Welfare for the rich - $700 billion bailout

[D.R. Payne]

There is no more Republicrat or Demican, they are called the "Political Elite". They are power hungry and simply want total control. Many of the sheeple out ther are unaware and buy into the dame old two way battle, while back room deals are being struck all the time.

Correct! I often refer to them as the Demopublicans, the Rebublocrats, or our "One party system". As long as we can use smoke screen issues to stir up an emotional response in people, we'll have the same Sunday NFL "my team" mentality in our politics.

 

[annunaki]

I would agree with you if these bank problems had anything to do with traditional recessionary forces... but they don't. They have a lot to do with bad investments, but they are 100% due to two major problems- A lack of liquidity and a failure in confidence. Like I said in my post the other day in the Enron thread, liquidity for financial institutions is like air and water for human beings, if they cannot access cash they are doomed, and due to the credit crunch there's just not enough money to go around.

Part of the problem is that the securities that these companies hold as assets need to be marked to market- for you non-finance types, this means that the value of the assets changes constantly based on the value in the marketplace, unlike say a piece of machinery which is valued at it's purchase price and then slowly depreciated over time. If you have a asset where the market has completely deteriorated (e.g. mortgage backed securities) it is very hard to determine the value of the asset. Should it be worth nothing? Maybe, since nobody wants to buy it right now. OTOH, if the security is backed by a solid asset (e.g. a pool of mortgages that are current and is constantly paying fee streams) then at some point in the future there is GUARANTEED value in the security because all of the money on the mortgages will be paid, so clearly the security is not worth nothing- it most likely will be worth full value.

The uncertainty in the values of these assets is causing banks to have to write-down their values, in-turn reducing the value of the total assets on their balance sheet, increasing their leverage ratio, reducing their credit-worthiness, and increasing their need for additional cash & collateral. And if you cannot sell your assets to raise capital because there's no market, or sell your stock to raise capital because short sellers are capitalizing on your poor liquidity and driving your share price down, and if you cannot borrow to raise money because you're not going to get any value against your assets... how does your company survive??

We've watched over the past 6 months as 5 major companies have been totally destroyed and at least 20 more have teetered.... not because they have bad business models (in fact, AIG has many outstanding businesses), but because confidence has plummeted and nobody wants to lend anybody else short-term money. Long term rates have shot through the roof. The best most financial institutions have been able to do is to borrow money overnight and to constantly roll it over day to day... eventually you're going to wake up one morning and there will be too much bad news and you realize that you cannot finance your business.

Letting this "play out" would be an even more unmitigated disaster than the bailout plan. The next stop would be the major commercial banks. Imagine what would happen if people thought Chase was going to go under? With Lehman/Bear it was only hedge funds and high wealth folks pulling their accounts... can you picture the run on the bank that Chase would experience??? Talk about armageddon!! The only way to solve this problem is to take all of the troubled assets off the books of banks, recreate a market for them, and then sit back and wait for the value to grow. If done right, the government will make TONS of money off of these distressed assets. They made money on Chrysler & they made money on S&Ls- once the housing market turns around... whether it's 2, 5, or 10 years, the mortgage securities that the government will buy will be worth much more than they pay for them- considering they're only paying cents on the dollar, it's an even better bargain.

I don't like the bailout, I think it sets a horrible precedence, but I think it's better than the alternative. I think some of the new regulations they are setting are a great idea, and one unintended positive consequence is that we will no longer have unregulated stand-alone investment banks. The most important thing is to make sure that liquidity actually gets injected back into the system, which will raise confidence, which in the end should reinvigorate securities markets to the point where a market actually exists (Doesn't have to go up, just has to be liquid).

I understand how the banks leverage these interests as invesments and such. They are the ones who created the issue (accepted very poor mortgages and packed them as hedge funds etc. in hopes for huge returns) and now they are being bailed out for the very mess they created. They took the risk and lost. Now the taxpayer has be partly responsible in order to keep them afloat??? The issue here is that it puts the country into a deeper hole than it already is. How long will it take these companies to come back? Many many years.

