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RicePlateReddy

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The crumbling of the US financial system (NC)
« on: September 14, 2008, 04:05:50 AM »

We have multiple politics threads, but no thread on this yet - so here goes.

After Bear Sterns, Lehmann Brothers is expected to be put out of its misery early next week. Merrill Lynch is probably a few weeks from its epiphany. AIG is rumored to be on the death march also. Who follow in procession after that?

And the grand-daddies of mortgages - Fannie and Freddie, had their common and preferred stock effectively lopped off, as we all heard. But Hank Paulson saved the sub debt holders (surprisingly) along with senior debt holders. http://www.marketwatch.com/news/story/fitch-affirms-fannie-mae-/story.aspx?guid=%7BC65AC8F4-D17E-46E0-A148-BE85575FFEE7%7D&dist=hppr

Paulson claimed that wiping out the sub debt holders would lead senior debt (read China) to fret and dump leading to unfathomable global turmoil. However, sub debt is less than 2% of senior debt and because it is after all sub (subordinate), it gets paid after senior debt gets paid. So the claim of backing it so as to not spook the Chinese is garbage. The feds haven't disclosed who owns the subordinated debt and it looks like we will never see the members of this small class that sees its security rise and continue to get interest payments, now that the fed has directly backed it!

All the papers are lauding Paulson (e.g. http://www.independent.co.uk/news/people/hank-paulson-give-him-credit-928809.html) and on cursory reading of both his background and accounts from his peers about his abilities, he does not seem to be a crook. Sidenote - the guy apparently made 70 business trips to China when at Goldman. He knows our masters  :o

But I am very very curious who these owners of subordinated debt of Fannie and Freddie are. Is it Goldman Sachs as this Wall Street article that highlights this sub debt murkiness speculates  ;D ? If Goldman falls, is it the unravelling of Wall St?
http://online.wsj.com/article/SB122108823814621239.html

This paper - http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/14/ccom114.xml seems to feel Goldman is safe:

Goldman's trade-off

As a corollary of this weekend's crisis at Lehman Brothers, consider the fortunes of another Wall Street titan. Few overseas companies excite the interest of British executives like Goldman Sachs. One asked me last week why I thought Goldman had been bobbing gently on the waves while rivals flail around wildly just to tread water.

Is it luck, they asked? Not a bit of it. Having a trader as the ultimate boss, in the form of Lloyd Blankfein, is self-evidently no bad thing. And three other facts seem to me to be the obvious explanations for Goldman's continuing outperformance, each in some way relating to that indefinable but often vital quality referred to as "corporate culture".

The first is that many of the principal investment activities undertaken by Goldman bankers use employees' own capital. There is nothing quite like that knowledge to sharpen the mind when placing big investment bets. Partly for that reason, the worst excesses of the crisis that originated in sub-prime mortgages have been largely avoided.

The firm's biennial partnership elections have much the same mind-sharpening effect. Next month, a group of Goldman employees will be elected to the most elite club in banking, while others will find that their omission from the coveted list amounts to a flashing neon sign marked "exit". As a rule, Goldman bankers and traders tend to be among the best in class - if they're not, they do not survive. The third thing: in an industry where the attitude to risk became little more than a game of machismo during the boom years of private equity mania, a group of people (invisible to outsiders) responsible for managing risk throughout the Goldman empire are incentivised in the best way possible - they are paid much the same as their rainmaking colleagues. For the rest of Wall Street, there must be a lesson in that: otherwise, expect more of the financial system's gorillas to topple in similarly spectacular fashion.


As always, instructive to look at what honest and wise Uncle Warren does with mortgages - http://money.cnn.com/2008/09/10/news/newsmakers/buffett_clayton.fortune/

« Last Edit: September 19, 2008, 04:48:16 AM by ShortSquatLeg »
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pipsqueak

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Re: The crumbling of US investment banks (NC)
« Reply #1 on: September 14, 2008, 07:19:08 AM »

Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America)

Nouriel Roubini | Sep 9, 2008

The now inevitable nationalization of Fannie and Freddie is the most radical regime change in global economic and financial affairs in decades. For the last twenty years after the collapse of the USSR, the fall of the Iron Curtain and the economic reforms in China and other emerging market economies the world economy has moved away from state ownership of the economy and towards privatization of previously stated owned enterprises. This trend was aggressively supported the United States that preached right and left the benefits of free markets and free private enterprise.

Today instead the US has performed the greatest nationalization in the history of humanity. By nationalizing Fannie and Freddie the US has increased its public assets by almost $6 trillion and has increased its public debt/liabilities by another $6 trillion. The US has also turned itself into the largest government-owned hedge fund in the world: by injecting a likely $200 billion of capital into Fannie and Freddie and taking on almost $6 trillion of liabilities of such GSEs the US has also undertaken the biggest and most levered LBO (“leveraged buy-out”) in human history that has a debt to equity ratio of 30 ($6,000 billion of debt against $200 billion of equity).

So now Comrades Bush, Paulson and Bernanke (as originally nicknamed by Willem Buiter) have now turned the USA into the USSRA (the United Socialist State Republic of America). Socialism is indeed alive and well in America; but this is socialism for the rich, the well connected and Wall Street. A socialism where profits are privatized and losses are socialized with the US tax-payer being charged the bill of $300 billion.

This biggest bailout and nationalization in human history comes from the most fanatically and ideologically zealot free-market laissez-faire administration in US history. These are the folks who for years spewed the rhetoric of free markets and cutting down government intervention in economic affairs. But they were so fanatically ideological about free markets that they did not realize that financial and other markets without proper rules, supervision and regulation are like a jungle where greed – untempered by fear of loss or of punishment – leads to credit bubbles and asset bubbles and manias and eventual bust and panics.

The ideologue “regulators” who literally held a chain saw at a public event to smash “unnecessary regulations” are now communists nationalizing private firms and socializing their losses: the bailout of the Bear Stearns creditors, the bailout of Fannie and Freddie, the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk toxic illiquid private securities), the use of the other GSEs (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of “liquidity” to distressed, illiquid and insolvent mortgage lenders, the use of the SEC to manipulate the stock market (restrictions on short sales), the use of the US Treasury to manipulate the mortgage market (Treasury will now for the first time outright buy agency MBS to manipulate and prop up this market), the creation of a whole host of new bailout facilities (TAF, TSLF, PDCF) to prop and rescue banks and, for the first time since the Great Depression,to bail out non-bank financial institutions, and a whole range of other executive and legislative actions (including the recent bill to provide a public guarantee to mortgage for banks willing to reduce their face value).

This is the biggest and most socialist government intervention in economic affairs since the formation of the Soviet Union and Communist China. So foreign investors are now welcome to the USSRA (the United Socialist State Republic of America) where they can earn fat spreads relative to Treasuries on agency debt and never face any credit risks (not even the subordinated debt holders who made a fortune yesterday as those claims were also made whole).

Like scores of evangelists and hypocrites and moralists who spew and praise family values and pretend to be holier than thou and are then regularly caught cheating or cross dressing or found to be perverts these Bush hypocrites who spewed for years the glory of unfettered wild west laissez faire jungle capitalism (and never believed in any sensible and appropriate regulation and supervision of financial markets) allowed the biggest debt bubble ever to fester without any control, have caused the biggest financial crisis since the Great Depression and are now forced to perform the biggest government intervention and nationalizations in the recent history of humanity, all for the benefit of the rich and the well connected. So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA. Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don’t run the biggest economy in the world. But these laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades. So let them be shamed in public for their hypocrisy and zealotry that has caused so much financial and economic damage.
http://www.rgemonitor.com/roubini-monitor/253529/comrades_bush_paulson_and_bernanke_welcome_you_to_the_ussra_united_socialist_state_republic_of_america


....meanwhile, american public are more concerned about who supports "pro-life" and in the same breath can kill a moose with bare hands!

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dhruvdeepak

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Re: The crumbling of US investment banks (NC)
« Reply #2 on: September 14, 2008, 08:09:51 AM »

i dont think ive ever read an article before that says the same thing 10-15 times over. OMG i nearly died reading that.
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prfsr

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Re: The crumbling of US investment banks (NC)
« Reply #3 on: September 14, 2008, 12:07:38 PM »

Great topic SSL.  I hope our free market proponents come forward and explain
(a) how this is good, or
(b) what should have been done instead.

