RTC II
September 18, 2008 1:04 PM   Subscribe

Banning short selling? Firing Chris Cox? Treasury Secretary Paulson has reportedly floated the idea of an 80s-style "Resolution Trust Corporation." Maybe we're finally turning the corner...or at least stopping the hemorrhaging.
posted by uaudio (124 comments total) 6 users marked this as a favorite

 
I see the point of banning NAKED short selling, since it is far too easy for for fund managers to exploit it and drive healthy businesses into the dirt and shatter investor confidence. But I don't see the point of banning generic short selling.
posted by RavinDave at 1:11 PM on September 18, 2008


None of that stuff is going to stop the fire sales. I wake up every day for the past couple weeks now, walk to my computer, and flip to Google news to see which Wall Street firm sold yesterday for less than the price of the building their people used to work in. I do it while I'm still in the haze of sleep because I can kind of pretend that I'm just watching a very disturbing movie that's slowly unfolding before my eyes. Except its not a movie, its real, and I can't do a damned thing to stop it.
posted by allkindsoftime at 1:12 PM on September 18, 2008 [2 favorites]


By law, the president can't fire Chris Cox, the SEC chief.
posted by octothorpe at 1:14 PM on September 18, 2008


By law, the president can't fire Chris Cox, the SEC chief.

That's old thinking. That's why we need change. Mavericky change.
posted by mazola at 1:16 PM on September 18, 2008 [7 favorites]


An honest question: Where is all this money (To save AIG, a new resolution trust corp, etc) going to come from? If it's from taxes, I can't afford it. If the government is just going to print the money, or rent it from the Chinese, it's just going to come back and bite us in the ass at a later date. Well, at least we still have the McCain tax cut to look forward to
posted by Xurando at 1:19 PM on September 18, 2008 [1 favorite]


If the government is just going to print the money...

U. S. gets busy printing money.
posted by ericb at 1:22 PM on September 18, 2008 [1 favorite]


McCain is an idiot. He championed deregulation for decades, his chief economics adviser, Phill Gram was the major architect of deregulation in the late 90s. His wife took a job at Enron after engineering energy regulation at the government.

Oh, and he's the guy who called America "A nation of whiners", at which point he was off the campaign but McCain still praised him.

Oh, and McCain championed privatizing social security several times, imagine if that had succeed under Bush.

But don't worry, McCain's gone all mavericky, he'll fire people he can't fire and stare down these wall street types, he'll intimidate them into fixing the economy. And then he'll sit down with the Shites and Sunnis in Iraq and tell them to "Cut out this bullshit"
posted by delmoi at 1:25 PM on September 18, 2008 [7 favorites]


I might be over-simplifying this, but isn't what McCain proposed this morning what Freddie Mac and Fannie Mae started out as? Before LBJ privatized them?
posted by lumpenprole at 1:25 PM on September 18, 2008


U. S. gets busy printing money.

They're not printing anything, at least not for that deal. And also, it's only 8 months worth of time in Iraq.
posted by delmoi at 1:26 PM on September 18, 2008


No. This is some shameful shit.
posted by fatllama at 1:35 PM on September 18, 2008 [1 favorite]


The problem is THE FED! 10% fractional reserve banking no accountability to citizens, or the government for that matter. directing the Treasury to print more money with nothing backing it.
posted by CCK at 1:38 PM on September 18, 2008


As I understand it, Securities and Exchange Chairman Chris Cox was just an over-zealous out of control enlisted man acting outside the orders of the Commander-in-Chief, who has very definitely said we don't torture and we do regulate the securities markets.

("Torture" is defined as "whatever we don't do", and "regulate" is defined as "not getting in the way of the President's big contributors' get-richer-quicker schemes".)
posted by orthogonality at 1:39 PM on September 18, 2008 [1 favorite]


But I don't see the point of banning generic short selling.
posted by RavinDave at 4:11 PM on September 18


There isn't a point. Shorting is illegal in China, and it stopped their markets' decline.

I wake up every day for the past couple weeks now, walk to my computer, and flip to Google news to see which Wall Street firm sold yesterday for less than the price of the building their people used to work in.

On the bright side, there are only two of these banks left, Morgan Stanley and Goldman Sachs, and Morgan looks like it's next. It was fun to watch the news this morning talking about Morgan buying Wachovia, and by the end of the day it was analysts suggesting Wachovia buy Morgan, or even GS. There was even talk that GS might take itself private, which evidently it, along with its employees and investors, it could pull off, and which would put some floor under the stock price.

The crazy thing about the shorting rules is that the free market blah blah that motivated the rule changes that contributed to the declines would work for companies other than I-banks. You can't short MSFT to zero, because Microsoft is sitting on $20 billion in cash and no debt, so if nothing else the company is worth at least $20 billion. The second its market cap falls below $20 billion, it's pretty much a no brainer buy.

No for i-banks, whose financial structure marries their market cap to their ability to do business. Drive the stock to zero, and they can't do what they exist to do, therefore they die. Push the stock price down below a certain level and they have to scramble for a buyer. Do it fast enough, and they can't take any action fast enough, and the stock goes to zero. That's why so many of these deals happen on Sunday -- two days of no trading where they can close their deals without being shut down.
posted by Pastabagel at 1:39 PM on September 18, 2008 [3 favorites]


Ha - this RTC concept that was floated today was greeting with cheers from the trading floors as the market roared like a mo'fo on this SPECULATION.

Now down to brass tacks: the cost of the RTC in the 80s was something like $125-$150 billion to the taxpayers for a problem that was anywhere between 1/10th and 1/100th the size of the current cluster**** we find outselves in (depending on who you ask). My guess is that we'd be looking at between $1 and $1.5 trillion for this kind of a bailout.

More importantly, in the previous RTC the banks were already insolvent and bankrupt and the RTC had to BUY these debts. Are we somehow going to magically come up with $1 trillion dollars in cash without crushing the value of the USD, Treasuries and the bond market?

I think not.

The devil is always in the details and methinks that the details are going to sink this proposal long before it gets any chance of being enacted.
posted by tgrundke at 1:39 PM on September 18, 2008 [3 favorites]


I see the point of banning NAKED short selling, since it is far too easy for for fund managers to exploit it and drive healthy businesses into the dirt and shatter investor confidence. But I don't see the point of banning generic short selling.

It's to prop up share prices, pure and simple. Elimination of the short position amounts to an artificial supply restriction.
posted by mr_roboto at 1:41 PM on September 18, 2008


if this is what you're referring to, lumpenprole:

In his speech in Cedar Rapids, McCain proposed creating a trust to work with the private sector and regulators to identify mortgage and financial institutions that are weak and to take measures to strengthen them.

...then no, not as i understand it. freddie and fannie began as governmental entities created to promote home-ownership by buying mortgages from lenders on the secondary market so lenders would have more dough to lend to other would-be homeowners. it wasn't that the mortgage lenders were weak or anything, just that, by buying up those loans, fm and fm kept things flowing and made it easier for lenders to offer home loans to more consumers. (that was the idea anyway.) then regulators apparently stopped doing their jobs and fm and fm became more and more entangled in the world of subprime mortgage-backed securities like everyone else. that doesn't really sound at all like what mccain's advisers are proposing with this.

anything mccain has to contribute to this problem is instantly suspect, in light of his former economic adviser and partner-in-crime phil gramm's role in introducing and promoting the legislation that directly led to the creation of the subprime mortgage-backed securities market. you know--the same guy who finally resigned from the mccain campaign recently after calling america a nation of whiners. it's too late for a change of heart now.
posted by saulgoodman at 1:42 PM on September 18, 2008


Oh, and McCain championed privatizing social security several times, imagine if that had succeed under Bush.

That's the only bright light coming out of this mess. That things would have been much, much worse (albeit somewhat delayed) had Bush succeeded in helping Wall Street get their greasy hands on all of those payroll taxes.
posted by three blind mice at 1:43 PM on September 18, 2008


Morgan Stanley and Washington Mutual scrambling to put together deals
posted by ornate insect at 1:55 PM on September 18, 2008


The problem is THE FED! 10% fractional reserve banking no accountability to citizens, or the government for that matter. directing the Treasury to print more money with nothing backing it.


The future labor of the American worker, the profits of every US-chartered corporation, and the natural resources the US holds all over the world are what is backing the $14T of Federal Reserve Notes in circulation today.

And while technically the $85B AIG LOC may not be printing USD, there nothing to prevent central banks from printing *their* money that buys the dollars that buys these bonds in the upcoming special auctions.
posted by troy at 1:55 PM on September 18, 2008


Interesting article from the NYT, in 2003 regarding the proposal to tighten regulation on Fannie Mae and Freddie Mac. The money quote, from Barney Frank: ''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis...The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
posted by mattholomew at 1:57 PM on September 18, 2008


That things would have been much, much worse (albeit somewhat delayed) had Bush succeeded in helping Wall Street get their greasy hands on all of those payroll taxes.

bailout of wallstreet is going to be the same difference in the end. There may be $2T in the SSTF but it's going to have to compete with $2T in the RTC2 when the time comes to get converted to cash, not to mention of course the ~$8T of debt issue that will be held by the public by the middle of the next decade.
posted by troy at 2:00 PM on September 18, 2008


An honest question: Where is all this money (To save AIG, a new resolution trust corp, etc) going to come from? If it's from taxes, I can't afford it.

