most people, it just means you get a different letterhead on your next statement. I had customers who survived bank collapses here in New England back in the 80s (before things were largely electronic), and they had access to their money in no more than 2-3 days.

The net result is still: Don't panic.
posted by Eideteker at 10:00 AM on March 17, 2008 [1 favorite]


There are times when I am glad to be too poor for any of this to matter to me.

Astro Zombies 2-7 will mutiny if their weekly supply of brains is affected.
posted by scabrous at 10:06 AM on March 17, 2008


quonsar - people with bombs deserve to die.

Or at least suffer a financial collapse. Maybe the trillion or so we have dropped on the homes of Iraqi women and children would be handy right now.

Cuz you know, we have more bombs than any terrorist organization. And we use them more too.

But of course, only for good.

Now watch. Cheney went to the ME to set it up: we're about to bomb Iran to take everyone's mind off this little financial dustup silliness. I just know it.
posted by fourcheesemac at 10:09 AM on March 17, 2008 [1 favorite]


"Here's a rule of thumb I find helpful in these situations - everyone is wrong. Everyone in this thread (including me), everyone in all the other threads, everyone on Wall Street, the Fed, The Treasury, every banker in China and Europe, Warren Buffet and Bill Gates, absolutely everyone everywhere who has opined on this is wrong.

So I don't know what is going on, but I know that the world isn't ending."


In other words, oh shit? Unless... I'm wrong that the world ending (which it certainly is by logic of your statement that it isn't + your statement that you're wrong) is a bad thing. Hooray, world's ending!

Or were you wrong when you said everyone is wrong? Hmm...

"Right now, there's no question that renting is better than buying."

Wow, everything is so easy when you speak in absolutes! Buying is actually good if: You plan to keep the house for 5+ years, if in your current market it will save you money vs. renting, just for 2 examples. You could keep renting until your apartment gets sold out from under you and then have to find a place quickety-quick, or you could stop trying to time the market and do what's right for your family right now. Life is not always a question of min-maxing.
posted by Eideteker at 10:15 AM on March 17, 2008


Cheney went to the ME to set it up: we're about to bomb Iran

No, Cheney went to the Middle East to beg for more money from the oil men to bail out our floundering firms on Wall Street -- which arguably could mean less death, but more overall destruction than bombing Iran.
posted by Asparagirl at 10:15 AM on March 17, 2008 [1 favorite]


"Throwing away money on rent" is typically something that that jealous, cash strapped homeowners say about people who rent apartments at a fraction of the cost of their mortgage payments.

There are scores of different reasons to favor one over the other in almost any economy. Renting gives you relative agility, a bit more cashflow, and access to neighborhoods and cities that would be completely unaffordable otherwise. Owning gives you cashflow predictability for several years out, the ability to control or re-make how your domicile looks, a bit of forced savings and some ability to shelter your income from Uncle Sam.
posted by psmealey at 10:20 AM on March 17, 2008


Where is the Sea Angel when we need him?
posted by Astro Zombie at 10:22 AM on March 17, 2008


...there's a bargain basement McMansion in my future! goodbye pup tent and coleman lantern!
posted by quonsar


Good luck heating the damn thing, q.
posted by Guy_Inamonkeysuit at 10:23 AM on March 17, 2008


Wow, everything is so easy when you speak in absolutes!

Home prices are overvalued across the board, credit is extremely tight, and no one is really sure where the bottom of this mess is.

Yes, there are exceptions to renting over buying right now, but they're very few. If you're buying the dream house you're gong to raise your kids in and paying (mostly) cash, now has never been a better time to buy. But generally, it doesn't seem all that wise to jump into this mess.
posted by dw at 10:44 AM on March 17, 2008


“I would say that this is the early stage of the US screwing over the rest of the world to our own advantage and to their detriment.”

Yeah. If you’re better armed than the loan sharks, not much they can do to collect. You see that in the underworld all the time. Then it comes down to negotiation for percentage and typically devolves into a % of counterfeit bills, bad paper that’s otherwise worthless except as a concession not to get killed so you don’t badmouth the guy you lent to so he can still borrow from....y’know, maybe it’s not just the underworld.

“A crash of the primary food market will not happen, maybe you cannot afford to buy "mini-vegetables packed in Honduras and flow in" at 6.50 for a small package, but basic (and more to basics) items will be there.”

I went to Cabela’s the other day to pick up some some stuff for reloading (I reload my own ammo ...yeah, you’re welcome to come out to Casa De Smed if the shit hits the fan) and some blah blah gear, looking at heading out in a bit.
So it’s this big dog and pony show. There’s t-shirts and tons of clothes, kids toys, board games - maybe 1/2 to 3/4 of the store is full of this, the other half is actual outfit stuff - fishing gear, anchors, motors, firearms, cleaning kits, dressing knives, hooks, bone saws, etc. etc. But there’s a food court, a general store that serves fudge - like 1/2 the store is fudge and old timey candy and the rest is geegaws to hang up in your garage.
A couple buddies went with me, I brought my baby girl, and I’m looking all over for something to feed her ‘cause she’s tired of crackers and cherrios, so I’m thinking orange, apple - even peanut butter or some venison or something.

Nope, nada. Not one damned nutritious thing. Even the venison was either jerked or overproduced, sealed in plastic and filled with factory preserves. The food court was the same ubiquitous fried food that’s everywhere - french fries, nasty pizza, etc. etc. Except packaged with an “outdoorsy” theme - “Majestic Buck” milk chocolate and such.

And just then it hit me how fat and unwell a lot of the people looked. I’m used to it in malls, but save for me, my buddies and some of the other guys actively looking at actual gear with an intent to go outside and use it (there’s a gun library full of very pretty shotguns and old timey rifles) most of the folks were in no shape to actually hike in the woods or anywhere else.
And I’m thinking “you people aren’t hunters, or outdoors folks, you’re just plugged into this idea of a lifestyle.”
I’m no financial guy, but that seems to be what’s going on in the country, on the larger scale.
Some folks seem to think by being in the environment, going through the motions in sort of a cargo cult way, they’re part of the thing. But they’re just fetishists. And they should take the hit for it.
I mean, I wouldn’t let some guy die of a heart attack without calling an ambulance, but I’m not going to lie to him and say it wasn’t a result of sitting on his ass eating french fries rather than sweating outside. Just because you eat french fries in Cabela’s rather than McDonald’s, doesn’t make a difference.

The point being - that sort of behavior promotes putting all that lousy food into the place, the useless junk in what is supposed to be a place for functional equipment, and as a result I can’t get my kid anything worth eating and I’m mislead by the conceptual framework - even though I myself am the genuine article appropriate to what the environment is supposed to be.
The forces buying the “Mighty Black Bear” dark chocolate bars are larger than those of us looking for something nutritious and in keeping with the general idea.

Just like some folks lose value on their houses even though they pay bills, invest wisely, all that. (Sorry for all the homily, I’m not Joe Fiscal)
posted by Smedleyman at 10:53 AM on March 17, 2008 [6 favorites]


Now that these lines of credit to consumers are being restricted en masse you can expect to see a coming downturn in consumerism. This is one reason for the almost 50% fall in shares of Apple since January 1 - word was leaked that Apple had "significantly reduced" orders from Asian factories due to concerns about slowing growth. That's all the jittery stock market folks need to hear.

Actually, AAPL was caught up in a tech runup along with MSFT and GOOG over the last six months of 2007. Over the last 12 months, AAPL is still up 41%, even if it's been down 36% since the start of the year.
posted by dw at 11:00 AM on March 17, 2008


They [the FDIC] plan ahead for failures and the like. They do not issue cash. In the event of a bank failure, the most likely outcome is an acquisition.

Yes, that's been the most common outcome, but not the only outcome. You can read the FDIC's failed banks list and see that in some cases, it does (eventually) write checks to individual depositors.
posted by enn at 11:05 AM on March 17, 2008


that sort of behavior promotes putting all that lousy food into the place, the useless junk in what is supposed to be a place for functional equipment, and as a result I can’t get my kid anything worth eating and I’m mislead by the conceptual framework

you walked into a big box store and expected to see paragons of jeffersonian democracy? in the 21st century?

i know how you feel - i used to drink old milwaukee and could never understand where all the girls in bikinis were hiding

and then there's all those people who were thinking they'd flip houses and get rich ...
posted by pyramid termite at 11:15 AM on March 17, 2008


"Yes, that's been the most common outcome, but not the only outcome."

Whoops. I glossed over that point. Yes, it does happen, but in a minority of cases.
posted by Eideteker at 11:17 AM on March 17, 2008


I believe this to be the best advice gong, right now.
posted by Rumple at 11:20 AM on March 17, 2008 [1 favorite]


because we all need advice gongs. jeeebus
posted by Rumple at 11:20 AM on March 17, 2008


Heather Mills could almost have afforded to buy Bear Stearns herself.
posted by gman at 11:25 AM on March 17, 2008


It was considered a point of pride among Bear employees to own stock in the firm, and selling that stock was considered bad form.

