Obama FAIL?

February 4, 2009 4:33 AM

The Bad Bank Assets Proposal: Even Worse Than You Imagined-- the administration appears intent on building another black swan. This is political capitalism. [via]
posted by kliuless (103 comments total)

Quite a series of excellent sites. Thanks kliuless.
posted by netbros at 4:52 AM on February 4

Does "black swan" have a separate meaning within the realm of economics? I was under the impression it meant "big impact, out of nowhere, very rare event."

As much as I hope that people continue to hold Obama's feet to the fire and hold him accountable to his campaign promises, I also can't help but feel really sorry for the guy. He's only been president for two weeks - I don't think any other president had made such strides in building his government, nor has any president (besides Lincoln, I guess) been asked to do so much so soon. Nobody accused Bush or Clinton of having the worst first two weeks, simply because they weren't doing much besides transitioning during their first two weeks.

On some level he's simply doomed to fail because of the circumstances our country faces. I hope the administration figures out the rest of the Cabinet quickly and I hope they hammer out the stimulus and the rest of the TARP funds quickly. The fact that there is a "stimulus watch" website where all the elements of the bill are published on the internet for all Americans to see is a great leap forward in transparency. Of course there's going to be some pork in the bill. So long as we know what's in there and where/who it came from, I think most people would be happy. Holding up a bill because you don't like that .04% of the bill contains funding for some program you find frivolous? Come on. At some point Obama and the Democrats in Congress need to just write the bill they want, cut out the Republicans, and hammer it through.
posted by billysumday at 5:12 AM on February 4 [5 favorites has favorites]

Billysumday: Taleb coined Black Swan, in fact, specifically to describe economic issues. I took the same issue with that last link, where the blogger clearly showed they didn't get what the Fourth Quadrant was and yet was telling us "how to build a Black Swan." Not the most illuminating of links there, but that's what happens with pundits with axes to grind clinging to dogmatic viewpoints (which, snarkily, was exactly what the blog post was railing against.)
posted by bclark at 5:21 AM on February 4

It's been interesting to see that economists in times of panic are no more convincing than economists in times of excess confidence. They appear to jump in a sort of quantum manner from "The Long Boom! Permanent Prosperity! We've Got It All Figured Out Now!" to "It's the Great Depression Only Much Worse!" with no intervening positions.

Of course, it may just be that the prevailing mood of the times seeks out and promotes the biggest characteristic extremist, good or bad. But I prefer to think of economists as a digital system that can express a value of either 1 or -1, and nothing else. Because that makes me chuckle.
posted by rusty at 5:25 AM on February 4 [4 favorites has favorites]

Who would read a blog site called: tenuoushopeformodestrecovery.com?
posted by Potomac Avenue at 5:30 AM on February 4 [3 favorites has favorites]

Taleb coined Black Swan...

It's a little more complicated -- the concept of a "black swan" was used (and I think introduced) by Karl Popper to highlight the role of falsifiability in science. If you see a thousand white swans, you are not logically allowed to conclude that all swans are white (i.e. it's difficult or impossible to prove a universal statement) but the existence of one black swan serves to disprove the universal claim that all swans are white.

It seems that the Taleb book extended this metaphor to mean not just an unexpected event but one that has "high impact," and that seems to be the way it is most frequently used in economics/finance/popular culture these days.
posted by tractorfeed at 5:35 AM on February 4 [5 favorites has favorites]

If only Chumbawumba was here to explain this to us.

Seriously, though, this comment is intriguing:

How 'bout this: It's a head fake. Get people to dump money into that hole, then nationalize said (less deep) hole. Hair cuts turn into decapitations, and we have something like a rebalancing.
posted by jbickers at 5:36 AM on February 4 [1 favorite has favorites]

Great post, but just to clarify - its just not the United States that is considering such a vehicle; pretty much every country across the G7 seems to be publicly entertaining the idea (and no doubt rapidly and privately planning the launch) of a bad bank: The UK briefed Parliament Tuesday of plans to create a bad bank, the ECB is reportedly drawing up guidelines for the creation of a bad bank, even while Germany's commercial banks have begun to execute their own plans to create a bad bank, seemingly because of resistance by the German government to creating a bad bank.

The numbers involved across the G7 are startling large; some £300 billion of assets for the UK, well over one trillion Euro for the German banks alone, and about one trillion dollars on the US side. Even so, I've seen research on this topic indicating such a sum should be considered a down payment, or first installment; yes, they may be back for more money.

The sums being bantered about in private raise concerns that the IMF may not be large enough to fund these activities alone; indeed, folks were openly speculating about this last October, long before all the current round of bad news was revealed. The risk of one or more sovereign defaults is skyrocketing, and we're seeing all sorts of strange anomalies in the market; the UK currently has a higher risk of default (as measure by CDS spreads) than HSBC.

Individual EuroZone countries are getting hammered in the Credit Markets; CDS' insuring against a default by Ireland are not only trading near record highs, liquidity is actually drying up for some issues (e.g., the 5Y); in other words, nobody is putting any money on the table to gamble with. S&P recently downgraded Greece , which hit CDS premiums insuring against default on Greek sovereign debt.

Now without taking a view either way on a bad bank, the problem with such vehicles is will no doubt drive deflationary forces, as the value of non performing assets are sharply written down before being moved into such a holding vehicle.

Bloomberg had a talking head on this AM who opined we're about halfway through de-leveraging, or what I call The Great Unwinding; considering the truly enormous sums of money already injected into the system the 13% or so delation we've seen in the US to date provides a tangible illustration of the true magnitude of the devaluation underway.
posted by Mutant at 5:37 AM on February 4 [20 favorites has favorites]

it may just be that the prevailing mood of the times nuance-eschewing, anti-intellectual American public and a compliant media seeks out and promotes the biggest characteristic extremist, good or bad.

FTFY
posted by DU at 5:40 AM on February 4 [2 favorites has favorites]

I thought the point of a black swan was that it was unanticipated. Here they are, anticipating.
posted by adipocere at 5:46 AM on February 4 [2 favorites has favorites]

the 13% or so delation we've seen in the US to date provides a tangible illustration of the true magnitude of the devaluation underway.

Or shows how much the price of oil has dropped.
posted by smackfu at 5:51 AM on February 4 [2 favorites has favorites]

No Black Swan does still mean what Popper meant. Jackasses just constantly misuse it. Or to put it another way - if you can predict something will be a shit show, it isn't a black swan. Taleb's point is that most trading businesses assume returns & risks are normally distributed which is not a correct assumption. As a result events that are inconceivable according to their models - Black Swans - actually occur quite regularly. Hence Taleb's who schtick about essentially being structurally long volatility, because the average guy underestimates how bad things can get.
posted by JPD at 5:57 AM on February 4 [2 favorites has favorites]

What, Big Business trying to influence Congress and the Senate with all their money to fund laws and such that suit their best interests?!?!?!? NOOOOO I don't believe it!
posted by Mastercheddaar at 6:00 AM on February 4

rusty To a certain extent I think you're right, but only to a certain extent. Krugman, for example, had been pushing the idea that we were facing serious problems back as far as 2005 or 2006. He was dismissed as a crank then.

Mostly though the published economics news is almost universally upbeat and cheerful. A few days after Black Thursday almost every newspaper had headlining economists talking about how "the worst has passed!". Economics reporting is one of the most relentlessly upbeat parts of any newspaper. They'll occasionally go gloom and doom, but its usually quite transient.
posted by sotonohito at 6:06 AM on February 4

prepare for the zeitgeist :P
posted by kliuless at 6:09 AM on February 4 [1 favorite has favorites]

the 13% or so delation we've seen in the US to date provides a tangible illustration of the true magnitude of the devaluation underway.

The 13% in the link was the change in price of consumer goods and services in the last quarter of 2008. That is to say, goods deflated in price at a rate of 13%, which is only scarcely more than 3% in those 3 months. If we continued that trend for 9 more months, we'd see prices fall 13%, but we won't. A lot of that price drop was due to Christmas sales.

The economy is bad, but it's not as bad as people believe it is, and we're not going to see widespread deflation. A decrease in inflation and some price stagnation, sure, but prices of staple goods going down? I doubt it.
posted by explosion at 6:13 AM on February 4

There are no bad bankers, just bad banks.
posted by larry_darrell at 6:29 AM on February 4 [2 favorites has favorites]

Can somebody please explain to me why the bad bank idea is a bad one?

This model was used successfully in other countries, most notably Finland and Sweden. This 2004 study by Norges Bank of the Scandinavian bailout efforts in the 1990s, "The Norwegian Banking Crisis" [pdf] says band banks were a crucial part of the effort to restore the system. But the paper does note that the small size of the Scandinavian banks relative to other crises is a critical factor.

Still, what's the alternative? Our problems aren't going to go away until we restore lending. So what do we do? Let our banks just sit around with billions of dollars in bad assets on their books that they won't write down? That is precisely what happened in Japan, which is now once again facing a major crisis. I think Obama is right to try something, anything at this point because this is above all a crisis of confidence and hand-wringing and inaction does nothing to resolve the situation.
posted by up in the old hotel at 6:32 AM on February 4

I prefer to think of economists as a digital system that can express a value of either 1 or -1, and nothing else.

This is both true and not true.
posted by ~ at 6:35 AM on February 4 [7 favorites has favorites]

There are no bad bankers, just bad banks.

Not true. A friend of mine was such a bad bank teller that when he stole $400, he was fired not because they suspected he was a thief, but because his drawer had been wrong so many times; they just assumed he was really bad at counting.

He had a somewhat-good reason for taking the money, actually, and it was more a misunderstanding than simple theft, but the point remains: he stole from a bank and got away with it because he was so bad at his job.
posted by uncleozzy at 6:42 AM on February 4 [2 favorites has favorites]

Economics is mostly burning chicken bones in a kiln and throwing them on the ground afterwards to see what is going to happen in the coming years and months.

I think quants might use calculus and tea leaves.
posted by chunking express at 6:43 AM on February 4 [3 favorites has favorites]

Why buy the bad assets and not the whole lot? For example, RBS has already received £20bn in bailout money, and the total market cap is now around £8b. If you're going to spend more than £1-2b on more bad assets from these guys, you would be better served just to buy the whole bank then sell off the profitable parts.