As for mortgage backed securities, the issue with many of them is not the fact that they are worth something, the uncertainty is how much they WILL be worth? For instance say one bank has a pool of 500 mortgages and 10% defaulted within the first 6 months, how much does that devalue that holding? After 12 months another 5% have defaulted, now what is it worth? After 24 months 25% have now defaulted.

As I am sure you are well aware, this is the problem. The bleeding has not ended. We are buying debt that may in-fact turn out to be more or less worthless in some cases. I was in the mortgage business for awhile. I know what some of that paper looks like (thankfully I did not write any of it). Most of the really bad stuff has punked out already. It is the A- stuff and some of the FHA that troubles me. It could be 4-5 years before you start getting to the end of defaults.

The fact that high paying jobs are becoming less and less is not helping either. We need to focus on bringing real jobs back into the US as well to help stop the crisis. Claimimg unemployment is low because Joe Somebody has to work 3 jobs to keep his house is an artificially inflated economy and employment outlook.

 

[Mort Corey]

Regarding the problem of "mark to market" on said assets, good old helicopter Ben Bernanke has floated the idea of purchasing this toxic waste at full, long term, value (best I can tell from listening to that cryptic (insert bad word) )

Should be interesting...to say the least. Just wait until Louis Armstrong starts the next tune of When the Derivitives Come Marching In....now there's some really big numbers

Mort

 

[cbraver]

The fact that high paying jobs are becoming less and less is not helping either. We need to focus on bringing real jobs back into the US as well to help stop the crisis. Claimimg unemployment is low because Joe Somebody has to work 3 jobs to keep his house is an artificially inflated economy and employment outlook.

Exactly. The market needs to adjust so that Joe Somebody can actually afford to their place. We are doing the same thing that we did at the beginning of the Great Depression, keep prices artificially high. High homes, high food, high salary... meanwhile people can't afford to feed their kids. It is playing with numbers, and it only will fool people until they start noticing it in their neighborhoods.

 

[mtrycrafts]

From the Republican Party Platform, approved Sept 1, 2008:

That was on paper and in speech, not in concrete
See how quickly it puffed

 

[mtrycrafts]

All the little interest groups are going to try to get a chunk of the $700 billion.

I better get one to Washington then, to get a crumb

 

[mtrycrafts]

This is like deja vu all over again.
Savings and Loan Crisis of 1980. http://www.econlib.org/Library/Enc/SavingsandLoanCrisis.html

But, didn't the government made money on that deal in the long run? At least that is what I read.

 

[mtrycrafts]

There is no more Republicrat or Demican, they are called the "Political Elite". ....

Now this I can see. See how far any of us would get trying to run for such office

 

[mtrycrafts]

As long as we can use smoke screen issues to stir up an emotional response in people, ....

That's because we are such a gullible species

 

[cbraver]

That's because we are such a gullible species

....and we are so busy with day to day things that sometimes the obvious just escapes us. People are busy with work, kids, family, bills and whatever else. It isn't an excuse, but people in America are tired. Half a gallon of coffee to wake up, get to work, work your *** off, go home, kids, bills, mom, this, that...so jacked up on coffee now you have to take some tranq's to get to bed ... the news, before it becomes big news, that is right in front of your nose just doesn't hit when it needs to. We are so busy with today, that tomorrow gets forgotten.

Again, not an excuse.

 

[aberkowitz]

But, didn't the government made money on that deal in the long run? At least that is what I read.

Yes they did... I believe they almost doubled their investment... but I could be wrong about that.

 

[dorokusai]

I'm very unhappy about all this beings I'm just a regular dude, employed and trying to survive like most folks.

Mark

 

[MinusTheBear]

I'm very unhappy about all this beings I'm just a regular dude, employed and trying to survive like most folks.

Mark

I love how you put it, the middle class get screwed once again. Now thats real!

 

[jinjuku]

This is what I don't get:

Who loans a company like AIG 85 billion? What was their market cap? I could understand buying them lock, stock, and barrel. But to 'loan' them that much? Cmon'.