FAIL
posted by mrgrimm at 11:26 AM on March 17, 2008 [2 favorites]


GreyFoxVT writes "It's not worth how much the comparable house around it are worth, it's worth the amount someone would cross your palm with TODAY, and nothing more."

Well, your house's value is affected by neighboring houses and the average value in your neighborhood. Buyers are well aware of these things, and so should the seller be. It's also true that your car is worth whatever someone will pay for it, but what they will pay for it depends on how well the car has performed over time. An unreliable model will not retain its value as much in the used market.
posted by krinklyfig at 11:50 AM on March 17, 2008


It was considered a point of pride among Bear employees to own stock in the firm, and selling that stock was considered bad form.

Now where have I heard that before?
posted by dw at 11:50 AM on March 17, 2008


Guess who was advising monkeyboy to buy Yahoo! ?
posted by b1tr0t at 12:03 PM on March 17, 2008 [1 favorite]


I've asked a question on Askme that's getting no love, and I'd appreciate and sage and learned input...
posted by Pastabagel at 12:15 PM on March 17, 2008


The answers are: Expanding. No. No. No. No.
posted by ND¢ at 12:23 PM on March 17, 2008


They tried make ya go to rehab, ND¢?
posted by Dave Faris at 12:24 PM on March 17, 2008 [2 favorites]


On the other end of today's deal:

British Billionaire Joseph Lewis, Bear Stearns's second-largest shareholder, lost 1.6 Billion dollars.


In other news, I'm never going to see that kind of money in my wildest dreams, and I'll bet he still has many times more left over than I will make in my life.
posted by OverlappingElvis at 12:35 PM on March 17, 2008


so what's up with the DOW? how does it keep finishing up overall despite all this bleak financial and economic news?
posted by saulgoodman at 12:40 PM on March 17, 2008


Bear Stearns Pwned
posted by Mach5 at 12:43 PM on March 17, 2008


Mach5 Pwned (corrected link)
posted by Malor at 12:56 PM on March 17, 2008


saulgoodman: My guess is that people are anticipating a rate cut this week.
posted by PenDevil at 1:04 PM on March 17, 2008


so what's up with the DOW? how does it keep finishing up overall despite all this bleak financial and economic news

The DJIA consists of 30 large companies. As of right now, the Dow is slightly up while most of the broader US equity indexes are down. This is due in part to the fact that JPMorgan is one of the 30 DJIA components and it is up about 11.66% as I type this.
posted by mullacc at 1:04 PM on March 17, 2008


(“you walked into a big box store and expected to see paragons of jeffersonian democracy”

Well, yeah. It’s Cabela’s, man. Not L.L.Bean. It’s a serious specialty store - ostensibly, not just clothes. I’m not going to find decent optics or useful hunting equipment at Dick’s or Wal-Mart or some such. It’s not like I’m a farmer going to a big box store looking for a ton and a half of feed.
This is the equivalent (ostensibly) of going to, say, an ADM mill in Decatur and they don’t have any milled grain, just the same stuff Big R carries, and oh, yeah, plus horse pants.
And it’s relatively close to me, I want something from a serious outfit like CMO I have to go to Savannah, GA, and they don’t sell other equipment (firearms, reloading equipment, etc. etc.)
And the Cabela’s here is out in the middle of fairly undeveloped land, it’s not in a mall or something or in the middle of an economic corridor. You actually have to plan to go directly there as opposed to stumbling across it because it’s convenient.
It’d be like walking into a World Gym and there’s no actual exercise equipment, just shirts and caps and lousy food and pictures of exercise equipment you’re supposed to hang on your wall. And there’s some free weights, but they’re on display, and made of hollowed out plastic, but there’s tons of palid chubby folks posing with them looking like they’re putting up 450 on the bench. And they’re between you and the actual area where you can work out.
Same deal with the economy, you’re trying to do the healthy (economically speaking) thing, but it’s a facade that’s driving actual useful healthy behavior out of reachability. I’m not rich or anything, but I’ve got money and my focus has always been on stability, paying off my bills, slow and steady growth, not turning huge profits. I’m looking for tools I can use, and everything - even the specialty tool store that’s supposed to be for people serious about - whatever - is selling just crap. And it seems like either you have to participate in and exploit that on the hard downward spiral or you lose. Hell, man, I wanted to screw people to make money I’d open a chain of those paycheck loan joints. As it so happens I’d rather not, but it looks like that’s the only kind of behavior - more and more that gets rewarded. I mean I still won’t. I’d rather be stuck with useless paper. Doesn’t mean I have to like it.)
posted by Smedleyman at 1:09 PM on March 17, 2008


British Billionaire Joseph Lewis, Bear Stearns's second-largest shareholder, lost 1.6 Billion dollars.

Heather Mills should have married him.
posted by scody at 1:10 PM on March 17, 2008


Why The Fed Helped JP Morgan Buy Bear Stearns
posted by Fuzzy Monster at 1:11 PM on March 17, 2008


Markets mostly recover. Yawn.

For example, if Hillary wins the Democratic nomination, I'm buying RXD, which is 2x the inverse of a bunch of health care companies (i.e. RXD would go up as the health care companies go down).

Given that Hillary wants to give everyone's money directly too insurance companies via a mandate to buy private health care, why would you take this position? Hillary's plan is a giant giveaway to health insurance providers.
posted by delmoi at 1:12 PM on March 17, 2008


Well, someone please clarify this for me. Here in India, my local CNBC-TV18 (moneycontrol.com) channel shows the US CNBC late night. I have been following the proceedings tonight. They are showing several people, possibly employees(?), coming out of Bear Stearns office with files/folders, bags etc..as if they are packing up for good and leaving. So, have the pink-slips already been distributed or employees are just leaving on their own ?

Some of them didn't look fired...at least the guy who took his belonging in plastic bags with Bear Stearns name on them. FWIW, they were saying on CNBC that JPMorgan might cut more than 50% of Bears 14000 employees.

Pastabagel: "How the hell does freight railroad CSX raise guidance. How is the Burlington Northern Railroad up at the time I'm writing this?"

As oil prices shoot up freight becomes the cheaper mode of transporting goods. And add to that the fact that Mr. Buffet has dipped his finger in that pie. I am assuming most investors who want to park their money now in the market might be looking to copy Buffet, Dr. Gloom Faber (gold at all time high for eg)..and so the railroads might be showing more than expected price surges.
posted by forwebsites at 1:16 PM on March 17, 2008


This is due in part to the fact that JPMorgan is one of the 30 DJIA components and it is up about 11.66% as I type this.

Oh, yeah, guess that makes sense--JPMorgan just got a sweet deal, so of course their stocks rally... It's just kind of surreal to me seeing how often the DOW's performance seems sort of disconnected from broader economic realities. Isn't the DOW supposed to be a useful index of overall market performance? Eh, I'm out of my league on this stuff. No financial whiz kid, me.
posted by saulgoodman at 1:38 PM on March 17, 2008


Markets mostly recover. Yawn.

The genius of the stock market system is its ability to send mixed signals and for YOU to accept tokens as accurate representations of the bigger picture. The fact that the DOW (or the whole market) closes UP for a day means nothing. However, hearing "markets recover" is a calming expression for the media to get out there, isn't it?
posted by spock at 1:39 PM on March 17, 2008 [2 favorites]


Isn't the DOW supposed to be a useful index of overall market performance?

Not really. The DJIA is the Dow Jones Industrial Average, which was originally intended to be used in Dow Theory calculations.

The only way to really index the overall market is with an index that takes into account the entire market, like the Nasdaq Composite index.
posted by b1tr0t at 1:51 PM on March 17, 2008


so what's up with the DOW? how does it keep finishing up overall despite all this bleak financial and economic news?

I think slickvaguely nailed it earlier.
posted by ryoshu at 1:57 PM on March 17, 2008


If we're going to force the government to get involved in anything, I don't see why we don't take direct steps toward reducing volatility in home prices.

Well, in order to do that, you need capital to rewrite all the mortgages, or you need to force the banks at gunpoint to do cramdowns. And right now, there's not enough capital to go around, and there's no political will to make the banks do anything.


I should clarify that by "freeze" I definitely didn't mean any sort of moratorium -- what I was pondering was a brief pause so that we could undertake a massive, coordinated revaluation of some of the more volatile assets (like home prices) so that the market could make an adjustment on a non-rolling basis.

If the Fed is going to be backing all of these securities (like it did with the Bear Stearns bailout), we could at least know what the hell it is we're buying. Right now, we don't even know what's on the other end. That just seems like a sort of obvious first step to tamp down the volatility and solvency issues a bit.
posted by spiderwire at 2:09 PM on March 17, 2008


SLATE: The Rise of American Incompetence
posted by psmealey at 2:09 PM on March 17, 2008 [2 favorites]


what I was pondering was a brief pause so that we could undertake a massive, coordinated revaluation of some of the more volatile assets (like home prices) so that the market could make an adjustment on a non-rolling basis.