It's disgusting to see the alacrity with which the politicians have come to heel at the call of the industry lobby the minute the public's back was turned. Having started out making these wide-boys drop their Savile Row striped breeks, instead of giving them six of the best we're now proposing fitting a toilet seat to the tax-payers punchbowl and handing the bankers and shareholders a moist towelette to wipe up and stroll off.
posted by Jakey at 6:46 AM on February 4 [2 favorites has favorites]

up in the old hotel: The Scandinavian governments nationalised banks and wiped out shareholders before recapitalising. Here it seems the US is intent to mostly keep insolvent banks alive on TARP life support in the name of the 'free market', without getting significant equity in return.
posted by PenDevil at 6:46 AM on February 4 [1 favorite has favorites]

Can somebody please explain to me why the bad bank idea is a bad one?

It's not that a 'bad bank' is a bad idea, but that what is being proposed is essentially that the government buy assets of say, Citibank for 83 cents on the dollar that the market would value at 53 cents or refuse to buy at all i.e. a massive income transfer from taxpayers to bondholders and stockholders.

The alternative is to take the assets of banks that have failed, wiped out their shareholders, and then put them in a 'bad bank.

What was true of Henry Paulson is true of the new guys, they are incapable of seeing a difference between the interests of the financial industry and that of the people: What's good for Goldman Sachs is good for America. They will never ever see it as larceny on a huge scale, they believe their own con.
posted by geos at 6:58 AM on February 4 [7 favorites has favorites]

adipocere: "I thought the point of a black swan was that it was unanticipated. Here they are, anticipating."

Exactly. A real black swan would be something like, say, an asteroid taking out Western Europe, or a zombie plague. Or an asteroid that turns everyone in Western Europe into zombies.

Or a disgruntled engineer reformatting Fannie Mae's servers. Yikes.
posted by Rhaomi at 7:03 AM on February 4

Short Economist article covering the history of "Bad Bank" interventions. They claim the first involved Mellon Bank in 1988.
posted by rongorongo at 7:08 AM on February 4

Why buy the bad assets and not the whole lot?

But that is socialism! And the government doesn't know how to run a bank!

As far as I can tell, that is the extent of the argument against it. It doesn't make sense to me, because the government has already paid enough to own the worst of the banks, and has very little to show for it. It is also clear that the people running the worst banks also don't have any special monopoly on banking success. How could to government do worse than to bring about a systemic financial collapse?
posted by procrastination at 7:15 AM on February 4

"Exactly. A real black swan would be something like, say, an asteroid taking out Western Europe, or a zombie plague. Or an asteroid that turns everyone in Western Europe into zombies."

I like where you are going with this. (Me/ Racks shotgun) Well except for the millions of deaths because of the asteroid zombie plague. Seriously though, you are starting that a Black Swan is an unforeseeable economic disaster?
posted by Mastercheddaar at 7:18 AM on February 4

Can somebody please explain to me why the bad bank idea is a bad one?

It's not a bad idea, it's an unfair idea, in that it involves forking over billions, or trillions of dollars to the companies that fucked up our economy. Nationalizes the loses and privatizes the profits.
posted by delmoi at 7:19 AM on February 4 [4 favorites has favorites]

stating = starting...
posted by Mastercheddaar at 7:19 AM on February 4

Seriously though, you are starting that a Black Swan is an unforeseeable economic disaster?

That would be the general idea, but it could also involve an unforseeable economic WIN as well, like discovering gold in your back yard, or the massive Lithium deposits in Bolivia combined with that being the best material for electric car batteries. A new energy source could be a black swan. That kind of thing.
posted by delmoi at 7:21 AM on February 4 [1 favorite has favorites]

just to clarify: the type of 'black swan' event i was alluding to (per the link) is of the 'more is different'/'short-termism' variety...
posted by kliuless at 7:33 AM on February 4

"Black Swan" is 2009's version of "Perfect Storm" -- a term that once actually described something accurately and precisely, and which has been bastardized and co-opted by morons and politicians so they can sound moderately smart 10,000 times a night on various newscasts.
posted by Shepherd at 7:35 AM on February 4

A new energy source could be a black swan.

So what you're saying is that they should have gotten a black actor to play Dr. Manhattan? Sorry, I don't know what came over me.
posted by mkb at 7:38 AM on February 4

Once upon a time there were three toxic assets, and the time came for them to leave home and seek fortunes for their masters.

Before they left, their brokers told them, "Whatever you do, do it on the sly, because that's the way to get around in the world."

The first little asset built his scheme out of real estate because it was the easiest thing to do.

The second little asset built his scheme out of hedge funds. This was a little bit stronger than realty.

The third little asset built his house out of commercial paper.

One day the big bad bank, who dearly loved to eat toxic little assets, came along and saw the first little asset in his house of the poor. He said "Let me in, let me in little asset, or I'll huff and I'll puff and I'll blow your scheme in!"

"Not by the shares in my chinny chin chin!", said the little asset.

But of course the bank did blow the scheme in and chased the first little asset all the way to the next scheme.

The bank then came to the hedge fund house.

"Let me in, let me in little assets, or I'll huff and I'll puff and I'll blow your scheme in!"

"Not by the shares in my chinny chin chin," said the two little assets. But the bank blew that scheme in too, and chased them both to the third scheme.

The bank then came to the commercial paper market.

" Let me in, let me in," cried the bank, "or I'll huff and I'll puff till I blow your scheme in!"

"Not by the shares in my chinny chin chin" said the assets.

Well, the bank huffed and puffed but he could not blow down the paper market. It was Too Big to Fail.

But the bank was a sly old bank and he climbed up on the roof to look for a safe way into the market.

The little assets saw the bank climb up on the roof and quickly lit a roaring fire in the heart of the economy and placed on it a large kettle of pundits.

When the bank finally found the hole in the market he crawled down and KERSPLASH right into that kettle of angry noise and that was the end of their troubles with the big bad bank.

The next day the little assets invited their brokers over. They said, "You see, it is just as we told you. The way to get along in the world is to do things just as sly as you can."

And they all lived happily ever after, except for homeowners and credit card-toters and people with jobs. They all died.

THE END (?)
posted by Rhaomi at 7:42 AM on February 4 [34 favorites has favorites]

yea, like taleb considers the internet a black swan :P and it might take an internet-scale WIN to avert an epic FAIL, e.g.:

It's time to reboot capitalism. So where do we begin?

Here's a suggestion for what should be at the top of agenda of every decision-maker across the economy, from Davos, to Obama, to Sand Hill Road, to the revolutionaries in tiny garages hatching tomorrow's Googles: reconceiving growth.

Why?

20th century capitalism is eating itself. For the first time since World War II, global growth is forecast to turn negative -- and that's an optimistic forecast, relative to the possibility of a global lost decade. Today's leaders are plugging dikes, bailing out industries and banks as they fail. Yet, what negative global growth suggests is that the problem is of a different order: that we have reached the boundaries of a kind of growth.

Reigniting growth requires rethinking growth. The question Davos -- and most leaders -- are asking is: where will tomorrow's growth come from? Will it result from oil, cleantech, bailouts, China, or Obama? The answer is: none of the above. Tomorrow's growth won't come from a person, place, or technology - but from understanding why yesterday's growth has failed. The same growth models applied to new people, places, and technologies will simply result in the same crises, over and over again. We have to reboot growth: the problem is not what is growing versus what is not, but how we grow...

cheers!
posted by kliuless at 7:55 AM on February 4 [1 favorite has favorites]

It turns out that we might have the Roman satirist Juvental to blame for the expression "Black Swan". He wrote "rara avis in terris nigroque simillima cycno" as part of an expression saying that a perfect wife was a rare bird of the land: like the black swan in fact. He wrote this on the anticipation that black swans do not exist. The west was therefore a bit surprised when they discovered that black swans are in plentiful supply in Australia - they are on the coat of arms for Western Australia for example.
posted by rongorongo at 8:09 AM on February 4 [3 favorites has favorites]

It's not a bad idea, it's an unfair idea, in that it involves forking over billions, or trillions of dollars to the companies that fucked up our economy. Nationalizes the loses and privatizes the profits.

It may be unfair, but again what's the alternative?

Take Citibank. It probably has hundreds of billions of dollars of loans at risk. But the market value of the company is $20b. No way shareholders can cover the risk.

So guess what? It's already effectively nationalized!

It sucks but the sooner we accept facts, the sooner we move on.
posted by up in the old hotel at 8:10 AM on February 4 [1 favorite has favorites]

Мы вас похороним!
posted by Abiezer at 8:14 AM on February 4 [3 favorites has favorites]

up in the old hotel wrote So guess what? It's already effectively nationalized!

Well, that's the problem, isn't it. Its "effectively nationalized", not really nationalized. The taxpayers get stuck for a giant bill and get nothing in return. The same gang of losers who screwed it up in the first place get to keep all their money, and get to stay in charge of a bank they drove into the ground. I'm not really seeing how this fixes the core problem, which is that the entire financial industry appears to be a cesspool of corruption and greed run by people so stupid they couldn't poor piss out of a boot if the instructions were written on the heel.

If we've got to spend a lot of money on the financial sector to keep things from falling apart, I don't like it but ok. But you can't tell me anything is fixed as long as the same greedy morons are left in charge, as long as we aren't imposing truly draconian oversight and regulation, etc.

If all we're doing is spending my taxes to throw money at the cesspool of greed and corruption then I don't see a solution, I see some of the most evil scum ever conceived being rewarded while I get the shaft.

Any proposal that doesn't involve completely replacing the current cohort of financial lords (with criminal charges please), and massive regulation and oversight is, from my POV a rip off, not a solution. Obama's (much belated) suggestion of capping executive "compensation" at $500k is a) doomed to fail, and b) doesn't go far enough. Any outfit taking bailout money should be formally nationalized, its board and execs axed (no golden parachute) and replaced with people who are marginally competent.
posted by sotonohito at 8:27 AM on February 4 [8 favorites has favorites]

The "Black Swan" goes back to Aristotle, and probably further. Please give it back.
posted by Nahum Tate at 8:41 AM on February 4 [1 favorite has favorites]

The taxpayers get stuck for a giant bill and get nothing in return. The same gang of losers who screwed it up in the first place get to keep all their money, and get to stay in charge of a bank they drove into the ground.

