Welfare for the rich - $700 billion bailout

[swestbom]

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!"

This stuff is very complicated in that the problem has spread like a virus throughout the financial system with a web of entanglements. The funny thing is that any layman understands that this is an issue of extreme leverage (gambling) artfully hidden where risks were passed around to many people (Norwegian municipalities becoming insolvent).

The professionals with the hedges with once in a 100 year probabilities of them coming unglued came unglued due to stupid assumptions about risks that they were to inexperienced to fully understand because the calculus worked out mathematically (GIGO applies here). There are a lot of really smart people working in investments (way too many, sort of like lawyers, but unlike lawyers this problem is being solved as I write this because lots of them have or will lose their jobs in the sector). These people have a tendency when they get caught up in the process of investing to forget that the economy's ultimate wealth is based on the sum of goods and services produced (the real economy), not numbers on a balance sheet.

Still, it happened, the markets have to function, it has to be orderly and predictable otherwise we end up with the mattress effect taking over when people pull their money out of the system and the economy stops working. Money has to circulate and be used to have value (money multiplier effect), it has to be trusted, bank deposits have to be safe, investments have to be made based on understandable risks otherwise we are in deep doo doo. Paulson and Bernanke are really good at what they do, neither one caused it, they have integrity and ability and will work with both sides of the aisle to work through it, I trust them much more than the congressmen they have to work with, but the legislative process sometimes works as a crucible and the truth will win out. It isn't going to be pretty, clean and some will benefit who shouldn't but all will lose if this isn't handled quickly and forcibly.

 

[Davemcc]

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

On the contrary, I've learned a great deal right here and I suspect many others that wouldn't ordinarily visit a finance or investment forum have as well. I certainly appreciate your input.

But if this really is a bad forum for this discussion, could you recommend some good finance forums to visit?

 

[swestbom]

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.

On the contrary, I've learned a great deal right here and I suspect many others that wouldn't ordinarily visit a finance or investment forum have as well. I certainly appreciate your input.

But if this really is a bad forum for this discussion, could you recommend some good finance forums to visit?

This stuff is all over the web, I like Google finance, WSJ, Yahoo finance my content comes from public news stories from these and other sites, nothing you cannot find easily if you are interested, I am not an investment professional I just work in the industry. The bad debt was written down, our CEO lost his job very publicly over what I told you about my company in the spring, his replacement is smart as a whip and very capable now we have to hope markets do not get worse and cause more mortgages to go under. Give Congress the Fed and our treasury secretary the benefit of the doubt on this, it is unpopular to fix this but sometimes the unpopular choice is the right one.

 

[Davemcc]

This stuff is all over the web, I like Google finance, WSJ, Yahoo finance my content comes from public news stories from these and other sites, nothing you cannot find easily if you are interested, I am not an investment professional I just work in the industry. The bad debt was written down, our CEO lost his job very publicly over what I told you about my company in the spring, his replacement is smart as a whip and very capable now we have to hope markets do not get worse and cause more mortgages to go under. Give Congress the Fed and our treasury secretary the benefit of the doubt on this, it is unpopular to fix this but sometimes the unpopular choice is the right one.

Thanks, I keep up to date primarily through print media and small doses of Fox news. I think I've got a basic understanding of the issue, but I have to say most of the news channels don't bother to explain the inner working of the industry the way you have. It's nice to have an insider's perspective on the issue.

 

[mudrummer99]

I've got an idea, since we are the ones footing the bill for the loan, maybe any interest accrued or any profits made from this endeavor be redistributed amongst the people that are taking all the risk in this investment, the taxpayers. I mean, that's how it's supposed to work in business, right? Why would it be any different in this situation since we, by all accounts in my head, are the stock holders on this deal.

Mike

 

[mtrycrafts]

I've got an idea, since we are the ones footing the bill for the loan, maybe any interest accrued or any profits made from this endeavor be redistributed amongst the people that are taking all the risk in this investment, the taxpayers. I mean, that's how it's supposed to work in business, right? Why would it be any different in this situation since we, by all accounts in my head, are the stock holders on this deal.