There are a few problems here. First, home price are probably the least volatile assets at hand here. Second various derivatives in play are vastly more volatile, and also vastly harder to price. Next, some companies are much better at pricing complex instruments than others. Pause the market for a few days and James Simons is likely to figure out a way to valuate these instruments, then come over and gobble them up.
posted by b1tr0t at 2:38 PM on March 17, 2008


The timing of this is great:
Here's how it works:

1. An insider client transfers all or a portion of their company stock into a JP Morgan Securities Inc. brokerage account.

2. The insider then develops, in conjunction with the 10b5-1 team, a 'phased, pre-planned sales program to be executed at either market or specified prices'.

3. Depending on the information available to the insider (but not the public), the insider can decide whether to execute the sale or not.

By gaming the system this way, JP Morgan teaches insiders how to use their knowledge to create a rigged market, one in which it is the "house" that always wins, and the small investor that always loses.

According to a statistical research paper published by Stanford's Graduate School of Business in September last year, executive 10b5-1 trades beat gains relative to non 10b5-1 executive trades by more than 500%.
posted by ryoshu at 2:39 PM on March 17, 2008 [1 favorite]


First, home price are probably the least volatile assets at hand here.

Well, right, that's the idea -- that it'd be the best place to squeeze the volatility out of the market. The point is that the housing market is over-volatile right now but not likely to calm down any time soon because of all the weird-ass securities packages floating around.

Second various derivatives in play are vastly more volatile, and also vastly harder to price.

On the other hand, volatility in the housing market has spillover effects.

Next, some companies are much better at pricing complex instruments than others. Pause the market for a few days and James Simons is likely to figure out a way to valuate these instruments, then come over and gobble them up.

Right. My notion would be contingent on getting everybody at the table -- come up with a valuation mechanism, an arbitration mechanism, and get the major players to lock-in and jointly indemnify at the newly-valued prices, in order to put a premium and incentive on accurate valuations and guard against the possibility of hedging. Anybody who joins in the deal gets more accurate prices on their underlying and also a guard against getting nickel-and-dimed by hedge funds that don't agree to be part of the deal.
posted by spiderwire at 2:47 PM on March 17, 2008


Markets mostly recover. Yawn.

You almost sound disappointed that the economy wasn't plunged into chaos. Whose side are you on anyway?
posted by Dave Faris at 2:48 PM on March 17, 2008


Anybody who joins in the deal gets more accurate prices on their underlying and also a guard against getting nickel-and-dimed by hedge funds that don't agree to be part of the deal.

How do you plan to guarantee that your magic valuation algorithm is superior to the proprietary hedge fund algorithms out in the wild already?
posted by b1tr0t at 3:02 PM on March 17, 2008


Renting gives you relative agility, a bit more cashflow, and access to neighborhoods and cities that would be completely unaffordable otherwise. Owning gives you cashflow predictability for several years out, the ability to control or re-make how your domicile looks, a bit of forced savings and some ability to shelter your income from Uncle Sam.

Also: owning means you won't lose your house if your landlord elects to go condo, sell the building to someone who won't renew your lease, or doesn't like how loud your television is. Essentially, so long as you can afford to pay the mortgage and taxes you get to stay.
posted by davejay at 3:12 PM on March 17, 2008


How do you plan to guarantee that your magic valuation algorithm is superior to the proprietary hedge fund algorithms out in the wild already?

Doesn't have to be. If the deal is for the partners to value-and-indemnify, then all you're doing is hedging out the risks of future trades in the market for those players. It doesn't solve all the market problems, because you can't do secondary-market trades, but it would help relieve a lot of the liquidity crunch in the institutional investor markets, which is crucial right now, and all of the big securities packages are institutional anyway. It would also solve some of the bailout problems -- because buyers who were parties to this deal wouldn't be getting a pig in a poke.
posted by spiderwire at 3:13 PM on March 17, 2008


On the Yahoo message boards (which is full of angry angry people) some people think that JP Morgan paid a token $2 a share instead of letting Bear Stearns go into bankruptcy and buying the pieces was so that the Bear Stearns executive bonuses (paid 3 weeks ago) would not have to be paid back.
posted by PenDevil at 3:16 PM on March 17, 2008


There's something to be said for not having to replace the gutters, or the water heater, or rake the leaves, or fix the leaky roof, or the million and ten other things that go with owning a house.
posted by Dave Faris at 3:17 PM on March 17, 2008 [2 favorites]


proprietary hedge fund algorithms

Also, to be clear, I'm talking about mutually-agreed third party reappraisals, not adjustments to a mutually-agreed valuation algorithm. That's entirely different. The point would be to come to an agreed-upon valuation of the underlying; right now, that's the big barrier holding up the credit market.

We've been trying to inject money into the market to get the institutional investors to open up their credit lines again, but the fear of insolvency -- which is driven by the lack of a stable valuation -- is keeping institutional credit in a deep-freeze.

Acting as an honest broker for asset valuations is a much better option for the government or the Fed than just dumping money on the market in a vain effort to liquefy it. That doesn't solve the underlying problem, which is that no one knows how much the underlying assets are worth and isn't willing to gamble right now; in fact, the inevitable result of those infusions is going to be future overcorrections. All that cash could have been used to fund and then back up the spreads in an asset appraisal, but instead it's just going to fuel secondary bubble effects.
posted by spiderwire at 3:25 PM on March 17, 2008


spiderwire: that makes more sense, but you would still need to train up an army of appraisers (and certify them), then send them out to valuate the nation's real estate. Sort of a modern-day Domesday Book.
posted by b1tr0t at 3:35 PM on March 17, 2008


psmealey - nice link.
posted by Smedleyman at 3:38 PM on March 17, 2008


Well, that's why I suggested the need for a "pause"; enough time to get an initial appraisal done so that all the players have a mutually-agreed reference point and enough cash-on-hand to cover any spreads due to error. After that, a rolling valuation process is trivial because everyone's already on board with the "Domesday Book" (good example) and has a mutual incentive to play along to keep volatility low. It's in everyone's interest to keep the appraisals up-to-date and to try to hone them wherever possible.

But all appraisals are still at some level just estimates -- the real point is to peg a reasonably-accurate price that can be used as an institutional bulwark against hedging; in order to do that, you don't have to discover the "objective value" of the assets -- all you have to do is get the valuations within the outside bounds of the price spreads. That's the baseline -- and the most important thing is just to push past the insolvency fears that are freezing the credit market right now. Once you set the peg price, everything after that is gravy, really.
posted by spiderwire at 3:47 PM on March 17, 2008


That SLATE-article about American incompetence...

"...The very mention of the strong-dollar policy now elicits raucous bouts of knee-slapping in even the most sober Swiss banks. (How do you say schadenfreude in German?)..."

If I take the article's claim seriously, I don't know what to make from that.
posted by Free word order! at 3:47 PM on March 17, 2008


I don't know what to make from that.

It's a joke.
posted by mr_roboto at 3:57 PM on March 17, 2008 [1 favorite]


Thanks. In that case it is a good article and I believe in it.
posted by Free word order! at 4:05 PM on March 17, 2008


Buddy of mine had exactly the same reaction to Evil Dead 3. "This is stupid! 'Gimme some sugar baby?' wtf is that?"
It's a joke.
"Oh....This is brilliant!"
posted by Smedleyman at 5:03 PM on March 17, 2008


The problem with a freeze on CDO trading, backed by independant revaluation is that the biggest holders do not want to participate.
We keep tossing around the idea that these CDOs have a value of something, 10c or 20c or 85c in the dollar, that not every sub-prime borrower will default etc. All we need to do is get the market trading liquidly and the threat to the economic system will pass.This is true, but it is a disaster for the CDO holders individually, so they are reluctant to play ball while they can hold the economy to ransom by blocking a liquid market and thereby increasing institutional risk.
If they can maintain a pretense that the instruments are just illiquid, they can remain at, or close, to the model value on the books.
If there is a real market price established, then mark-to-model prices would have to be corrected to reality.
James Howard Kunstler (who is an end of the world doom and gloomer) floated the idea that Bear Sterns was bailed to prevent its debt book being publicly sold off, creating benchmark pricing that all the other CDO holders would be forced to account for, and potentially setting off an avalanche of margin calls.
posted by bystander at 6:10 PM on March 17, 2008 [1 favorite]


Interesting analysis from the Sydney Morning Herald. It answered my question up thread about whether the Fed could run out of resources. The answer is a technical no, as it could print money, but a practical yes as that would lead to crazy inflation.
Also has some interesting wording on hedge fund prime broker contracts with banks like Bear Sterns.
posted by bystander at 6:25 PM on March 17, 2008


oops - link
posted by bystander at 6:30 PM on March 17, 2008


Spiderwire, I was under the impression that most of these mortgage-based instruments had a pretty tenuous connection to the underlying mortgages and houses. Kinda like the relationship between iPod sales and Apple stock. Clearly the two are related, but good luck finding a formula.
posted by ryanrs at 7:28 PM on March 17, 2008


bystander: Hmmm, a lot of problems there.