The money comes from nowhere. The Federal Reserve has essentially an infinite capacity to lend money. That is what is happening here, the Federal Reserve is lending money. They are not printing money.

The thing to remember is that you are seeing in the last few days only the last of a very long chain of transactions. The Fed is lending money to compensate for money that is lost from the system. In fact, since the first rash of mortgage defaults back in early 07, money has been steadily disappearing from the system. First from mortgage companies who didn't get their money back from delinquent homeowners, then from ever larger banks who lent these guys money, to i-banks who got the rolled up mtge derivatives, to insurance companies who first insured the derivatives and then insured the banks who owned the derivatives, etc. The money vanished in losses.

That vanishing money is deflationary - less money in the system means everything should cost less as its value is denominated in therms of a more scarce currency. You read some financial blogs and you'll hear a debate about whether the system is inflationary or deflationary. The inflationary side came from higher commodity prices driven by leverage speculation from hedge funds tied to i-banks who were generating massive profits, and who it appears now the i-banks were relying on to stack up enough assets to balance the black holes in their books.

Once the i-banks started to go, the redemptions from hedge funds start, and the funds have to start selling everything. So very liquid, very profitable google gets taken down along with the busted banks (but not nearly by the same percentage). At the same time, the commodity speculation unravels, and oil slams down to as low as 90 from the dizzying heights of 140. Ditto for the rest. The selling was so fast and brutal when couple with shorts, that any firm playing beat the clock loses. The only thing saving Morgan appears to have been that they posted better-than-expected quarterly results a day early. Getting that news out a day early may have bought them until the weekend.

Everyone wants to place blame, and a lot of people monkeyed with the system in ways that enabled the shitstorm to rise from thunderstorm to a hurricane. But as I've said a million times before, the first move was played by guys like Casey Serin, who decided to gamble with homes. True, the system should have been regulated to block guys like him from stacking up three or more houses, but people have common sense.

You don't have a job or money, and you want to own $2.5 million worth of houses? That amounts to leverage of a trillion to one. No one on Wall Street took on that much leverage, so why did Casey and others?
posted by Pastabagel at 2:01 PM on September 18, 2008 [5 favorites]


Is this still just a mental recession? Sorry to be such a whiner.
posted by kirkaracha at 2:02 PM on September 18, 2008


Barney Frank and Chuck Schumer and two of the biggest dolts (amongst many) who have injected themselves into this crisis. These are the same two knuckleheads who thought that banks should just not foreclose on anyone and hold the mortgages until people could afford them. Frank has wanted to use Fannie and Freddie as a dumping ground for financial crap for ages now - and statements like the one mattholomew found just reinforce my belief that he's a complete fuckwad.
posted by tgrundke at 2:02 PM on September 18, 2008 [1 favorite]



There isn't a point. Shorting is illegal in China, and it stopped their markets' decline.


Actually, I meant to type "it hasn't stopped their markets' decline." Trust me, it sounded really good in my head.
posted by Pastabagel at 2:05 PM on September 18, 2008


Actually, I meant to type "it hasn't stopped their markets' decline." Trust me, it sounded really good in my head.

I was starting to get really intrigued....
posted by mattholomew at 2:09 PM on September 18, 2008


There was a good segment on last week's This American Life on how Christopher Cox, the chairman of the SEC, doesn't seem to be interested in regulating much of anything. He could use a good kick in the pants or a firing.
posted by jaimev at 2:13 PM on September 18, 2008 [1 favorite]


Oh, and McCain championed privatizing social security several times, imagine if that had succeed under Bush. (delmoi)

OK, let's try to imagine it, hmm?

Well, first, all 3 of the plans that Bush has proposed for partial privatization were optional, not mandatory, for those paying into Social Security. So I suppose if they'd succeeded, people who had chosen, of their own free will, to take money they had earned and put it into the stock market may have lost some of that money. Those who chose to instead leave the money in the hands of the government would be getting exactly the returns they'd otherwise be getting without the change. Wow, what a shocker.

Continuing on, of the three plans, all of them were partial, not full, privatization. One allowed 2% (of the total 7.65% of FICA taxes paid by employees) of a person's income to be moved into a privately managed account. One allowed 4% (again, of the total 7.65%) to be diverted, but was limited to $1,000 maximum. And the third allowed 2.5% (again, out of the 7.65%) to be diverted, up to $1,000 maximum, along with an additional (on top of FICA) 1% of taxable earnings.

Assume we're talking about someone making $50,000 a year, which means that the 2.5% and 4% (maximum $1,000) options are not the worst options, since the 2% option has no limit. Also assume that we'll ignore the extra 1% for the third option, since that's outside of what we already take out for FICA, and would essentially be someone taking advantage of a tax-free option to put more money into the stock market. This means that the worst that this person could do would be to put 2% of their income into the stock market, which in fact only amounts to about 13% of the total FICA withholdings (since employers match the 7.65% -- so, 2% of total earnings, out of a total FICA tax of 15.3% of total earnings).

Currently, the Dow Jones Industrial Average is down by 17.7%, year-to-date. Using that to average across investors, that means that our example taxpayer who made the personal financial decision to put some of their own money into the stock market could have, this year, at worst, lost 2.3% compared to someone who did not elect to put any into the stock market. And this is in what some are calling the worst year for the Stock Market since 1929.

Wait, what's that? Oh, I'm sorry, did I get in the way of your ridiculous scaremongering about the evils of privatization? Carry on, then.
posted by tocts at 2:15 PM on September 18, 2008 [3 favorites]


I thought NAKED short selling was already illegal just the SEC doesn't do shit about it. Besides it's not THAT big of a phenomena and not the problem with our current mess. Which was a result of these ridiculously risky CDO's being rated high by the same people selling them.

I tell you I got a FREEPER so flummoxed yesterday. I have lots of GOP faithful friends. Most who have any sort of principle left the fold right after Iraq turned into a complete shit fest. But one friend is such a frothing Righty Freeper, it's absurd.

Funny thing is he's a rabid free marketer. Which obviously doesn't jibe with President Un-Funded-Mandate-No-Bid-Contract-Massive-Spending-Bail-Out-Failing-Corporations-Bush.

He's been visibly unhappy lately. So asked him what's up. He reluctantly admitted bailing out failed banks and rewarding them for doing exactly the wrong thing was a very bad idea, but he could see it might be in the best interest of society at large. But he was worried that we are simply nationalizing private debt.

So Asked him: Why it was considered 'okay' to bail out failing, unprofitable, and unscrupulous businesses, thus NATIONALIZING them and their debt in "societies best interest?"

BUT it was not okay for Venezuela, for instance, to nationalize profit making, successful companies, that utilize shared public strategic natural resources in "societies best interest? Especially when it seems to be working at putting the country in surplus?"

He had no answer. He just stood there and blinked until our beers came.
posted by tkchrist at 2:27 PM on September 18, 2008 [18 favorites]


The Federal Reserve has essentially an infinite capacity to lend money. That is what is happening here, the Federal Reserve is lending money. They are not printing money.

Actually from what I gather the Fed's limit is bounded by the treasuries it has on its books.

Here's something I wrote on another forum:

A basic primer, in charts:

Fed gives .gov $ in return for treasuries:

chart

Gov't deposits money, spends it into the system, and it become bank reserves that banks then lend against:

chart

Resulting in expansion of money supply over time:

chart


~~

tocts, the problem with privatization is that it was nose-in-the-tent scheme that would eventually obliterate the SOCIAL INSURANCE purpose of SS.

Transfering FICA payments to Wall Street would have prolonged the rally, drawn calls to uplimit the contributions, and postponed the crash until everyone was much more fully vested sometime next decade.

There's already going to be a rush for the exits for the $4.8T in equities, another $4.8T in mutual funds, and $12.2T that pension plans control when the boomers start retiring en masse and cashing out their holdings. Anybody expecting to beat 4% in the teeth of this demographic trend, well, good luck with that.
posted by troy at 2:29 PM on September 18, 2008 [3 favorites]


pastabagel--With all due respect, the blame for the housing bubble and the subprime mortgage crisis of the last few years cannot be placed on individual reckless speculators or lone eccentrics like Casey Serin.

My understanding is that predatory lending practices for the subprime market were systematically encouraged (especially in certain states like Florida, etc) by the big investment banks, creating an aggressively new kind of mortgage lender. Before this subprime explosion the individual case histories of guys like Sarin would have been back-checked by local banks, and due diligence would have been heeded.