Centralize profits, distribute losses. Way to go  :icon_thumleft: :icon_thumleft:
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Shukla

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Re: The crumbling of US investment banks (NC)
« Reply #4 on: September 14, 2008, 05:48:40 PM »

LTCM too got rescued during Clinton. However, no taxpayer money was involved.
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LosingNow

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Re: The crumbling of US investment banks (NC)
« Reply #5 on: September 15, 2008, 05:31:07 AM »

Finally the Government did the right thing.. this bailout stuff was getting out of hand. Those who made mistakes should bear the brunt of their bad decisions.
--

Ultimatum by Paulson
Sparked Frantic End

By DEBORAH SOLOMON, DENNIS K. BERMAN, SUSANNE CRAIG and CARRICK MOLLENKAMP
September 15, 2008

One of the most tumultuous weekends in Wall Street's history began Friday, when federal officials decided to deliver a sobering message to the captains of finance: There would be no government bailout of Lehman Brothers Holdings Inc.

Officials wanted to prepare the market for the possibility that Lehman could simply fail. The best way to do that in an orderly way would be to get everyone together in a room.

Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and his top New York lieutenant, Timothy Geithner, summoned some 30 Wall Street executives for a 6 p.m. Friday meeting at the Fed's offices in Lower Manhattan.

 
"There is no political will for a federal bailout," Mr. Geithner told the assembled executives, according to a person familiar with the matter. "Come back in the morning and be prepared to do something."

Over the next 48 hours, these marching orders developed into a nerve-wracking test of the ability of the U.S. financial system to hold itself together amid the worst series of shocks it has faced in decades.

By taking the rescue option off the table, the U.S. government was declaring that there are limits to its role as backstop-in-chief. A week earlier it had seized mortgage giants Fannie Mae and Freddie Mac, and months prior had brokered the sale of Bear Stearns & Co. to J.P. Morgan Chase & Co. But now, Washington appears to want Wall Street to largely fix its own problems, and feels that flailing institutions shouldn't expect the government to commit money to save them.

"We've re-established 'moral hazard,'" said a person involved in the talks, referring to the notion that the government should eschew bailouts, since financial firms might take more risks if they're insulated from the consequences. "Is that a good thing or a bad thing? We're about to find out."

One immediate impact: As Lehman's future darkened, Merrill Lynch & Co., another vulnerable firm, raced into the arms of Bank of America Corp.

This account of the weekend's events was compiled from interviews with Wall Street executives, traders, government officials and other participants in the talks.

Barring some last-minute, late-night alternative, Lehman will likely file for liquidation, people familiar with the situation said.

The storied firm's decline occurred in slow motion this year. Heavily exposed to troubled real-estate investments, the firm tried to raise fresh capital, only to be thwarted. The most recent disappointment came last Monday when a possible deal with a Korean bank faded, sending Lehman's shares down 45% the next day. They had already fallen 80% since the start of 2008.

On Tuesday and Wednesday, when Mr. Paulson called Wall Street CEOs to give them early notice of his no-bailout stance, some argued to him that the government needed to structure a rescue like that of Bear Stearns, according to people familiar with the matter. To prevent Bear Stearns's collapse in March, the Fed agreed to put up $30 billion to help complete the acquisition of the failing bank by J.P. Morgan Chase.

Repeating that move with Lehman, however, would create a terrible precedent, Mr. Paulson worried. Which other firms would take that as a cue to ask for U.S. government help -- and from what other industries? Detroit auto makers were already knocking at the door.

Mr. Paulson was also irked that Wall Street saw him as someone who would always ride to the rescue. And because Lehman's troubles have been known for a while, Mr. Paulson felt the market had had time to prepare.

In addition, Lehman had access to special emergency lending from the Fed -- something Bear Stearns didn't have when it was struggling. This was another reason Mr. Paulson there shouldn't be a Bear-like rescue for Lehman.

The government's no-bailout decision emerged as serious obstacle for Lehman's two most likely buyers, Bank of America and Barclays PLC. Indeed, this past Friday, federal officials monitoring talks to sell Lehman to Bank of America realized that deal probably wouldn't be consummated without federal backing.

That triggered the call for the Friday-evening meeting of financial titans. The gathering was attended by at least 30 executives, a Who's Who of Wall Street.

Mr. Geithner laid out two potential scenarios. One involved an orderly dismantling of Lehman that would essentially end its existence. But he also suggested that Wall Street firms come up with their own solution -- perhaps by joining forces among themselves to remove Lehman's riskiest and most toxic assets. That move would make Lehman more attractive to potential buyers, but would also require Wall Street firms to commit their own scarce money to the cleanup.

Mr. Paulson told the group it was in their interest to find a solution. "Everybody is exposed" to Lehman, Mr. Paulson said, according to two people in attendance.

Most of the Wall Street executives present at the meeting listened and asked questions, but didn't show what hand they might play. The meeting broke up just after 8 p.m. Friday.

Finding a Buyer

Saturday morning, the CEOs and their closest advisers reconvened at about 9 a.m. and broke into groups to discuss various scenarios. Lehman representatives weren't present.

One group focused on the possible dismantling of Lehman; it included both government officials and Wall Street representatives. Among the things the group discussed was having every bank borrow from the Fed under an emergency lending provision it has offered since the collapse of Bear Stearns. With that borrowed money, the banks would buy up Lehman's assets, preventing it from filing for bankruptcy.

The other main track focused on finding a buyer. Either Barclays or Bank of America would buy Lehman's "good assets," such as its stock-trading and analysis business, people familiar with the matter say. Lehman's more toxic real-estate assets would be placed in a "bad" bank containing about $85 billion in souring assets. Other Wall Street firms would inject some capital into the bad bank to keep it afloat. The goal would be to avoid a flood of bad assets pouring into the market, pushing prices even lower.

But getting Wall Street firms to cooperate among themselves, without government assistance, was proving tough. Several CEOs openly questioned why they should bear the cost of Lehman's problems when others who also face exposure -- such as institutional investors, hedge funds and foreign investors -- aren't being asked to do the same.

Morgan Stanley CEO John Mack raised serious questions, saying that this time it was Lehman and next time it would be Merrill, according to people in attendance. "If we're going to do this deal, where does it end?" he said, according to a person familiar with the matter. Other bankers in the room felt the same way, this person added.

By noon on Saturday, Bank of America hadn't budged from its position that it needed government support to consummate a deal. The bottom line: It was effectively out of the running.

Outside the Fed's downtown New York headquarters, a fortress-like building of stone and iron, a fleet of black limousines waited for the bankers inside. At one point, they blocked the narrow streets around the building, causing a traffic jam that had to be broken up by the Fed's uniformed guards.

Bankers and Fed staffers milled outside, smoking cigarettes and talking on their cell phones about subjects such as counterparty risk, a normally arcane matter of contract law, suddenly front and center. On one occasion, in the men's bathroom, a trio of bank CEOs debated the merits of a rescue plan.

The bond- and derivative-trading heads of major investment banks, assuming that a deal to save Lehman was a diminishing possibility, gathered to discuss how to deal with their exposure to minimize havoc Monday when markets opened.

Shortly after 5 p.m., a clutch of Fed staffers left the building. The day hadn't gone well. The government and potential buyers remained miles apart, mainly due to the bailout issue. Wall Street executives left in cars parked in a garage to avoid being photographed by the waiting press.

One person in the Fed meetings Saturday night described them as "the world's biggest game of poker."

With different doomsday scenarios being batted around the meeting rooms, some participants felt the government would blink and do a bailout. "This is going to go down to the last second," one participant said.

With Bank of America backing away from a deal, the enormity of a potential bankruptcy filing by Lehman started settling in. Even understanding Lehman's current trading positions was tough. Lehman's roster of interest-rate swaps (a type of derivative investment) ran about two million strong, said one person familiar with the matter.

Overnight, the outlines of possible deals started to crystallize. The idea that Wall Street firms would fund a "bad bank" full of Lehman's problematic assets was dead. Unlike when Wall Street firms stepped in to bail out hedge fund Long-Term Capital Management a decade ago, today's banks are much weaker. Some were loathe to provide support when a rival like Barclays might still buy Lehman.

By Sunday morning, the U.K.'s Barclays looked like the sole potential buyer. That further minimized the chances of a government bailout: If the Bush administration wouldn't help to fund a Wall Street solution, aiding a foreign buyer was even less likely.

Lehman employees followed their firm through news reports. One manager said he was encouraging his staff to show up Monday and hang tough for a few more days. "It is not like there are a million jobs to go to," he said.

The Chance to Transform

Barclays pushed ahead, eager at the chance to transform itself into a U.S. powerhouse at potentially a fire-sale price. Its advisers thought the U.S. Treasury could be persuaded to support a foreign buyer. By Sunday morning in London, after working around the clock for three days, the British bank -- whose roots date to the late 1600s as a goldsmith banker in London -- thought it had a shot. Documents were drawn up to pitch the deal to investors and journalists.

During the afternoon on Sunday, two Fed policeman wheeled a large, double-decker cart filled with cakes, cookies, sandwiches, chips and bottles of water into the Fed building.

But soon after, Barclays was threatening to walk as it argued with the Fed and Treasury over seemingly mundane matters, such as whether it would have to hold a shareholders' meeting to ratify any deal. Barclays was still insisting on some kind of federal financing.