First, a CDO isn't the same thing as a packaged mortgage security at all. There are certainly CDOs backed by mortgage securities, but they're not the same thing -- the entire point of a CDO is that it's a cash flow that's definitionally split from the underlying assets, so that the holder can purchase or exchange the risk while having nothing to do with the underlying. The notion that current CDO holders have an interest in systemic risk is either wrong, or at least highly inaccurate.

The CDO holders are actually the ones left holding the bag if too many mortgage securities go into default -- since a CDO is really not much more than an insurance policy against the default of the security -- so those players actually have a higher incentive than anyone to reduce the price uncertainty in the housing market and thereby decrease the systemic volatility and the risk of mass defaults that might not otherwise occur.

Second, the housing-price uncertainty is a problem that reaches across the entire CDO market, since the stability of house prices and home equity is one of the central assumptions supporting the creation of the high-risk tranches in many CDOs (even synthetic CDOs), either directly or indirectly, so volatility in that market is uniquely dangerous to the CDO market. It's our inability to accurately price home equity that created much of this problem in the first place.

Third, the fact that the CDO holders are in this position is actually one of the reasons why the plan I was proposing is probably even feasible right now -- generally, those high-risk, heavily-leveraged funds would be the people who would want to be hedging the mortgage securities, but since they're currently also holding the bag on so many CDOs, in this case they have a higher-than-usual incentive to go along with a plan that writes hedges out of the market, just for the sake of some stability.


Now, I think what you're talking about are the holders of the mortgage securities, which, granted, may be a harder sell, because they might decide to gamble on the fact that they do still hold some claim to an underlying asset and that a recorrection could be bad for them. I don't think that's a realistic impediment, for a bunch of reasons:

First, many of the players owning the big mortgage securities are institutional investors, and they're already pretty much on board, it seems.

Second, at this point (particularly after Bear Stearns has gone under), anyone holding those securities, no matter how big, can't possibly be relying on the unbelievable gamble that they'll be able to stay long on those positions. If the hammer drops, they're screwed. The value of the investments isn't the issue any more -- hell, Long Term Capital Management's books actually ended up in the black after they'd been bought up, but the executives just weren't around to see it. That's the story that's lurking in the background right now. Volatility is what's important right now, not equity.

Third, they can't even give those securities away right now, so their value is, for all intents and purposes, zero. The market is waiting for a correction first, which means that there's going to be a price correction before they can sell anyway, whether they like it or not.

Fourth, and relatedly, the central reason why it can't be the case that the owners of these securities can't possibly be long on these positions right now is because they don't actually know what they're worth. That's the whole problem. If anyone actually did have a reliable reason for thinking that their investments were undervalued, then there'd actually be a market for them. The credit freeze is proof positive that no one is in fact harboring this notion, or someone would be buying the damn things.

Fifth, everyone is taking massive writedowns in the interim anyway, and all the executives are sweating bullets worrying that they'll end up like Citibank's CEO and personally get booted -- so they've got a personal stake in a managed correction, too, even if it means a markdown. A one-time loss would be a good bargain for them right now.

Sixth, as this goes on, the problem only gets worse, as it spills over into other investments. An ongoing credit crunch destroys underlying equity everywhere, because there's no free cash for capital investments, maintenance, etc. There's also the increasing prospect of an economy-wide lockup -- and it's obvious that there's enormous concern about this, or JP and BofA wouldn't be taking bullets on Bear Stearns and Countrywide, etc.

Seventh, and as mentioned above, a foreclosure spiral reduces underlying equity on its own, so even if there are players who might consider staying long because they're in risk tranche that's safer than a nuclear bomb shelter, a liquidity freeze ends up hurting the value of the underlying asset and they have no way of hedging the loss.

Bottom line, I can't really think of anyone who doesn't have some sort of personal incentive to buy in to a managed correction.


Finally, if in doubt, there's always the option available to make this a one-shot deal: i.e., provide that any mortgage securities that aren't opted into the revaluation won't be mixed or traded with those that are. Anyone that opts in gets the benefits of mutual indemnification against misappraisal. Anyone that doesn't, well, have fun waiting for the correction.

Although that provision's kind of de facto built in to the proposal functionally (because the assets in the pool are theoretically less volatile), making it an all-in or all-out proposition is what would really put teeth into the deal. The whole point is to create a stable peg that won't be prone to hedging, and a mutual pool does exactly that.

In theory, this should be achievable via negotiated agreement -- I know that the 10b-5 rules allow for it, but the issue's admittedly far beyond my expertise -- and the SEC would be able to enforce it. But at this point, I see no reason why the government and the Fed shouldn't get behind it explicitly anyway. They've got as much interest as anybody in making this happen -- and if they joined in as a party they could also make joining the pool a condition for bailouts, and again avoid the potential pig-in-a-poke problem they faced with Bear Stearns.

If the idea is sound, the result isn't really in doubt, I think. If the choice is between pushing a bunch of currently-valueless securities into the pool or being left out in the cold to be snapped up later, there wouldn't be many fence-sitters.
posted by spiderwire at 8:39 PM on March 17, 2008 [1 favorite]


Spiderwire, I was under the impression that most of these mortgage-based instruments had a pretty tenuous connection to the underlying mortgages and houses. Kinda like the relationship between iPod sales and Apple stock. Clearly the two are related, but good luck finding a formula.

Well, yes, there's a whole host of financial products that slice-and-dice these obligations in all kinds of weird ways. But they all rely on underlying assets in some form or another, so a stable, guaranteed valuation in theory helps to stabilize the entire market. That's why Greenspan is saying that a correction in the housing market would calm things down.

Of course, that assumes that the correction will happen quickly enough and smoothly enough that there won't be a further crunch, which... well, I can't think of a single sign suggesting that is happening or will happening, because if it was, we theoretically wouldn't even have a credit crunch in the first place, because the market would be correcting itself. The fact that it's seizing up even tighter despite more and more injections of liquidity... Greenspan's whole MO has always been about smoothing transitions, so my intuition is that he's completely clueless right now to be spouting this line at all, but... well, I have to imagine/hope that I'm missing something.

Anyway, the valuation problems actually become worse as you get into the weirder synthetic CDOs and such, so arguably starting at the bottom is actually a good strategy for dealing with the big disconnect. (It certainly seems like a better idea than what Greenspan's proposing or what Bernanke's doing, though I'm quite open to discussion on this point.)

To be clear, what I'm discussing isn't a formula -- we've got too many of those already -- but a mutually-negotiated agreement that (a) has a neutral third party appraise the underlying assets and (b) where the parties agree to abide by those prices and indemnify against the differences. The agreement could be facilitated by another backer -- ideally the third party -- covering the spreads. (That's a white-knight position, of course, which is why it's natural for the government to fill both roles -- to say nothing of the fact that they're obviously spending this money anyway, so why not?)

That way you create a stable, insulated market where these securities can again be traded -- at least among the big players -- without the parties not knowing what in the world they're buying, which is why the credit market's in a seizure right now. Everyone's afraid that a bomb's going to go off somewhere, so no one's collateral is any good.

But instead of trying to insure the spreads for those who are willing to play ball, the Fed's just opening up new lines of credit in hopes that more liquidity will unfreeze everything. Why they're doing this, I have no idea, since it clearly doesn't solve the underlying market fears.

And opening those lines of credit up to everyone (not just the institutional lenders) like they're doing now just strikes me as mind-bogglingly stupid, since that's just more capital to be shoved into the hedges, but hey, Bernanke's a Ph.D, so he must know what he's doing. Or something.
posted by spiderwire at 8:58 PM on March 17, 2008


NB: Something vaguely like what I'm proposing was actually floated a while back, as you may recall -- to the tune of $70B, I think? -- but as I recall it was shot down as a "bailout" even though it was supposed to be mutually-financed by the big lenders. Surprisingly, $70B apparently wouldn't have been enough, but it seems that the amount that's been poured into this debacle so far might have been.

Regardless, my guess is that a bailout will probably take the form of something like what I was suggesting above, albeit with a much higher price tag. The question is just how long until the big investors decide to bite the bullet on it -- and whether it gets shot down again, which is actually a major worry right now, I think. People don't like "bailouts," much as they fear "runs on the bank," I suppose because they don't seem to understand how the two are connected.
posted by spiderwire at 9:04 PM on March 17, 2008


Bernanke's a Ph.D,so he must know what he's doing. Or something.


Or Something. His idea is to solve a credit problem/crunch by injecting liquidity. I doubt that a credit problem can be accessed this way. But my professor always said that ideas are like hemorrhoids... every asshole sooner or later gets some.

Calm down. The dollar has not always been the main currency. Before the dollar it was the Pound. After the dollar there will be a mix of major currency and maybe the Renminbin emerging as a new major currency. It will be much much harder for the US in the future. George Soros said that when the US recovers from the recession it won't be the same as before. The weight is shifting to the East. Just wondering why the Euro is doing so well. The German philosopher Voltaire said that all paper currencies sooner or later reach their inner value. Paper value. We may just see a shift of power and money or a global meltdown and the end of FIAT money. Who knows?
posted by yoyo_nyc at 9:07 PM on March 17, 2008


I'm not really worried about the dollar (I mean hey, less national debt), and I personally think a total meltdown is probably unlikely (like I said, eventually the executives are going to have to buy in to a program to consolidate their losses and restore liquidity).

