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pipsqueak

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Re: The crumbling of the US financial system (NC)
« Reply #160 on: September 25, 2008, 02:12:13 AM »

the visionaries in 2007 - incompetent or deliberately misleading?


http://www.youtube.com/watch?v=t7F1tpqFtgA
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pipsqueak

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Re: The crumbling of the US financial system (NC)
« Reply #161 on: September 25, 2008, 02:31:08 AM »

Hobo road to high finance

By JOE BENNETT

The Dominion Post | Wednesday, 24 September 2008

So you want to get into high finance. Good on you. Here's a four-step guide.


Step 1 – find a hobo.

He should be homeless, hopeless and with a hole in his pocket through which money tumbles straight to the liquor store.

Offer him a loan. The loan is to buy him a modest house in which he can entertain friends to methylated cocktails round the heated swimming pool. But don't forget to put an inflated valuation on the house first.

When the hobo accepts, assume the role of mortgage broker. In other words, sell the loan to someone else. It may seem like a bad loan to you, but lending institutions will jump at it. Add a cut for yourself, and hey presto, you've started making money. But there's a lot more cash to be made further up the ladder.

Step 2 – become a lender.

As a lending institution, you must always remember that one bad debt is a bad thing, but a lot of bad debt is a good thing. So buy as many hobo-loans as you can. Sweep them up like confetti after a wedding.

You'll soon have loans by the fistful. A few will be sound but most will be lousy. Just bundle them together and slice the bundle into sellable units, each of which has a bit of each loan in it. The process is simple, but you must make it seem complicated so that commentators will refer to it as sophisticated financial engineering. Everyone's impressed by sophisticated financial engineering, especially when you give it an impenetrable name like Collateralised Debt Obligations. To obfuscate matters even more you can then reduce this to CDO. Initials lend status. And anyone who doesn't understand them is reluctant to admit their ignorance.

Now sell your CDOs to venerable financial institutions such as investment banks. They'll snap them up and you'll have made a nice fat profit. Once again you can stop there, but step three beckons the brave.

Step 3 – become boss of an investment bank that buys CDOs.

This has the immediate advantage of paying a simply hilarious salary. But it comes with a hitch. Remember the hobo? Having held a couple of poolside parties he felt the call of the open road and simply walked off the property. But he did remember to drop the keys in an envelope. So you now have the keys to a house that is worth less than the loan you advanced on it. This is known in financial circles as negative equity and, in less financial circles, as a problem.

BUT in the world of high finance every problem is an opportunity in disguise. Just file for bankruptcy. Almost immediately the United States cavalry will arrive in the form of the US Treasury. They'll buy your bad loans and you'll get a fat golden handshake that is more than enough to retire on. But you may find you've enjoyed the ride so much that you want to go on to step 4.

Step 4 – become president of the United States of America, a position that comes with enormous prestige.

But it also comes with a trillion dollars worth of CDOs which have now been stripped of their verbal finery and have reverted to what they always were, which is plain bad loans. You've bought them in the name of the people who originally took them out. And you've used their taxes to pay for them. So effectively the American people now own a trillion dollars worth of bad loans to themselves. And most of the money has just plain disappeared. House prices have shrunk and the rest of the cash has gone to China in exchange for goods that the American people are too sophisticated to make for themselves.

To prop up the American people you need money fast. But your only reliable source of money is taxes levied on the American people, and in order to achieve the presidency you promised to lower taxes on the American people rather than raise them. To compound your problems you're running a colossal trade deficit and you've got some expensive wars to fight in the name of the American people. So your only choice is to borrow from the people who've now got the money that used to be American. So off you trot to Beijing selling Treasury bonds. These are effectively mortgages on the United States.

Then all you have to do is to cross your fingers and hope that the Chinese don't ask for their money back before your term in office ends. You really don't want to be the first US president to take step 5.

Step 5 – pop the keys to your country into an envelope and take to the open road, homeless, hopeless and with a hole in your pocket through which money tumbles straight to the liquor store.

Good luck in your financial careers.

http://www.stuff.co.nz/4703807a1861.html
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keep-it-cool

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Re: The crumbling of the US financial system (NC)
« Reply #162 on: September 25, 2008, 10:43:56 AM »

http://www.moneyandmarkets.com/files/documents/Final-Bailout-White-Paper.pdf

A very good white paper on the Bailout package ... executive summary is as follows but makes sense reading the entire document

New data and analysis demonstrate that the proposal before Congress for a $700 billion financial industry bailout is too little, too late to end the massive U.S. debt crisis; and, at the same time, too much, too soon for the U.S. Government bond market where most of the funds would have to be raised.

I. Too Little, Too Late to End the Debt Crisis.

Congress should

1. Disregard data based on the list of troubled banks maintained by the Federal Deposit Insurance Corporation (FDIC). The FDIC’s list currently has 117 institutions with $78 billion in assets. However, based on a broader analysis of recent FDIC call report data, we find that institutions at risk of failure include 1,479 FDIC member banks and 158 thrifts with total assets of $3.6 trillion, or 36 times the assets of banks on the FDIC’s list.