By the middle of Sunday afternoon, Barclays was out. Its plan -- to buy Lehman's subsidiaries -- was contingent on government support, which wasn't coming.

At a meeting held at the Fed offices, Mr. Paulson, Mr. Geithner and Securities and Exchange Commission Chairman Christopher Cox addressed a group of about one dozen banking chiefs. Their message was steadfast: They would not put up money to assist in salvaging Lehman. In the meetings with Mr. Paulson were his chief of staff, Jim Wilkinson, and two advisers, Dan Jester and Steve Shafran, both of whom used to work at Goldman Sachs.

Somber Mood

The mood turned somber as it became clear that the group would have to turn its attention to dismantling Lehman in a way that didn't seriously disrupt the financial system. Soon the group began discussing the mechanics of such a plan.

A sense of foreboding descended over the rival bankers. They focused on the fear that drove down shares in Lehman, worried that would now spread to Merrill, another storied name facing losses from mortgage-related holdings, despite the reputation of its wealth-management business.

"I think the government is playing with fire," said a top executive of a big bank.

The worry for Merrill, said people briefed on the conversations, was that as its stock tumbles, its credit rating could change, increasing its cost of borrowing. Faced with rising borrowing costs -- a key expense for giant Wall Street financial firms -- its business might be severely crimped. As well, as concerns mount, its trading partners might stop doing business with it.

Many in the room began to wonder when Merrill would sell itself. "Tonight, or tomorrow?" said one of these people in an interview. In fact, within a few hours, the bankers learned that Merrill was in talks to be acquired by Bank of America.

As word that a Barclays deal was off filtered across Wall Street, traders scrambled to extricate themselves their various financial transactions with Lehman. Traders at many Wall Street firms were told to come to work immediately.

The European Central Bank was also in a state of high alert on Sunday, with employees in divisions from money-market operations to financial stability camped out in the bank's 37-story glass-and-steel tower in Frankfurt, preparing for what Monday might bring. "We are in the hands of the Americans," said one employee.

--Aaron Lucchetti, Serena Ng, Jon Hilsenrath, David Enrich, Joellen Perry and Matthew Karnitschnig contributed to this
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keep-it-cool

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Re: The crumbling of US investment banks (NC)
« Reply #6 on: September 15, 2008, 05:34:54 AM »

LTCM too got rescued during Clinton. However, no taxpayer money was involved.


Exactly. The government bailing out private institutions directly is stupid and only encourages inefficiency.

Given that the LTCM bail out did not involve tax payer money, it was much better structured. But it also set a bad precedent by creating a moral hazard, in my view. I dont think the whole financial system will crash if a couple of private banks go bust ... the US government seems to have realised this belatedly given their refusal to bail out Lehman Brothers.
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LosingNow

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Re: The crumbling of US investment banks (NC)
« Reply #7 on: September 15, 2008, 05:38:12 AM »

Sensex down.. Rs falling against $.. at 46
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Re: The crumbling of US investment banks (NC)
« Reply #8 on: September 15, 2008, 06:51:06 AM »

One more article .....

After Frantic Day, Wall St. Banks Falter

This article was reported by Jenny Anderson, Eric Dash and Andrew Ross Sorkin and was written by Mr. Sorkin.

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, said it would seek bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.

But even as the fates of Lehman and Merrill hung in the balance, another crisis loomed as the insurance giant American International Group appeared to teeter. Staggered by losses stemming from the credit crisis, A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive.

The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.

“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street and threatened the broader economy.

Early Monday morning, Lehman said it would file for Chapter 11 bankruptcy protection in New York for its holding company in what would be the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago, the Associated Press reported.

Questions remain about how the market will react Monday, particularly to Lehman’s plan to wind down its trading operations, and whether other companies, like A.I.G. and Washington Mutual, the nation’s largest savings and loan, might falter.

Indeed, in a move that echoed Wall Street’s rescue of a big hedge fund a decade ago this week, 10 major banks agreed to create an emergency fund of $70 billion to $100 billion that financial institutions can use to protect themselves from the fallout of Lehman’s failure.

The Fed, meantime, broadened the terms of its emergency loan program for Wall Street banks, a move that could ultimately put taxpayers’ money at risk.

Though the government took control of the troubled mortgage finance companies Fannie Mae and Freddie Mac only a week ago, investors have become increasingly nervous about whether major financial institutions can recover from their losses.

How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation’s growth rate has slowed.

What will happen to Merrill’s 60,000 employees or Lehman’s 25,000 employees remains unclear. Worried about the unfolding crisis and its potential impact on New York City’s economy, Mayor Michael R. Bloomberg canceled a trip to California to meet with Gov. Arnold Schwarzenegger. Instead, aides said, Mr. Bloomberg spent much of the weekend working the phones, talking to federal officials and bank executives in an effort to gauge the severity of the crisis.

The weekend that humbled Lehman and Merrill Lynch and rewarded Bank of America, based in Charlotte, N.C., began at 6 p.m. Friday in the first of a series of emergency meetings at the Federal Reserve building in Lower Manhattan.

The meeting was called by Fed officials, with Treasury Secretary Henry M. Paulson Jr. in attendance, and it included top bankers. The Treasury and Federal Reserve had already stepped in on several occasions to rescue the financial system, forcing a shotgun marriage between Bear Stearns and JPMorgan Chase this year and backstopping $29 billion worth of troubled assets — and then agreeing to bail out Fannie Mae and Freddie Mac.

The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman’s stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.

Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their own precarious situation.

The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation’s largest brokerage force and its name is known in towns across America, while Lehman’s main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.

Knowing that investors were worried about Merrill, John A. Thain, its chief executive and an alumnus of Goldman Sachs and the New York Stock Exchange, and Kenneth D. Lewis, Bank of America’s chief executive, began negotiations. One person briefed on the negotiations said Bank of America had approached Merrill earlier in the summer but Mr. Thain had rebuffed the offer. Now, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, the two parties proceeded with discussions.

On Sunday morning, Mr. Thain and Mr. Lewis cemented the deal. It could not be determined if Mr. Thain would play a role in the new company, but two people briefed on the negotiations said they did not expect him to stay. Merrill’s “thundering herd” of 17,000 brokers will be combined with Bank of America’s smaller group of wealth advisers and called Merrill Lynch Wealth Management.

For Bank of America, which this year bought Countrywide Financial, the troubled mortgage lender, the purchase of Merrill puts it at the pinnacle of American finance, making it the biggest brokerage house and consumer banking franchise.

Bank of America eventually pulled out of its talks with Lehman after the government refused to take responsibility for losses on some of Lehman’s most troubled real-estate assets, something it agreed to do when JP Morgan Chase bought Bear Stearns to save it from a bankruptcy filing in March.

A leading proposal to rescue Lehman would have divided the bank into two entities, a “good bank” and a “bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would have agreed to absorb losses from the bank’s troubled assets, to two people briefed on the proposal said. Taxpayer money would not have been included in such a deal, they said.

Other Wall Street banks also balked at the deal, unhappy at facing potential losses while Bank of America or Barclays walked away with the potentially profitable part of Lehman at a cheap price.

For Lehman, the end essentially came Sunday morning when its last potential suitor, Barclays, pulled out from a deal, saying it could not obtain a shareholder vote to approve a transaction before Monday morning, something required under London Stock Exchange listing rules, one person close to the matter said. Other people involved in the talks said the Financial Services Authority, the British securities regulator, had discouraged Barclays from pursuing a deal. Peter Truell, a spokesman for Barclays, declined to comment. Lehman’s subsidiaries were expected to remain solvent while the firm liquidates its holdings, these people said. Herbert H. McDade III, Lehman’s president, was at the Federal Reserve Bank in New York late Sunday, discussing terms of Lehman’s fate with government officials.

Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firms, Lehman cannot hope to reorganize and survive. It was not clear whether the government would appoint a trustee to supervise Lehman’s liquidation or how big the financial backstop would be.

Lehman has retained the law firm Weil, Gotshal & Manges as its bankruptcy counsel.

The collapse of Lehman is a devastating end for Richard S. Fuld Jr., the chief executive, who has led the bank since it emerged from American Express as a public company in 1994. Mr. Fuld, who steered Lehman through near-death experiences in the past, spent the last several days in his 31st floor office in Lehman’s midtown headquarters on the phone from 6 a.m. until well past midnight trying to find save the firm, a person close to the matter said.

A.I.G. will be the next test. Ratings agencies threatened to downgrade A.I.G.’s credit rating if it does not raise $40 billion by Monday morning, a step that would crippled the company. A.I.G. had hoped to shore itself up, in party by selling certain businesses, but potential bidders, including the private investment firms Kohlberg Kravis Roberts and TPG, withdrew at the last minute because the government refused to provide a financial guarantee for the purchase. A.I.G. rejected an offer by another investor, J. C. Flowers & Company.