The things that do worry me:

(1) The possibility that any federally-brokered deal with be shot down as a "bailout" rather than a cushion, which is a big difference. The fact that the previous plan got torched even though it was the banks that were supposed to pony up the cash is worrisome.

(2) As indicated, the solutions so far have been... questionable, to put it charitably. Why injecting liquidity isn't just begging for a future overcorrection, I don't know. Taking on the Bear Stearns losses? Opening up a $200B federal credit line to regular traders? That brilliant stimulus package? The random interest rate cuts? Doesn't inspire a lot of confidence.

(3) If the reports of the 10b5-1 scheme at JP are true, then that's really scary, because it indicates that the opportunism (I'm avoiding the word "corruption") reaches all the way to the bottom.

All recovery scenarios are predicated on the notion that there's some personal risk to the people running these funds, if for no other reason than that their jobs are on the line and they stand to lose if the economy crashes, too. I think that's also the main reason to discount a lot of the tinfoil-hat sky-is-falling stuff, too.

But those reports have the odor of people plundering everything they can on the way out the doors, and that's really bad. This sort of thing has to stop, or we are in really, really big trouble. One advantage of a risk-pooling scheme like I was suggesting (and in fact, the entire point, really) is that it makes this sort of gaming very difficult, because you can't hedge against yourself. But that sort of thing won't happen unless there's enough people in the industry who stand to lose by gaming that they'll push for something like that.

There is, in fact, probably also a point at which it looks like a better idea to grab the money and run, and that risk shouldn't be discounted. We can't afford to get near that point. That's another really good reason why we need to do something before any more major players like Bear Stearns go under (and it's probably a large part of the reason they were bailed out, too). Without some buy-in from the financial community, a solution becomes prohibitively difficult if not impossible.
posted by spiderwire at 9:27 PM on March 17, 2008


Turns out that this story was barely a blip on the major American news outlets. It was overshadowed by continuing coverage of the Heather and Paul divorce trial, the Florida Democratic Primary imbroglio, and the New jersey Governor 3-way sex story.

Amazing.
posted by Joey Michaels at 9:32 PM on March 17, 2008


Every Breath You Take
Dean Glenn Hubbard
Parody: Follies Student Comedy Revue
(may take a moment to load)
posted by hortense at 9:53 PM on March 17, 2008


The only solution that would make me happy would be for the criminal CEOs to have their ill-gotten multi-megamillion paycheques and bonuses taken away. Every one of these fuckers have given themselves tens and hundreds of millions of dollars while they drive their companies straight into the dirt.
posted by five fresh fish at 10:12 PM on March 17, 2008 [2 favorites]


In fact, If I had to bet (and in a way I sort of am) I would say that this is the early stage of the US screwing over the rest of the world to our own advantage and to their detriment. It wouldn't be the first time it's happened.

I would be interested to hear how on earth (despite the fact that I agree, to put it mildly, with the last part) you might see such a scenario play out. Honestly, that's a bit of a headshaker, right there, at least for me.
posted by stavrosthewonderchicken at 10:54 PM on March 17, 2008


Robert Reich, Clinton's former Secretary of Labor, says that "managing directors on The Street" see a 20% chance of a depression.

My personal guess is that we won't see a depression, that things will play out quite differently, but it's interesting to see that more and more big players are twigging to the fact that things are really messed up.
posted by Malor at 12:00 AM on March 18, 2008


Thanks spiderwire. I was conflating CDO holders with the root securities. I would still suggest there are a lot of CDO holders who don't want to see a market emerge that crystalises their losses, my local government, for example, holds some CDOs that look to be impaired. The councilors would certainly wait out any time with the uncertainty, so they can claim the CDOs are still worth what they paid, rather than have a true, much lower, value applied.
posted by bystander at 12:47 AM on March 18, 2008


Is it wrong that I feel a little disappointed that this didn't bring about a COMPLETE FREAK OUT by the populace? I went to the grocery store today (yep, I know how to kite checks until payday) and no one was even making a run on toilet paper. Complete normalcy in every aisle. Totally anti-climactic. Sheesh.
posted by amyms at 1:05 AM on March 18, 2008


stavrosthewonderchicken: Some are speculating that the US will inflate their way out of the debt that is currently owed to countries such as China and Japan.

Say the US owes China $1 billion. Instead of paying back that money out of the current money supply, the Fed merely pumps another billion into the money system (via rate cuts and increases to the money supply) and pays the debt off with that. The Chinese get paid back, but it's now in dollars that are worth nowhere near as much as they were back when they made the original loan.
posted by PenDevil at 1:07 AM on March 18, 2008


Thanks, PenDevil. I find it hard to believe that anyone would think the kind of pain involved domestically would make that kind of fuckery worthwhile, but it's always a bad idea to underestimate the malice or the stupidity or the greed of the actors in question, I suppose.

Here's a nice wrapup from Mish Shedlock, today, addressing many of the questions (and dismissive business-as-usual wishful thinking, too) in the thread so far.
posted by stavrosthewonderchicken at 1:12 AM on March 18, 2008


Whoah. Bill Fleckenstein, the steadiest voice of reason I read on a regular basis... who has been talking at length about the foolishness of the stock market for damn near a decade now... has gone unbelievably bearish. I've never seen this from him before. Here's the top two letters on Ask Fleck:
Seriously, is this the end of world as we know it?
• Yes, in a sense it is..

Bill, after watching the market action in the wake of the Bear Stearns disaster, I've decided to invest in beans, rice and canned goods. Oh, and lots of ammo to defend it when people finally wake up to reality.
• Not a bad idea.
I've been a profound bear for a long time, but this is surprising and distressing even me. If Fleck is talking about canned goods and ammo, holy shit.
posted by Malor at 2:36 AM on March 18, 2008


Another nice try from the short scam artist.

Bill Fleckenstein has been a wild doom-and-gloomer for many years. In fact, people have tracked his record. Link, and the money quote:

In summary, Bill Fleckenstein's stuck-on-pending-disaster outlook has resulted in a very weak stock market forecasting record over the past few years. When disaster does strike, he will have warned us, and warned us, and warned us...
posted by felix at 7:11 AM on March 18, 2008


From Stavros' link:

Bear Stearns is not just some random company. Enron was a random company.

At its peak, Enron's market cap was $120B -- 6 times Bear Stearns at its peak. At one time, a majority of the country's energy was traded through Enron, along with a number of commodities. Bear Stearns was the fifth largest investment bank and dwarfed by JP Morgan and others.

That's really shoddy analysis.

It sounds like there's a bias in the system -- Bear Stearns getting swallowed up is much closer and dearer to folks in NYC than some company in flyover country crashing.
posted by dw at 7:47 AM on March 18, 2008


And one more thing: I keep reading Malor and others screaming that Bernanke isn't doing it right, and it doesn't matter anyway because Greenspan got us in both bubbles.

OK. Fine. So if Bernanke and Co. are doing it wrong, then how should they be doing it? Hold the line on interest rates? Let Bear Stearns go bankrupt? Because honestly, I don't see how any of that would make the situation any better.

So, please, offer up some solutions that would have worked. And if you can't, why weren't you buying canned goods in 2005?
posted by dw at 8:47 AM on March 18, 2008


dw: I don't think there's anything that can be done to make the situation better now, as in right this very minute. What people are arguing about is what can be done to make the minimise the downturn as much as possible.

There are arguments that if Greenspan had not cut interest rates in 2001 to near record lows and allowed the dotcom and 9/11 fueled recession to fully play out the US might not be facing a credit bubble over 10 times (if not more) the size of all the dotcom speculation.

People are worried that if the Fed continues to try and delay the inevitable by pumping in liquidity that all they are doing is pushing the eventual reckoning a bit further out but at the same time increasing the eventual damage that will be done. The classic example is Japan which cut interest rates to 0% and had to then deal with a 15 year long economic downturn.

It comes down to either a recession which hurts but is over soon versus a recession that is not as bad but losts longer.
posted by PenDevil at 9:38 AM on March 18, 2008


“Bear Stearns is not just some random company. Enron was a random company.”

I’m starting a firm - JSRC Inc. I’m going to do everything I can to make it look completely innocuous. I expect it to become a whale.

I saw Sorkin (et.al) on Charlie Rose last night. Clarified some things. I’m not versed enough in finance to relate it well. But it might be worth checking out. My Google-fu is failing me here tho (I’m finding stuff from 2003) otherwise I’d post a link.
posted by Smedleyman at 10:17 AM on March 18, 2008


Afroblanco: If the FDIC fails, it's game over for me.

Since FDIC insurance is "Backed by the Full Faith and Credit of the United States Government," I don't think it can fail unless the government itself fails, in which case we'll all be in pretty bad shape.
posted by Juffo-Wup at 12:55 PM on March 18, 2008


At this point, I'm convinced that the DOW is powered by wishful thinking rather than any rationality.