All right now, just to bring a little balance to all the comments here about the new administration being just like the previous administration on these issues, do you seriously believe the previous administration would have ever taken a step nearly as unpopular with the financial sector as imposing substantial caps on the value of executive benefits packages for financial entities receiving large amounts of Federal assistance?

And it's not true that we get "nothing in return": we get shares of ownership in the institution's receiving aid. There is no more "real" way to nationalize them than to own them, is there? If your objection is we don't "own them enough" or something along those lines, fine, then you might have a point, but it comes across as either dishonest or ignorant when people keep asserting we're getting "nothing."

And as for all the more general criticisms about Obama's administration not maintaining its purity by working with "insiders" like Geitner, just remember of all the candidates considered to have had even remotely enough practical experience to take the head Treasury job, Geitner was literally the only one who'd never held a Wall Street job. That's the real reason he elicited such a scared response from Murdoch controlled financial new outlets like WSJ and Market Watch: He actually is an outsider, from the perspective of Wall Street. Not to mention he was vocally critical of Paulson's handling of the initial rollout of TARP.

The challenge for Obama is that our political process has been left to molder in the dark for so many years now, there's barely anyone with practical experience or working knowledge of the process who doesn't have at least some potential smudge on their record, especially when the right-wing media and even many on the left side of the aisle are prone to repeating (or at least, taking in good faith) whatever partisan talking points are in circulation that day without critically examining the claims first.
posted by saulgoodman at 8:41 AM on February 4 [6 favorites has favorites]

I just don't understand why people keep using the awkward term "bad bank" when the perfectly good "Shittybank" is so much more apt.
posted by Asparagirl at 8:42 AM on February 4 [11 favorites has favorites]

As a taxpayer and an investor, what would be a prudent course of action at this time? If insolvent banks like Citi and BofA are going to unload their bad assets with no haircut for bondholders and without wiping out shareholders, won't there be a big rally in financial stocks? If the Gov't is intent on bailing out these banks, then share prices are attractively underpriced.

Maybe this is better posed on AskMefi.
posted by csw at 8:46 AM on February 4

won't there be a big rally in financial stocks?

Hasn't worked that way so far. Citibank had a pop after the original bailout but are now back down again as further problems are revealed.
posted by smackfu at 8:50 AM on February 4

"Black Swan" seems to be being used in inconsistent ways.

I've only read "Fooled by Randomness" by Nicholas Nassim Taleb, but he seemed to me to be using it in its traditional philosophical sense, as an illustration of the problems of inductive knowledge. A biologist might study a large number of white swans and conclude "All swans are white", or possibly "I can be 99.99999999% confident that all swans are white". Then someone brings him a single black swan from Australia and it turns out he's wrong after all.

Similarly in the financial markets, the quants look at stretches of data and conclude "I can be 99.99999999% confident that the market is not going to crash". But all it takes is one unforseen event, and the prediction is falsified. Yet people may have invested their lives savings on the basis that that risk assessment was accurate...

However, the Aleph Blog link seems to be using "Black Swan" to just mean "a catastrophic event, unpredicted by most people".
posted by TheophileEscargot at 8:50 AM on February 4

Capital punishment for the Madoffs and the others at the top who brought us all here.
posted by Blazecock Pileon at 9:07 AM on February 4

Contrary to the opinions of some others, I think this post is crappy, unresearched, highly speculative FUD.

It should be pointed out that the blog post in question is written by a former financial exec for Goldman Sachs, and is based solely upon her "tea leaves" reading of this WaPo article, which says that the Obama administration wants to decide which bad assets to take off the banking industry's books, which ones not to, which banks will fail, and which ones won't.

Never mind Nouriel Roubini, that the economist who really nailed the current crisis, has made a point of saying that recapitalizing the banks is essential, and has called on the Obama administration to employ the "Swedish solution", which is what we're basically talking about here.

Admittedly, the big question is, "what is the risk to the taxpayer?" Are we taking over risky assets in a way that there might be a profit to be made, or are we locking the taxpayer into a bad investment, bailing out people who should lose their shirts?

That, as I said, is the big question. Unfortunately, amidst all the -- ultimately harmful and self-defeating -- doom & gloom of this post, that's precisely the question that really isn't answered. And indeed, it can't be answered yet, because the author engages in wild speculation.
posted by markkraft at 9:16 AM on February 4 [2 favorites has favorites]

saulgoodman wrote And it's not true that we get "nothing in return": we get shares of ownership in the institution's receiving aid.

Not true. It was originally proposed that we'd get ownership, but Paulson never saw fit to enact such measures, and the Fed has just been handing out bails of cash with no strings of any sort attached. Perhaps the money distributed by Obama will have such conditions, I certainly hope so. I doubt he'll be able to make his "compensation" [1] cap passed, and I haven't heard anybody talking about new regulation or oversight.

[1] Am I alone in figuring that anybody who gets "compensation" instead of "pay" is an evil parasite?
posted by sotonohito at 9:22 AM on February 4 [1 favorite has favorites]

I understand that some view bailing out the banks as pouring money down a hole. So, what's at the bottom of the hole? A bonfire? George Bush's fatcat buddies? To whom or to where are the billions going to? The unwashed masses need to know.
posted by digsrus at 9:26 AM on February 4

This isn't about Obama FAIL. It's about Obama BAIL... which is the right thing to do when the boat we're all on has a hole in it.

You can collectively kvetch about how you're already rowing, and how the boat might slow down if you stopped rowing and started bailing or trying to plug the hole. You could complain about how your arms might get too tired and strained if you were to pick up a bucket, and really, you shouldn't have to bail anyways because you weren't the one that punched a hole in the bottom of the boat anyways. Sure, the guy who did punch a hole in the boat has damn-near bled to death, but it's really his responsibility.

Indeed, nobody really wants to have to bail, so you might be able to sow enough discord to effectively prevent any meaningful action being taken to address the problem at all.

You might believe that the natural forces of the waves or the wind will eventually push you to shore... which I guess would be a fair thing to believe, if natural forces could be relied on to act expeditiously, or if the natural forces of the big hole in the bottom of the boat weren't also having their say in the matter.

Clearly, something has to happen, and soon.
posted by markkraft at 9:36 AM on February 4 [2 favorites has favorites]

You could complain about how your arms might get too tired and strained if you were to pick up a bucket, and really, you shouldn't have to bail anyways because you weren't the one that punched a hole in the bottom of the boat anyways. Sure, the guy who did punch a hole in the boat has damn-near bled to death, but it's really his responsibility.

I'd help bail, but I got laid off and nobody wants to give me a bucket. And why are the guys who punched the hole in the boat still in the boat? Toss their stupid assess overboard and maybe the boat will ride higher in the water and be easier to save. Otherwise, we're going to get the boat three quarters bailed out and they'll punch another hole in the boat and say "The market made me do it!"
posted by vibrotronica at 10:00 AM on February 4 [11 favorites has favorites]

DU has it right, the misleading and downright erroneous characterizations of the leadup to this and the resulting effects by the media, politicians, and others is more stark than I have ever seen. As the easiest examples of this, I'll point to sotonhito's post, which is blatently wrong, and say that I heard a HUGE and well respected hedge fund manager pontificate on CNBC in the last few days that 'the only value is market value.' What bullshit. I suggest that people really, really try to NOT form opinions on this topic too quickly or take everything that they hear at face value, and look at primary sources before forming strong opinions on these critical issues.
posted by sfts2 at 10:02 AM on February 4 [2 favorites has favorites]

The problems with Wall Street and the banks will not be resolved until executive compensation is predicated on long term results.

The current system allows executives to become fantastically wealthy in a very short time: a time so short that the consequences of their fatally flawed decisions occur after they've been compensated.

Thus, they will always decisions that present the highest risk, because those same decisions present the highest possible compensation. All they need to do is show high returns for a year or two, and they'll be incomprehensibly wealthy; that those decisions crash and burn four or ten years down the line is inconsequential to them: they are long gone, cash in hand.

There is no incentive to make decisions that will ensure the long-term health of the corporation. There is only incentive to maximize one's next big payout before the corporation self-destructs.

It would be difficult to design a system that is more guaranteed to destroy companies and countries.

IMO, it would be a damn fine were the CEOs who made decisions to maximize their income to the long-term detriment of their corporations jailed, and their wealth returned to shareholders and taxpayers. They have been pirates, and they deserve the consequences we have traditionally meted out to pirates.
posted by five fresh fish at 10:04 AM on February 4 [7 favorites has favorites]

So there's ~$350 billion left to spend in the TARP, right?

Why not set up 10 new banks with $35 billion each (or 35 new banks with $10 billion each) which are strictly under the control of the government?

The troubled banks, their management, their stockholders and debt holders get destroyed.

The tax payers get new, unecumbered banks to promote lending that are directly beholden to the government.

I believe the new banks will have absolutely no problem finding job applicants.
posted by de void at 10:09 AM on February 4 [1 favorite has favorites]

Thus, they will always choose decisions that present the highest risk...
posted by five fresh fish at 10:11 AM on February 4

sfts2: What was I wrong about? Not trying to start a fight here, I'm genuinely curious. I wrote what I did because that's what I think the reality is, obviously you disagree, and for all I know you may be much better informed than I am. What did I get wrong, and how?

five fresh fish How about we pay executives instead of compensating them. How about just a straight, reasonable, salary? I mean, seriously, what's wrong with that? Its how I get paid, and ya' know, I do my job and I do it well. Why should we expect that CEO's need super special (super expensive) treatment or else they won't do their jobs?)
posted by sotonohito at 10:14 AM on February 4 [1 favorite has favorites]

it's not true that we get "nothing in return": we get shares of ownership in the institution's receiving aid. There is no more "real" way to nationalize them than to own them, is there? If your objection is we don't "own them enough" or something along those lines, fine, then you might have a point, but it comes across as either dishonest or ignorant when people keep asserting we're getting "nothing."

Thank you.