The weekend’s events indicate that top officials at the Federal Reserve and the Treasury are taking a harder line on providing government support of troubled financial institutions.

While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed chairman, Ben S. Bernanke, and Mr. Paulson had warned that they would not put taxpayer money at risk simply to prevent a Lehman collapse.

The message marked a major change in strategy but it remained unclear until at least Friday what would happen. “They were faced after Bear Stearns with the problem of where to draw the line,” said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisors, a forecasting firm. “It became clear that this piecemeal, patchwork, case-by-case approach might not get the job done.”

Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger bailout of Fannie Mae and Freddie Mac.

Outside the public eye, Fed officials had acquired much more information since March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives. In the end, both Wall Street and the Fed blinked.

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Re: The crumbling of US investment banks (NC)
« Reply #9 on: September 15, 2008, 02:25:01 PM »

http://edition.cnn.com/2008/BUSINESS/09/15/lehman.merrill.stocks.turmoil/index.html

Financial turmoil as top bank collapses

NEW YORK (CNN) -- Global markets were reeling Monday after a convulsive day on Wall Street that saw a leading U.S. investment bank file for bankruptcy and other institutes scramble to merge as the credit crunch claimed one of its biggest victims yet.


The value of Lehman Brothers shares declined 94 percent in the past year.

 Stock prices plunged in Asia and Europe in the wake of investment bank Lehman brothers announcing its collapse and Bank of America's $50 billion buyout of ailing brokerage Merrill Lynch.

This crisis is clearly deeper than anybody had imagined only a short time ago," Peter Stein, an associate editor at the Wall Street Journal in Asia, told CNN.

The Dow Jones Industrial Average fell 330 points or 2.9 percent to around 11091 in early trading. In Europe, FTSE index in London declined 3.37 percent while the Paris CAC 40 was down 4.47 percent.

Major Asian indexes were closed but India's Sensex fell 5.4 percent, Taiwan's benchmark dropped 4.1, Australia's key index dropped 2 percent and Singapore fell 2.9. Check market indexes

The turmoil followed a roller-coaster weekend for a Wall Street already concussed by woes at other major financial firms and mortgage-financing titans Fannie Mae and Freddie Mac.

Sound off: What do you think?

At one point the U.S. Federal Reserve was forced to step in, announcing plans to loosen lending restrictions to the banking industry in an effort to calm markets, while a consortium of 10 leading domestic and foreign banks agreed a $70 billion fund to lend to troubled financial firms.

In an effort to calm market jitters, the European Central Bank on Monday said it has pumped $42.6 billion into money markets. The Bank of England in London also took steps, offering nearly $9 billion in a three-day auction.

In another development, American International Group, the world's largest insurer, was reportedly struggling to secure billions of dollars in capital after months of seeing its share values slide.

Police cordoned off Lehman's headquarters in New York on Sunday as staff, some in suits, others in casual clothes, left the building with cardboard boxes while tourists and onlookers gathered to watch the spectacle.


On Monday, the British operations of Lehman were placed under administration, according to accounting firm PriceWaterhouseCoopers.

The collapse of Lehmans came after shares declined 94 percent in the space of a year, prompting speculation over its fate. It took a turn for the worse Sunday when Bank of America and British bank Barclays, both viewed as potential "white knights," pulled out of deal talks, sources told CNNMoney.com.  Watch the impact on global markets from Lehman's financial woes »

 
Both Lehmans and Merrill have been caught with huge exposures to unsecured mortgages, the bad debts at the heart of the so-called credit crunch that has devalued the U.S. housing market and sent financial shockwaves worldwide.

Lehman's collapse and the sale of Merrill reduces the number of independent firms on Wall Street to two -- Morgan Stanley and Goldman Sachs -- following the sale of Bear Stearns to JP Morgan at a bargain price earlier this year.

"Acquiring one of the premier wealth management, capital markets and advisory companies is a great opportunity for our shareholders," Bank of American Chairman and Chief Executive Officer Ken Lewis said in a statement Monday. Read story

"Together our companies are more valuable because of the synergies in our businesses."

Like Lehman, Merrill Lynch has been suffering from bad real estate bets, and its stock price lost 27 percent last week -- shares are down 65 percent this year.

In a bid to prevent further turmoil, the U.S. Federal Reserve Sunday announced a series of steps to support the financial markets. The Fed said it would expand its short-term lending to banks by starting to take all investment-grade debt as collateral.

"The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets," said Fed Chairman Ben Bernanke.


Treasury Secretary Henry Paulson, who has led efforts to help get the U.S. housing market and the economy back on track, welcomed the moves.

"These initiatives will be critical to facilitating liquid, smooth functioning markets, and addressing potential concerns in the credit markets," he said in a statement
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Re: The crumbling of US investment banks (NC)
« Reply #10 on: September 15, 2008, 02:40:55 PM »

Reactions to the news that the fourth-largest investment bank in the US, Lehman Brothers, will file for bankruptcy protection.
http://news.bbc.co.uk/2/hi/business/7616037.stm

JONATHAN, LEHMAN BROTHERS CONTRACT WORKER
"We were just told in the last hour not to come back tomorrow. People are trying to put a brave face on it, in the main.

Obviously there are some disconsolate people in there. People are just trying to come to terms with it."



HENRY PAULSON, US TREASURY SECRETARY
"I am committed to working with regulators and policymakers - including Congress - to take necessary and appropriate steps to maintain the stability and orderliness of our financial markets.

I am confident in the resilience of our capital markets, and in the commitment of US regulators and market participants to work together through this difficult period."



SPOKESMAN FOR PRIME MINISTER GORDON BROWN
"The UK is better placed than in the past to deal with these challenges."



VINCE CABLE, LIB DEM TREASURY SPOKESMAN
"Effectively the Bush administration, which is probably the most right-wing government in modern history, was forced to nationalise the whole of the mortgage lending sector and now we have one of the big investment banks on the brink of collapse - I think they've filed for bankruptcy today.

Now the importance of this is that they hold the security - what's called the counter-parties - to trillions of dollars worth of derivatives - swaps, futures, options - and if this pack of cards collapses then the whole of the international financial system goes down with it."





ALAN GREENSPAN, FORMER US FEDERAL RESERVE BOSS
"We will see other major financial firms fail but this does not need to be a problem.

It depends on how it is handled and how the liquidations take place.

And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers."


TERRY SMITH, CHIEF EXECUTIVE TULLET PREBON
 FROM THE TODAY PROGRAMME


More from Today programme

"It may be past time to panic already. These are certainly seismic events.

I think these moves may be the most intelligent we have seen so far, allowing Lehman to go because of the flaws in it, but simultaneously shoring up the next domino in the chain, Merrills."


JON MOULTON, ALCHEMY PARTNERS
"AIG was until recently the world's largest insurance company. It provides over a hundred billion dollars of capital to banks, and it is in trouble too. These really are unprecedented days. This is not stress testing, this could be testing where the failure point lies."


ANGELA KNIGHT, CHIEF EXECUTIVE, BRITISH BANKERS' ASSOCIATION
"Lehman Brothers is a relatively small player in the UK. As far as UK High Street banks are concerned, they have been recapitalising themselves in the last few months.
Whilst it's not going to be a particularly comfortable day, the issue is one of a major US investment bank which has got into difficulty. No UK bank is in a similar situation."


PETER KENNY, KNIGHT EQUITY MARKETS
"The US financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before.

It's a new financial world on the verge of a complete reorganisation."


PETER MORICI, UNIVERSITY OF MARYLAND SCHOOL OF BUSINESS
"Lehman executives will find it difficult to replicate their generous compensation elsewhere, but the readjustment of banking compensation to more realistic levels and responsible schemes is necessary to return Wall Street to sanity.

Performance-based compensation practices at Lehman and throughout Wall Street, which pay big bonuses when bankers bet right but only imposes losses on shareholders when they bet wrong, has propagated the kind of toxic financial engineering that caused mortgage-backed securities meltdown, general credit crisis, and the near death experience of many Wall Street banks and securities dealers."


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Re: The crumbling of US investment banks (NC)
« Reply #11 on: September 15, 2008, 04:32:19 PM »

These guys make the BCCI (why, even the Zimbabwe board) look lame in comparison.

"In situations like this [Fannie Mae and Freddie Mac], where the government is backing private companies with private managements, the result is the socialization of the risk — that is, all the taxpayers have to take the risk," Wallison says. "But there is a privatization of the profits. All the profits go to the shareholders and the management, while the taxpayers are taking the risk."  The profits and pay were huge. Former Rep. Richard Baker, a Republican from Louisiana and a longtime critic, brought to light the pay schedule of Fannie Mae managers during controversial Capitol Hill hearings in 2004.