2. Think twice before providing a broad bailout for U.S. debts given the wide diversity of mortgage holders and the great magnitude of the total debts outstanding in the United States. Just-released Federal Reserve Flow of Funds
data show that, beyond mortgages, there are another $20.4 trillion in private sector consumer and corporate debts, plus $2.7 trillion in municipal securities outstanding.

3. Recognize that, among banks and thrifts with $5 billion or more in assets, there are 61 banks and 25 thrifts that are heavily exposed to nonperforming mortgages.

4. Get a better handle on the enormous build-up of derivatives held by U.S. commercial banks.

5. Base any legislation on (a) realistic estimates of the loan amounts already delinquent or in default, and (b) reasonable forecasts of how many more are likely to go bad in a continuing recession.

6. Recognize the inadequacies in already-established safety nets, such as the FDIC for bank depositors, Securities Investor Protection Corporation (SIPC) for brokerage customers, and state guarantee associations for insurance
policyholders.

There should be no illusion that the $700 billion estimate proposed by the Administration will be enough to end the debt crisis. It could very well be just a drop in the bucket.


II. Too Much, Too Soon for the U.S. Bond Market.


There should also be no illusion that the market for U.S. government securities can absorb the additional burden of a $700 billion bailout without putting dramatic upward pressure on U.S. interest rates.

The Office of Management and Budget (OMB) projects the 2009 federal deficit will rise to $482 billion. But adding the cost of announced and proposed bailouts, now approximately $1 trillion, it is undeniable that the federal deficit could double or triple in a short period of time, driving interest rates sharply higher and aggravating the very debt crisis that the bailout plan seeks to alleviate.


III. Policy Recommendations to Congress


1. Congress should limit and reduce the funds allocated to any bailout as much as possible, focusing primarily on our recommendation #4 below.

2. If Congress is determined to provide substantial sums to a new government agency to buy up bad private-sector debts, we recommend that the new agency pay strictly fair market value for those debts, including a substantial discount that reflects their poor liquidity.

3. Congress should clearly disclose to the public that there are significant risks in the financial system that the government is not able to address.

4. Rather than protecting imprudent institutions and speculators, Congress should protect prudent individuals and savers by strengthening existing safety nets, including the FDIC for bank deposits, SIPC for brokerage accounts and state guarantee associations that cover insurance policies.


IV. Recommendations to Savers and Investors


Regardless of what Congress decides, savers and investors should continue to invest and save prudently, seeking the safest havens for their money, such as banks with a financial strength rating of B+ or better, U.S. Treasury bills, and money market funds that invest almost exclusively in short-term U.S. Treasury securities or equivalent.
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Sachin Tendulkar gave the muhurat clap for 'Awwal Number' - that apart, he hasn't done much wrong in the last 20 yrs!

kban1

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Re: The crumbling of the US financial system (NC)
« Reply #163 on: September 25, 2008, 08:28:51 PM »

Tentative meltdown deal: Bush, McCain, Obama meet

By JENNIFER LOVEN, Associated Press Writer

WASHINGTON – Confident but not yet celebrating, key lawmakers agreed Thursday on a multibillion-dollar bailout plan for Wall Street aimed at staving off a national economic catastrophe. President Bush brought the two men fighting to succeed him to a historic White House huddle on how to sell a deal to lawmakers who were still resisting.

Welcoming Republican John McCain and Democrat Barack Obama — as well as congressional leaders — Bush said, "My hope is that we can reach an agreement very shortly."

The tentative accord would give the Bush administration just a fraction of the $700 billion it had requested up front, with half the money subject to a congressional veto, congressional aides said. Under the plan, the Treasury secretary would get $250 billion immediately and could have an additional $100 billion if he certified it was needed. The last $350 billion could be blocked by a vote of Congress under the arrangement, designed to give lawmakers a stronger hand in controlling the unprecedented rescue.

The aides described the details on condition of anonymity because they were not authorized to speak publicly.

Private talks on Capitol Hill ended at midday with the announcement that an agreement in principle had been reached on a $700 billion financial rescue package that the Bush administration wants. Few details were immediately available.

There were signs that the conservative-leaning House Republican Caucus was not on board. Both of Congress' Republican leaders, Rep. John Boehner and Sen. Mitch McConnell, issued statements saying there was not yet an agreement.

But Banking Chairman Chris Dodd, D-Conn., and Republican Sen. Bob Bennett, among others, said negotiators from Congress and the administration had arrived at a deal that could win approval. Other key lawmakers said that after days of bare-knuckles negotiations there was little of note left to resolve.

The early reaction from the White House was positive but cautious. "It's a good sign that progress is being made," White House deputy press secretary Tony Fratto said.

Wall Street showed its pleasure. The Dow Jones industrials closed some 196 points higher, though that was down from larger gains earlier in the day.