I (disclaimer: Canadian) agree with the prevailing sentiment on MetaFilter that those banks need to be nationalized completely, or at least let the government be the majority shareholder. It bothers me though when people I agree with express sentiments I agree with in language so hyperbolic as to be plain wrong. As a matter of fact, the government gets equity in exchange for bailout money. It's not a point up for debate. To make the false claim that you get nothing discredits the legitimate complaint of not getting enough.

For so long, every time I see comments by people like [insert name of famous and *right* doomsayer], I want to favorite them but always end up favoriting people like Mutant. Stop the hyperbole if you want to be taken seriously. Throwaway lines like "America no longer makes anything" destroy the credibility of otherwise enlightening comments. Even clueless non-American laymen like me know that American manufacturing output still dwarfs that of Japan or China, and that it had been rising before last year, and that it's not falling too hard now relative to other heavyweights. It's not a matter of interpretation or perspective, but of fact.

sotonohito wrote: Not true. It was originally proposed that we'd get ownership, but Paulson never saw fit to enact such measures, and the Fed has just been handing out bails of cash with no strings of any sort attached. Perhaps the money distributed by Obama will have such conditions, I certainly hope so.

For but one example: "The $20 billion from TARP will be provided by the Treasury in exchange for preferred stock with an 8% dividend. Treasury said BofA will have to comply with enhanced executive compensation restrictions and implement a mortgage loan modification program in exchange for receipt of the money."

Are you going to argue preferred != equity? To repeat myself, I'm outraged by the paltry amount of shares (and I'm not even American), but it's not nothing.
posted by fatehunter at 10:15 AM on February 4 [5 favorites has favorites]

IMO, it would be a damn fine were the CEOs who made decisions to maximize their income to the long-term detriment of their corporations jailed, and their wealth returned to shareholders and taxpayers. They have been pirates, and they deserve the consequences we have traditionally meted out to pirates.

Whilst I agree with the general opprobium direct towards the executives of the banks, the shareholders are hardly blameless. The entire economy, including small shareholders, has become short-termist and in recent years has clamoured for short-term returns at the expense of strong growth in fundamentals. Anecdotally, it seems to me that the small shareholder has also moved towards the mentality of a 'flipper', with an eye only for an opportunity to move the share on at a profit as quickly as possible, rather than holding as a sound investment. This has contributed to the debacle, and shareholders don't deserve a free pass.
posted by Jakey at 10:36 AM on February 4 [4 favorites has favorites]

The taxpayers get stuck for a giant bill and get nothing in return.

For those complaining about getting nothing in return--what you get is a disaster avoided which most certainly would have affect most of us very directly.

More specifically, in addition to actual equity shares the government gets, the government more importantly gets the right to poke its nose further into bailed out banks' affairs than current regulations would normally allow. The government is a shareholder, and shareholders have rights.
posted by Pastabagel at 10:54 AM on February 4

This has contributed to the debacle, and shareholders don't deserve a free pass.
posted by Jakey at 1:36 PM on February 4

Look at share prices over the last one year, and tell me again how shareholders are getting a "free pass."
posted by Pastabagel at 10:55 AM on February 4 [1 favorite has favorites]

Capital punishment for the Madoffs and the others at the top who brought us all here.

Emotionally, I'm with you. Except this was not 'really' a Madoff-generated experience. Also, capital punishment appears to be the price large scale defrauders pay in China. I'm not sayin', I'm just sayin'.
posted by From Bklyn at 11:10 AM on February 4

the unfortunate fact is that very little is know about how the first $350 billion of TARP money was spent. but starting with the name Troubled Asset Relief Plan and now continuing into the Obama administration has been the fact that no one wants to admit that a bank with more troubled assets then capital is a FAILed bank.

Citi is a failed bank.
BoA is probably a failed bank.

TARP was based on the idea that if everyone just believed then the stock prices for BoA/Citi et al would go up and they would be able to get enough capital from the private market. As far as I can tell from the WaPo article this is still the world-view in DC.

the $500k salary cap will never happen for the big players, count on it and read the article: it's only for banks taking 'extraordinary' assistance from the government.

the idea that Tim Geithner is an 'outsider' is laughable.

the black swan here is that the 'shadow banking system' built on CDO's and derivatives was not more stable than the obsolete regulated banking world inherited from the great depression.

none of the people making decisions have come to terms with that as far as I can tell and I bet that if Roubini were chief economic advisor instead of Summers we'd be seeing a very different set of policies coming from the Obama administration.
posted by geos at 11:16 AM on February 4 [1 favorite has favorites]

If we don't do something soon, something big, I don't know that we will be able to do much of anything effective at all. History shows that when a bubble pops, countries that act swiftly do far better than those that act slowly (Sweden vs. Japan). It's like the global economy is a 50-ton juggernaut of a boulder balanced precariously atop a hill, and now it's begun rolling downhill. During the time that we watch the boulder roll down the hill, it is accelerating, the ripple effects spreading farther and wider throughout the economy, making eventual recovery more and more expensive/painful/slow. If we stop the boulder before it's gained much momentum (too late for that), it's a helluva lot easier to stop it than it is if we wait until it's rolled halfway down the hill, at which time there will be no stopping it. It'll just smash us flat if we wait too long. We may have waited too long already.
posted by jamstigator at 11:39 AM on February 4

imposing substantial caps on the value of executive benefits packages

from the 'i' in via, nemo sez: "The media and Congress are completely focused on 'executive compensation'. There will be a 1-2 week debate over executive comp, then some token gesture for the lawmakers to point to as they hand $1 trillion to our largest and worst banks. Same thing that happened with TARP I."

also btw fwiw, i found these helpful...

• Never, ever feed the zombies! Zombie banks beg for money. They are very clever. They come up with ways you can give them money while pretending not to give them money, such as guaranteeing their assets, guaranteeing new debt issues, or buying up assets at "hold to maturity" values. Just say no! A healthy financial system cannot be run by zombies. "Rescuing" insolvent banks makes about as much sense as tying string to the arms of a loved one's corpse so it can come to the dinner table as a marionette. For a while that may be comforting (or not), but pretty soon it's sure to smell really bad, and it's gonna ooze. If you think you have engineered a miraculous turnaround, you have only made matters worse. An undead bank is an abomination. It will pretend good health but hide a rot. It will afflict you, over and over and over again, with harrowing near insolvencies (cf. Citibank). Dead banks must be allowed to die...
• Drawing poison: Investors remain nervous about the solvency of US banks, in part thanks to their large stocks of toxic assets. The government can end this uncertainty by establishing prices for these assets. It can do this by buying them outright – creating a “bad bank” – or by offering insurance to the banks that the price of these assets will not fall below a floor. The difficulty for the Treasury is that it must make estimates of prices for securities that the markets have deemed unpriceable. The next step in such a plan should be for regulators to then insist that all banks price their assets at the appropriate assessed value. This would mean write-downs for institutions that had been taking an optimistic view of their possessions. But the banks should not feel hard-done-by; the government has a duty to make sure that its banks are solvent. The Treasury should not, however, try to spare banks by pretending that these securities are worth more than they really are. Recapitalising banks by overpaying for toxic assets, or insuring the value of their assets on over-generous terms, would deliver an undeserved windfall to bank shareholders from taxpayers. The government might well overpay for these assets anyway – their value is uncertain – but the Treasury should still try to use fair market prices. After this process, some banks would prove to be in reasonable shape and some would be inadequately capitalised. If no investors were willing to step in, the government should then inject capital into those that needed it. Forcing the banks to realise losses on their illiquid securities could, in some cases, wipe out ordinary shareholders altogether. Recapitalisation would mean nationalisation. So be it... [1a 2a 3]
• What the U.S. Can Learn from Japan's Lost Decade: The chief lesson from Japan, scholars say, is that good monetary and fiscal policies are necessary but not sufficient for a recovery. The government also needs to spend political capital by taking on entrenched interests: the management, shareholders, and debtholders of big but unhealthy banks that need to be shut down so the financial system can get a fresh start. That campaign must start with a cold-eyed audit of the books of every major financial institution. "We have not closed down the banks ruthlessly. That's the big problem," says Harvard University's Kenneth Rogoff, who delivered a paper at the [Jan. 3-5] San Francisco meeting. ... It has become conventional wisdom that it was a huge mistake for the government to let Lehman Brothers go under, but [Anil] Kashyap said: "I don't think it's so obvious that if you had saved Lehman no one else big would have failed." The bigger mistake, he said, was taking an ad hoc, inconsistent approach that has left the private sector confused about which institutions are sage to invest in, thus chilling capital-raising... [also see 1a 2a 3]
• Bailouts should be no fun: The representative of the taxpayers in such negotiations would seem to have by far the strongest hand at the table. The threat point is to let the company go into bankruptcy, and the limit on what the taxpayers are willing to contribute should be the direct benefit to taxpayers (as opposed to benefits to the other four parties). If your company doesn't like our terms, fine, go your own way, and we'll prop up the next domino in line instead. If properly implemented, the taxpayers should leave the negotiating table pleased with the deal they achieved, and everybody else should leave battered, comforted only by the knowledge that, had they not made those concessions, things would have been even worse. On the other hand, if everybody and their grandmother is lining up for a bailout, and pulling political strings to make sure they get it, I read that as prima facie evidence that the taxpayers' interests are not being properly represented.
• Why the bank bailouts are doomed: Bank losses from the write-offs of bad loans and busted derivatives tally up to $1.5 trillion so far. In addition, $5 trillion to $10 trillion worth of off-balance-sheet businesses such as structured investment vehicles -- leveraged lending vehicles used by big banks to fatten their profits in boom times -- are being forced back to banks' balance sheets by regulators. Rules require banks to keep a base of real shareholder capital amounting to 10% of those funds. So banks need to find up to $1 trillion within the next year to meet that objective. Add the $1.5 trillion in losses to $1 trillion in needed new reserves, and you can see that banks need as much as $2.5 trillion in new capital to remain solvent under current rules. I know that we throw around words like "trillion" like they're nothing, but that is a lot of money. Consider that the entire world banking system had only $2 trillion in shareholder capital in 2007, before everything blew up...
• Transparency And Power: The banks made many bad decisions and now have assets worth much less than their liabilities. We have guaranteed their liabilities, because we had a look at the alternative and it was ghastly. So who pays for the losses and on what basis? I would prefer something much simpler and more transparent: new capital in exchange for a change in control at the major banks - presumably leading to new private owners, wholesale managerial change, and the breakup of the big banks. Instead, we are looking at the mother of all Credit Default Swaps - if things go well, we get a small premium; if things go badly, we are on the hook for a huge and hard-to-quantify amount (ask AIG). Either way, the bankers get the greatest deal of this or any century, and they emerge more powerful than ever... [also see 1a 2a 3]
• Bailouts for Bunglers: what happens if you lose vast amounts of other people’s money? Answer: you get a big gift from the federal government — but the president says some very harsh things about you before forking over the cash. Am I being unfair? I hope so. But right now that’s what seems to be happening...
• The Humility of Realism: My phrase, “the humility of realism” is meant to get us thinking about the system as a whole, and about the long-term consequences of societal actions, whether by the government or private parties. Humility says that sometimes we have to say, “No, we can’t.” It also says that we should think carefully about major policy actions, and not let ourselves get bullied by those who rush, shouting “crisis, crisis,” while quietly angling for their favored pet projects to get swept in while no one is looking. Realism sometimes means the government has no good solutions, so it should inform the public that they aren’t omnipotent, and humbly say the crisis must be borne with grace. The problems generated by the short-termism of the past three decades will not get solved by more short-term thinking. The present rush to assure prosperity will not end well, in my opinion...
• Fix the Accounting, Then Fix the System: Almost all of the bailout plans being discussed fail to consider a simple fact: without the homogenization of accounting rules, any plan will represent a piecemeal approach to the problem. Some banks are holding out their hands to get TARP funds; they are on the brink of failure and are seeking a lifeline. Others are saying "Nah, we don't want them (TARP funds)," because they don't want the more stringent oversight applied to TARP recipients. In both cases, the motivations are less than pure, and neither facilitates greater lending to stimulate the economy. The system is broken, and current proposals do nothing to address the overarching issue: we don't know the true tangible book value of ANY financial institution, and therefore are unclear as to which have strong capital positions, which are on the verge of failure, and which are essentially bankrupt but have been propped up temporarily with taxpayer dollars. As has been suggested by many, draconian steps must be taken to repair the system. Problem is, the only thing draconian so far is the damage done to the wallets of every US citizen today and tomorrow...
• Key Themes in Financial Services 2009-10: Regardless of how deftly or inept the financial crisis is handled, the financial services sector is facing tectonic change: how firms are managed; how staffers are compensated; how ideas are generated and researched; and where transactions will take place. Mega-trends such as transparency, centralized exchanges, increasing specialization and disaggregation of services will rule the day, and will sharply impact the size, scope and power of the industry relative to its meteoric rise over the past two decades. Risks will be taken, money will be made, and innovation will continue, just not at the pace and in the same manner to which we've become accustomed during the halcyon days of the 1990s and early 2000s. Here are a few of my prognostications for how the industry will change in the wake of Government intervention over the next 18-24 months...