Consider that in the late 1980s and early 1990s, sub-prime loans were rare. But starting in the mid-1990s, sub-prime lending began surging; these loans comprised 8.6 percent of all mortgages in 2001, soaring to 20.1 percent by 2006. Since 2004, more than 90 percent of the sub-prime mortgages came with exploding adjustable rates.
posted by ornate insect at 2:29 PM on September 18, 2008


So Asked him: Why it was considered 'okay' to bail out failing, unprofitable, and unscrupulous businesses, thus NATIONALIZING them and their debt in "societies best interest?"

BUT it was not okay for Venezuela, for instance, to nationalize profit making, successful companies, that utilize shared public strategic natural resources in "societies best interest? Especially when it seems to be working at putting the country in surplus?"


tkchrist, so far we haven't nationalized anything other than $29B of Bear Stearn's bad debt (the sweetener allegedly required for JPM to take on the rest of the risk), plus fannie and freddie which were already quasi-public.

As for the latter question, I've found geolibertarianism to have an intriguely bulletproof moral and practical foundation. Whether it's truly workable in the real world is questionable, but damn if I can see its faults.
posted by troy at 2:33 PM on September 18, 2008


ridiculous scaremongering about the evils of privatization

Dude, the Federal Reserve is in the process of hastily socializing the investment banking history and the largest insurer in America. It is an unprecedented chain of events, and an implicit admission that the system was not working. Let's bury the ideological hatchet just for a moment, shall we?
posted by ornate insect at 2:34 PM on September 18, 2008 [1 favorite]


investment banking history industry
posted by ornate insect at 2:34 PM on September 18, 2008


The money comes from nowhere. The Federal Reserve has essentially an infinite capacity to lend money. That is what is happening here, the Federal Reserve is lending money. They are not printing money.

PastaBagel, is this correct? It was my understanding that the Fed has a reserve fund which they are using to provide short term liquidity to the market. The Fed in alignment with central banks globally has shifted to allow Federal reserve funds to be available across the globe via receiprocal agreements with other government banking organizations.

The Fed as I understand it is limited in the amount of liquidity short term it can provide without being backfilled by the Treasury. Under normal circumstances both of the Fed's action would require some oversight from congress, or sponsorship from the executive.

There is an aweful lot of sky is falling talk and reports going around these days, which is understandable given the circumstances and grasping a clear picture of what is going on. As has been mentioned in previous threads on this subject the goal of all of this stability in the form of time to unravel this crisis and to prevent it's spread so that regulatory reforms can be enacted and liquidity/capitalization concerns shored up. This is what is going on with the major banks world wide right now.

The naked short selling ban puts those folks participant in the short selling under capitalization and liquidity restrictions, requiring them to take a stake in the object of their short selling. It limits their ability to inject further chaos in to an unstable situation and impact the credit worthiness and ratings of the impacted financial institutions and then take profits as easily out of that chaos injection.

Is this still just a mental recession? Sorry to be such a whiner.

Assuming you're not being a snark here, it is not a mental recession. It is, without getting tin foil hat with torches and pitchforks, sincerely the most troublesome time in global financial markets since the great depression, except it's global this time. The difference is we actually learned a little bit about slowing down the unraveling so it can happen in a more orderly fashion, once we're past this first bit and assuming the actions stick to restore stability via liquidity.

This is where the RTC II comes in. It's one of the logical next steps to implement in step with increased regulation. It engineers a vehicle in to the system to carry unraveling financial passengers and their associated baggage to a more graceful end. It steps down the necessity of some of the reactionary moves the Fed has made over the last few days. It's not a no brainer though, a lot of people argue that further regulation and the establishment of systems diminish the ability of the market to operate in a dynamic fashion and grow. It will be a matter of time to see which school of thought prevails. When times are good the pendulum of opinion swings towards deregulation, and then in times such as these it goes the other way.

I would think over the last couple of bubbles people are beginning to value stability over explosive growth. The bubbles are wearing on every day people and long term the action of the bubbles erode the long term trust in the financial system. That trust erosion is generational, so it fades pretty handily over time, but we've seen increased shortening of the bubble bust cycle and I think it's going to start sticking a lot better. We'll see how it plays out in the coming elections, and how it rolls through the legislative branch up stream. There are (were) some pretty broad differences between the candidates when it comes to economic policy and philosophy in terms of government involvement.
posted by iamabot at 2:35 PM on September 18, 2008


troy: I don't dispute that there are issues with privatization, but I am so very tired of people claiming that Bush, for all his fuckups, was actually pushing for anything close to 100% privatization. He wasn't. Had what he wanted come to pass, would it have affected some people negatively? Yes. Would it have utterly destroyed the savings of all who are putting into SS in the current market climate? Absolutely not.

Moreover, hasn't the current outlook on SS already destroyed the "social insurance" aspect? I really don't know many, if any, people who view it as anything other than a (forced) retirement plan, which is a far cry from "social insurance".

ornate insect: again, see my first comment. I'm not necessarily arguing for or against any given ideology, I'm simply arguing against people being willfully ignorant of actual proposed plans so that they can throw a little more election-year mud.
posted by tocts at 2:37 PM on September 18, 2008


tocts why not just reduce SS taxes and benefits (optionally)? What's with privatization? You "privatize" but I can't use that money for a house or education? That's basically a govt endorsement of some restricted set of financial products, hardly the free market and something that people would be awfully vocal about if those govt-approved financial vehicles didn't make everyone money.

Just kill SS if you want to kill SS, at least then we're communicating. I just can't see why free market types want to keep SS, keep the free market, and add a 3rd thing.
posted by Wood at 2:37 PM on September 18, 2008


ornate, yes, the lending was demand-pulled by the packagers. If you read my charts above, you'll see that supply of US dollars rose from $4T in 1995 to $14T today (well, you would if the Fed still reported that figure, I'm using the shadowstats figure for current M3.

We were truly "awash in liquidity" chasing return in an environment of very low interest rates.

Houses were a safe bet after the beating it took in most areas over the 1990s. Wall Street had the money, all that was required was people to sign up for the shearing, 2004-2007, and regulators to look the other way and allow it.

A Frankenstein debt monster was created and ran amok 2005-2007, until the reality of peoples' inability to repay their obligations became apparent.
posted by troy at 2:39 PM on September 18, 2008


Using that to average across investors, that means that our example taxpayer who made the personal financial decision to put some of their own money into the stock market could have, this year, at worst, lost 2.3% compared to someone who did not elect to put any into the stock market. And this is in what some are calling the worst year for the Stock Market since 1929.

First of all the worst of what is bout to happen to the stock market is not over. "17.7%, year-to-date" is only a tiny portion of what could be a a much larger trend that seems to be going unchecked and unregulated.

Second of all once the bulk of active contribution was over and incomes became either fixed or reduced it would leave a substantial portion left over vulnerable to the vagaries of the stock market.

Third, if i'm no mistaken, these partial contribution plans were a compromise. They wanted a much more risky version.

Fourth, while I invest myself and see it as very much a long term strategy and do not overall see the stock market as an evil in it self, the issue is that SS was supposed to be a fifth leg, NOT the soul source, of retirement income. The idea that the government was gonna hand the pile of cash over to Wall Street, that was obviously due for a massive correction, AND not regulate them, as has been the Bush Administration Mantra, was highly irresponsible and yet another potentially criminal example of public monies going into the hands of a small cohort of wealthy Private interests.
posted by tkchrist at 2:41 PM on September 18, 2008 [3 favorites]


Moreover, hasn't the current outlook on SS already destroyed the "social insurance" aspect? I really don't know many, if any, people who view it as anything other than a (forced) retirement plan, which is a far cry from "social insurance".

it's a guaranteed return (with mild redistributive aspects), backed by the full faith & credit of the United States of America, for whatever that's worth -- which, in the end, is whatever we collectively decide it to be.

The "current outlook" on SS is fine, btw. It's everything else that is totally fucked.
posted by troy at 2:42 PM on September 18, 2008


best reductio ad absurdum ever
posted by saulgoodman at 2:42 PM on September 18, 2008


Dude, the Federal Reserve is in the process of hastily socializing the investment banking history and the largest insurer in America. It is an unprecedented chain of events, and an implicit admission that the system was not working. Let's bury the ideological hatchet just for a moment, shall we?

I don't know if I agree with the socializing thing as one of their aims. Socializing an economy takes far more direction and planning than what has been demonstrated over the last week. Historically the market has leaned towards deregulation, as a result of that leaning the Fed has had to take some extreme measures to halt an unplanned unraveling of a very very complex financial system. The unprecedented measures taken by the Fed are in direct response to unprecedented events. To extend the logic that the Fed wants to socialize the markets as an extension of an overall policy is a bit of a stretch. I think this is too early to lay blame that the system as a whole is unworkable. A more accurate characterization of it might be that the system has several pieces which came together to unravel a large block of the markets. Tighter controls and regulation over one or some of those pieces would have reduced the overall impact of a failure in the system, absence of one of those pieces may have brought about this problem down the road, but it's equally as likely that the system would have unraveled in a different fashion on a different timescale. It's complex.
posted by iamabot at 2:43 PM on September 18, 2008 [2 favorites]


Biggest drive-by chickenshit ever
posted by tkchrist at 2:50 PM on September 18, 2008 [1 favorite]


the Fed has had to take some extreme measures to halt an unplanned unraveling of a very very complex financial system. The unprecedented measures taken by the Fed are in direct response to unprecedented events. To extend the logic that the Fed wants to socialize the markets as an extension of an overall policy is a bit of a stretch.