Under the tentative plan, the government would buy the toxic, mortgage-based assets of shaky financial institutions in a bid to keep them from going under and setting off a cascade of ruinous events, including wiped-out retirement savings, rising home foreclosures, closed businesses, and lost jobs. Bush warned darkly in a prime-time address Wednesday night, "Our entire economy is in danger."

Debate has been fierce on such questions as whether to phase in the cost and whether to give taxpayers an equity stake in rescued companies. Housing Financial Services Chairman Barney Frank, D-Mass., told The Associated Press both would be included in the legislation.

The Bush administration has made concessions almost daily to demands from the right and the left from its original three-page proposal, including agreeing to limit pay for executives of bailed-out financial institutions.

While lawmakers engaged in nitty-gritty dealmaking, Democrat Barack Obama and Republican John McCain, who have each sought in their own ways to distance themselves from the unpopular Bush, prepared to sit down together with the sitting president at the White House for an hourlong afternoon session apparently without precedent. By also including Congress' Democratic and Republican leaders in the meeting, much of Washington's political power structure was to be gathered at one long table in a small West Wing room.

The White House timed the session to fit the candidates' schedules — and after the stock markets closed for the day.

It was somewhat upstaged nearly three hours before various motorcades deposited the meeting participants and their entourages inside the White House gates, when Capitol Hill leaders reported their deal. Despite the national prominence of Bush, McCain and Obama, none has been deeply involved in this week's scramble to hammer out a package.

The developments on the Hill lent fresh and urgent purpose to the session: providing encouragement — and political cover — for lawmakers of both parties to accept the plan in this highly charged election season.

The bailout plan is expected to come up for votes in the House and Senate quickly, perhaps within days, so that lawmakers can adjourn to campaign for their own re-elections.

"The meeting's purpose is to provide for a discussion among the country's top political leadership where everyone can agree on the urgency of getting something done and on a path to bringing it to conclusion," said White House press secretary Dana Perino.

The pitch by Bush, Obama and McCain was no easy sell.

All lawmakers are returning to home districts packed with constituents angry that they are being asked to foot the bill to bail out Wall Street's rich guys when they and their neighbors are suffering the effects of ballooning mortgages and tightening credit. This means Obama and even the increasingly marginalized Bush could have sway with their joint resolve.

McCain, in particular, was being leaned on by Democrats and fellow Republicans alike to deliver GOP votes, as some conservatives are in open revolt over the astonishing price tag of the proposal and the heavy hand of government that it would place on private markets. Placating them enough to bring them in line could be a tall order for the Republican presidential nominee who has a checkered relationship with the right wing of his party.

A group of GOP lawmakers circulated a less government-focused alternative. Their proposal would have the government provide insurance to companies that agree to hold frozen assets, rather than have the government purchase the assets. Rep Eric Cantor, R-Va., said the idea would be to remove the burden of the bailout from taxpayers and place it, over time, on Wall Street instead.

Layered over the White House meeting was a complicated web of potential political benefits and consequences for both Obama and McCain.

McCain hoped voters would believe that he rose above politics to wade into successful, nitty-gritty dealmaking at a time of urgent crisis, but he risked being seen instead as either overly impulsive or politically craven, or both. Obama saw a chance to appear presidential and fit for duty, but was also caught off guard strategically by McCain's surprising gamble in saying he was suspending his campaigning and asking to delay Friday night's debate to focus on the crisis.

___

Associated Press writer Julie Hirschfeld Davis contributed to this story

http://news.yahoo.com/story//ap/20080925/ap_on_bi_ge/financial_meltdown
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keep-it-cool

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Re: The crumbling of the US financial system (NC)
« Reply #164 on: September 26, 2008, 03:45:59 AM »

CNBC interview of Warren Buffett ... long one .. shall try to format & highlight some aspects later .. but the entire thing is worth a read.

CNBC INTERVIEW TRANSCRIPT :  Warren Buffett Explains His $5B Goldman Investment
Topics : Politics & Government | Henry Paulson | Warren Buffett

Warren Buffett was interviewed live by telephone on CNBC's Squawk Box this morning about his surprise investment of at least $5 billion in Goldman Sachs.

BECKY QUICK:  We know you get all kinds of deals, all kinds of people who come knocking asking you to jump in.  You've said no to everything to this point.  Why is this the right deal at the right time?

WARREN BUFFETT:  Well, I can't tell you it's exactly the right time.  I don't try to time things, but I do try to price things.  And I've got a formula that says bet on brains, and bet of them when it's the right type of deal.  And in this case, there's no better firm on Wall Street.  We've done business with them for years, with Goldman, and the price was right, the terms were right, the people were right.  I decided to write a check.

BECKY:  Does the backdrop of the Federal government potentially getting involved with a massive bailout plan for Wall Street, does that have anything to do with this deal?

BUFFETT:  Well, I would say this.  If I didn't think the government was going to act, I would not be doing anything this week.  I might be trying to undo things this week.  I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly.  It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal.

BECKY:  Why would that be a mistake?  Because the institutions would collapse, or because you could get a better price?