etc...

• SOC or Bust
• Yes we can, Mr Geithner
• Time to take the banks into full public ownership
• More on Bank Nationalization [also see 1 2 3]
• Nationalize like real capitalists [also see 1 2 3]

oh and lemme just end with another great interfluidity post re: reconceiving capitalism...

I have a little secret... I don't want banks at all... Since we have already bought and paid for our nation's banking institutions, we are within our rights to, um, transition them to a different business model. Let's do that.

But credit is the lifeblood of a capitalist economy, right? I keep hearing that line. It's a dumb line.

Credit, also known as debt, is one of several arrangements by which a party with the power to command resources but lacking aptitude or interest in managing a productive enterprise delegates wealth to another party who is capable of creating value but unable to command sufficient resources. You would be forgiven for not noticing, given how habitually we misuse credit, but supplying credit is really just a subspecies of the practice that used to be called "investing" ... credit is to investing what heroin is to painkillers: Unusually appealing, in a certain way. Hard to kick once you're on it. Almost certain to, um, cause problems, eventually. Our overall goal ought not be to kickstart the credit economy, but to kick the habit and move towards financing arrangements that are more equity-like than debt-like. That's going to be hard to do, because historically, we've subsidized the hell out of debt financing...

It's not my intention to suggest that consumer credit is always bad... But if we let consumer credit contract, and if investment demand is derived from consumption demand, doesn't that spell macroeconomic disaster? There is an alternative. It is called "transfers"...

SRW goes on to describe what is actually the libertarian idea of guaranteed minimum income; 'basic income' was espoused by hayek (or 'negative income tax' by friedman), and was the basis for the earned income tax credit -- i like it, but i also have some other ideas :P
posted by kliuless at 11:43 AM on February 4 [4 favorites has favorites]

From Obama's remarks today:

"As part of the reforms we are announcing today, top executives at firms receiving extraordinary help from U.S. taxpayers will have their compensation capped at $500,000 - a fraction of the salaries that have been reported recently. And if these executives receive any additional compensation, it will come in the form of stock that can't be paid up until taxpayers are paid back for their assistance.

Companies receiving federal aid are going to have to disclose publicly all the perks and luxuries bestowed upon senior executives and provide an explanation to the taxpayers and to shareholders as to why these expenses are justified. And we're putting a stop to these kinds of massive severance packages we've all read about with disgust; we're taking the air out of the golden parachute. . .

Finally, these guidelines we're putting in place are only the beginning of a long-term effort. We're going to examine the ways in which the means and manner of executive compensation have contributed to a reckless culture and quarter-by-quarter mentality that in turn have wrought havoc in our financial system. We're going to be taking a look at broader reforms so that executives are compensated for sound risk management and rewarded for growth measured over years, not just days or weeks."

OMFG! Let's just kiss the US economy goodbye! Hostage to the interests of the bankers! Worse than you imagined! Obama FAIL!!!

Hell... I *WANT* him to fail! Don't you?!
posted by markkraft at 12:14 PM on February 4 [1 favorite has favorites]

As to whether this is all doom, I decided to run the numbers on the eight biggest US banks (as reported in 2007). They are:

1. Citigroup 2.2 trillion dollars (2007)
Stock value, NYSE, Feb. 2007: 54.95; Feb. 2008: 27.05; Feb. 2009, 3.46

2. Bank of America 1.7 trillion dollars
Stock value, NYSE, Feb. 2007: 52.88; Feb. 2008: 42.33; Feb. 2009, 5.54

3. JP Morgan 1.6 trillion dollars
Stock value, NYSE, Feb. 2007: 51; Feb. 2008: 43.89; Feb. 2009, 24.05

4. Wachovia, 810 billion dollars
Stock value, NYSE, Feb. 2007: 57.06; Feb. 2008: 34.44; dropped to 0.75, went up to 5.46 when it closed out.

5. Taunus (Deutschebank) 750 billion dollars
Stock value, NYSE, Feb. 2007: 137.06; Feb. 2008: 108.57; Feb. 2009, 27.27

6. Wells Fargo 600 billion dollars
Stock value, NYSE, Feb. 2007: 35.90; Feb. 2008: 30.47; Feb. 2009, 19.23

7. HSBC 490 billion dollars
Stock value, NYSE, Feb. 2007: 89.78; Feb. 2008: 76.38; Feb. 2009, 38.14

8. USBancorp 240 billion dollars
Stock value, NYSE, Feb. 2007: 36.02; Feb. 2008: 32.09; Feb. 2009, 14.11

So, number 4 imploded, number 1 is down by 93.7%, number 2 is down by 89.5%, number 5 is down by 80.2%, number 8 is down by 60.8%, number 7 is down by 57.5%, number 3 is down by 52.8%, and number 6 is down only 46.4%. Those are Great Depression numbers.
posted by dances_with_sneetches at 12:29 PM on February 4

Obviously, the problem is real.

The *REAL* doom, however, is in thinking that a desperately-needed solution is part of the problem.
posted by markkraft at 12:42 PM on February 4

An interesting question is whether the stock valuations were correct in 2007. And if they weren't, why trust the 2009 valuation any more?
posted by smackfu at 12:45 PM on February 4

Look at share prices over the last one year, and tell me again how shareholders are getting a "free pass."

Perrhaps I could have phrased that a little better. Clearly shareholders have not fared well financially, but I was referring to the fact that they seem to be keen to point fingers whilst avoiding any scrutiny of their own complicity in encouraging the kind of behaviour that got us to our current situation.
posted by Jakey at 1:05 PM on February 4

Not to let the bankers completely off the hook, but as I've mentioned in other discussions about the financial crisis, I think what's really being overlooked at the national level is the substantial role that sophisticated real estate and other investment fraudsters played in creating the financial crisis.

Real estate fraud in Florida has been a widespread epidemic for at least the last ten years or so.

There's an article in the newest New Yorker I've been wanting to read about just how large the problem of real estate investment fraud in Florida alone is/was. Of course, New Yorker requires a paid registration for its current content, and I don't have a subscription and don't want one right now. They do offer an abstract of the article, however, and there's a write up with a few quoted passages here on The Miami Herald's "Naked Politics" blog.
posted by saulgoodman at 1:41 PM on February 4

their own complicity in encouraging the kind of behaviour

Heh--and just what complicity is that? In the occasional exercise of their paltry number of proxy votes? Non-institutional shareholders (meaning, the little guys who aren't banks or hedge funds or mutual funds) account for such an incredibly small proportion of the overall ownership of most common stock that they have virtually no voting power at all when it comes to the big financial players. Not to mention the fact they seldom get to vote on any crucial decisions anyway.

Shareholders don't even have much influence over share price due to the dominance of large investors, not that that matters anyway to a company whose executives aren't compensated in common stock. The price of a company's stock except in the most extreme cases (like, when shares dip into penny stock territory or below) has no direct bearing on the company's financial well-being at all. Once a stock has been sold, it's only the shareholders that are making or losing money off of trades.

And a lot of companies whose executives are compensated in equity compensate them with preferred as opposed to common stock. Preferred stock (which isn't available to the general public as a general rule) trades at different prices than common stock, if I'm not mistaken.