I agree it's complex, but I do not think it's hyperbolic to say that the era of big investment banks is over. Bear and Lehman are gone, Merrill has been absorbed by BoA, and Morgan Stanley is frantically looking for a buyer. And AIG, although not technically an investment bank, appears to have been brought down by the same problems plaguing the entire market system. I don't think the Fed wanted to socialize the markets, but that is effectively what is happening. They were forced into the situation: call it reactive, rather than proactive, socialization of the investment banking industry.
posted by ornate insect at 2:50 PM on September 18, 2008 [1 favorite]


I also want to add that I do think that one myth that should be put to rest once and for all is the notion that markets can "regulate themselves." I'm not anti-banking, and I do believe over-regulation is at least theoretically a possibility, but anyone looking soberly at the events of the last few days--and what led to them--has to conclude that the market was dangerously under-regulated.
posted by ornate insect at 2:56 PM on September 18, 2008 [2 favorites]


Pfft.
Wall Street has floors full of MBAs working on creating products designed to get around any and all potential rules or laws. Well be back here in 10 years...tops.

Greed trumps memory...always.
posted by Thorzdad at 2:58 PM on September 18, 2008 [3 favorites]


the issue is that SS was supposed to be a fifth leg, NOT the soul source, of retirement income.

I respectfully disagree. Originally, social security was just supposed to be like a really secure bank account (people were pretty leery of ordinary banks post Depression, and there were fears people just wouldn't have a way to save for retirement--plus everybody keeping their retirement cash in their mattresses would have put a serious long-term dent in available investment capital) where your retirement nest-egg would be kept until you got old enough to need it.

It wasn't some grandiose socialistic concept. And at first, Uncle Sam couldn't even spend SS withholdings on other things, although obviously that's not the case anymore.

Still, even today: We pay directly for every dime of our future social security benefits. It's not like they're some kind of government handout.

According to this handy calculator, I can expect to get a return of about 1.30 per dollar paid into SS for my investment. That ain't a great rate of return. But it's my damn money, so don't anyone dare think about shutting SS down and redistributing whatever's left in the pot to the usual suspects.

And if Uncle Sam can't afford his obligation to me when my time comes to retire, that's his problem. If the US can find a way to come up with billions in untraceable "aid money" to pay Pervez Musharraf, then it can damn sure come up with my measly $1,200 a month retirement benefit check.
posted by saulgoodman at 3:01 PM on September 18, 2008 [1 favorite]


tkchrist: wtf? i really liked your comment. what's with being such a dick?
posted by saulgoodman at 3:03 PM on September 18, 2008 [1 favorite]


I agree it's complex, but I do not think it's hyperbolic to say that the era of big investment banks is over.

No disagreement there, something different will emerge to fill that role, but what they used to be they are never going to be again.
posted by iamabot at 3:03 PM on September 18, 2008


They were forced into the situation: call it reactive, rather than proactive, socialization of the investment banking industry.

I prefer to think of it as the Fed performing the social function of the Fire Department here.
posted by troy at 3:05 PM on September 18, 2008 [1 favorite]


Financier Soros warns crisis will only get worse

The Bailout Tab That Keeps Growing

Darkest day for Scottish banking as the Bank of Scotland faces its end

Europe and Asia see U.S. as no longer practicing what it preaches
posted by ornate insect at 3:10 PM on September 18, 2008 [1 favorite]


The idea that short selling is responsible for the mess we're in strikes me as fundamentally absurd.
posted by Flunkie at 3:19 PM on September 18, 2008


Is the economy something we can bomb? Because, if so, John McCain has got a solution to this mess!
posted by edverb at 3:32 PM on September 18, 2008 [3 favorites]


from this NPR Fresh Air podcast from yesterday, Michael Greenberger adequately explains what is going on. Greenberger also explains that any restructuring by Paulson is just merely changing the flowchart, thereby making it easier for the Federal Reserve to carry out its adjustments. At the end of the interview, Terri Gros and Greenberger talk about Socialism, as well.
posted by captainsohler at 3:52 PM on September 18, 2008 [5 favorites]


Maybe we're finally turning the corner... or maybe we just went right 'round the bend.
posted by sfenders at 4:26 PM on September 18, 2008


the panic of 1907
posted by captainsohler at 4:28 PM on September 18, 2008 [1 favorite]


``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' said Schumer, who today proposed an agency to pump capital into troubled banks. ``I've been talking to them about it,'' Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today.

Schumer urged forming an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable.

Schumer advocated a Great Depression-era Reconstruction Finance Corp. model, different from the Resolution Trust Corp.- type plan others have floated. Another RTC, which was a 1990s agency that sold devalued assets in the Savings and Loan Crisis, would ``simply transfer excessive risk to the U.S. government without addressing the plight of homeowners,'' he said.


Hey it's the re-establishment of the "middle" class, the ones who get saddled with keeping the rich rich by bailing out the investment bankers with their tax dollars and also get to pay for the mortgages of those who can't/won't pay their own.
posted by Rafaelloello at 5:09 PM on September 18, 2008


Flunkie: "52The idea that short selling is responsible for the mess we're in strikes me as fundamentally absurd."

You are right, it is fundamentally absurd. Short-sellers add liquidity to the market and their absence will create a powerful vacuum under and propped-up market that will eventually and violently seek it's own level. If you want to be cynical, I think the announcement of what "might" happen (the new RTC to bury all the bad loans in the back yard "announcement") was architected to shake out short-sellers on the eve of perhaps saying they are not allowed back into the market.
posted by Rafaelloello at 5:16 PM on September 18, 2008


This hasn't officially passed yet, but the SEC is temporarily banning short-selling.

While I'm not thrilled about short-selling, and I'm still ridiculously pissed that they got rid of the uptick rule, this temporary ban, IMHO, is simply unconstitutional (not legally, but ethically). The government is preventing the market from finding a security's intrinsic value, all in order to prop up the financials. While I believe that the financials don't deserve to be shorted to zero, preventing the market from doing its job is the wrong tack.

Of course, creating a government-sponsored bad bank is the epitome of privatize the gains, socialize the losses, but I get the fact that otherwise, the entire US financial system may just implode. I'll tell you this: the US is losing its AAA status, and inflation (and potentially stagflation) will be a significant risk for the coming months/years.
posted by SeizeTheDay at 5:20 PM on September 18, 2008


If you want to be cynical, I think the announcement of what "might" happen (the new RTC to bury all the bad loans in the back yard "announcement") was architected to shake out short-sellers on the eve of perhaps saying they are not allowed back into the market.

Cynical, or spot on?
posted by SeizeTheDay at 5:22 PM on September 18, 2008


"Oh, I'm sorry, did I get in the way of your ridiculous scaremongering about the evils of privatization? Carry on, then."

D00d, by your own reckoning, had individuals decided to privatize their Social Security, they'd have been totally screwed. Millions of people would have seen their SS cut dramatically, during a recession - people who might also have been losing their homes at the same time.

This is no scaremongering; we dodged a bullet; had people been able to privatize their Social Security, this crisis would have been significantly worse.
posted by lupus_yonderboy at 5:26 PM on September 18, 2008



had individuals decided to privatize their Social Security, they'd have been totally screwed


OK, you'll have to do the math for me, or correct some factual inaccuracy. From the post you're referring to:

One allowed 2% (of the total 7.65% of FICA taxes paid by employees) of a person's income to be moved into a privately managed account. One allowed 4% (again, of the total 7.65%) to be diverted, but was limited to $1,000 maximum. And the third allowed 2.5% (again, out of the 7.65%) to be diverted, up to $1,000 maximum, along with an additional (on top of FICA) 1% of taxable earnings.

How does that equate to 'totally screwed' had someone chosen to go with one of the three options?
posted by mattholomew at 5:57 PM on September 18, 2008


I think we should just select CNBC's Larry Kudlow as a scapegoat, and beat him to within an inch of his life. Just on general principle.
posted by raysmj at 6:03 PM on September 18, 2008 [1 favorite]


Reality Catches Up to the Free Market
posted by homunculus at 6:05 PM on September 18, 2008


The government is preventing the market from finding a security's intrinsic value, all in order to prop up the financials.

I don't think that in the past few days we've seen the market attempting to find a company's intrinsic value. Morgan Stanley's value right now is less than book value. They have said they have $179 Billion in liquidity. Mack today said that even if they lost their entire prime brokerage business they would still be solvent. And between September 9th through the 15th they lost 52% of their value. The only explanation for that is that fear and panic and rumors are causing people to push the price down.