CNBC.COM POLL:  BUFFETT'S BET, A BOOST OF CONFIDENCE?

BUFFETT:  Well, there's just no telling what would happen.  Last week we were at the brink of something that would have made anything that's happened in financial history look pale.  We were very, very close to a system that was totally dysfunctional and would have not only gummed up the financial markets, but gummed up the economy in a way that would take us years and years to repair.  We've got enough problems to deal with anyway.  I'm not saying the Paulson plan eliminates those problems.  But it was absolutely, and is absolutely necessary, in my view, to really avoid going over the precipice.

CARL QUINTANILLA:  Warren, we can almost hear you measuring your words as you speak, because what we're talking about has such gravity.  There are people out there who either don't, or are unwilling, to acknowledge what exactly, how serious the situation was last week.  And I'm hearing you say is that, was it the most frightening experience you've had in your lifetime, in terms of evaluating where this economy stands?

BUFFETT: Yeah, well, both the economy and the financial markets, but there're so intertwined that what happens, they're joined at the hip.  And it doesn't pay to get into horror stories in terms of naming institutions or anything.  But I will tell you that the market could not have, in my view, could not have taken another week like what was developing last week.  And setting forth the Paulson plan, it was the last thing, I think, that Hank Paulson wanted to do.  there's no Plan B for this.


AP
Goldman Sachs at 85 Broad Street in New York City. (2007 File Photo)
--------------------------------------------------------------------------------


BECKY:  Warren, you mentioned that Wall Street could not have taken another week like that.  But what does that mean to the American taxpayer who's sitting at home saying, 'Why is this my problem?'

BUFFETT:  Yeah, well, it's everybody's problem.  Unfortunately, the economy is a little like a bathtub.  You can't have cold water in the front and hot water in the back.  And what was happening on Wall Street was going to immerse that bathtub very, very quickly in terms of business.  Look, right now business is having trouble throughout the economy.  But a collapse of the kind of institutions that were threatened last week, and their inability to fund, would have caused industry and retail and everything else to grind to something close to a halt.  It was, and still is, a very, very dangerous situation.  No plan is going to be perfect, but thanks heavens that Paulson had the imagination to step up with something that is of the scope that can really do something about it.  And what he did with the money market funds,  that was not an idea that I had, but as soon as I heard about it, that was an important stroke.  Because the money, pulling out of the money market funds and going to Treasuries, and driving Treasury yields down to zero.  That -- a few more days of that and people would have been reading about lots and lots of troubles.

JOE KERNEN:  People listen, Warren, when you speak.  And I don't know if you watched the hearings yesterday ...

BUFFETT:  I got to watch some of them.

JOE:  But when the more dire it looked, in terms of communicating, with some of these Senators,  the three-month or one-month bill, again, started acting similar to what was happening on Thursday.  Now we averted that disaster on Thursday, but it's already been three or four days.  It's almost as if these guys already forgot about the position that we were in.   Do you think that accounted --  we're still susceptible to that happening again if it looked like they're not going to go through with this?

BUFFETT:  No, it would get worse.  Last week will look like Nirvana (laughs) if they don't do something.   I think they will.  I understand where they're very mad about what's happened in the past, but this isn't the time to vent your spleen about that.  This is the time to do something that gets this country back on the right track.  What you have, Joe, you have all the major institutions in the world trying to deleverage.  And we want them to deleverage, but they're trying to deleverage at the same time.  Well, if huge institutions are trying to deleverage, you need someone in the world that's willing to leverage up.  And there's no one that can leverage up except the United States government.  And what they're talking about is leveraging up to the tune of 700 billion, to in effect, offset the deleveraging that's going on through all the financial institutions.  And I might add, if they do it right, and I think they will do it reasonably right, they won't do it perfectly right,  I think they'll make a lot of money.  Because if they don't -- they shouldn't buy these debt instruments at what the institutions paid.  They shouldn't buy them at what they're carrying, what the carrying value is, necessarily.  They should buy them at the kind of prices that are available in the market.  People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments.  If the government makes anything over its cost of borrowing, this deal will come out with a profit.  And I would bet it will come out with a profit, actually.

BECKY:  Are you buying instruments like these in the market?

BUFFETT:  Well, I don't want to leverage up.  No one wants to leverage up in this thing.  So, if I could buy a hundred billion of these kinds of instruments at today's prices, and borrow non-recourse 90 billion, which I can't, but if I could do that, I would do that with the expectation of significant profit.

JOE:  But the government can do that.  You can't.  And that's why the private sector can't, even you, can't save the system.