 

[mtrycrafts]

....and we are so busy with day to day things that sometimes the obvious just escapes us. People are busy with work, kids, family, bills and whatever else. It isn't an excuse, but people in America are tired. Half a gallon of coffee to wake up, get to work, work your *** off, go home, kids, bills, mom, this, that...so jacked up on coffee now you have to take some tranq's to get to bed ... the news, before it becomes big news, that is right in front of your nose just doesn't hit when it needs to. We are so busy with today, that tomorrow gets forgotten.

Again, not an excuse.

I understand. Of course not an excuse. They have time as that is their job, full time today, unlike in the distant past when few days and hours here and there took care of the government business. Cannot do that today, so we have the so called professionals
I think what I was driving at, or think is that if we/all/most of us were more skeptical about everything, we'd ask a whole bunch more questions about the facts and not accept things on blind faith. Sounds familiar to our hobby
But, I don't have enough in that brain mass to know what is the answer. If I did, I wouldn't be here.
Maybe time will fix things.

 

[cbraver]

I understand. Of course not an excuse. They have time as that is their job, full time today, unlike in the distant past when few days and hours here and there took care of the government business. Cannot do that today, so we have the so called professionals
I think what I was driving at, or think is that if we/all/most of us were more skeptical about everything, we'd ask a whole bunch more questions about the facts and not accept things on blind faith. Sounds familiar to our hobby
But, I don't have enough in that brain mass to know what is the answer. If I did, I wouldn't be here.
Maybe time will fix things.

This isn't a new problem, and I think some people were aware of it, but it was still too abstract. It just wasn't a "talking point," for lack of a better word. This isn't a new issue, but we probably won't find any thread about it a while back here or much elsewhere for that matter. It has become real. But even now that it is real, I don't know what to do. I woke up today, looked at the news, went "oh $&@#," went to class, looked at LCD TVs, studied, surfed the web on "Flu remedies," played Metal Gear Online, and now I'm writing this. I had plenty of time to have some sort of cause today, but I played video games. It was just easier.

I invested some of the money I earned over the summers (I'm just a college senior about to graduate, so I don't have much to my name ... it all can fit in a truck), and I pulled it out before the big drops this summer and fall. That's not what articles and TV told me to do. I shouldn't "play the market" if I want to make steady interest over time.. That there will be ups and downs but in the long run you make an average of 10-15% in a good fund, or whatever. Basically, the simple answer wasn't it (debt, war, no products, etc. == bad), there was something more complex at work.

It turns out the simple answer is it. We have to let the market adjust. People are freezing, not much money has come out of the market (I read like 3.10 for every 100 over the past year last week?)..

When the market adjusts, our economy will go up again. But we need a president that will let it. And we had one get close, but he was a "nut job."

I know I'm rambling, but my point is that I can't pretend to be anymore helpful of the situation than anyone else. I feel helpless, and all I can really do is anticipate and save myself. This is our problem now, but we have other issues we need to deal with too. But I won't talk about those until they are on the news.

 

[Haoleb]

I vote, Give us the 700 billion and divide it up among everybody in the country equally.

 

[mtrycrafts]

...

I invested some of the money I earned over the summers (I'm just a college senior about to graduate, so I don't have much to my name ... it all can fit in a truck), :

That is great to know that some young ones are thinking about savings even if they don't make much or have much. Good for you; keep it up. Also, don't forget a Roth IRA

 

[swestbom]

Right on, that's exactly what this is ... a 11th hour power grab. Those who read the 'real' news new some last minute Bush Administration power grab was coming, but the driving force was the only question.

It's not $700 Billion total, it's $700 Billion at any one time with NO LIMIT. This week they could snatch up $700 Billion of debt, give it to their elite buddies for pennies on the dollar, then buy $700 Billion more next week. And there's no regulation on types of debt, like your credit card debt for example ... then your own personal assets could seized as well.

I'm a pessimist as far as current affairs go, but rightfully so I think. I've always thought of myself as a Republican, but these people we have now are NOT Republicans. They're something new, call 'em what you want, but they scare the crap out of me.

Read up on the Resolution Trust Corporation that existed when the S&L crisis happened in the 80s. The real issue is moral hazard. Speculators need to lose and not be rewarded with a bailout. These bad debts will be bought at fire sale prices and will go out to the highest bidders (those who still have cash) over a period of time so they are not sold at firesale prices unnecessarily.