I believe, and I admit to not have any evidence to back this up, that certain bigger players are shorting these companies and pushing their prices down. This isn't short selling filling its function in the market. This is short selling being used to create problems that are profitable for the ones creating them. If the SEC/FSA has to temporarily stop short selling in order to get the market to act behave semi-normal, then so be it.
posted by aburd at 6:22 PM on September 18, 2008


BUT it was not okay for Venezuela, for instance, to nationalize profit making, successful companies, that utilize shared public strategic natural resources in "societies best interest? Especially when it seems to be working at putting the country in surplus?"

Um, well, no, it's not OK for a government to sieze a privately held company unless it is the last option in the interest of the greater economy and that company is going to fail otherwise. And you might want to check on that fabulous Venezuelan economy again, a trade surplus (that is largely petroleum based) is cold comfort when you have 8% unemployment.
posted by mattholomew at 6:23 PM on September 18, 2008


I believe, and I admit to not have any evidence to back this up,

I believe, and do have some evidence to back this up, that there is another trillion or two of losses to be booked by the financial sector over the next year or two.

The first $500B has produced the fireworks of this year. The next $500B will be doubly worse, and the sequence is geometrical in its import.

These one or two trillion of losses will not be distributed uniformly. Some companies have none. Some have a lot.

I recently read that a trillion dollars is more than the entire profits the financial sector has booked in its existence.

THAT'S why the system is experiencing increasing stress right now.

Either someody's got to pay these loans back or everyone's fucked.
posted by troy at 6:48 PM on September 18, 2008


Morgan Stanley's value right now is less than book value.

This is not an argument AGAINST short-selling. It's an argument FOR short-selling, because the market finally woke up and realized that Morgan's assets aren't worth what's stated on its book.

Banks trade at or above book because even though a bank's assets may not be immediately transferrable into cash, it will be by maturity, so the price reflects the value of the organization, as well as the assets. When the price is below book, the market is indicating that it doesn't believe Morgan will EVER get book value for those assets, and if Merrill's 22 cents on the dollar trade, and Lehman's bankruptcy, are any indication, the market is right.

I agree that there is a systemic problem with large players taking advantage of the short-selling rules. But the government took out the uptick, and casually looked the other way for naked shorting. And now the government is overreacting by banning it altogether.
posted by SeizeTheDay at 6:50 PM on September 18, 2008 [1 favorite]


it's not OK for a government to sieze a privately held company unless it is the last option in the interest of the greater economy and that company is going to fail otherwise

I'd argue that's its perfectly legit for a regime to nationalize the profits of resource extraction. There are better ways to go about it, but (in the initial analysis) private ownership of the public weal is theft.
posted by troy at 6:51 PM on September 18, 2008 [3 favorites]


THAT'S why the system is experiencing increasing stress right now.

I'm not disputing the amount of problems that are lying out there in the system. I'm just saying that given the evidence we have right now, the reaction of the past couple of days focuses the entire weight of the problem on a few names that are in no way proportionate to their weighting in the problem. It was also dragging down the rest of the market in the process. It also ignores the profitability of Morgan Stanley specifically in the face of their write downs. I'm focusing on MS because I've been reading about them a lot today.

If eliminating short selling for a short span can get rid of this irrational behavior maybe we can get back to the business of salvaging what's left of our financial system.
posted by aburd at 6:57 PM on September 18, 2008


It's an argument FOR short-selling, because the market finally woke up and realized that Morgan's assets aren't worth what's stated on its book.

They have a market value of 25 Billion dollars right now. And they have $179 Billion in liquidity. This isn't caused by a realization of their true value. It's caused by fear based irrationality.
posted by aburd at 6:59 PM on September 18, 2008


I'd argue that's its perfectly legit for a regime to nationalize the profits of resource extraction.

And I'd argue that it's not. But I believe in properly regulated free enterprise, and you apparently don't, and nothing either of us say will convince the other. "Theft", huh? good luck with that.
posted by mattholomew at 7:03 PM on September 18, 2008


They have a market value of 25 Billion dollars right now. And they have $179 Billion in liquidity.

I don't think you know what that means.

When you buy Morgan for $25 billion, you assume all their debt. All their debt is worth FACE value. All their assets ARE NOT. So they are worth less than book. Much less, if forced to sell some of their more crappy assets.

Liquidity is a measure for meeting creditor withdrawals. A significant source of funding for investment banks is the overnight repo. If suddenly a bunch of your trading partners decide that they don't want to lend to you anymore (as what happened with BofA and Merrill last week), you need to come up with cash to give to your creditors. That's where liquidity comes in.

Liquidity does not equal capital. Liquidity does not equal market value. Liquidity does not have any value, per se, except to satisfy working capital needs (in this case, buying assets and/or satisfying creditors and paying employees, electric bills, etc.).
posted by SeizeTheDay at 7:07 PM on September 18, 2008


And you might want to check on that fabulous Venezuelan economy again, a trade surplus (that is largely petroleum based) is cold comfort when you have 8% unemployment.

Michigan unemployment rate, as of August, 2008: 8.9%



Um, well, no, it's not OK for a government to sieze a privately held company unless it is the last option in the interest of the greater economy and that company is going to fail otherwise.

Sooo... you're saying that the Market's decision (through inaction) to let Bear-Stearns and Lehman and AIG and Freddie and Fannie die was wrong? If the judgment of the market as to the continued viability of these companies was, according to your logic, invalid, then why trust the market at all? In these cases, you are supporting the Government's socialization (either directly or by proxy) efforts, even as you try to make the case that somehow we should respect the Market's primacy (even if that judgement leads-as it inevitably would if Fannie and Freddie (AIG is debatable) were allowed to collapse--in the destruction of those mechanism by which the Market itself is defined).

You sir, are no capitalist, merely a corporatist.
posted by Chrischris at 7:08 PM on September 18, 2008 [3 favorites]


sincerely the most troublesome time in global financial markets since the great depression, except it's global this time

I've seen a lot of people saying it's global ... except it doesn't seem to be wholly. America is bankrupt, sure. We're in an equal mess. India and China however, while both their markets are down too, aren't in anything like the debt situation of America. And China is holding all that US debt.

I wonder how that's going to play out.
posted by bonaldi at 7:09 PM on September 18, 2008


Liquidity does not equal capital. Liquidity does not equal market value. Liquidity does not have any value, per se, except to satisfy working capital needs (in this case, buying assets and/or satisfying creditors and paying employees, electric bills, etc.).

I have have been pwned. Thank you!
posted by aburd at 7:12 PM on September 18, 2008


also tkchrist: I think that was a compliment, dude.
posted by bonaldi at 7:12 PM on September 18, 2008 [1 favorite]


Entire country == Michigan. There's this thing called 'moving' that people in Michigan can do, which as a former Michigan resident I can speak quite well to, that greatly expands those options.

And...

Sooo... you're saying that the Market's decision (through inaction) to let Bear-Stearns and Lehman and AIG and Freddie and Fannie die was wrong? If the judgment of the market as to the continued viability of these companies was, according to your logic, invalid, then why trust the market at all? In these cases, you are supporting the Government's socialization (either directly or by proxy) efforts, even as you try to make the case that somehow we should respect the Market's primacy (even if that judgement leads-as it inevitably would if Fannie and Freddie (AIG is debatable) were allowed to collapse--in the destruction of those mechanism by which the Market itself is defined).

The fact that the market acted temporarily irrationally because the proper controls were not in place prior to that does not mean that the market is always irrational. And by the way, Fannie Mae and Freddie Mac were always government backed. Check that great quote from Barney Frank above indicating that he didn't think they needed tighter regulation.
posted by mattholomew at 7:21 PM on September 18, 2008


The fact that the market acted temporarily irrationally because the proper controls were not in place prior to that does not mean that the market is always irrational

Temporary irrationality? Without big daddy government rushing to its aid, the "temporary irrationality" the market has displayed these last two weeks would have been tantamount to committing suicide. If I can't trust to the market to act rationally in times of stress and crisis, why should I trust it to act thusly at any other time?
posted by Chrischris at 7:31 PM on September 18, 2008 [1 favorite]


Venezuela, eh? Next time you need an example of a government with a large stake in the oil industry which works to the benefit of its people, I recommend Norway instead. For some inexplicable reason, it seems to inspire less of that "fear-based irrationality".

And by the way, Fannie Mae and Freddie Mac were always government backed.

Good point, yeah. Your government doesn't seem particularly capable when it comes to managing such things. Not that Canada did a whole lot better with its national oil company. But I'm sure they've learned their lesson and will do a great job with the RTC or whatever they come up with next.
posted by sfenders at 7:43 PM on September 18, 2008


I'll say it again, slowly: R-E-G-U-L-A-T-I-O-N. If the proper regulations were in place, this would not have happened. So you do what it takes to clean up the mess, implement the proper regulations, and move on.

If I can't trust to the market to act rationally in times of stress and crisis, why should I trust it to act thusly at any other time?