BUFFETT:  I can't come close to it.  But they have the ability to borrow.  They can borrow much cheaper than I can borrow.  They can borrow unlimited.  They don't have covenants.  They don't have -- I mean, they are in the ideal position.  So, for example, if I were hiring advisers, as I talked about doing to buy these things, I would tell those advisers, 'Look it!  People are buying these instruments to make 15 percent.  So if you're going to charge me any fees, I'm going to defer those fees until I get rid of these instruments later on.  If I don't make at least ten percent on my assets, you know, your fee goes down the drain.  Because it should be a lead-pipe cinch to make 10 percent at the kind of prices that exist now.  I wouldn't try to write that into the legislation.  I don't think you should  -- I think they should punish, in many cases, the people -- I would think they might insist on the directors of the institutions that participate in this program waiving all director's fees for a couple of years.  They should, maybe, eliminate bonues.  They may wish to do some of those things.  I don't think you should try to write it into the instrument, though.  I think that gets so damn complicated and ties people's hands.  But if I were administering the program, I think I'd be fairly tough about some of those things, and I'd make sure that the advisers earned me a return that was well above my cost of borrowing before they got paid a dime.

BECKY:  Would you administer the program? 

JOE:  Yeah, can you be on the oversight board?  (Buffett laughs.)  Can you be on the oversight board?

BUFFETT:  I'd love to administer (laughs).  I'd love to administer it for nothing, but I would really love to administer and get some kind of an override in terms of the profits, which is naturally the way Wall Street thinks.  No, it's not my game to do that, but I will tell you that the buyers of the instruments these days are going to do better than the sellers.  And the big buyer, if they -- they shouldn't pay any attention to the cost of these instruments to the selling institutions.  They shouldn't pay any attention to the carrying value.  In fact, one thing you might do, is if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion in the market and then have the Treasury match that, for what they pay.  You don't want the Treasury to be a patsy.   But I'll tell you, with Hank Paulson on top of it, you couldn't have any better guy to do that.  The important thing is that if this program extends into the next administration is to have somebody in the next administration that has similar market savvy.

CARL QUINTANILLA:  Separate from the bailout, Warren, people obviously this morning want to look at the Goldman deal, I guess on top of Mitsubishi-Morgan, which happened yesterday and wasn't nearly as popular, at least from a market point of view.  But they want to point to you as the 'canary in the coal mine.'  Is that fair?  Do you have a problem with that?



WARREN BUFFETT:  Well, as long as the canary lives, I'm fine. (Laughs.)

CARL:  I'm guessing you're going to live.  At least, you're guessing you're going to live?

BUFFETT:  Yeah, I think so.  (Laughs.)  This is, you know, from our standpoint, we've had a lot of cash.  And we now are seeing things that, you know, give us a chance to use that cash sensibly.  And this was a five billion dollar opportunity to, I think, deploy cash sensibly.  I understand, incidentally, that there will be another five billion.  In other words, they mentioned 2-1/2 billion, but I think they're going to allocate it down to five billion additional.  So Goldman will have ten billion, I believe, of new money coming in.

BECKY:  In that capital offering.  In the release, they said 2-1/2 billion (of common stock would be offered in addition to Buffett's investment.)  You're saying you understand it's five billion?

BUFFETT:  Yeah, I think they have quite an outpouring of orders, so I think -- They'll be allocating it down, but I think from all over the world.  So I think there will be five billion of additional common stock sold.  That will be determined and announced, I believe, before the opening.

JOE:  How much do you know about AIG [AIG  3.31    -1.69  (-33.8%)   ] and their books right now, Warren?

BUFFETT:  Well, I think I know a fair amount, but I don't think anybody knew what they needed to know, including the management.   the troubles there were in the subsidiary, AIG Financial Products, and they had hundreds of thousands, I'm sure, hundreds and thousands of derivative contracts.  And I think that top management did not have their mind around what was involved with those contracts.  And you can do a lot of damage on Wall Street with a pen and a piece of paper.

JOE:  How many of those units are going to end up under the Berkshire umbrella?

BUFFETT:  Well, we would have an interest in a couple of 'em.  And actually over that weekend I expressed an interest in one or two, but the pressures were such, and the hole was deep enough, that they simply couldn't get it worked out.  And some of those units, most of those units, I believe, will be for sale over the next year or two.  And we would be interested in a couple of them.  I think they'll probably do a pretty intelligent job of selling them, which means we won't be as good a buyer.

CNBC.COM POLL:  BUFFETT'S BET, A BOOST OF CONFIDENCE?

BECKY:  You know, Warren, we've been trying to figure out -- I have to admit that I was shocked when I heard the news yesterday about this deal with Goldman, because you haven't put any money into an investment bank since 1987, Salomon.  And that was a deal you had to get personally involved with later in 1991 when you went to run the company for almost a year.  It was a very difficult experience.  I'm shocked that you would get back in with another investment bank.  Why do it?

BUFFETT:  (Laughs.)  Well, the pain has worn off.  That won't be happening with Goldman, but I -- That was a very unfortunate experience, and it was actually caused by just a couple of people out of a workforce of 8000 that got the company into big trouble.  And I had the help of a lot of people at Salomon in getting out of it.  But I don't think this experience will be similar.  Goldman has been extremely well run.  My experience with Goldman goes back, when I was nine or ten years old my parents took me back to the New York World's Fair, and by an odd chance I got to sit down with Sidney Weinberg, who was the dean of Wall Street then, and he talked to me as if I was a grown-up for 45 minutes.  I've never forgotten the experience.   Gus Levy (who later ran Goldman in the 1970s) was a good friend of mine when I worked in Wall Street.  In 1955, we only had four wires to Wall Street firms and one of them was to Goldman Sachs and Gus was on the other end of the phone.  So I've had a long experience with Goldman and they've done a lot of things for me recently.