"I noted that, of the top 20 officials of the company, none made less than $1 million a year," Baker says. "And during the course of a 5-year period, there were bonuses, not salaries ... bonuses paid out of $245 million. This, going to an entity that was supposed to be focused on helping first-time, low-income homebuyers getting access to housing credit."

But when Baker tried to lead reforms, he says he was stymied.

"Many in the political world were very cautious about leveling criticism, because the entities had enormous political allies and were always able to squash any reform effort that might look like it would go somewhere," Baker says.

http://www.npr.org/templates/story/story.php?storyId=92529364
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Re: The crumbling of US investment banks (NC)
« Reply #12 on: September 15, 2008, 05:17:01 PM »

This goes to show why free market is not necessarily the best thing for the people. Companies that gives out million dollar bonuses shouldn't be bailed out with public money. Although perhaps government needed to have regulated this industry better to start with; if not, now, the whole thing will collapse.
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LosingNow

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Re: The crumbling of US investment banks (NC)
« Reply #13 on: September 15, 2008, 05:17:30 PM »

The Japan Lesson:
U.S. Must Own Up
To Its Bank Crisis
By JUSTIN LAHART
September 15, 2008; Page A2

When Japan was mired in economic crisis, the U.S. urged it to take decisive action to deal with its ailing banks. Japan didn't follow the advice and the crisis dragged on for years. Now, it is the U.S. that is mired in crisis and facing the prospect of swallowing the bitter medicine it once proffered.

Japan's stock-market bubble began rapidly deflating in 1990 and its property bubble followed suit shortly afterward. Many borrowers were unable to make payments on their debt and bad loans piled up on bank balance sheets. A long period of lackluster economic growth made a tough situation worse. With the financial system saddled with bad debts, Japan desperately needed its banks to acknowledge the severity of their problems and for some banks to shut their doors. But the banks, unwilling to take steps that might render them insolvent, refused to acknowledge their problems, extending the crisis.

"One of the lessons we took from Japan was the hesitation and refusal to own up to the problem was a disaster," says University of Chicago Graduate School of Business economist Anil Kashyap.

U.S. financial firms, too, have struggled with owning up to the extent of their credit losses, partly because those losses are a moving target. A year ago, Bear Stearns Cos. was reluctant to sell mortgage-related credit at a loss. That decision came back to haunt the firm as declining home prices continued to pummel mortgages, and Bear ended up in a government-backed fire sale to J.P. Morgan Chase & Co. Meanwhile, Merrill Lynch & Co. Chief Executive John Thain said in a January interview that the firm's troubles were "for the most part behind us" -- but in July the firm agreed to sell more than $30 billion in mortgage-related assets at a large loss.

Still, U.S. financial firms have been much quicker to acknowledge losses than their Japanese counterparts were. While the slicing and dicing of mortgages into tradable securities played a part in the mortgage mess, accounting rules make it difficult for firms to ignore losses on those securities, says Princeton University economist Hyun Song Shin. In contrast, by continuing to extend credit to bad borrowers, Japanese banks were able to put off recognizing the extent of their debt problems.

"The denial strategy is harder to pull off -- it will catch up to you in the accounting," says Mr. Shin. "That's one of the more encouraging and hopeful signs in the U.S."


Fannie Mae and Freddie Mac, the two giant mortgage companies that the U.S. government seized a week ago, operated under rules that made the extent of their woes much more difficult to assess. But Treasury officials took a tougher line getting Fannie and Freddie to own up to their problems than Japan's Ministry of Finance did with ailing Japanese banks. Just as Federal Reserve Chairman Ben Bernanke has been intent on not repeating the Fed's Depression-era mistakes, Treasury Secretary Henry Paulson is intent on not repeating Japan's mistakes in the 1990s, says Brad DeLong, an economic historian at the University of California at Berkeley.

One last problem the current U.S. situation shares with Japan in the 1990s may be a financial sector that is far larger than it should be. "If you have an unsustainable lending boom, then by definition the lending has to shrink," says Adam Posen, a deputy director at the Peterson Institute for International Economics in Washington.

In Japan, that didn't happen. Rather than failing, troubled banks merged with healthier ones. But even though the combined bank would often end up with branches that were within steps of one another, few bank workers lost their jobs. Mr. Posen worries that concerns about the systemic risk to the financial system will prevent the U.S. from allowing enough firms to shut their doors to make the necessary capacity cuts.

In that regard, the tougher line with Wall Street that U.S. officials took over the weekend is encouraging. Refusing to financially backstop a takeover of Lehman Brothers Holdings Inc. with government money, as they did for J.P. Morgan's hasty acquisition of Bear Stearns, they showed they were far more willing to let a troubled firm fail than their Japanese counterparts were. Also, many financial firms have already begun cutting operations in a way Japanese banks balked at.

But while the U.S. has been decisive where Japan was not, it is worth remembering there was a reason Japan was hesitant to deal with its problems. Recognizing the financial sector's problems quickly increases the possibility of a run for the exits that could seize up the credit markets, putting the overall economy at greater risk. Quickly shrinking the financial sector could have a social cost, as well, putting tens of thousands of people out of work. Where will they go?

Write to Justin Lahart at justin.lahart@wsj.com
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LosingNow

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Re: The crumbling of US investment banks (NC)
« Reply #14 on: September 15, 2008, 05:20:59 PM »

This goes to show why free market is not necessarily the best thing for the people. Companies that gives out million dollar bonuses shouldn't be bailed out with public money. Although perhaps government needed to have regulated this industry better to start with; if not, now, the whole thing will collapse.
They should have never bailed out Bear Stearns.. what we are seeing today would have happened 6 months ago
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LosingNow

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Re: The crumbling of US investment banks (NC)
« Reply #15 on: September 15, 2008, 06:23:33 PM »

These guys make the BCCI (why, even the Zimbabwe board) look lame in comparison.

"In situations like this [Fannie Mae and Freddie Mac], where the government is backing private companies with private managements, the result is the socialization of the risk — that is, all the taxpayers have to take the risk," Wallison says. "But there is a privatization of the profits. All the profits go to the shareholders and the management, while the taxpayers are taking the risk."  The profits and pay were huge. Former Rep. Richard Baker, a Republican from Louisiana and a longtime critic, brought to light the pay schedule of Fannie Mae managers during controversial Capitol Hill hearings in 2004.

"I noted that, of the top 20 officials of the company, none made less than $1 million a year," Baker says. "And during the course of a 5-year period, there were bonuses, not salaries ... bonuses paid out of $245 million. This, going to an entity that was supposed to be focused on helping first-time, low-income homebuyers getting access to housing credit."

But when Baker tried to lead reforms, he says he was stymied.

"Many in the political world were very cautious about leveling criticism, because the entities had enormous political allies and were always able to squash any reform effort that might look like it would go somewhere," Baker says.

http://www.npr.org/templates/story/story.php?storyId=92529364

Lehman’s Political Largess
September 12, 2008, 7:50 am

From Leslie Wayne, a DealBook colleague:

As Lehman Brothers struggles to stay afloat, it is not only the investment bank’s employees who may be worried about the future. It’s also politicians who have long benefited from the largess of the company’s employees at campaign time.

A study by the Center for Responsive Politics, a Washington group that tracks campaign finance data, found that Lehman currently ranks No. 4 among all securities firms and investment banks in contributions to federal parties and candidates. Goldman Sachs, a perennial heavyweight on the political scene, leads the pack, having donated $4.3 million in this election cycle on the federal level.

This money comes mainly from individuals and, to a much lesser extent, company political action committees. Corporations are barred from making campaign contributions. Lehman’s donations amount to $1.9 million in this election cycle, after Goldman, Morgan Stanley ($2.7 million) and UBS ($2.3 million).

According to the center, nearly all of the donations from Lehman came from individual employees. A total of 64 percent of the donations went to Democrats, while 36 percent went to Republicans.

When it comes to the presidential race, Lehman employees were among the top contributors to both Senator Barack Obama and Senator John McCain. Lehman employees gave $370, 524 to Mr. Obama and $117,500 to Mr. McCain. While these numbers may appear small by Wall Street standards, donations to candidates are capped at $2,300 for the primary election and $2,300 for the general.

Among all big donors, Lehman was the 10th-largest donor to the Obama campaign and in 15th place for Mr. McCain. (For Mr. Obama, the top donor was Goldman at $691,930, and Merrill was the top donor for Mr. McCain at $298,413).

The center also calculates that Lehman is on track to spend $800,000 in lobbying this year, having spent $430,000 to date. Given the fact that the company is hoping that Washington might help in throwing it a lifeline, that may be money well spent.
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prfsr

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Re: The crumbling of US investment banks (NC)
« Reply #16 on: September 15, 2008, 07:57:29 PM »

This goes to show why free market is not necessarily the best thing for the people. Companies that gives out million dollar bonuses shouldn't be bailed out with public money. Although perhaps government needed to have regulated this industry better to start with; if not, now, the whole thing will collapse.