If nationalization of resources went so horribly wrong under Pol Pot, how could it ever work elsewhere?
posted by mattholomew at 7:50 PM on September 18, 2008


I think we've hit the point in the thread where tin foil hats are issued at the door.
posted by iamabot at 7:54 PM on September 18, 2008 [2 favorites]


Felix Salmon (who writes one of those blogs I keep in my feed list because I disagree with him just often enough to keep it interesting, but this time he wrote just what I was thinking) had this to say:

"I don't think anybody's capable of holding in their head all the vital information needed to get a grip on things right now -- not in the wake of Lehman and Merrill and AIG and the liquidity injection and the TED spread and Morgan Stanley and the money-market funds and counterparty risk in the CDS market and bans on short-selling and WaMu and negative nominal interest rates on T-bills and the oil price and the dollar and why on earth that German bank wired $300 million to a bankrupt bank and on and on and on and on. We've been overwhelmed by the complexity of the system, and nobody knows anything.

But hey, at least the stock market rose today."
posted by sfenders at 8:02 PM on September 18, 2008


March 22, 2008

The leader of the Swedish Pirate Party explaining how the US went bankrupt in 1971, and has been covering it up through an accelerating whack-a-mole borrowing frenzy that is bursting right now.

posted by mlis at 8:30 PM on September 18, 2008


But hey, at least the stock market rose today."

the market was a gnat's nuthair of going Oct 1987 on us. I was taking a nap at the time, but the chart today a glimpse of the abyss. An oversold abyss, but all crashes are oversold, almost by definition.
posted by troy at 8:35 PM on September 18, 2008


mattholomew: "81I'll say it again, slowly: R-E-G-U-L-A-T-I-O-N. If the proper regulations were in place, this would not have happened. "

You can make a pretty strong case that some R-E-G-U-L-A-T-I-O-N led to this mess.

1977 Regulation of Redlining led to the CRA

1995 changes to the CRA opened the door to subprime mortgages

2005 Attempted fixes to the CRA 3 years ago (via revamping Freddie Mac and Fannie Mae as reported in the New York Times) was shot down, so nothing changed.

Before all this regulation, banks acted like private businesses, they strove to make the best loans on properties in the best areas to borrowers with the best credit.

After this regulation two new markets grew in rapidfire succession. First the mortgage "brokers" who could write as many bad loans as they pleased because these regulations required banks to have a certain number of these bad loans in their portfolio so they were a captive market to the brokers. Second, seeking a solution for the small banks to get these bad loans out the door and up to the bigger fish caused the CDO Market to arise. They packaged the good loans with the bad loans and divided them up into ABX tranches, the best of which trade 65 cents on the dollar, the worst of which trade for about 5 cents on the dollar.

In some sick way, I find it kind of humorous that in this massive shell game it was the very biggest fish who got stuck with the hot potatoes. That is until Paulson makes RTC II mashed potatoes out of the rotten mess and serves us all a couple scoops.
posted by Rafaelloello at 8:51 PM on September 18, 2008 [1 favorite]


Rafaelloello, do you think the solution is to have some sort of dynamic legislation similar to the way Google changes its algorithm constantly to keep those who would game the system guessing? It seems to me with every new legislation and regulation it takes minutes for the crooks to figure out a way to either get around it or profit from it. I just don't see how any new rules aren't going to be circumvented like all the rest unless the government gets as crafty as they are. It's a digital age, time to do away with analog laws.
posted by any major dude at 9:01 PM on September 18, 2008


any major dude:
That in itself will bring uncertainty in the market, and increase the possibility of EVEN MORE corruption (undemocratic opaque laws? how can you lose!?)

--

Also, to the anti-short selling comments above, short selling serves a very vital role in accuracy of pricing and stability in the markets. If you think short sellers are playing it too hard, you should be buying the stocks!

The reason no one is defending against the shorts for financial is because no one *should* be, the investment banks really should be 0 dollars. I don't care what the book value is, if you have unknown liabilities due to potential of hundreds of billions (if not trillions) due to swaps, you have NO IDEA how much you're going to pay out, but we know the number is bigger than the value of the bank itself. Book value doesn't mean shit if you're valuing swaps as an asset when it should be a liability.

Secondly, if you don't let shorts do their thing on run-ups, guess what's created? Bubbles! Yes, denying shorts creates MORE bubbles, the very thing that caused the tech and mortgage boom. Shorts give downward pressure for overvalued bubbles, because if something is overpriced, you should be able to bet against it.

Shorts also give stability in the markets on a day-to-day basis, because on rallies (such as today), shorts can prevent wild swings. If you want to see markets in which shorts aren't allowed, just watch the Hang Seng and Shanghai markets. 5% daily moves (like in the past few days) are normal over there in stable markets. That just increases the prices for options, making transactions much more expensive than it should be.

Denying shorts will just cause more bubbles and less accurate pricing of equities, making the market more expensive for everyone involved.
posted by amuseDetachment at 9:13 PM on September 18, 2008


any major dude: "87Rafaelloello, do you think the solution is to have some sort of dynamic legislation..."

Don't kill the messenger, but nothing is going to fix this. There is a deflationary spiral that's already begun that no force on earth will curtail, only delay. Jobs will be lost, prices will go down, jobs will be lost, prices will go down, rinse, repeat.

$180 Billion of "real" money injected into the market this morning did virtually nothing to stop the freefall, just like $85 billion to AIG did nothing to stop it, and taking over FRE and FNM did nothing before that. But just talk of the government buying all the bad debt and burying it out back reversed all the major index losses of the previous session. The cold hard truth is they just don't have the TRILLIONS to cover the current losses, much less the TRILLIONS to cover the losses yet to be reported.

Read this and This

There is $60 trillion dollars in credit default swaps outstanding, and there are $700 trillion of credit derivatives outstanding.

The money to bail the world out this hole just does not exist.
posted by Rafaelloello at 9:25 PM on September 18, 2008


How is deflation possible when the government can create money at will?
posted by empath at 9:33 PM on September 18, 2008


empath: "90How is deflation possible when the government can create money at will?"

Boy oh boy. Deflation can be caused also by a decrease in government, personal or investment spending. Seen any of those things happening lately? (hint: INCREASED goverment spending on worthless paper does not counteract deflation)
posted by Rafaelloello at 9:48 PM on September 18, 2008


How is deflation possible when the government can create money at will?

There are feedback loops involved here.

Right now our $5.5T national debt is incurring a 2-3% interest rate IIRC.

Borrowing too much could raise this rate to 6%, where it was in the late 90s, doubling the interest burden from $140B to ~$300B. Per year. More than Iraq costs us per year!

If the dollar weakens then oil will go up again. Oil has backed off a bit but I remain convinced that systemic supply issues -- peak oil -- still lurk here.

There is also something called a "liquidity trap". Krugman wrote about this in the late 90s when describing Japan's fiscal difficulties.

Since money is debt, to inject money into the system requires banks to find willing and able borrowers, and that this borrowed capital is either put to productive use to pay the interest (or the borrower has other means to pay the interest for discretionary purchases).

We're in unchartered waters here so I can't really pretend to understand what's going on or what's going to happen over the various time frames. I don't think anybody does, frankly.
posted by troy at 10:03 PM on September 18, 2008


There is $60 trillion dollars in credit default swaps outstanding, and there are $700 trillion of credit derivatives outstanding.

yeah, well, the theory is that these will net out to not that much.

The money to bail the world out this hole just does not exist.

Money is simply a claim on wealth. Wealth is produced by labor, in fact wealth is the integral of labor over the time interval.

M3 rose from $4T in 1995 to ~$14T today. This was (arguably) not disproportionate, given the rise in productivity and free access of wealth-creation sources (BRIC) to our markets.

If we slip into global recession then any further rise in M3 will be inflationary. However, there is no reason why global GDP cannot continue to increase and M3 continue to rise given population and industry underutilization. We can create more wealth, and when we do our debts will be repaid.
posted by troy at 10:10 PM on September 18, 2008


When you buy Morgan for $25 billion, you assume all their debt. All their debt is worth FACE value. All their assets ARE NOT. So they are worth less than book. Much less, if forced to sell some of their more crappy assets.

this is a common misconception that the BAC purchase of CFC educated me on. BAC didn't assume the CFC debt, they kept it firewalled in CFC -- that's the point of limited liability corporations, to firewall debts and other liabilities from the owner(s).

Now, CFC has bond-holders who have first dibs on the assets of CFC, but as long as BAC works with the bondholders to liquidate CFC in an equitable manner then the buyout can be mutually beneficial to all parties, or preferable to a straight liquidation at least.

Now, Morgan having $179B in liquidity just means it has access to that much cash and credit lines. It has a net income of around $7B in a good year which does give it some borrowing capacity.

MS has got just over a trillion in assets and $34B less in liabilities, so if it has to mark down its assets by another 3.4% its book value would be negative.