From my perspective, we're definitely in a period of inflation, possibly stagflation, and it's going to be a while before we're out.
posted by drezdn at 1:54 PM on March 18, 2008


You guys are saying that the bailout saves the company from it's stupidity and so encourages bad choices and risky behaviour in Wall Street, but the bailout was pennies on the dollars - owners of Bear Stearns have been thrashed to within a few percent of everything. What am I missing here? Are you saying the shareholders aren't the ones that should be reamed over this? I'm assuming the shareholders are going to ream the executives... so isn't a bailout like this effectively allowing the company to fail in terms of giving wall street a belt up the backside, while still avoiding some of the pitfalls of bankrupting it?
posted by -harlequin- at 2:00 PM on March 18, 2008


I don't think it can fail unless the government itself fails, in which case we'll all be in pretty bad shape.

Not me - my assets include a citizenship in a desirable foreign country, which would become available to my spouse should I marry, and I'm single. So... only the hottest need apply!
Ok, this plan doesn't help with that whole financial crisis thing, but you go to war with the assets you've got... :-)
posted by -harlequin- at 2:08 PM on March 18, 2008


-harlequin-: The bailout wasn't for Bear Stearns, it was for JP Morgan. They were given a $30 billion non-recourse (that is if they don't pay it back the Fed can't do much about it) line of credit to take over Bear Stearns liabilities, which must have exceeded the $13 billion market capitalisation Bear Stearns had before the weekends shenanigans. The $2 they are paying per share is purely a token so as to prevent Bear Stearns going into bankruptcy.

Bear Stearns was basically removed from the market by the Fed and JP Morgan before it went bankrupt to prevent it's dodgy mortgage backed securities being sold off. Had that occured a price would finally have been set on the toxic paper all the other banks hold and the writedowns in asset value would probably have hurt Wall St like a stiff kick to the nuts (and taken down Lehman Bros as well by the looks of it).

Ignorance is bliss!
posted by PenDevil at 3:41 PM on March 18, 2008


PenDevil - thanks!
posted by -harlequin- at 3:55 PM on March 18, 2008


Not me - my assets include a citizenship in a desirable foreign country, which would become available to my spouse should I marry, and I'm single. So... only the hottest need apply!

We're starting to sound like those lovely foreign brides. Except--and perhaps I'm just speaking for myself here--but we're not as hot as them. Maybe that doctorate in Philosophy that I'm $100k in hock for will come to some good use!

The ship's sinking. Slowly, but it's sinking. If you don't have a spot on the lifeboat picked out already, you better start now. I hear Canada is nice. Two years and ten grand and I can become a (legal) citizen. In two years... who knows? Might be a ten-year wait at that point. One thing I know for sure is that I'd rather my money be in Euros or Maple Leafs than in USD. I mean at this rate the Fed will be paying for these bailouts with the hard-saved "rainy-day" money we responsible people have been told to be saving. It's a sure-fire way to encourage spending: if I know my dollar buys me less tomorrow, I might as well buy shit today.
posted by Civil_Disobedient at 3:56 PM on March 18, 2008


Bear Stearns was basically removed from the market by the Fed and JP Morgan before it went bankrupt to prevent it's dodgy mortgage backed securities being sold off. Had that occured a price would finally have been set on the toxic paper all the other banks hold and the writedowns in asset value would probably have hurt Wall St like a stiff kick to the nuts (and taken down Lehman Bros as well by the looks of it).

That's silly. If Bear Stearns had collapsed and those CDOs gone to auction, there probably wouldn't have been any takers. But if JPMorganChase sold them today... there probably wouldn't be any takers.

The market disruption is the problem with Bear Stearns going under, not the CDOs. The CDOs will remain until they're liquidated or written off. When the banks are ready, they'll do it. Hopefully it won't be like Japan where it took over a decade for the banks to cut their losses.
posted by dw at 4:08 PM on March 18, 2008


If Bear Stearns had collapsed and those CDOs gone to auction, there probably wouldn't have been any takers.

Too true. And that's the reason why it was a great deal: because the one thing they can't afford to let on is how bad the situation really is. So I'll throw a couple hundred million your way and buy your worthless crap, and all your executives can gently sail by in their golden sailboats. It's worth it just for the pretense.

See, I think the "real value" of the average American Home hasn't appreciated much since 1990. There have been so many crappy homes put up in some crappy neighborhoods that are just changing hands left and right. I say we give Americans a taste of the American Dream and let them afford to get a good deal on their shitbox of plywood and plastic.
posted by Civil_Disobedient at 4:41 PM on March 18, 2008


(But yeah, to the folks out there holding half-a-million for a two-bed... sorry. Consider it an expensive mistake and walk away. You won't be the only ones.)
posted by Civil_Disobedient at 4:42 PM on March 18, 2008


The ship's sinking. Slowly, but it's sinking. If you don't have a spot on the lifeboat picked out already, you better start now. I hear Canada is nice.

This is ridiculously pessimistic. We got through the stagflation in the 70s and we'll get through this. It might be rocky for a while, but we aren't all going to be eating cat food and we aren't all going to be living in cardboard boxes under bridges. Seriously, some people need perspective; there is a middle ground between the status quo and THE END OF THE WORLD AS WE KNOW IT.
posted by Justinian at 5:38 PM on March 18, 2008


I'm assuming the shareholders are going to ream the executives... so isn't a bailout like this effectively allowing the company to fail in terms of giving wall street a belt up the backside, while still avoiding some of the pitfalls of bankrupting it?

How are the shareholders going to ream the executives, when the asswipe of a CEO walked away from the company with a $250 million package? Five times what the company sold for.

Irresponsible, greedy, shitheaded CEOs and upper management have been making themselves massively wealthy while simultaneously driving their companies into the ground.

They should be hunted down and jailed for life. They have caused greater harm to society and to more people than any random murderer, and should be penalized proportionately.

But of course to do so would require a government that gives a good goddamn for its citizens, let alone a criminal justice system that works.
posted by five fresh fish at 6:03 PM on March 18, 2008


How are the shareholders going to ream the executives, when the asswipe of a CEO walked away from the company with a $250 million package? Five times what the company sold for.

Actually, roughly what the company sold for. But carry on, math isn't really important here.
posted by b1tr0t at 7:16 PM on March 18, 2008


The doors to Bear Stearns today.
posted by delmoi at 7:35 PM on March 18, 2008


Oops. I mixed up the Bear Stearns number with the Heather Mills number.

Regardless, the CEO has fucked-over the shareholders and customers, and is getting away with it scot-free.
posted by five fresh fish at 8:21 PM on March 18, 2008


dw writes "But at the same time you're also paying household maintenance you wouldn't have to pay if you're renting."

And

Dave Faris writes "There's something to be said for not having to replace the gutters, or the water heater, or rake the leaves, or fix the leaky roof, or the million and ten other things that go with owning a house."

Your paying for this stuff unless your rent is somehow subsidized from an entity losing money monthly. It just isn't itemized.
posted by Mitheral at 8:39 PM on March 18, 2008


Bear's shareholders certainly got fucked, but do we really know who did the fucking?

Has anyone positively identified a Quattrone or Meriwether here?

Schwartz, the Bear CEO, has only been on the job for three months according to wikipedia. Prior to that, he was COO, and prior to that, he ran investment banking. I'm obviously not familiar with all the facts in the Bear meltdown, but I would be looking for a trader to string up rather than an investment banker.

Perhaps Schwartz was so busy trying to convince Steve Balmer to create MicroHoo that he didn't have time to mind his own house.
posted by b1tr0t at 8:48 PM on March 18, 2008


WaPo commentary. Nicely said.
posted by five fresh fish at 10:33 PM on March 18, 2008


SEC Opens Bear Stearns Stock Manipulation Inquiry

I am developing a mad hate-on for all these fat-cat assholes.
posted by five fresh fish at 10:42 PM on March 18, 2008


But you hate everyone.
posted by Artw at 10:44 PM on March 18, 2008


Except my wife, who I love so much I can't spare any for you assholes. :)

"If Bear Stearns had to declare bankruptcy, you'd realize that Bear Stearns paid out billions of dollars in bonuses in January - six weeks ago...they all would have had to send back their bonuses." (crappy video link, sorry.)
posted by five fresh fish at 10:52 PM on March 18, 2008 [1 favorite]


This is ridiculously pessimistic.

Hardly. Just take a couple of steps back and look critically at this country, and ask yourself what you think are some general trends or big numbers that might be indicators of the future prospects for the country. What are the things that make a country strong? Its military, educational system, businesses, social services, infrastructure... these are our big-ticket items. Would you say that our current military expenses are sustainable, or do you think we'll shutting down a lot of bases in the next decade under the guise of "Frugal Belt Tightening?" Our manufacturing base has shifted a few thousand miles east. Most natural resources are cheaper to import, meanwhile our "value-added" companies boil down (in reality) to a single business: technology. Besides that, the rest of the world has caught up to us.