JOE:  I just assume you know what was going on at all of these firms because I know everybody probably came to you and you made your decisions one-by-one on what to do.  When you look at the way some of these assets were marked, could you tell that, for example, Lehman still wasn't facing reality and perhaps Merrill Lynch was more in the real world?

BUFFETT:  Well, I think that turned out to be the case.  I was apprached on Lehman back in, I think, maybe it was April or March.  But the first round of financing when they raised the four billion, and, yeah, it looked to me like it was pretty unrealistic where they were marking things.  I feel good about the Goldman marks, incidentally, that's one of the discussions I've had.  And -- You can be pretty fanciful in marking positions in Wall Street, particularly when things aren't trading.  The one thing you want to make sure, when the Treasury is buying things, is the marks they have don't make any difference.  Like I said, it wouldn't be a bad idea, if you're buying ten billion of a security and you're the Treasury,  to have them sell five-hundred million, or something like that into the market, so you find out what the real market price is and then buy the other 9-1/2 billion at that price.  I really think, I really think the Treasury will make -- I think they'll pay back the 700 billion and make a considerable amount of money, if they approach it in that manner.   But I don't believe in trying to write that into some legislation.  I think it gets so unworkable.  I think you have a smart person in charge, and have them treat it like it's their own money,  and the taxpayers' money, in terms of behavior, and I think it will work out very well.  I think it's not comparable to the RTC.

CARL:  A lot of people who are watching us Warren, and even people who have just started watching us over the past week or two, look at the stock market every day and are confused.  They want to use it as a metric for how we're doing,  or at least the progress we're making on big issues.  I'm guessing you don't think it's reflective of anything that's based in reality right now?

BUFFETT:  Well, the stock market in the short -- my old boss Ben Graham said that in the short-run the stock market is a voting machine, in the long-run it's a weighing machine.  As a voting machine, it responds to people's emotions.  There's no literacy test for voting. You vote according to how much money you have, not according to how smart you (are.)  So the stock market does some very silly things in the short-run.  Over the long-run, it behaves quite rationally.  And, you know, five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary buys.  That doesn't mean it won't get more extraordinary a week or a month from now.  I have no idea what the stock market is going to do next month or six months from now.   I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well.  But they shouldn't own it on leverage.  That's what people have learned in this period, that you've got to be able to play out your hand and it's a big mistake to let somebody else be in a position where they can sell you out.

BECKY:  Warren, when you first invested back in '87 in Salomon, I believe your partner, Charile Munger, was not as enthusiastic about the idea as you were.  Is that true?

BUFFETT:  That's true.  Of course, he's never as enthusiastic about my ideas as I am.  But I would say he was even less enthusiastic.  (Laughs.)

BECKY:  How does he feel about the Goldman deal?

BUFFETT:  Well, I'm glad you asked because I, (laughs), didn't tell him about it until after it was done.  (Laughs.)

CARL:  How rude!

BUFFETT: (Laughs.)  Yeah, it is kind of rude.  But Charlie's wife had a bad fall and he's (inaudible) and I called him last night about an hour after I committed it, or something, and I called kinda like a little boy ... (laughs) ... bringing into the house something he was a little worried about.  But, Charlie's all for it. (Laughs.)

BECKY:  He's all for it.

BUFFETT: Yeah.  Now I'm really worried.

BECKY:  Uh-oh.  For the last nine months, Berkshire has spent a lot of that cash it's been hoarding over the last several years.

BUFFETT:  That's right.

BECKY: I was trying to figure it out.  I think it's about 24 billion dollars you've spent in the last nine months?

BUFFETT:  Yeah, we've spent a lot of money.  The money, the money we've spent, you know, we've found things we like to do.  It's nice to have a lot of money, but you don't want to keep it around forever.  I prefer buying things.  Otherwise it's a little like saving up sex for your old age.  (Laughs.)  At some point, you've got to use it.  (Laughter.)

JOE:  Uh-oh.

BECKY:  Twenty-four billion dollars.  Is that a right guess and how much cash do you have left?

BUFFETT:  You know, it would be 6-1/2 for the Mars deal, there's five for this, there's five for Constellation, there's a couple of other things.  So, yeah, your addition is fine, Becky.

BECKY:  How much cash do you have left?

BUFFETT:  Well, I've got enough.   (Laughs.)  I don't really look at it every day.  I look for opportunities every day, and then if I find opportunities, I see if I've got enough cash around to take care of them.