I wonder if the great Lehman executives will get severance pay (many more millions) when they get laid off?
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RicePlateReddy

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Re: The crumbling of US investment banks (NC)
« Reply #17 on: September 15, 2008, 08:15:42 PM »

This goes to show why free market is not necessarily the best thing for the people. Companies that gives out million dollar bonuses shouldn't be bailed out with public money. Although perhaps government needed to have regulated this industry better to start with; if not, now, the whole thing will collapse.

I wonder if the great Lehman executives will get severance pay (many more millions) when they get laid off?

Here is an article from Dec 13th 2007. No need for Baidu or Google cache either  ;D

Lehman's 2007 Bonus Pool Rises Almost 10% on Higher Revenue
By Christine Harper


Dec. 13 (Bloomberg) -- Lehman Brothers Holdings Inc.'s 2007 bonus payout, the first reported by a Wall Street firm, rose almost 10 percent from last year as revenue gains through August overcame a fourth-quarter decline.

Compensation, including salaries, benefits and bonuses, climbed 9.5 percent to $9.5 billion from $8.7 billion a year earlier, the New York-based company said today in a statement. Bonuses typically account for about 60 percent of compensation, or $5.7 billion compared with 5.2 billion in 2006.

Lehman, the fourth-biggest U.S. securities firm by market value, boosted 2007 revenue by limiting losses from subprime mortgage-related securities and lifting income from fund management, equities and investment banking. The firm said earlier this week that Richard Fuld, Lehman's chairman and chief executive officer, was granted a $35 million stock bonus for 2007, up 4 percent from last year.  :notworthy:  :notworthy:

``There were many divisions that made a lot of money and they made a lot of money all year,'' said Jeanne Branthover, managing director of Boyden World Corp., an executive recruiter in New York. ``These firms have to keep their talent and they have to do it by paying.''

The company's average pay per employee fell slightly in 2007 as Lehman added workers at a faster rate than it increased compensation. Salary, benefits and bonuses per person dropped to an average $332,470 from $334,246 a year earlier, as the number of employees rose 10 percent to 28,556 from 25,936 a year earlier.

`Out Of The Gate'

Lehman said today that 2007 earnings rose 5 percent from a year earlier as gains in the first three quarters overcame a 12 percent decline in fourth-quarter net income. While Goldman's full-year profit is also expected to rise, with analysts estimating a 20 percent jump, profit is expected to fall 22 percent at Morgan Stanley and 59 percent at Bear Stearns Cos., depressed by losses related to subprime mortgages.

Lehman, ``being the first out of the gate, is signaling to the rest of the market that it is willing to pay aggressively and now other banks will have to follow to compete for talent,'' said Michael Karp, chief executive officer of Options Group, a recruiting and consulting firm in New York. ``It's going to get very competitive in early 2008 as banks balance declining profits with retention issues.''

Goldman, the biggest securities firm, is the only firm other than Lehman that's expected to report an increase in 2007 revenue, compensation and profit. Lloyd Blankfein, Goldman's chairman and CEO, may receive $70 million this year, up 30 percent from $54 million last year, the Financial Times reported today, without citing its sources.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajI8xAslBPLc
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RicePlateReddy

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Re: The crumbling of US investment banks (NC)
« Reply #18 on: September 15, 2008, 08:41:51 PM »

Dick Fuld, CEO of Lehman

Now:



Then:



Merrill Lynch kush hua!
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Re: The crumbling of US investment banks (NC)
« Reply #19 on: September 15, 2008, 11:02:03 PM »

Lets not kid ourselves. Fed would have stumbled over itself to save Lehman if it could. None of the participating banks had enough capital to shore Lehman. Each of them was asked to put up $3bn for a total of $30bn to back bad debt of Lehman. Others balked because 1. they did not have spare capital and 2. they did not want to clean up Lehman and let BoA and Barclays walk away with a cleaned up Lehman.

I think now all the bailouts need to happen that can happen. The time for regulation was earlier but is gone now due to bonehead-edness of free market proponents. The best case scenario now is for banks to be bailed, markets to stabilizated and then cleaning up the banks in an orderly manner.

Think of the people getting laid off, losing their pensions. In this downward spiral, markets are driving the fundamentals . That is not good and not reflective of true value of businesses. If markets take away liquidity, a firm with sufficient capital (lehman) can still go down.
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RicePlateReddy

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Re: The crumbling of US investment banks (NC)
« Reply #20 on: September 15, 2008, 11:51:29 PM »

Disagree - the so-called free market (which was never really "free" in the first place) should be allowed to play its course when the chips are down and even when the common people are affected. Why should tax money go to bail out these crooks when the profits weren't shared? Too bad about those secretaries and middle managers - let them go after their bosses bandits who made a ton  when the going was good.

Bear Sterns was a mistake, Fannie and Fred sub-debt coverage -- see above -- was a cover up. Irrespective of its double talk - at least the fed is limiting its malarkey.



« Last Edit: September 15, 2008, 11:54:45 PM by ShortSquatLeg »
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LosingNow

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Re: The crumbling of US investment banks (NC)
« Reply #21 on: September 16, 2008, 12:55:25 AM »

Correct.. a struggling investment bank is the same as a struggling car maker. The ibankers who have lost their jobs now due to their (or their company's) wrong decisions.. would not blink a eye if a car maker taken over through their "advise/efforts" would have to layoff 1000s.
This is part of the game. Govt should not bailout IBs just like they should not bailout car makers
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Re: The crumbling of US investment banks (NC)
« Reply #22 on: September 16, 2008, 12:56:02 AM »

Disagree - the so-called free market (which was never really "free" in the first place) should be allowed to play its course when the chips are down and even when the common people are affected. Why should tax money go to bail out these crooks when the profits weren't shared? Too bad about those secretaries and middle managers - let them go after their bosses bandits who made a ton  when the going was good.

Bear Sterns was a mistake, Fannie and Fred sub-debt coverage -- see above -- was a cover up. Irrespective of its double talk - at least the fed is limiting its malarkey.


But we are surely overlooking the impact of the "failure of free markets" on common masses. The impact of the failure of these institutions goes way beyond the employees and counter parties of these institutions. It affects everyone. With tighter lending and/or drying of liquidity, many deserving folks cannot get the loans they deserve. Businesses suffer, jobs are lost. This simplistic causation notwithstanding, the impact on taxpayers cannot be denied. This impact may potentially be even greater than the burden imposed on them by the bailouts. So bailouts, given the situation we are already in, may not be a bad thing in itself from the taxpayer point of view. The fact that we should never be in this situation is a different argument.


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dextrous

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Re: The crumbling of US investment banks (NC)
« Reply #23 on: September 16, 2008, 12:56:58 AM »

Correct.. a struggling investment bank is the same as a struggling car maker. The ibankers who have lost their jobs now due to their (or their company's) wrong decisions.. would not blink a eye if a car maker taken over through their "advise/efforts" would have to layoff 1000s.
This is part of the game. Govt should not bailout IBs just like they should not bailout car makers

what about the smug attitudes of classmates who went into i-banking ;-)
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Shukla

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Re: The crumbling of US investment banks (NC)
« Reply #24 on: September 16, 2008, 12:58:06 AM »

Correct.. a struggling investment bank is the same as a struggling car maker. The ibankers who have lost their jobs now due to their (or their company's) wrong decisions.. would not blink a eye if a car maker taken over through their "advise/efforts" would have to layoff 1000s.
This is part of the game. Govt should not bailout IBs just like they should not bailout car makers
I think there is a big difference between IBs and carmakers. The health of the financial sector has a much farther reaching impact on the general economy than any other industry. Most economists would agree with this due to the multiplying effect of credit.

« Last Edit: September 16, 2008, 03:02:23 AM by Shukla »
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LosingNow

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Re: The crumbling of US investment banks (NC)
« Reply #25 on: September 16, 2008, 12:58:42 AM »

Disagree - the so-called free market (which was never really "free" in the first place) should be allowed to play its course when the chips are down and even when the common people are affected. Why should tax money go to bail out these crooks when the profits weren't shared? Too bad about those secretaries and middle managers - let them go after their bosses bandits who made a ton  when the going was good.

Bear Sterns was a mistake, Fannie and Fred sub-debt coverage -- see above -- was a cover up. Irrespective of its double talk - at least the fed is limiting its malarkey.