So by what mechanism exactly are shareholders supposed to encourage or discourage any kind of behavior from the companies they invest in? I'm not saying it's right, but under the current system, even shareholders are pretty much powerless to influence the behavior of corporate boards and CEOs.
posted by saulgoodman at 1:51 PM on February 4

I can certainly understand the anger with banks that issued irresponsible loans, but the thing is, lots of consumers *KNEW* subprime loans with low teaser rates were too good to be true. They knew that credit cards with low teaser rates were too good to be true as well, and that things were so bad that even the Santos L. Halper's of the world could -- and sometimes were -- get their own credit cards. They knew payroll advance services were little better than legalized loansharking without the kneecapping. They knew that credit card companies intentionally tried getting people to borrow more, with intentionally manipulated fees for just about everything and with minimum payments that were far too low to ever pay off the balance, designed to encourage irresponsible behavior and leave people mired in a spiral of debt.

Why didn't they contact their representatives and force them to support legislation against such policies when they had the chance?

Anyone who tells you that our current crisis is a subprime crisis is a fool. It's a bad debt crisis, because tens of millions of Americans are even more insolvent than the banks they owe their money to... and many of the rest of you are only a few paychecks away from that point, in the middle of a deep economic downturn, so your debts might need bailing out soon too.

So... how do you like your easy credit now?!
posted by markkraft at 2:25 PM on February 4 [1 favorite has favorites]

Most of the foreclosures in Florida have been due to fraud or failed real estate investment strategies, not consumer excess, markkraft. It's not the "Credit Card Queen's" fault; it's

Four states accounted for 50% of the foreclosure and distressed mortgage filings (cite).

These states were California, Florida, Arizona, Nevada. All four of them have Republican governors and extraordinarily high rates of real estate fraud.
posted by saulgoodman at 2:41 PM on February 4

oops:

"it's sophisticated real estate scammers."
posted by saulgoodman at 2:41 PM on February 4

I thought it was all the black people buying houses with their acorns, and that's why there weren't any acorns this year.
posted by dirigibleman at 2:49 PM on February 4 [1 favorite has favorites]

U.S. Dollar Slips Against Canadian Acorn
posted by kliuless at 2:53 PM on February 4

> I can certainly understand the anger with banks that issued irresponsible loans, but the thing is, lots of consumers *KNEW* subprime loans with low teaser rates were too good to be true. ...They knew that Credit cards... [with] intentionally manipulated fees for just about everything and with minimum payments that were far too low to ever pay off the balance, designed to encourage irresponsible behavior and leave people mired in a spiral of debt.

Well, you might think that, yet when lenders, who should have known EVEN better than the average shmo how wrong this was, were spending big bucks on marketing and PR to tell us otherwise...

It's like blaming a mouse for getting nailed in a trap. "Free cheese? You know there's no such thing. The fact that it smells so good should be a warning. Doesn't matter if you're hungry."

And what's the conventional wisdom about how to get OUT of the recession? Get the consumer to stop saving and start borrowing and spending again!

If these things (subprime loans, teaser card rates, payroll advance loansharks, usurious credit cards) are known to be dangerous, abused and wrong, then why are they in the marketplace at all?
posted by Artful Codger at 3:01 PM on February 4

OK I answered my own question. George Soros presents an alternative to the bad banks in today's WSJ "We Can Do Better Than a Bad Bank"

The bad bank could serve as a useful interim measure, except that it will make it more difficult to obtain the necessary funding for a proper recapitalization in the future. It will also encounter all kinds of difficulties in valuing toxic securities, and it will serve as a covert subsidy to the banks by bidding up the price of their toxic assets. This will generate tremendous political resistance to any further expenditure to bail out the banks.

For these reasons it would be a mistake to take the "bad bank" route, especially when there is a way to adequately recapitalize the banks with currently available resources. The trick is not to remove the toxic assets from the banks' balance sheets but instead put them into a "side pocket," as hedge funds are doing with their illiquid assets. The appropriate amount of capital -- equity and unsecured debentures -- would be sequestered in the side pocket.

This would cleanse bank balance sheets and transform them into good banks but leave them undercapitalized. The same $1 trillion that is now destined to fund the bad bank could then be used to infuse capital into the good banks.

Although the amount needed to recapitalize the banks would be more than $1 trillion, it would be possible to mobilize a significant portion of the required total amount from the private sector. In the current environment, a good bank would enjoy exceptionally good margins. Margins would narrow as a result of competition, but by then the banking system would be revitalized and nationalization avoided.

The scheme I am proposing would minimize valuation problems and avoid providing a hidden subsidy to the banks. Exactly for that reason it is likely to encounter strong resistance from vested interests.

posted by up in the old hotel at 3:12 PM on February 4

"Most of the foreclosures in Florida have been due to fraud or failed real estate investment strategies, not consumer excess..."

Perhaps so, but not everywhere in the country is Florida, and foreclosures are up everywhere.

Subprime mortgages are a nasty, painful gotcha that often lead to foreclosures, but they're one that thrives in an environment where consumers are already deep in debt... and now the foreclosure crisis is hitting everyone, subprime or not.

Indeed, even those with subprime mortgages who managed to negotiate special rates are still in trouble. A recent study by the Office of the Comptroller of the Currency found that more than 50 percent of troubled homeowners had missed at least one payment six months after their loan was modified. That points to some significant underlying financial issues, increased job loss, etc.

I admit that fraud was there at the beginning of the problem, but the contagion has clearly spread. It's estimated that over 8 million Americans are currently facing foreclosure, and this is only going to increase, because it will likely be another 12-18 months before we see unemployment top out... plenty of these people aren't subprime.

This doesn't even begin to count all the people out there who are defaulting on consumer debt, going bankrupt, etc. Credit card delinquencies are at record highs, and will only get worse. Total charge-offs on prime, general purpose credit cards rose 0.66 percentage point to 7.5 percent, up 40 percent from a year earlier, and it's estimated to reach 9 percent by the second half of this year.

"It's like blaming a mouse for getting nailed in a trap."

...except, of course, that we're not mice.

It's time for people to realize that uncontrolled, unrestrained capitalism means dangerous and fundamentally destructive exploitation. Bad for our health, bad for our economy, bad for our entire planet.

We need to grow again, sure... but we also have to weed out the excesses, and make a point of shunning -- and regulating -- that which seems too cheap, too easy, and too good to be true. Everything -- from our mortgages to our credit cards to the power and food we consume -- needs to accurately reflect the real cost, so that consumers have a hope at making smart decisions again. The financial crisis has only just begun... I suspect we all might have a lot of hard learning to do over the next few years.

"We remain a young nation, but in the words of Scripture, the time has come to set aside childish things."
- President Obama
posted by markkraft at 4:24 PM on February 4

Sure sounds like you're blaming the rape victim for wearing a miniskirt, markkraft.

Why do you prefer to blame loan-takers, instead of loan-givers? Are not the loan-givers the ones who are supposed to have the financial acumen to recognize a good risk from a bad risk?

I doubt anyone is going to disagree with your assertions that consumers need to quit spending so much of their money on plastic crap, need to start saving their money, need to get a clue about investing and living within their means.

But, man, does it ever stink of classism when you blame the common citizen instead of the people who should have known when to say "nuh-uh, ain't gonna give you any more money."
posted by five fresh fish at 5:20 PM on February 4

Sure, the guy who did punch a hole in the boat has damn-near bled to death, but it's really his responsibility.

The guy that punched the hole in the boat just got picked up by a helicopter that landed on his 500 ft. yacht and is now doing lines of coke off a $10k/hr hooker's ass. This is the largest looting of public funds in modern history.
posted by ryoshu at 7:10 PM on February 4 [2 favorites has favorites]

five fresh fish: Sure sounds like you're blaming the rape victim for wearing a miniskirt

There it is again, inappropriate (in this case downright offensive) hyperbole that only servers to undermine the comment's legitimate points.

Why can't you just say sounds like you're blaming the fraud victim for...? Rape has nothing to do with the topic at hand. I'm inclined to agree with fraud allegations against many in finance, but fraud does not compare to rape. Surely you see the difference in kind.
posted by fatehunter at 7:32 PM on February 4

yea, i really think obama is on thin ice here; like if the 'leaked' plan is implemented as is, you could see a quick turnaround from 'fuck bush' to 'fuck obama' in no time (from a lot of people who 'want to believe') -- obama & co. appear to be on the verge of falling into the trap of becoming "too clever by half." i mean if anything screams 'business as usual' it's this and esp for obama (as an 'instrument of change') i don't think hypocrisy is something he can afford. lets hope like daschle (but not geithner) that obama reverses course before he has to admit a(nother) mistake and prove that the cynics were right all along.

on preview: there's a great phrase i came across awhile back -- "simultaneously determined" -- and while you can still split hairs on relative blame/causation i think it's (at times) useful to consider certain phenomenon (well a lot actually) as simultaneously determined and leave it at that, i.e. there's enough to go around afterall; postmortem recrimination has its place of course, but lets not lose sight of 'the mutual prize' -- a (multiple of?) future(s) where we're all better off -- and how best to collectively bring it about :P

cheers!
posted by kliuless at 7:53 PM on February 4

Also, capital punishment appears to be the price large scale defrauders pay in China.

For looting so many bank accounts and putting the next 3-4 generations of yet-to-be-born Americans in hock, and for crippling and destroying so many lives in the process, there should be some sort of punishment for people in finance that meets a crime of this scale.

Comparisons with China aside, it's enough to be a terrorist leader or a drug lord to earn the death penalty in the United States. CEOs and CFOs shouldn't escape the same fate, if they commit crimes with similar catastrophic consequences for the public.
posted by Blazecock Pileon at 8:40 PM on February 4

TARP Recipients Paid Out $114 Million for Politicking Last Year
posted by homunculus at 8:57 PM on February 4

"Sure sounds like you're blaming the rape victim for wearing a miniskirt, markkraft. Why do you prefer to blame loan-takers, instead of loan-givers?"

It's not that I don't blame the loan-givers. I most certainly do.

That said, these loan-giving institutions are out to make as much money as reasonably possible. In fact, they are publicaly-traded companies that have an obligation to make a ton of money. Their best interest is oftentimes served by wringing as much money out of people as legally and competitively possible, without them defaulting.