The stuff comes off the books of the banks, the gov't. owns it and auctions it off at their leisure, the money goes into the treasury (or 20% to Acorn if the Democrats get away with it, not likely). This one is a bigger badder bubble with lots of derivatives in use that spread the mess globally with really bad repercussions if it isn't resolved in an orderly fashion. The people who made this mess are paying for it and will continue to pay for it (ask a Wamu or Lehman Bros. shareholder). JP Morgan got a deal on Wamu but look at the percentage of the assets they will immediately write off.

You may also want to read up on credit default swaps (loan insurance for the bond holders) and mark to market to understand why the whole financial sector has been going topsy turvy. Mark to market was put in place after the mess with Enron (they carried crap assets on their books at face value to make things look ok). Unfortunately this reform causes instruments that may be held to maturity to be marked to market prices every day (or once a quarter for banks), this allowed the private equity and hedge funds to drive prices up and down at will so they could make a killing (the mechanics are too complicated for a forum). This thing is very scary (think Ponzi scheme). It is the biggest bubble since 1929 and we need to be very careful on working it through so we don't make things a lot worse.

Things got really scary when you started seeing Alt-A loans (stated income or liar loans). Down payment loans used to put 20% down on an 80% loan (100% leverage), negative amortization loans (you don't pay enough interest to keep the principal from going up every month), these were originally only for use by builders or someone who is selling a home and buying another (bridge loan) and needs the second loan until the first house is sold. ARMs and 30 year mortgages just added way too much leverage to housing on their own, this other stuff made a big crash inevitable.

The head of Blackstone gave a nice 2 paragraph summary of it a couple of days ago in the WSJ.

What it boils down to is leverage works on the up side and downside, but can cause the real economy to collapse on the downside. In a nutshell a lot of people gambling on housing, a lot of self interested mortgage brokers, real estate agents, appraisers, bond rating agencies all selling crap to make a commission or bonus without any regard to the consequences (read up on who pays to have bonds rated and you will understand why that went to hell in a handbasket), me too loan portfolios across the banking industry (if you didn't keep up with the booked income of your competitors you were toast), pension funds trying to goose returns by buying AAA bonds made up of derivatives that were based on subprime crap (the less you put into a pension fund the more you have to spend on other things). municipalities did this, companies did this etc. Certain congressmen who got sweetheart deals on loans from Countrywide. A certain congressmen from my district pushing for more and more power for Fannie and Freddie to fund his pet government projects and like minded charities as well (Acorn) who happens to head the house finance committee (he had a big hand in causing this crisis, but he had plenty of help from others on both sides of the aisle).

I work for an investment company that is owned by a bank. I may lose my job because of less than smart decisions made by people at the top in buying a company with a loan portfolio that was crap at the peak of the market in the state with the biggest bubble. If I lose my job because of this problem that is fine, I can afford it, but retail stores will go under because they will not be able to finance their inventory, people with ARM mortgages based on LIBOR will be going under in droves without a bailout (really a buyout of crap mortgages at pennies on the dollar and then an orderly liquidation of them to get the money back), cars will not be sold to those who need loans, etc. etc.

Ironically this mess really came about to a great degree because of the reforms put in place after the S&L crisis of the 80s.

Lots more to say, but this is a bad forum for it.

 

[D.R. Payne]

... snip ...

Ironically this mess really came about to a great degree because of the reforms put in place after the S&L crisis of the 80s.

Lots more to say, but this is a bad forum for it.

Nice post. You realize, of course, that the free market will take the blame, not the gov't meddling. Not the "too big to fail" doctrine. The repeal of a single securities law from the 1930s will be bloated into "look what deregulation got us" nevermind the thousands of laws still on the books controlling the behavior of banks and insurance companies.

The real problems are far above most people's ability or desire to understand, which is why politicians who are at best holders of law degrees (they are not bankers, insurers, actuaries, or economists...) should not have the power to meddle in things above their heads. Politics is the only job where someone can build a resume that states "professional liar and baby kisser" and have the interviewer say "Well, based on this, lets put you in charge of a huge chunk of our GDP!"