JOE:  Well, by my calculation, if you lever that up thirty times, Warren, you can really get serious here.  (Laughter.)  Maybe you don't want to do that, I don't know.  (Laughter.)  What about, how are we going to deal with this looming 50 -- we just had (New York State Insurance Commissioner) Eric Dinallo on, I don't know if you were watching, Mr. Buffett.  He talked about, he can, maybe New York and his unit can look at the twelve billion, or trillion, jeez, we've got to add a T.  I'm finally getting used to Bs, now we have to add a T.  But what we are going to do with that 50 trillion and how, having that still around, all these credit default swaps, how serious is that, and how are we going to unwind it and deal with it?

BUFFETT:  Yeah, well, it goes beyond credit default swaps into all forms of derivatives.  But the derivative genie got out of the bottle, and it's a huge genie, and it will never get back into the bottle.  It is a terribly tough problem because they are not homogeneous items.  It's one thing to have a clearing house for the futures in Chicago, or something, and every morning have everybody post to market and that's a very efficient system.  It's very hard to do that with derivatives where you can derivatives based on the New Zealand money supply or the number of babies born in Japan, and all kinds of things as the variables.  And they're often very complicated.  I applaud Dinallo.  He is an outstanding insurance comimssioner.  But getting regulation around the entire derivatives market is really tough.  I've thought a lot about it.  But it's important.  Derivatives have been an important part of the problem in financial markets.  And they continue to be part of it.  And in AIG's case -- AIG would be doing fine now, I think, if they'd never heard of the word derivative.     

BECKY QUICK:  Mr. Buffett, the front page of the Wall Street Journal and other media organizations around the globe have been picking this up, your move yesterday into Goldman Sachs, as a vote of confidence in the banking institutions across the globe.  Is that fair?

BUFFETT:  Well, I'm not buying a cross-section of banking institutions.  But I certainly have confidence in Goldman.  And you can say it's a vote of confidence in the Congress to do the right thing with something that's being debated before them right now.

CARL QUINTANILLA:  You know, Warren, some might say, 'OK, we know Buffett is a pure capitalist.  he's in this to make money and nothing else.'  But also you're a philanthropist, you have interests in seeing the country do well over time.  Some might say he's doing this, he's timed this to help get the package through.   Is there anything -- is that even close to reality?

BUFFETT:  No.  I timed this because Goldman Sachs yesterday came up with something that made sense to me.  I'm not brave enough, to try and influence the Congress.  The other way around, they influence me.  And I am betting on the Congress doing the right thing for the American public by passing this bill and not trying to doctor it up with a hundred things that, you know, emotionally they feel should be on the bill but as a practical matter will gum things up.

CARL:  When do you think, Warren -- I don't know if you even have an answer to this question -- When is the absolute deadline by which you think this needs to happen?   Is it this weekend?  Can you be that specific?  Or if this thing were to bleed into next week, or if they had to reconvene a special session, would that be disastrous?

BUFFETT:  Well, I think anything that makes it look like it's in doubt is what causes the problem.  So if they said on Friday we're absolutely having a vote on Monday, or something of the sort, I don't think that would be a problem.  But if they went home on Friday and there was doubt about whether they were going to do something on Monday, I think you'd see some things you don't want to see in the markets and they would have some effects on the economy.

JOE:  You were watching yesterday, and I don't know, maybe I don't know the ways of Washington.  Maybe they say one thing and maybe they're really planning -- you know, they have to look good for their constituents.  But I wasn't convinced they really understood the seriousness of the situation, Warren, and that was after they said, look, Greenspan says we need this, Volcker says we need this, Bernanke, Paulson.  Now we have you.  I don't know.  Do you think they get it?

BUFFETT:  Well, I think they will get it.  I think enough of them will get it.  You know, it's not like Pearl Harbor where you could look at what happened with your own eyes and decide you had to do something that day.  But this is sort of an economic Pearl Harbor we're going through.  And I think most of them will get it.  And I do believe they will do what's right for the country.  They may vent their spleen a little bit by getting mad about the people that brought us into that, and I don't blame them for that.  I might do that privately, too.   But in the end, you know, Republican, Democrat, I think they've got the interest of the country at heart and I think they will do the right thing.  But I hope they do it soon.  (Laughs.)

BECKY:  Warren, how long were you talking to Goldman Sachs and how significantly did they have to change the terms of the deal to get you interested?

BUFFETT:  Well, what they -- they had talked with me -- almost every financial institution has talked with me, that you read about, over the past few weeks.  But, but, they were serious yesterday about doing something.  They said, in effect said, 'What would you do?  What would Berkshire do?  And I laid out something.  And they said,  'That makes sense to us.'  And we had a deal.  It doesn't take long.

JOE:  You were kidding Becky when you said that you did this just 'cause you knew we were going to ask you when you were going to do something in financials again and you wanted to have an answer.

BUFFETT:  Joe, Joe, I was not -- you know, I was trembling with the thought of you asking me again, 'When are you finally going to do something?'  (Laughs.)  So this was definitely an attempt to get you off my back.

JOE:  It was a cheap way, a mere five billion, so you'd have something to show us this time.