But really, this is something we all should know already. It's a bit like the old story about the scorpion and the frog. It's not that they're evil. It's just business. Most of the time, they perform a very valuable service... for a price.

All the suffering and hardship they have caused was legal, and, indeed, specifically sanctioned by our government. And we have to accept our share of the responsibility in that, and in the "too good to be true" behavior we all really kind of liked. Low rate ARMs. Low introductory APR credit cards. Cash advances. Everyone appreciates the convenience, and generally tends to overlook how much the real cost is to them.

The American people repeatedly voted for a congress and a president who spoke out against excessive regulations which stifle our economy, our energy sector, etc. And we -- collectively -- got what we wanted... or at least what we were told that we should want. Less accountable, more freewheeling financial institutions.

I can't remember the name of the economist, but about thirty years ago, one was clever enough to explain a lot of the reasons why economic bubbles form. Part of it is cyclical... growth to boom to bust. Eventually, there's a lot of free-flowing money, and all the "easy picking" ways of making money are already exploited. So, new investments tend to go places where there is less and less money to be made, overexploiting some "sure things", forming bubbles, until the point where people start routinely investing in ways that are overpriced and simply not sound.. which leads to risk, instability, and a crash.

The way I see it, that's what both the banks *AND* ordinary Americans are guilty of. All the easy pickings were gone, and Bernanke was dropping money out of helicopters, lowering the institutional lending rate over and over and over again. All that money was there, waiting for anyone who wanted it to pick it up, but you tell me... what was the surest investment back in 2002-2006 when subprimes really took off?

Houses. We were in the midst of a very sluggish economy around here in Silicon Valley, with wages still down from the dotcom days, and yet housing prices were going up around 10% a year... which is insane, when you're talking about $800K houses. The hot thing to do was to get a subprime / zero-money down loan, do a few cosmetic fixes, and flip it for an extra $150K.

So, while the banks were risky and irresponsible, so were we. And we expect the banks to be the responsible ones, when they were doing what the politicians supported and the public demanded.

So, when people say "the banks should go under" now, it makes me think... whose the guilty party and who are all the victims?

The bank execs are certainly guilty... but as rich and avaricious as they are, they've still lost a fortune in stocks, and now the President seems intent on capping their salaries and withholding their bonuses until they pay back all of the money they're borrowing from us. This seems fair, as you don't want high-priced talent to flee the banks in question while you're trying to help them recover, but you don't want to reward incompetence either. Obama *ALSO* wants to see what can be done to change their future compensation from rewarding short-term profits to rewarding long-term, steady growth. That strikes me as major, significant, and the right approach not only for the banks themselves, but for every consumer whose ever felt screwed over for short-term profits.

The shareholders like money too... but oftentimes, those shares are part of somebody's pension, IRA, retirement savings. People don't generally invest in banks to make a quick buck. They invest in them for solid, dependable returns over time. The bank shareholders have been very badly punished, and very badly served by the bank execs. They never asked for or expected this, and all the pundits were out there saying that the banks were solid. Many people held on to their bank stocks for all the best reasons. My money wasn't in bank stocks... but if it was, I probably wouldn't have sold either, because I wouldn't have wanted to be a party to gutting a bank that so many people depended upon.

If you want to know where the money went, well... much of it went to all those greedy, unpatriotic bastards out there who shorted the stock. To me, they're arguably worse than the bank execs.

And what about the bank employees? While it would be nice to axe those execs most responsible for the mess, I certainly don't want all of the thousands of employees nationwide to lose their jobs.

Sure, we want to see irresponsible people held accountable, profiteering prevented, and we don't want to have our money stolen by fatcats, the fact remains that most of the money isn't in the bank... it's in Joe's house, and in the Kennedy's house, and Mrs. Macklin's house. And maybe in your house, your car, your student loans...

But what are you going to do... foreclose on them?!
posted by markkraft at 9:03 PM on February 4

"yea, i really think obama is on thin ice here..."

Yea, i really think you're trying to write the narrative on your FUD post here...
posted by markkraft at 9:13 PM on February 4

Krugman: The plans for rescuing the banking system are shaping up as a classic exercise in “lemon socialism”: taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right.
posted by homunculus at 9:33 PM on February 4

There it is again, inappropriate (in this case downright offensive) hyperbole...

The comparison to rape is not particularly hyperbolic. People's lives are being destroyed. The feelings of powerlessness, the fear of further harm, loss of confidence, distrust: hell, yes, it is appropriate to compare the psychological and emotional impact to rape.

Why can't you just say sounds like you're blaming the fraud victim for...?

(a) the phrasing you propose is pointless: it doesn't just sound like he's blaming the fraud victim: he clearly is blaming them; and (b) it's a convenient short-hand that any reasonably informed reader will understand as referring to the recent change in society's treatment of victims.

It is no longer acceptable to blame the victims of rape. It should not be acceptable to blame the victims of predatory lending for the crimes perpetrated by rapacious liars who preyed upon people less astute than our esteemed markkraft.

I am sorry your life experience is such that I can't use a recent sign of positive growth in our society as an example of how we can further improve our society. Perhaps you were a predatory lender yourself, and are now having deep feelings of guilt and shame. (Hah, no, I joke. Those loathsome lizards aren't capable of such emotions.)
posted by five fresh fish at 9:51 PM on February 4

Also in the Krugman article:

"Am I being unfair? I hope so."

Well, given that he wrote this article before Obama's statements on his plan today, I think he needs to reconsider the claim that stockholders and execs are going to get all the benefits.

I tend to agree with the Obama administration's statement that "governments make poor bank managers".

It's not that they couldn't do the job. It's that it would create a lot of business disruption and serve as a HUGE distraction for everything else in an Obama administration, stoking the claims of Democratic socialism, and making it harder for him to concentrate on the rest of his agenda.

If there's a privatized and non-privatized solution that has about the same chance of working, it makes sense to try the non-privatized solution first... especially since that is arguably the one most likely to pass Congress.

"prices would, The Financial Times reports, probably be based on “valuation models” rather than market prices, suggesting that the government would be making a big gift here, too. And in return for what is likely to be a huge subsidy to stockholders, taxpayers will get, well, nothing."

Except, of course, the difference between what the government pays for the debts and what the debts are actually worth. Krugman knows very well that the market price for these financial instruments is practically nothing AND means practically nothing right now, because the true value of these have not been adequately determined... which they presumably would be before any kind of value is fixed. Why would we possibly expect the administration -- or Congress, for that matter -- not to insist on a share of any profits?

This, frankly, is premature, disingenuous, and misleading. Krugman should know better.
posted by markkraft at 9:58 PM on February 4

All the suffering and hardship they have caused was legal, and, indeed, specifically sanctioned by our government.

No, it was not. A good many mortgage brokers outright lied to both the borrowers and the banks. They cared only about increasing their own wealth, without regard for the consequences to their clients. They behaved flat-out immorally, by every metric.

And we have to accept our share of the responsibility in that, and in the "too good to be true" behavior we all really kind of liked.

How on earth can you conceive that I have some share of responsibility? That must be a royal "we" you use, because I sure as hell did not participate in these financial misadventures, yet I am directly and deeply harmed by the outcome.

Everyone appreciates the convenience, and generally tends to overlook how much the real cost is to them.

It may come as a surprise to you, but your financial savviness is not common. Most people are simply intellectually ill-equipped to understand financial concepts, and must rely on "experts" to advice them.

Their "experts" flat-out lied to them.

I think it's pretty clear you've had a lot of advantages in your life. And you sit up there on your high horse, well above the most of your fellow citizens, and denigrate them.

Must be nice to be king, kid.
posted by five fresh fish at 10:14 PM on February 4 [2 favorites has favorites]

I am sorry your life experience is such that I can't use a recent sign of positive growth in our society as an example of how we can further improve our society. Perhaps you were a predatory lender yourself, and are now having deep feelings of guilt and shame.

Nice ad hominem. Do you seriously believe this tactic gains you credibility?

Why yes, you win the argument. I'm not interested to engage you any further.
posted by fatehunter at 10:26 PM on February 4

"No, it was not. A good many mortgage brokers outright lied to both the borrowers and the banks."

True, but we're not bailing the mortgage brokers out. We're bailing out the banks. And yes, they can still be charged with fraud, from what I can tell.

"How on earth can you conceive that I have some share of responsibility? That must be a royal "we" you use, because I sure as hell did not participate in these financial misadventures, yet I am directly and deeply harmed by the outcome.

We all have to share some of the responsibility for our government's previous actions to deregulate the financial markets and encourage subprime mortgages, regardless of our own personal actions, whether we borrowed subprime $$, maxed out our credit cards, or what have you. We're all on the hook whether we like it or not. It was pretty obvious to me that the economy was weak, that there was a huge housing bubble, and that it was a *BAD* time to take on personal debt, and yet lots of people did.

Despite being fairly well invested with zero debt, I've lost about $50K on this economy so far. I expect to lose more before the worst is over. And I certainly know that I did my best to point out the problems I saw, but this is the proverbial sh*t sandwich, and not only do we all get a bite, we all get seconds... and probably thirds.

And yes, it would be a *LOT* less painful had we not collectively failed this test. Indeed, we're being tested now, as to whether we can agree to keep taking a bite out of the sandwich... if we don't though, it will be *MUCH* worse for much longer.

"It may come as a surprise to you, but your financial savviness is not common. Most people are simply intellectually ill-equipped to understand financial concepts, and must rely on "experts" to advice them. Their "experts" flat-out lied to them."

Which experts would those be? Their elected officials, who thought that deregulation was the ideologically correct thing to do... but who didn't really know better? Their bank CEOs, who were told that the loans were good, and that derivatives would essentially hedge their bets and protect them from undue risks on the subprime loans? The people who made those derivatives and thought they were incredibly clever and would work?

They were all largely victims of self-deception, at least until it was too late. None of them thought their stocks would tank... but shareholders panicked. In fact, it's almost disingenuous to call it a panic, because what really killed the markets were speculators, making money by betting that our country's banks would fail.