Combine that with tens of trillions of dollars of debt we're sitting on, and you stop asking yourself where's all the money going, and start asking yourself where it's all coming from. Because we sure as shit aren't selling the world enough to counterbalance our expenses. As the Fed tightens its belt, it pushes the cost of our awesomely touted social services further down the food chain to the local municipalities that have to come up with creative solutions to cover the cost for the "essentials" like fire/police/etc. with money that could have been going to schools, or road repair, or...

Point being, I don't think we're going to suddenly pull up a mattress in the next five years and discover a spare couple trillion dollars stuck to the bottom of the cushion. We're in heavy debt and we don't produce enough to pay our bills. Just about the only reason we're solvent is because of the money pouring in from foreign banks to keep us (and their target market, natch) afloat.

The best case scenario at this point over the next couple of decades is heavy cutting of entitlements and social services, stronger reliance on third parties (churches, community centers, other "pooled" resources) to pick up the slack, while the country eats Ramen for a couple of decades to pay for the previous bullshit and chicanery. Heavy scale-back of military forces means our geopolitical sphere of influence wanes. The few industries where people will be making money will be ones you can't export, like doctors, lawyers, mechanics and plumbers. The kinds of businesses where you can specialize and stay local. The definition of "middle class" will continue its slow transformation into our current definition of "working poor." These are real, tangible trends, and point to systemic problems you can't make go away just by sticking your fingers in your ears and yelling "LA LA LA I CAN'T HEAR YOOOU.."

If you put your personal patriotism aside for a moment and just look at the country's balance sheet, and compare it to every other first-world country, we start to stand out like a sore thumb. Like the one remedial student that accidentally went to the wrong class one day and found themselves in Advanced Discrete Math looking dazed and confused but too scared to get up and walk out. The next couple of decades are going to be about perceived stability--heavy natural resources (oil, gas, wood, steel), solid infrastructure (roads, rails, air), stable social systems (democracies of one sort or the other)... (Canada, Norway, ).

Just ask yourself one simple question: if you had the option of picking up everything and moving to a country where you'd make slightly less each year, but housing wouldn't be as expensive, and you'd never have to worry about finding yourself on the street, and medical care was covered, and you got an extra couple of weeks of vacation time, free... you wouldn't snap that up in a heartbeat? Maybe you personally think you've got a better chance staying here. I can accept that, sure. But what do you think most people would do? The rate of personal bankruptcy filings has been going up steadily over the past couple of years. Do you think those people would rather have taken the deal?

There's nothing wrong with leaving a sinking ship unless you're the captain.
posted by Civil_Disobedient at 12:28 AM on March 19, 2008 [1 favorite]


Just ask yourself one simple question: if you had the option of picking up everything and moving to a country where you'd make slightly less each year, but housing wouldn't be as expensive, and you'd never have to worry about finding yourself on the street, and medical care was covered, and you got an extra couple of weeks of vacation time, free... you wouldn't snap that up in a heartbeat?

Hell, I did that a couple of decades ago. And I'm from Canada!
posted by stavrosthewonderchicken at 12:31 AM on March 19, 2008


I do see financial hardships ahead, but I am not overly pessimistic. If a bad recession comes to pass, well, everybody (except presumably Bear Sterns ex-execs) will be worse off. Shrug.
I don't see starving in the streets type problems. The worst that can happen is you lose your stuff. It might be stuff you're particularly attached to - I love my house - but it is just stuff.
Now just make sure a president who can deliver universal healthcare gets elected, so you can still afford medical care if things get a bit grim.
posted by bystander at 3:32 AM on March 19, 2008


Round up everyone who can't prove they are an American citizen (KBR has camps ready and waiting). Ship them out of the country. Spread bird flu among the remaining population and bury them at sea.

Problem solved. All those who survive inherit the wealth of the missing and dead.
posted by five fresh fish at 7:56 AM on March 19, 2008


There's nothing wrong with leaving a sinking ship unless you're the captain.

we are the captain
posted by pyramid termite at 8:34 AM on March 19, 2008 [1 favorite]


Just ask yourself one simple question: if you had the option of picking up everything and moving to a country where you'd make slightly less each year, but housing wouldn't be as expensive, and you'd never have to worry about finding yourself on the street, and medical care was covered, and you got an extra couple of weeks of vacation time, free... you wouldn't snap that up in a heartbeat?

Hell, no. Because this is a false question. That stuff isn't free. And if you're talking about long-term trends, the social systems in the countries you're talking about are unsustainable as the populations age. We're probably going to have to cut entitlements, yes, but (and this is key) so are the places you're talking about.
posted by Justinian at 9:07 AM on March 19, 2008


Oh and also, I'm not a wimp who abandons my home, town, family, community, and country because there might be a rough patch ahead.
posted by Justinian at 9:08 AM on March 19, 2008


Hell, no. Because this is a false question. That stuff isn't free.

Effectively it is - here in the USA, I pay about the same tax, but instead of free medical care, my money buys me a war in Iraq. Since Iraq was nowhere near the threat to me that lack of healthcare was, I would be gaining something for no extra cost if I go with the healthcare.

Same goes with vacation - in the USA, my employer spends about the same on benefits, but that money is wasted lining the pockets of health insurance companies whose job it is to deny me my healthcare, when that same money elsewhere would instead be lining my pockets while I relax and enjoy vacation.
Same amount of money being thrown around, but only in one hand do I actually gain something. So it is, effectively, free.

(Unless of course, you work for a welfare industry like health insurance, in which case you would face the additional cost of having to get a proper job that actually contributes something to society. Like jobs are supposed to.)
posted by -harlequin- at 10:58 AM on March 19, 2008


Oh and also, I'm not a wimp who abandons my home, town, family, community, and country because there might be a rough patch ahead.

What, you mean like the 90% or so of the ancestors of the North American population, who arrived there as immigrants? Yeah, those piss-weak weinerdogs!
posted by stavrosthewonderchicken at 1:57 PM on March 19, 2008


What, you mean like the 90% or so of the ancestors of the North American population, who arrived there as immigrants?

I think you're rather oversimplifying the causes of immigration to the united states. But since I was oversimplifying the reasons for staying, I guess we're even. yay.
posted by Justinian at 3:27 PM on March 19, 2008


Fleckenstein also writes a weekly column that publishes on Sundays; this one's on MSN Money, for free. So, yay, I don't have to feel guilty about reposting it. The 3/14 edition:
Fed's $200 billion loan scheme won't work
The giveaway strategy -- creating a huge pool of cash to lend to securities dealers, with risky mortgage-backed debt as collateral -- is little but stalling for time.

For some time now, the Federal Reserve has been writing a book. It's called "What Not to Do," and on Tuesday it penned a chapter called "The Prudent Bailing Out the Reckless."

That was via the Fed's creation of a $200 billion Term Securities Lending Facility, a pool of money it can lend to securities dealers on top of funds it has already injected into the financial system.

I guess the sight of all those suffering hedge funds and brokers was just too much to bear.

Now, I realize the Fed was created to provide a liquidity backstop in times of emergency. But the Fed has abused its privilege for so long -- by being the creator and proponent of excess liquidity and the problems it causes -- that, in my book, the Fed is nothing short of an abomination. The reality that's eluded Fed "experts" is simple: Credits in much of the financial system are simply no good. And creating liquidity and stalling for time won't make those credits good.

I find it stunning that the Fed is willing to open up its tool kit when faced with liquidity problems -- spawned from bubbles of its own making -- and yet while those bubbles were inflating, the Fed kept it snapped shut tight.

The cheerleader for excess
Former Fed Chairman Alan Greenspan is responsible for this mess. At every juncture, he insisted on getting out a megaphone and cheering the bubbles. That is why we're in dire straits now.

This action by the Fed will temporarily alleviate some pressure, but it will not change the fundamental problem: Home prices were in a bubble that has now burst. People making median salaries in this country can't afford to buy houses. And even folks who make more money often own more house than they can afford.

The Fed's move set off a big rally on Wall Street, but it lasted just one day. This problem is going to run its course. There's no bubble to bail out the housing bubble.

As to the folks who think commodities may be the next bubble: They might be right.

But exploding commodity prices will not help. They're not going to make housing more affordable because less of people's paychecks will be available for mortgage payments.

Will Fed be left holding the bad?
This just goes to show you the Fed will move heaven and earth to try to keep Wall Street (and, by extension, the economy) running. The Fed cares nothing about capitalism, inflation or the dollar, and it really cares nothing about the message that it sends to the world regarding its aims. Just imagine the image that would be projected if the comrades in power here declared Fannie Mae (FNM, news, msgs) to be a ward of the U.S.

Consider the potential ramifications of the Term Securities Lending Facility, under which the Fed will lend Treasurys for a period of 28 days, taking mortgage-backed debt as collateral.