Mike

I think the way it will go is that any gains will pay off some of the $10T national debt

 

[unreal.freak]

I think the way it will go is that any gains will pay off some of the $10T national debt

Ive always wanted to ask this question but never have, im going to now. Sorry if it is a stupid question. Who does the U.S.A. actually owe the national debt to?

Peace,
Tommy

 

[mtrycrafts]

Ive always wanted to ask this question but never have, im going to now. Sorry if it is a stupid question. Who does the U.S.A. actually owe the national debt to?

Peace,
Tommy

Not totally sure but those who by the treasury stuff, China, other countries, institutions and people. I think I hear China owns $500B alone.

 

[cbraver]

Ive always wanted to ask this question but never have, im going to now. Sorry if it is a stupid question. Who does the U.S.A. actually owe the national debt to?

Peace,
Tommy

The big one is China.

But, the national debt is really a measure of liabilities. It's not like I borrowed a thousands bucks from you and have to pay it back. It's federal debt, but also consumer, business and state debt. It's kind of strange, actually.

 

[aberkowitz]

Ive always wanted to ask this question but never have, im going to now. Sorry if it is a stupid question. Who does the U.S.A. actually owe the national debt to?

Peace,
Tommy

Anybody who owns any government securities is a holder of the national debt. Short-term t-bills, medium term t-bills, longer term bonds, explicitly backed government agency debt (e.g. Ginnie Mae), etc. The thing to understand about the vast majority of this debt (I'd say easily 85%, but I'm just pontificating here) is that it never truly comes "due". Take treasury bills for example- they are sold via auction and have maturities of 1, 3, & 6 months. Most holders of t-bills typically try to roll-over their debt from one period to the next, once the bills that they hold mature they will immediately take part in the next auction to replace the holdings. Even if a particular holder decides not to buy back in, the auctions are vastly oversubscribed so the treasury is never short in replacing the holder of the paper. Therefore the principle of the debt is never actually paid out in the same way you or I pay off a loan, it is constantly being replaced. The only way the US debt will ever actually "come due" is if the number of buyers for US treasury securities starts to dramatically slip to the point where the auctions are undersubscribed and treasury has a permanent net outflow of cash. Since treasury securities are viewed as the safest in the world and represent a flight to quality during troubled times, auctions are still very much over subscribed these days.

If we ever start having undersubscribed auctions and a "run on the treasury" for repayment of debt, it would pretty much spell the downfall of the world economy. It's actually in the best interest of the rest of the world for the US to remain financially solvent, which is part of the motivation for the constant demand of US debt securities.

 

[aberkowitz]

But if this really is a bad forum for this discussion, could you recommend some good finance forums to visit?

Stay away from finance forums in general. I'll come across some in my daily readings on the WSJ, google finance, Bloomberg, etc., and most of them are absolute crap- filled with people who have no background in anything related to the topic and are generally there to rant and rave about a specific stock or how much the government sucks. They end up being too much like many forums on extreme political blogs, and most of them have no moderators ot serve as checks. Using a venue like the Steam Vent is incredibly useful b/c posters have to have established reputations here for people to take them seriously, and the mods do a great job at filtering out the crap. Feel free to keep asking questions.

 

[Alex2507]

Hmm ... it never occured to me that the mods actually did anything ...
I mean outside of the occaisonal thread closing ...
And banning ...

I gotta go.

 

[jamie2112]

I just gotta say this is a freakin sad situation we have ourselves in...

 

[rnatalli]

The big one is China.

Wrong. Japan is the big one and has been for some time now:

http://www.treas.gov/tic/mfh.txt

You'll also notice that foreign countries only own about 25% of the total debt so don't buy into the crap that China will own us soon.

 

[cbraver]

Wrong. Japan is the big one and has been for some time now:

http://www.treas.gov/tic/mfh.txt

You'll also notice that foreign countries only own about 25% of the total debt so don't buy into the crap that China will own us soon.