You know how I said that economically, all the easy pickings for money had vanished long ago, and there wasn't a really profitable, safe place to invest money anymore? Well, when real estate started falling and foreclosures went up, another sure bet / economic bubble was created... the "betting that financial stocks will go down" bubble. Lots of your neighbors were probably on that bandwagon. Lots of all our neighbors were.

"I think it's pretty clear you've had a lot of advantages in your life. And you sit up there on your high horse, well above the most of your fellow citizens, and denigrate them."

I made good money at the height of the dotcom days, but I'm not rich. I don't even own my own home yet, because home prices around here still cost too much, and will be falling for probably another 18 months. I do have a good education, research and study exhaustively, I paid off all my debts before the crisis hit, and I have about two hundred thousand invested for the long term. I'd have more, but I don't believe in selling good companies I believe in.

Really, I've been incredibly conservative with my money. If I had been as irresponsible as many of my fellow countrymen, I would've perhaps bought a house years ago and flipped it, or shorted American stocks to make some "easy" money, but I'm not that big a dick as to bet against American jobs.

So, I hold my investments, because someone has got to if we're going to recover, confident that they will go up eventually.

It's not a case of me denigrating my fellow citizens. It's just that they need to face facts, pull together, and face this problem... which frankly, I have my doubts about their ability to do. They need to learn what it means to be financially responsible, and must learn that they can't rely on the "experts", because the experts usually have an ulterior motive for blowing smoke up their arses... either financial or ideological.

About five months ago, I got into a conversation in the hot tub at my local Y with about a half-dozen older "adults", none of who thought real estate prices would fall in the Silicon Valley, even when I pointed out that the vast majority of younger people just could not afford to buy, that those who were retiring would need to sell when they downsize, because that's where they had their retirement savings, and that foreclosures were just starting with the subprime mess, and that it would spread and start to effect everyone.

None of them could conceive of real estate prices falling around here. Not a one.

Really... where do people come from who think that they're somehow immune from ever seeing the prices fall, just because they've never seen it in the last twenty years? Did they skip out on their history classes?

What it comes down to is that everyone wanted to make a quick buck. Banks. Home buyers. The investors who harmed our economy by driving up the price of oil, or by shorting American companies. The way to get out of this is for our country to fundamentally shift, and start thinking about how to invest for the long haul. Show me a get-rich-quick'er, and I'll show you someone whose intent on making money at our collective expense.
posted by markkraft at 11:39 PM on February 4 [1 favorite has favorites]

Yea, i really think you're trying to write the narrative on your FUD post here...

indeed i hope it is FUD :P and there's nothing to worry about!
posted by kliuless at 4:20 AM on February 5

amen, markkraft. although i'd like to emphasize that an important part of that fundamental shift has to include taking excess risk-taking and investment fraud--everything from naked short selling to real estate ponzi schemes--more seriously and reforming government institutions to empower them with better regulatory tools and the authority it needs to play bad cop when it's needed.

the prevailing attitude toward regulatory functions at all levels of government (and i know this to be particularly true at the state level) has become that the government's role is to maintain friendly partnerships with the entities and industries it regulates. but nothing could be further from the truth.

adversarial relationships are not only sometimes called for, but can even benefit both parties to the relationship. for example, why have our car companies continued to lose market share, becoming less and less competitive in the world? at least partly, IMO, because the US government has coddled them with tax breaks, loose regulatory standards, favorable policies, in ways that few other developed governments coddle their industries. obviously that's not the whole picture, but I'm convinced it's a big part of it.
posted by saulgoodman at 7:03 AM on February 5

Nice ad hominem.

Hilarious.
posted by five fresh fish at 7:33 AM on February 5

If I had been as irresponsible as many of my fellow countrymen, I would've perhaps ...shorted American stocks to make some "easy" money, but I'm not that big a dick as to bet against American jobs.

Wait, what? What, pray tell, is wrong with shorting -- or buying put options on, or buying an inverse ETF on -- a stock or stocks whose price you think will shortly go down? How is that at all unethical or, as you actually seem to be implying, unpatriotic? Are you aware what actually happened to the market last year when all those eeeevil greedy short sellers were banned for one month?

Seriously, I just don't understand that line of thinking at all. Why is it more objectively wrong to bet (with your own money) that a stock price will go down than to bet that a stock price will go up? If I were betting on sports, I wouldn't be outraged that one team at the SuperBowl will lose while the other one wins, right?
posted by Asparagirl at 9:34 AM on February 5

Asparagirl: During the Great Depression, a moritorium on short-selling had to be imposed because it was having such a corrosive and disruptive effect on the health of the stock market. Short-selling, when its widespread and trading volume is low, can exert artificial, downward pricing pressure on stocks even when there's no fundamental reason for a decline in the value of the stocks. In other words, it can distort the market.

In fact, the whole idea that participating in the stock exchange should be thought of as like gambling at all is arguably one of the biggest problems going. Speculation was never the purpose of markets when they were first established. Stock markets were supposed to allow people to take part ownership in companies and share in the profits in return for their providing needed one-time capital to be used for expansion and business investment. Shareholders, it was thought, would also put pressure on companies to innovate and develop superior business models and practices in their desire to see larger returns on their investments in the form of dividends.

But almost no one except big institutional investors invest in stocks to participate in dividends anymore, because so few companies even bother to return profits to their shareholders. They just increase their executive compensation packages, or redecorate their offices and call it reinvestment of the profits, or they put them in risky investment vehicles hoping to achieve high return rates.

Once you undermine investment fundamentals (which the increasing prevalence of purely speculative market actions like short-selling do, in a lot of people's opinions), the stock market doesn't provide incentives for responsible corporate governance and becomes excessively short-term focused--which is exactly the kind of corporate governance and executive leadership that caused this mess (but continues to make high-flyers rich).

Also, brokerage firms carry out short sales by literally borrowing shares of stock from another shareholder who's still hoping for its value to go up, lending them to another investor who's betting they'll go down, and then paying the second investor to return them when the price has dropped. They don't ask the original shareholder's permission in most cases. And it's just personally insulting and perverse to think that someone else is likely profiting off of a decline in the value of a stock you own, while you're losing share value.

I guess the main objection is just that it's not investment: It's speculation. Speculation isn't supposed to be the main business of the stock market anymore than commodities speculation is supposed to be the purpose of a super market.
posted by saulgoodman at 11:07 AM on February 5 [3 favorites has favorites]

Some investors say the short ban hastened the flight of capital from stock and bond markets, by showing the government could intervene in markets in unexpected and troublesome ways.

And as for your link Asparagirl, it doesn't actually provide an especially ringing endorsement of short-selling, either.

In fact, all it really says in effect is that the simple fact that the government tried to take any substantive corrective action at all made the cry-babies in the investor community freak out and think they were finally coming face to face with the long dreaded rise of the Zombie Red Menace.
posted by saulgoodman at 11:15 AM on February 5

um, "moratorium"
posted by saulgoodman at 11:25 AM on February 5

saulgoodman you raise some good points regarding short selling, many that mainstream media (CNN?) don't acknowledge.

Miller (1977) did a lot of the seminal research regarding short selling. We've seen countless papers and research on the topic since Harrison & Kreps, (1978) and Scheinkman & Xiong (2003) are two that I've got in my research library at home corroborating the view that short selling prevents overpricing, adds liquidity and in doing so enhances overall market efficiency.

And you are absolutely correct about banning short selling during The Great Depression. And no, in spite of comments unthread, this wasn't done because short sellers are "eevil" or "greedy", it was done because these guys knew how destabilising short selling was when the market were under extreme stress.

I've been in this business since the early 80's, and when I started there were these older guys who just knew; fair value of bond, the trend of the market, whatever. While we'd get our Monroe Bond Calculators out to calculate yield to maturity, they just knew (and could solve the problem faster than us to boot!).

Those decisions taken during the depression era weren't much different; they didn't have to explain the underlying reasons as they knew. The knew how damaging - not "unpatriotic" short selling could be. Lacking data or models, they just knew.

Of course now Econometrics is coming of age, and we try to model things, performing primary research to understand precisely how the markets work, the anomalies we witness.

There is some very recent research I'm familiar with that formally explores price manipulation in the markets during periods of relative illliquidity, as observed during during large intraday return reversals (Shkilko & Van Ness, 2008). Lots of attention is being focused on these activities.

This work interested me as it corroborated some primary research I did in the late 90's, looking at the serial correlation of asset returns (during periods of low volatlity, and in particular responses to sharp changes in intra period returns).

Shkilo & Van Ness concluded that "short sellers exacerbate price declines during the initial stages of large intraday return reversals." and they took their research further, examining the role of predatory trading, leveraging off research done by Brunnermeier & Pedersen(2005), Attari (2005), and Carlin (2007), all of whom examined liquidity crisis' caused by predatory trading practices. This is an emergent part of finance, one that I find very interesting.


So yes, short selling under specific market conditions is nothing more than predatory trading, and it can lead to price overshooting on the downside i.e., share prices far, far lower than they fair value.

And we know that in some cases these deviations from fair value do not reverse; in other words, the short selling - the predatory trading drives the share price effectively to zero.

The research contrasts with lay opinion expressed upthread, I'm afraid. But this is not only an interesting area of finance, but one to watch. I'm aware of lots of activity, papers, research seminars, etc, all taking a good, hard look at this practice.


Complete citations to research:

Attari, M., Mello, A., Ruckes, M., 2005, Arbitraging arbitrageurs, Journal of Finance 60
Brunnermeier, M., Pedersen, L. H. , 2005, Predatory trading, Journal of Finance 60
Carlin, B.,Lobo, M., Viswanathan, S., 2007, Episodic liquidity crises: Cooperative and predatory trading, Journal of Finance 62
Miller, E., 1977, Risk, uncertainty, and divergence of opinion, Journal of Finance V32
Harrison, J., D. Kreps, 1978, Speculative investor behavior in a stock market with heterogeneous expectations, Quarterly Journal of Economics
Scheinkman, J., Xiong, W., 2003, Overconfidence and speculative bubbles, Journal of Political Economy 111

posted by Mutant at 4:06 AM on February 6 [3 favorites has favorites]

For Banks, an $80 Billion Gift: Treasury Overpaid Troubled Banks Under TARP
posted by homunculus at 9:29 AM on February 6