But we are surely overlooking the impact of the "failure of free markets" on common masses. The impact of the failure of these institutions goes way beyond the employees and counter parties of these institutions. It affects everyone. With tighter lending and/or drying of liquidity, many deserving folks cannot get the loans they deserve. Businesses suffer, jobs are lost. This simplistic causation notwithstanding, the impact on taxpayers cannot be denied. This impact may potentially be even greater than the burden imposed on them by the bailouts. So bailouts, given the situation we are already in, may not be a bad thing in itself from the taxpayer point of view. The fact that we should never be in this situation is a different argument.

There are better ways to provide liquidity in the market than to bailout a bad company. For instance, the treasury has opened its credit window to banks and the fed will most likely reduce interest rates.
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Shukla

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Re: The crumbling of US investment banks (NC)
« Reply #26 on: September 16, 2008, 01:05:03 AM »

Disagree - the so-called free market (which was never really "free" in the first place) should be allowed to play its course when the chips are down and even when the common people are affected. Why should tax money go to bail out these crooks when the profits weren't shared? Too bad about those secretaries and middle managers - let them go after their bosses bandits who made a ton  when the going was good.

Bear Sterns was a mistake, Fannie and Fred sub-debt coverage -- see above -- was a cover up. Irrespective of its double talk - at least the fed is limiting its malarkey.


But we are surely overlooking the impact of the "failure of free markets" on common masses. The impact of the failure of these institutions goes way beyond the employees and counter parties of these institutions. It affects everyone. With tighter lending and/or drying of liquidity, many deserving folks cannot get the loans they deserve. Businesses suffer, jobs are lost. This simplistic causation notwithstanding, the impact on taxpayers cannot be denied. This impact may potentially be even greater than the burden imposed on them by the bailouts. So bailouts, given the situation we are already in, may not be a bad thing in itself from the taxpayer point of view. The fact that we should never be in this situation is a different argument.

There are better ways to provide liquidity in the market than to bailout a bad company. For instance, the treasury has opened its credit window to banks and the fed will most likely reduce interest rates.

Despite any amount of liquidity (given by the Fed or otherwise), a 'bad bank' will not be able to extend credit to others if its balance sheet is in shambles. Please do note that Fed has now started accepting equities to extend its loan. Yet, none of the banks took this facility to rescue lehman. More liquidity from Fed is just not the issue currently. Lowering of rates similarly will do nothing to solve this crisis. The only way this can be solved is if the issue of bad assets is handled. Linking it to my argument earlier, no amount of fed liquidity will ease the effect of these banks failing on main street businesses and taxpaying consumers.
 
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keep-it-cool

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Re: The crumbling of US investment banks (NC)
« Reply #27 on: September 16, 2008, 04:11:34 AM »

Disagree - the so-called free market (which was never really "free" in the first place) should be allowed to play its course when the chips are down and even when the common people are affected. Why should tax money go to bail out these crooks when the profits weren't shared? Too bad about those secretaries and middle managers - let them go after their bosses bandits who made a ton  when the going was good.

Bear Sterns was a mistake, Fannie and Fred sub-debt coverage -- see above -- was a cover up. Irrespective of its double talk - at least the fed is limiting its malarkey.


I agree.
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keep-it-cool

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Re: The crumbling of US investment banks (NC)
« Reply #28 on: September 16, 2008, 04:14:47 AM »

Disagree - the so-called free market (which was never really "free" in the first place) should be allowed to play its course when the chips are down and even when the common people are affected. Why should tax money go to bail out these crooks when the profits weren't shared? Too bad about those secretaries and middle managers - let them go after their bosses bandits who made a ton  when the going was good.

Bear Sterns was a mistake, Fannie and Fred sub-debt coverage -- see above -- was a cover up. Irrespective of its double talk - at least the fed is limiting its malarkey.


But we are surely overlooking the impact of the "failure of free markets" on common masses. The impact of the failure of these institutions goes way beyond the employees and counter parties of these institutions. It affects everyone. With tighter lending and/or drying of liquidity, many deserving folks cannot get the loans they deserve. Businesses suffer, jobs are lost. This simplistic causation notwithstanding, the impact on taxpayers cannot be denied. This impact may potentially be even greater than the burden imposed on them by the bailouts. So bailouts, given the situation we are already in, may not be a bad thing in itself from the taxpayer point of view. The fact that we should never be in this situation is a different argument.

There are better ways to provide liquidity in the market than to bailout a bad company. For instance, the treasury has opened its credit window to banks and the fed will most likely reduce interest rates.

Despite any amount of liquidity (given by the Fed or otherwise), a 'bad bank' will not be able to extend credit to others if its balance sheet is in shambles. Please do note that Fed has now started accepting equities to extend its loan. Yet, none of the banks took this facility to rescue lehman. More liquidity from Fed is just not the issue currently. Lowering of rates similarly will do nothing to solve this crisis. The only way this can be solved is if the issue of bad assets is handled. Linking it to my argument earlier, no amount of fed liquidity will ease the effect of these banks failing on main street businesses and taxpaying consumers.
 


Bailing out entities for investing in bad assets just does not make any sense in my view. You would be creating one heck of a moral hazard by doing so ... actually, the Fed went ahead and did it.

Let all private entities who feel that they need a stable market pool in and bail out one of their counterparts if they can. Why should the regulator step in with its funds?
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broadbat

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Re: The crumbling of US investment banks (NC)
« Reply #29 on: September 16, 2008, 04:19:27 AM »

I am not sure if the Fed has actually infused any funds into these entities.
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keep-it-cool

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Re: The crumbling of US investment banks (NC)
« Reply #30 on: September 16, 2008, 04:21:08 AM »

This goes to show why free market is not necessarily the best thing for the people. Companies that gives out million dollar bonuses shouldn't be bailed out with public money. Although perhaps government needed to have regulated this industry better to start with; if not, now, the whole thing will collapse.

This has got nothing to do with a free or not free market.

In fact, a free market would entail exactly what you are saying - the government will not step in and bail these entities out with its own money. Unfortunately, the US Fed blinked first by bailing Bear Stearns and then Freddie Mac and Fannie Mae - setting a dangerous precedent.

I dont subscribe to the general view or scenario that is being created that one or two banks going bust will end up damaging the entire economy for good - yes, there will be some period of pain, but it is vastly exaggerated in my view and there are self correcting mechanisms.

For instance, the moment it started getting clear that Lehman will not be bailed out, Merrill immediately sold out to Bank of America ... a bailout would probably have meant that Merrill carries on and becomes the next bailout candidate.

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Shukla

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Re: The crumbling of US investment banks (NC)
« Reply #31 on: September 16, 2008, 04:35:50 AM »

One of the criticisms of the central banks during the great depression was that they did not step in to try and save a few guys.
« Last Edit: September 16, 2008, 05:32:27 AM by Shukla »
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Libran

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Re: The crumbling of US investment banks (NC)
« Reply #32 on: September 16, 2008, 06:18:01 AM »

Globalisation comes one full cycle...

Sub prime hits invetsment bankers hits IT companies in India hits campus recruitments for new engineers hits campus offers made at management institutes hits stockmarkets hits telecom and retail spends hits travel industry hits oil consumption hits paypacket revisions hits mortgage spends ....

I have seen my market portfolio crumble by a few lakhs in the last one week ...

Gloom...gloom all around... the only thing constant is the sun coming up in the morning ( Blore sees that a little rarely nowadays  :-\ ) and the daily dose of Dada bashing
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Libran

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Re: The crumbling of US investment banks (NC)
« Reply #33 on: September 16, 2008, 06:21:46 AM »

McCain claiming that he will not let this kind of a thing happen in US hereafter is laughable.....

1929 .... 2000 ...WorldCom, Enron... Bear Sterns, Lehman....

What next... AIG, UBS, WaMu ... MS...Oracle... Walmart .. GE
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LosingNow

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Re: The crumbling of US investment banks (NC)
« Reply #34 on: September 16, 2008, 01:58:17 PM »

This goes to show why free market is not necessarily the best thing for the people. Companies that gives out million dollar bonuses shouldn't be bailed out with public money. Although perhaps government needed to have regulated this industry better to start with; if not, now, the whole thing will collapse.

This has got nothing to do with a free or not free market.

In fact, a free market would entail exactly what you are saying - the government will not step in and bail these entities out with its own money. Unfortunately, the US Fed blinked first by bailing Bear Stearns and then Freddie Mac and Fannie Mae - setting a dangerous precedent.

I dont subscribe to the general view or scenario that is being created that one or two banks going bust will end up damaging the entire economy for good - yes, there will be some period of pain, but it is vastly exaggerated in my view and there are self correcting mechanisms.

For instance, the moment it started getting clear that Lehman will not be bailed out, Merrill immediately sold out to Bank of America ... a bailout would probably have meant that Merrill carries on and becomes the next bailout candidate.

Eggjacktly.. the regulator should be like an umpire in a game.. should enforce the rules of fair competition, not pick winners and losers ...or in this case prevent a loser from losing.