Sorry! I didn't think they would own us, but, I was under the impression we had about 1.5 trillion in with them.

 

[rnatalli]

Sorry! I didn't think they would own us, but, I was under the impression we had about 1.5 trillion in with them.

You could be right after this bailout happens, lol.

 

[aberkowitz]

I just gotta say this is a freakin sad situation we have ourselves in...

I agree with that, but this isn't close to the worse situation the US has ever had themselves in with credit. This is just the first time that we've had a credit crunch in a 24/7 news cycle with a large dissemination of information to the general public. Credit crunches come along every 20-30 years like clockwork... most of us will see another 1-2 in our lifetimes. Japan had a modified credit crunch going for 10-15 years now.

The best we can do is fix the system to prevent against the problems we've had from occurring again. Once somebody invents the "next new thing" in financials, all of our current controls will go out the window and we'll have to wait for the next meltdown to fix the holes in the system. Until you have regulators sitting on every trading floor and in every bank CEO suite, the people who want to make the money will always be smarter and 3 steps ahead.

 

[MinusTheBear]

I agree with that, but this isn't close to the worse situation the US has ever had themselves in with credit.

What are the the numbers here?

 

[aberkowitz]

What are the the numbers here to back this statement up? If running up 10 trillion dollars in debt isn't even close to their worst situation with running up credit than I am curious to hear what was.

There are a few key points to understand when it comes to public debt:

First- over the $10 trillion in public debt outstanding, 50% of it is held by the government itself, a good portion of which is used to fund social security. In this case you have the social security trust fund investing in government securities. OF the other 50%, 25% is held by foreign govts and 25% is held by the public.

Second- You have to stop equating government debt with consumer debt. When you and I take out a loan, we have to pay everything back along with interest and normally at rates that are unfavorable to us. Like I explained in an earlier post, US government debt is constantly being rolled over because it is regarded as a safe haven investment. If the US ever defaulted or if the world decided that US securities are no longer safe, then the money would have to be repaid in full... but if that scenario ever came to existance we'd probably be using dollars to paper our walls anyway so it wouldn't really matter (example- Weimar Republic).

Third- This is not even close to the worst situation this country has ever been in. After the revolutionary war we couldn't even get a $5 million loan from the Dutch because they didn't believe we'd last 5 years. We had 2 national banks fail in the 1800s, along with 11 formal panics in the 19th century between 1819 and 1896 (they occured every 10 years like clockwork and 3 between 1890 and 1896), there was the bank panic of 1907 where JP Morgan single-handedly saved the country, the bank panic of 1910-11 which caused a mini-depression, the Great Depression itself, followed by large market crashes in the 70s, multiple market crashes in the late 80s, the major liquidity crisis in the late 90s that came much closer than anybody wants to recognize to being very similar to what's happening today, and then everything that's happened since. If you look at Debt as a % of GDP, it's still at a relative historical low (although Reagan helped jack it up).

From a solvency standpoint the US is in a strong position... we're not on the brink of default, which cannot be said about at least 50% of the situations I laid out above.

 

[itschris]

There's a lot of blame to go around, however, there's one group who seems to b devoid of criticism: The Shareholder. They are the "owners" of these companies. You can certainly argue that the individual cannot shape policy, but I will submit that a serious, organized effort can and does impact decisions of even the largest companies. That's why minority groups so often call for boycotts of a particular company.

Shareholder have responsibilities. They should organize and bring issues to the table. I for one have started more than my share of uprisings on executive managment compensation over the past few years with some of the companies I own. I was amazed by the traction it got. Money managers also have an obligation as well.

I understand the most media are in the tank for Obama and I don't really care one way or the other about that... I accept it... but I really want to know why there's so little reporting or even questioning as to the his judgement of having two of the major players who certainly had no small hand in the issues facing the mac & mae holding prominent economic advisory positions in his campaign.

I'm also wondering how Barney Frank or Chris Dodd can even show their face, let alone speak about this issue considering their role. Then again, I guess if the people bringing the new are so comfy in bed with your party, you don't have to worry too much about such things.