Before its implementation, the chance of the Fed buying a piece of paper that could deteriorate rapidly over the course of a couple of repo terms would have been small. But now that the Fed, through this facility, is willing to accept (exchange for Treasurys, actually) "AAA-rated" paper -- and remember that the rating agencies are suspect -- it's not inconceivable that the following could occur:

The Fed might actually start taking paper at one price and then find out (by the time XYZ financial institution is supposed to take it back) that the paper is trading at a different price. Inquiring minds would like to know what the Fed would do about these losses if the repo'ing entity was determined not to take back the collateral.

The ball is in Bernanke's court
Creating liquidity and stalling for time won't make those credits good. Credit is contracting all across the financial system, in America as well as around the globe. At the same time, credits are going bad. Both of these problems keep lapping up against each other, and their magnitude will render bailouts useless.

Despite that glaring reality, the Fed remains intent on monetizing whatever needs to be monetized, as Chairman Ben Bernanke thinks this can prevent the underlying mass of home-price issues and the economic consequences of the burst housing bubble from doing what they will do.

But in the end, he's going to shred the currency market and at some point the Treasury market. And, though Greenspan deserves all the blame, Bernanke will likely get it -- with history erroneously declaring him to be the worst Fed chairman ever.

At the time of publication, Bill Fleckenstein did not own or control shares of any equity mentioned in this column.

posted by Malor at 10:25 PM on March 19, 2008


I think you're rather oversimplifying the causes of immigration to the united states. But since I was oversimplifying the reasons for staying, I guess we're even. yay.

Double yay!
posted by stavrosthewonderchicken at 10:28 PM on March 19, 2008


Fleckenstein also writes a weekly column that publishes on Sundays; this one's on MSN Money, for free. So, yay, I don't have to feel guilty about reposting it. The 3/14 edition:

The Fed caused the first depression according to Bernake. What makes you think the second one should be different?
posted by ryoshu at 11:25 PM on March 19, 2008


I'm not sure if this has been discussed here, but the Swedish banking crisis of the early '90s is an interesting case study. Especially in comparison to Japan's problems around the time.

Excerpt from a report by Merrill Lynch’s David Rosenberg called “Transitioning from crisis prevention to management”:

Intervention by the federal government has to happen
This brings us to the second development, which is that in this new chapter of crisis management, the solution is going to necessarily transcend the Federal Reserve and inevitably require intervention by the federal government. And there are two templates we can learn from: Japan or Sweden. Both experienced banking sector crises at around the same time in the early 1990s. But one lasted more than 10 years and one lasted two years. We have been working hard to try and get a handle on what the roadmap is going to look like going forward, and we think these two bookends, Japan and Sweden, provide tremendous insights on what to do and what not to do to get through this credit crisis.

We may well end up doing something in between, but what is clear is that Japan did not let its badly capitalized banks fail until the crisis was already almost a decade old. Japan spent the early 1990s denying much of the problem existed at all. By the mid-1990s, it was out of denial mode but doing the least amount possible to rid the economy of its bad debts – selectively bailing out small lenders and that was it. Only in the late 1990s were Japanese policymakers addressing the root of the problem head-on by letting the "bad houses" fail when the Long Term Credit Bank of Japan and Nippon Credit collapsed. Only then did the authorities get serious, but dragging the process out meant more than a decade of stagnant economic growth.

The Japanese credit crisis is usually cited as the benchmark for what not to do. But few cite Sweden's crisis as a template on what might actually work. As was the case in the United States, Sweden's crisis followed dramatic deregulation in its financial sector and lax supervision during the mid-1980s. Combined with a highly expansionary set of macro policies, this contributed to a speculation-fueled asset price boom – in what else? -- residential real estate. As property prices doubled, the banks dramatically eased their lending standards and this culminated in private-sector debt relative-to-GDP soaring from 100% to 150% during the second half of the 1980s. But in the aftermath of a policy tightening cycle, as is so often the case after a leveraged-asset bubble forms, a bust follows and triggers a downward price spiral in asset values, resulting in surging
bankruptcies and massive credit losses. (Sound vaguely familiar?)

Sweden's financial sector was in a full-blown crisis by 1990. At the peak, loan losses amounted to about 20% of total outstanding private sector credit or 12% of GDP (not that far off Japan's nonperforming loans, which are estimated to have been around 15% of GDP at the peak). But the fact that so few know about the Swedish experience is testament to how effective the response was – in stark contrast to Japan. We should add here that we relied on various academic literatures on this file, but one real authority is Peter England and his acclaimed book "The Swedish Banking Crisis: Roots and Consequences").

What Swedish policymakers did after realizing that it could not prevent a crisis was to move to manage the situation in such a way as to save the entire financial system. But this required heavy doses of government intervention. The key finance official at the time (Bo Lundgren) quickly examined the historical record regarding banking crises with particular emphasis on the 1930s (which Bernanke is an expert on). He concluded that if the government did not take decisive action right away "the financial crisis may become very serious, protracted, and very costly to resolve."

So, the Swedish authorities realized early on that a banking crisis cannot be resolved until the problem is properly defined. That means assessing who the "bad" and "good" houses of issues are and be willing to allow the "bad houses" to fail (as an aside, "good houses” do not necessarily imply "big" houses).

In describing the Swedish approach to crisis management, Mr. Lundgren told BusinessWeek in an interview five years ago that "a great deal of work began on valuing loans and collateral in each bank in order to arrive at a need for support
that could be provided without delay." To that end, Sweden established a Bank Support Authority to undertake "reality testing" on the loan books of Sweden's largest banks and had a 'board of valuation” experts go in and value the assets on the books of all the lenders. Call it invasive if you will, but then again, the government was doing the work that market players could not or would not do – value the collateral and do it quickly. This is similar to what Barney Frank is proposing in the US mortgage sector today.

In the case of Sweden in the 1990s, the critical feature for resolving its banking crisis was the splitting of distressed financial institutions into so-called “good” banks and “bad” banks. This may serve as a model for the inevitable financial failure procedures here in the United States. Good bank/bad bank restructurings simply involve the separation of the good assets of a bank from the bad assets during a time of crisis, and calls for separate management of the disposition of these two categories of assets. As the Swedish experience indicates, such a restructuring can provide an effective means for disposing of nonperforming loans and return the financial sector back to health.

It should also be noted that it was Sweden's equivalent of the US Treasury, and not the central bank, that played the primary role in this crisis management stage (though the Riksbank maintained an accommodative monetary stance and lowered interest rates right through to December 1993, more than a year after the markets had bottomed). And, it obviously required the heavy hand of government intervention; there are solid grounds for this when there is market failure in the private sector, in this case, insufficient information regarding the quality of financial sector balance sheets. Both the US Senate and the House of Representatives are already proposing legislation that would trigger much more public sector involvement in re-dressing the housing crisis -- either through an expansion of the FHA's existing mandate (from Barney Frank in the House) or the revival of the 1933 Home Ownership Loan Corporation (from Christopher Dodd in the Senate).

So let's not delude ourselves. A government-backed solution to the intensifying financial strains is probably going to be part and parcel of this new crisis management phase we are about to enter, though there is a question over timing in view of the ideological differences between the current Administration and the Congressional leadership. But in our view, any durable solution will likely require tremendous political compromise, just as it was in Sweden in the early 1990s.

It is easy to jump to the conclusion that Sweden's economy has always existed with a heavy reliance on the "state", but if truth be told, the government during its credit crisis was a non-socialist coalition that worked very closely with the opposition Social Democrats. Mr. Lundgren, who was Sweden's Hank Paulson equivalent at the time, emphasized in the BusinessWeek interview that "broad political consensus and resolute political actions taken by the political system are probably more important than any of the technical aspects on how to deal with the crisis".
posted by mullacc at 10:56 AM on March 20, 2008 [1 favorite]


That was from a report that came out Monday, 3/17. Sorry for the odd line-breaks--copying/pasting from pdfs is always a pain.
posted by mullacc at 11:00 AM on March 20, 2008


We're probably going to have to cut entitlements, yes, but (and this is key) so are the places you're talking about.

Of course they will. The point is, would you rather have your legs cut off while you're on dry land, or would you rather lose them while standing in four feet of water?
posted by Civil_Disobedient at 3:42 PM on March 20, 2008


I'm in a master's program in real estate, in direct communication with real estate professionals of all backgrounds, and we just got back from a week-long trip to visit developers and financiers in new york and boston. We spoke to a VP at JPM on tuesday. I'm not a financial genius myself, but I understand what I've been hearing from them, and I'm not. freaking. out.

Fact is, my generation has never lived through a real recession (I'm 25) and so I have plenty of questions about the right way to weather a downturn; however, the real estate market and the economy in general is cyclical. Shit happens, the market evolves, players adjust to new conditions and find new ways to play. It's not the end of the world.
posted by Chris4d at 10:46 AM on March 26, 2008


BS CEO walks away with $62M of your money. Thanks to the fed bailout.
posted by five fresh fish at 10:43 PM on March 27, 2008


BS CEO walks away with $62M of your money. Thanks to the fed bailout.

Thank god the news on CNN last night was still all about OMG OBAMA'S PASTOR. He was engaging in class warfare!
posted by scody at 9:53 AM on March 28, 2008


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