MS had around $400B of level 2 and level 3 assets as of April, so an 8% markdown there would wipe out shareholder equity. It's also important to note that just a 2% markdown in level 2 & 3 assets would wipeout earnings for the year.

So if a third of this $400B is in at-risk securities, and the recovery value is 50%, then that will be a $66B hit, putting the company over $30B in the hole.

It's possible to earn yourself out of this hole, but only if your line of business is earning money for you. The jury's out on this.
posted by troy at 10:28 PM on September 18, 2008


M3 rose from $4T in 1995 to ~$14T today.

This is true, but shouldn't it be duly noted that M3 was ~$17T at the beginning of the year. Extrapolate that very steep downtrend and where does that leave us? There will be no rise in M3. It is falling and will continue to fall. Don't you find it odd that the government stopped reporting M3 in 2006? Smart people saw this Tsunami coming.
posted by Rafaelloello at 10:30 PM on September 18, 2008


you're reading the chart wrong (I did that too). That's YOY growth, not $.

Frankly once money is loaned out I don't think it *can* be destroyed, other than lighting a cigar with a FRN . . .
posted by troy at 10:53 PM on September 18, 2008


you're reading the chart wrong (I did that too). That's YOY growth, not $.

Yep. I stand corrected. But according to this chart it looks ominously flat on top at around $13.5T. I don't think it's far-fetched to assume that a contraction is worth some consideration.
posted by Rafaelloello at 11:12 PM on September 18, 2008


If I have some spare money and am a patient, patient man, is this a good time to be stuffing my pockets with some of that cheap as all get out Fannie Mae stock?
posted by Alvy Ampersand at 11:21 PM on September 18, 2008


Regarding the theme of drafting, legislating and implementing new regulatory principles and oversight into the financial system (what remains of it), the devil will be in the details. While certain recent acts of deregulation (like the Commodity Futures Modernization Act of 2000, which created the "Enron Loophole"), appear to have contributed to the mess we are seeing today, some of the corrective legislation, namely in this case the accounting oversight drafted into Sarbanes Oxley (or SOX) in 2002 (as a response to Enron, WorldCom, Tyco, etc), has had mixed reviews.

Oxley himself is now advocating for more regulation:

In 1981, [Oxley] pointed out, two-thirds of Americans’ savings was in bank deposits. By 2002, two-thirds of the country’s savings was in equities. “I can tell you that the junk-bond scandal in the 1980s didn’t affect my constituents in any tangible way,” he said. “But the WorldCom bankruptcy hit us like a slug. People were interested, because it was their money at stake.” He said a notable difference between the Enron and WorldCom accounting scandals that led to the creation of Sarbanes-Oxley and the mortgage crisis that prompted the Lehman bankruptcy is one of intent and oversight.

Still others are now calling SOX useless, a total waste of time and money, that "may...have made things worse."
posted by ornate insect at 11:35 PM on September 18, 2008


I made $15 -- free dinner wahey! -- on FRE last week, and am in for some more that I bought at .40.

But these are lottery tickets. My thesis is that, like you, I can wait 5-10 years for this stock to recover. The common has an immense risk of getting crammed down to $0 but who the hell knows what is going to happen over the next 5-10 years. I've read that these guys are pretty profitable if they can get their book cleaned up, and I think there's going to be a lot of pressure on the USG to return the GSEs to fully functioning participants in the economy. Having them return to the living a la Chrysler would be seen as a great win for the gov't.
posted by troy at 11:37 PM on September 18, 2008


To Rafaelloello,

New regulations and mergers led to a flurry CRA activity in the 90's, but in a meeting of the Committee on Financial Services (United States House of Representatives) on
2/13/08, Ellen Seidman (New America Foundation) noted the following:

"During the early 1990s, there were unsuccessful attempts to repeal CRA. However, the Clinton Administration's strong support for the statute; the Riegle-Neal Act of 1994,
which allowed interstate banking and branching and precipitated a series of major bank mergers; increased advocacy by community-based organizations; and revisions
to the regulations in 1995, ushered in a period of intense activity under CRA.

That period largely came to an end by 2001, as a new Administration revised priorities, merger activity slowed down substantially, and the far larger banks
that emerged largely focused on their home towns and on national goals, rather than the more local focus that smaller or sub-regional institutions had provided."

This statement cites the Harvard Joint Center for Housing Studies report in which the following conclusion is made:

"...[T}he impact of CRA on mortgage lending has waned in recent years, as dramatic changes in the banking and broader financial services industries have
weakened the link between mortgage lending and smaller branch-based deposit gathering organizations on which CRA was based. By tapping into national and international capital markets and utilizing high speed communication and computer technology, larger banking organizations and their mortgage company affiliates have come to dominate mortgage lending.

As recently as 1993, only 14 lenders made more than 25,000 home purchase loans, accounting for only 23 percent of all home purchase lending. By 2000, the 25 lending organizations making more than 25,000 loans accounted for 52 percent of all home purchase loans made that year. Several major mergers announced in 2001 suggest that the trend toward consolidation among the largest lenders continues."

This is supported by the evidence (pdf):

"In fact, with new and lower-cost sources of funding available from the secondary market through securitization, and with advances in financial technology, subprime lending exploded in the late 1990s, reaching over $600 billion and 20% of all originations by 2005. More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts."

Also note Dr. Barr's end point, "Although reasonable people can disagree about how to interpret the evidence, my own judgment is that the worst and most widespread abuses occurred in the institutions with the least federal oversight." (p. 4)

What's more, even one of the presidents of the Federal Reserve Banks, Janet Yellen, noted the following:

"There has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe
it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households. We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households..."

Essentially, practitioners, academics, and the people behind the wheel all agree that CRA was not a leading cause of this crisis. Furthermore, they have evidence to back this up.

I guess my question is, in light of the fact that so few of the loans were CRA-motivated, and that, in 9/05, the FDIC, OCC, and FRB excluded banks with under $1B in assessts from the most rigorous assessment of meeting community credit needs (further reduing the number of CRA-motivated loans) - would you agree that the contention that "regulation led to this mess" is not supportable? If not, what would your evidence be?

- hc

Note, I do not understand the full complexities of this matter and I would request, if possible, a detailed (and beginner-intermediate level) response to the points.
posted by Hypnotic Chick at 11:41 PM on September 18, 2008 [3 favorites]


Re: FNM, FRE common stock

I had some Fruit of the Loom stock a long time ago at .18 or .25 when I heard Warren Buffet was buying it. It went up to .35, I think then down, then to zero and gone.

OTOH, From around that time period (maybe 8-10 years ago), I had 10,000+ shares in a company called Network Plus. It went delisted, pink sheets, and bankrupt. The company has been bankrupt for at least 6 years I think, but those shares still sit in my account and, amazingly, still trade. 52 week high .002, 52 week low .0001 Those shares still amuse me, so much that I haven't sold them and taken my $4K loss yet. NPLSQ is the symbol now.
posted by Rafaelloello at 11:54 PM on September 18, 2008



I guess my question is, in light of the fact that so few of the loans were CRA-motivated, and that, in 9/05, the FDIC, OCC, and FRB excluded banks with under $1B in assessts from the most rigorous assessment of meeting community credit needs (further reduing the number of CRA-motivated loans) - would you agree that the contention that "regulation led to this mess" is not supportable? If not, what would your evidence be?


You can chicken and egg this all day long, that's not the issue. I'm not saying that low-income borrowers or CRA auditing pressure on banks caused the mess we're in now, but CRA undeniably had a hand in changing the way the home loan business runs. Origination channels changed and secondary markets changed in direct response to CRA regulation. The major market shift involves lower quality products being introduced to the market and rapidly handed off from party to party to party. That's been the game until jig was up. Banks operating under CRA regs may not now or recently have been a major player in this shell game, but the CRA regs got the game going and the '95 changes to the CRA regs really got it going. I've read allegations that Clinton used these changes to sick Janet Reno on non-complying banks, basically trading easy mortgage money to the masses for votes in swing states, but I haven't read extensively on that subject, but it sounds plausible.
posted by Rafaelloello at 12:35 AM on September 19, 2008


Actually, Fannie and Freddie were explicitly not government backed. People just assumed that they were.

...and you know what happens when you assume something. Bill Gross from PIMCO makes 1.7bil in one day.
posted by fet at 3:28 AM on September 19, 2008 [2 favorites]


BBC is now saying that uncle Sam is just going to take all the bad debt off everyone's hands. How is this not creating more moral hazard than the pope endorsing a brothel?
posted by bonaldi at 5:12 AM on September 19, 2008 [1 favorite]


fet: specific bonds issued by FRE and FNM might not be government backed, but that doesn't mean FRE and FNM as entities aren't. they were established by congress.
posted by saulgoodman at 7:55 AM on September 19, 2008


People just assumed that they were.

The Fed was taking GSE stock as collateral for their liquidity mechanisms.

Their was an implicit guarantee involved -- ISTR Paulson heading over to China to sell them on our GSE bonds not too long ago.