The roots of this problem are in the easy credit days of Greenspan. One of the arguments against a central bank proactively setting interest rates and driving monetary policy to "manage" growth was that it will "amplify" the ups and downs of business cycles...and we are perhaps seeing that. This is one  of the main arguments for return to Gold standard.
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prfsr

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Re: The crumbling of US investment banks (NC)
« Reply #35 on: September 16, 2008, 04:18:39 PM »

This goes to show why free market is not necessarily the best thing for the people. Companies that gives out million dollar bonuses shouldn't be bailed out with public money. Although perhaps government needed to have regulated this industry better to start with; if not, now, the whole thing will collapse.

This has got nothing to do with a free or not free market.

In fact, a free market would entail exactly what you are saying - the government will not step in and bail these entities out with its own money. Unfortunately, the US Fed blinked first by bailing Bear Stearns and then Freddie Mac and Fannie Mae - setting a dangerous precedent.

I dont subscribe to the general view or scenario that is being created that one or two banks going bust will end up damaging the entire economy for good - yes, there will be some period of pain, but it is vastly exaggerated in my view and there are self correcting mechanisms.

For instance, the moment it started getting clear that Lehman will not be bailed out, Merrill immediately sold out to Bank of America ... a bailout would probably have meant that Merrill carries on and becomes the next bailout candidate.

Eggjacktly.. the regulator should be like an umpire in a game.. should enforce the rules of fair competition, not pick winners and losers ...or in this case prevent a loser from losing.

The roots of this problem are in the easy credit days of Greenspan. One of the arguments against a central bank proactively setting interest rates and driving monetary policy to "manage" growth was that it will "amplify" the ups and downs of business cycles...and we are perhaps seeing that. This is one  of the main arguments for return to Gold standard.
So you are saying that without Fed controls the situation would be better?
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LosingNow

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Re: The crumbling of US investment banks (NC)
« Reply #36 on: September 16, 2008, 04:56:51 PM »

This goes to show why free market is not necessarily the best thing for the people. Companies that gives out million dollar bonuses shouldn't be bailed out with public money. Although perhaps government needed to have regulated this industry better to start with; if not, now, the whole thing will collapse.

This has got nothing to do with a free or not free market.

In fact, a free market would entail exactly what you are saying - the government will not step in and bail these entities out with its own money. Unfortunately, the US Fed blinked first by bailing Bear Stearns and then Freddie Mac and Fannie Mae - setting a dangerous precedent.

I dont subscribe to the general view or scenario that is being created that one or two banks going bust will end up damaging the entire economy for good - yes, there will be some period of pain, but it is vastly exaggerated in my view and there are self correcting mechanisms.

For instance, the moment it started getting clear that Lehman will not be bailed out, Merrill immediately sold out to Bank of America ... a bailout would probably have meant that Merrill carries on and becomes the next bailout candidate.

Eggjacktly.. the regulator should be like an umpire in a game.. should enforce the rules of fair competition, not pick winners and losers ...or in this case prevent a loser from losing.

The roots of this problem are in the easy credit days of Greenspan. One of the arguments against a central bank proactively setting interest rates and driving monetary policy to "manage" growth was that it will "amplify" the ups and downs of business cycles...and we are perhaps seeing that. This is one  of the main arguments for return to Gold standard.
So you are saying that without Fed controls the situation would be better?
Which Fed controls ?

..and which situation?
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prfsr

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Re: The crumbling of US investment banks (NC)
« Reply #37 on: September 16, 2008, 04:58:48 PM »

This goes to show why free market is not necessarily the best thing for the people. Companies that gives out million dollar bonuses shouldn't be bailed out with public money. Although perhaps government needed to have regulated this industry better to start with; if not, now, the whole thing will collapse.

This has got nothing to do with a free or not free market.

In fact, a free market would entail exactly what you are saying - the government will not step in and bail these entities out with its own money. Unfortunately, the US Fed blinked first by bailing Bear Stearns and then Freddie Mac and Fannie Mae - setting a dangerous precedent.

I dont subscribe to the general view or scenario that is being created that one or two banks going bust will end up damaging the entire economy for good - yes, there will be some period of pain, but it is vastly exaggerated in my view and there are self correcting mechanisms.

For instance, the moment it started getting clear that Lehman will not be bailed out, Merrill immediately sold out to Bank of America ... a bailout would probably have meant that Merrill carries on and becomes the next bailout candidate.

Eggjacktly.. the regulator should be like an umpire in a game.. should enforce the rules of fair competition, not pick winners and losers ...or in this case prevent a loser from losing.

The roots of this problem are in the easy credit days of Greenspan. One of the arguments against a central bank proactively setting interest rates and driving monetary policy to "manage" growth was that it will "amplify" the ups and downs of business cycles...and we are perhaps seeing that. This is one  of the main arguments for return to Gold standard.
So you are saying that without Fed controls the situation would be better?
Which Fed controls ?

..and which situation?

The interest rate was what I was thinking about, and the situation is the current doo-doo.
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LosingNow

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Re: The crumbling of US investment banks (NC)
« Reply #38 on: September 16, 2008, 05:35:41 PM »

This goes to show why free market is not necessarily the best thing for the people. Companies that gives out million dollar bonuses shouldn't be bailed out with public money. Although perhaps government needed to have regulated this industry better to start with; if not, now, the whole thing will collapse.

This has got nothing to do with a free or not free market.

In fact, a free market would entail exactly what you are saying - the government will not step in and bail these entities out with its own money. Unfortunately, the US Fed blinked first by bailing Bear Stearns and then Freddie Mac and Fannie Mae - setting a dangerous precedent.

I dont subscribe to the general view or scenario that is being created that one or two banks going bust will end up damaging the entire economy for good - yes, there will be some period of pain, but it is vastly exaggerated in my view and there are self correcting mechanisms.

For instance, the moment it started getting clear that Lehman will not be bailed out, Merrill immediately sold out to Bank of America ... a bailout would probably have meant that Merrill carries on and becomes the next bailout candidate.

Eggjacktly.. the regulator should be like an umpire in a game.. should enforce the rules of fair competition, not pick winners and losers ...or in this case prevent a loser from losing.

The roots of this problem are in the easy credit days of Greenspan. One of the arguments against a central bank proactively setting interest rates and driving monetary policy to "manage" growth was that it will "amplify" the ups and downs of business cycles...and we are perhaps seeing that. This is one  of the main arguments for return to Gold standard.
So you are saying that without Fed controls the situation would be better?
Which Fed controls ?

..and which situation?

The interest rate was what I was thinking about, and the situation is the current doo-doo.

That is my point.. current situation (again assuming you mean Lehman, Bears Stearns collapse) would or would not have happened based on the decisions made by those companies...it has little to do with Fed, more to do with themselves (ie their management and shareholders)

They made some bets (rising house prices!) that did not pan out and they were not sufficiently capitalized (or had access to capital when needed) to cover the downside risk..and hence are paying the price. Fair enough.

Did the fed play a role in creating the illusion that house prices will always rise .. IMO, somewhat.. because of their loose monetary policy (which I think would have self-corrected through market-mechanism if there was a gold standard..because any money issued by Fed would have to backed by "real collateral" rather than a government IOU) and the "lack of reliable and complete credit-worthiness check" in the days of soaring house prices.
« Last Edit: September 16, 2008, 05:56:59 PM by winningnow »
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dextrous

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Re: The crumbling of US investment banks (NC)
« Reply #39 on: September 16, 2008, 06:24:59 PM »

This goes to show why free market is not necessarily the best thing for the people. Companies that gives out million dollar bonuses shouldn't be bailed out with public money. Although perhaps government needed to have regulated this industry better to start with; if not, now, the whole thing will collapse.

This has got nothing to do with a free or not free market.

In fact, a free market would entail exactly what you are saying - the government will not step in and bail these entities out with its own money. Unfortunately, the US Fed blinked first by bailing Bear Stearns and then Freddie Mac and Fannie Mae - setting a dangerous precedent.

I dont subscribe to the general view or scenario that is being created that one or two banks going bust will end up damaging the entire economy for good - yes, there will be some period of pain, but it is vastly exaggerated in my view and there are self correcting mechanisms.

For instance, the moment it started getting clear that Lehman will not be bailed out, Merrill immediately sold out to Bank of America ... a bailout would probably have meant that Merrill carries on and becomes the next bailout candidate.



What you're suggesting is a hypothetical situation that goes along the lines of lets hope companies regulate themselves, executives aren't greedy, etc. and if they fail, well so be it...market will balance itself out.

Sure, we'll play your hypothetical game of libertarian triumph. Even if that were the case, exactly what happens to the everyday guy who is now trapped in a bad place because of these companies? It isn't the CEO who gets affected--he still has the $25 million tucked away on the side. I know...libertarians don't care...still.
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