We needed the Chinese to keep revolving their dollars back to us via the GSEs, and not go on a RE shopping spree like the Japanese did in the late 80s.
posted by troy at 8:30 AM on September 19, 2008


While I'm not a McCain supporter, I do support Cox being distracted by all this attention. Otherwise, he may keep moving forward on his Proposed Rule 151A crusade.
posted by NationalKato at 8:50 AM on September 19, 2008


Rafaelloello,

Wait, now I am confused. If I understand you correctly, you are saying the following:

1. CRA was passed.
2. Financial markets now had to integrate lower-quality (CRA-motivated) loans into their product.
3. This lower-quality integration leads to a de-sensitization of the market to the problems posed by low-quality loans.
4. Low-quality loan de-sensitization leads to further deterioration of loan quality.
5. Continuing poor quality leads to the current collapse.

I don't buy this at all. I don't see how anyone could, though. Did the government require the vendors of low-quality loans to securitize them? Let's set that aside and just say that it just made sense for these vendors to do this...I don't see how the creation of innovative financial products intended to spread risk is a bad thing. It does not seem as though the "CDO", with or without low-quality loans, is the bad guy here. If anything, it is good diversity, no?

The problem, in my estimation, was #3 above. Lower-quality integration should not have de-sensitized the market to the risk that was posed by these products in the housing boom environment of that past few years. What do I mean by this de-sensitization? First, the ratings agencies should have been more rigorous in their assessments of the innovative financial products. Second, the loan originators should have been more rigorous in their assessments of the people taking out the mortgage.

It seems to be profoundly unfair to blame CRA in this. The program itself was helpful. It is clear that CRA-motivated loans, themselves, did not meaningfully contribute to this crisis. I think that your contention (if I understand it correctly) that CRA distorted the landscape of investment products to include low-quality loans is still unsupportable in light of the fact that these loans had been successfully integrated in the past.

Is it completely wrong to say that CDO's were workable products and that CDO's were not workable if they were abused through non-good faith players?. The government did not force anyone to abuse this system. I really think that unregulated self-interest and the lack of due dilligence led to this crisis. Otherwise, CRA seemed to have filled both a valuable social/community need as well added a higher-return vehicle to the CDO package.

Look, any investment avenue, spurred to the front because of regulation, can be abused. That's because any investment avenue can be abused. That the government may have (and we should not be ready to concede that it had in this case, by the way) pushed it to the front is not very relevant. The abuse is.

Again, I am above my head in this. I'd appreciate insight into my errors.
posted by Hypnotic Chick at 9:22 AM on September 19, 2008


Right on schedule.

So is this going to work like last time, where distressed properties are sold right back to the principal players at pennies on the dollar and the taxpayer gets to foot the bill not only for the bailout, but gets shafted on the unloading of assets as well? Will we see large blocks of properties being sold together in the name of expedience while keeping the entrance price so high that only those on a first name basis with the Fed get to play?

Can I make my opening bid for Paulson's head on a stick for even imagining that the bad taste from the first RTC has left memory?

I'd eat ramen for the rest of my years just to know for once some justice has been metered out instead of this self-serving kleptocracy.
posted by quintessencesluglord at 9:48 AM on September 19, 2008 [1 favorite]


Apologies Saul Goodman.

I jumped the gun. For no good reason.

I am no longer allowed to toke from the pipe of knowledge and I will run around the block yelling what a dick I am.
posted by tkchrist at 11:14 AM on September 19, 2008


no need--you're usually one of the better knowledge-pipe-tokers around here. i think you can have a pass (as long as you pass it on the left-hand side)...
posted by saulgoodman at 11:40 AM on September 19, 2008


which reminds me: any news about the impact of this financial crisis on the cost of a good bag of weed? i'd say that's one of the best leading indicators of what the real impact has been.
posted by saulgoodman at 11:42 AM on September 19, 2008


Does anybody think the timing of the ban on short selling is to keep the market from having an even bigger meltdown before the election, which could lead to a landslide defeat for McCain?
posted by jonp72 at 1:02 PM on September 19, 2008


Could I just say that these events are exactly why the wealthy should pay steeply progressive tax rates. They reap enormously larger benefits from our well funded government, which provides all the infrastructure that allows them to make huge money in the first place and bails them out when they fuck up in the last place.
posted by Mental Wimp at 1:44 PM on September 19, 2008 [2 favorites]


Does anybody think the timing of the ban on short selling is to keep the market from having an even bigger meltdown before the election, which could lead to a landslide defeat for McCain?

Yes. I'm about 100% convinced of it, in fact. If it had just been the ban on naked short selling, that's one thing... but the new special list of 800 financial stocks you're just not allowed to short sell? What is that if not an advertisement that these 800 stocks would otherwise deserve to be shorted?
posted by pikachulolita at 3:22 PM on September 19, 2008


Does anybody think the timing of the ban on short selling is to keep the market from having an even bigger meltdown before the election

prevent the meltdown today more like. I happened to be taking a nap when the market bottomed yesterday, but looking at the chart that was the glimpse of the abyss IMHO.
posted by troy at 3:41 PM on September 19, 2008


I said: When you buy Morgan for $25 billion, you assume all their debt. All their debt is worth FACE value. All their assets ARE NOT. So they are worth less than book. Much less, if forced to sell some of their more crappy assets.

troy said: this is a common misconception that the BAC purchase of CFC educated me on. BAC didn't assume the CFC debt, they kept it firewalled in CFC -- that's the point of limited liability corporations, to firewall debts and other liabilities from the owner(s).

I'm glad you're still here troy. I wanted to respond to you earlier, but didn't get a chance. This is not a misconception. The way that the CFC deal was structured, you're right that the CFC bonds were corralled from other debts. But I don't think you understand the implications. That corral only saves current BAC bondholders, and ONLY in the event that the BAC bonds are associated with an OpCo that has assets greater than or equal to its liabilities.

See, when CFC was purchased, existing BAC bondholders were pissed because EVERYONE knew that CFC's bonds were bad debt. So CFC was "corralled". But there are many, many issues that make this point moot. 1) BAC (consolidated) is technically insolvent (or that's the fear, if its entire book was liquidated right now), which would leave equity holders wiped out, and bondholders (of any stripe) significantly compromised.* 2) CFC is a revenue generator, or should be. If CFC is causing BAC to incur losses, net income of the consolidated bank is compromised, leaving less cushion for ALL bondholders, not just CFC. This compromises current bondholders, even though they may be first in line for better assets.

*I write this star because technically, right now, all banks are insolvent (generally speaking), which is partially why the market just went hog wild. Some of the better ones could earn their way out of it, but others were being punished so hard so quickly that the market decided it wasn't going to be patient and wait (since CEOs had been lying through their teeth this entire time (although it's not entirely their fault; only 3 people in the entire world modelled 30% nationwide home price decline back in early 2007)).
posted by SeizeTheDay at 4:16 PM on September 19, 2008


only 3 people in the entire world modelled 30% nationwide home price decline back in early 2007)).

Havent there been recuring threads here on metafilter about a looming crash in home prices, for like the last several years?
posted by Iax at 4:49 PM on September 19, 2008


which reminds me: any news about the impact of this financial crisis on the cost of a good bag of weed? i'd say that's one of the best leading indicators of what the real impact has been.

Hearken back to the advice of noted investment advisers Fabulous, Furry, and Freak Bros.
posted by Kirth Gerson at 6:40 PM on September 19, 2008 [1 favorite]


Hypnotic Chick: "109Rafaelloello,

Wait, now I am confused. If I understand you correctly, you are saying the following:

1. CRA was passed.
2. Financial markets now had to integrate lower-quality (CRA-motivated) loans into their product.
3. This lower-quality integration leads to a de-sensitization of the market to the problems posed by low-quality loans.
4. Low-quality loan de-sensitization leads to further deterioration of loan quality.
5. Continuing poor quality leads to the current collapse.

.
"

1. Yes
2. I don't know what that means
3. I don't know what that means either
4. I really, really don't know what that means
5. Yes
posted by Rafaelloello at 7:08 PM on September 19, 2008


Let me follow on,

1. Yes the CRA was passed.
2. BRAND NEW MARKETS AND CHANNELS AROSE AS A RESULT OF #1
3. I still don't know what that means
4. Maybe, I'm not quite sure what you mean
5. Yes
posted by Rafaelloello at 7:11 PM on September 19, 2008


Hypnotic Chick: "101To Rafaelloello,


...Note, I do not understand the full complexities of this matter...
"

Agreed
posted by Rafaelloello at 7:15 PM on September 19, 2008


Given his strong grasp of economics and politics, it is inevitable that the Pirate Party shall usher in the era of Sweden as a great power. *eye roll*

Someone needs to begin collecting a list of people who are currently on the 'US Collapse is Imminent" bandwagon, so that we can collectively berate (or congratulate) them in a few years time.
posted by boubelium at 6:47 PM on March 22 [1 favorite +] [!]


I guess it didn't take that long.
posted by Mental Wimp at 12:21 PM on September 22, 2008


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