BUFFETT:  That's right.  I mean, your withering questioning is just too tough for me.  (Laughs.)

BECKY:  You know, you mentioned earlier, in the grand scheme of things, it's going to matter who the next Treasury Secretary is going to be.  Are there names of people you think would be sound in either administration.

BUFFETT:  Becky, if I were running things, Republican or Democrat, I would ask Hank to stay on.  I mean, you don't get talent like that very often in any administrative job.  And the guy pays an enormous price to do it.  He's probably sleeping three or four hours a night.  He knows the market.  He's got the interests of the country at heart.  So I think if I were either Barack Obama or John McCain and found myself in the White House in January, I would go down there and say, 'Hank, do me a favor, stick around another year.'

CARL:  And Warren, if you believe, as a lot of people do, that we are in for several years of this unwinding process, the government's going to play a huge role.  If you were called to do something on the public side, would you do it?

BUFFETT:  Well, I would certainly be glad to help in any way that I could.  You know, I would be looked at as having conflicts-of-interest, I'm sure.  But anytime I can be helpful on something -- For example, in terms of what you might do with institutions that participated in this program, I think the Treasury can, they can lay down some terms for these people.  I don't think they should be in the legislation, but I think -- And if anybody wants my opinion on it, I'd be glad to help them out. 

BECKY:  Warren, if ... 

BUFFETT: They can make money on this deal.  I can tell you this.  I would love to have 700-billion at Treasury rates to be able to buy fixed-income securities now that they're in distress.   There's a lot of money to be made.

JOE:  It's just that, you know, they want these details, Warren.  They said -- Paulson says there's the hold-to-maturity price and there's the firesale price.  We're going to go somewhere in between, get a much better price but still leave enough for the people that are buying it to make some money.  That can be done in principle?  There's a way to do that, do you think?

BUFFETT:  I think what I would be looking for  -- I heard that hold-to-maturity price.  I'm not as excited about that.  I basically like a market, or something very close to a market-related price.  And there are ways to determine that and I don't think that Uncle Sam should be in the business of paying somebody a whole lot more than it's worth in the market today.  And if the guy that bought it doesn't like it, he doesn't have to sell it, and it was his problem, he bought it in the first place.  I think a market price will enable people to be leveraged.  The problem they have now is that some of the institutions, they're loaded with this stuff, they're having trouble funding, and they're worried about being able to sell a ton of it.  But take the Merrill Lynch deal.  Merrill Lynch had to take back 75 percent of the sales price.  Well, they didn't want to take back that 75 percent.  I would let 'em sell it for the same price, but I'd pay them the whole thing in cash.   So they'd be a lot better off if they could have sold the whole thing at that same price but gotten paid a hundred percent in cash instead of having to take back 75 percent.  And I see the government fulfilling that kind of a function.

JOE:  All the outrage we're seeing in these comments from viewers, and obviously the senators are hearing from constituents.  If we take your word for it, that the government could even break-even, or only lose 50 billion, that 700 billion dollar number is out there in the public, and people think that we're spending that.

BUFFETT: Yeah, they think that, yeah.

JOE:  It seems crucially important to get the point across that, in your view, we could, the government could actually end up making money and saving the taxpayer from much worse, a much worse outcome if we didn't do this.

BUFFETT:  The government is getting 700 billion worth of assets, assuming they spend the 700 billion, they're getting 700 billion of assets at what I regard as attractive prices.  And they've got the staying power to hold those things.  If I could get 700 billion, if I could borrow 700 billion on the government's terms and buy these assets I'd be doing it myself.  But unfortunately I'm tapped out.  (Laughs.)

BECKY:  And yet, Warren, Mayor Mike Bloomberg, I heard him making comments this morning, and he's someone I know you've spoken very highly of ..

BUFFETT:  I admire him.

BECKY:  You admire him.  he says this morning we should not be giving a blank check to have something passed in the dead of night.  How dire is this situation?

BUFFETT:  Well, I'm sure we didn't want to go to war on December 7, 1941, maybe, in the dead of night, or whenever we did it, in the middle of the afternoon actually.  But there are time when events force timetables on you, and force action, and you have to be -- You know, it's just like in my business.  I might like to think over buying something for a month, I'm not that type anyway.  But in the end, if somebody offers me something that makes sense, I better decide whether to act or not.  And if it makes sense to me, I usually don't attach unnecessary conditions, you know.   It would be nice to have the luxury of thinking about this for three months.  But I will tell you, if you think about this for three months, you're going to have a situation where -- If you think about it for three weeks, you're going to be facing a situation that's far different, and far more difficult, than if you do something now.
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LosingNow

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Re: The crumbling of the US financial system (NC)
« Reply #165 on: September 26, 2008, 04:30:25 AM »

The phones of all the representatives in congress are ringing off the hook (1million calls in last 2 days!)...and they are 99% opposed to any bailout deal.

Republicans do not want government to bailout bad performing companies or those who made bad decisions .. democrats do not want government to bailout "rich people" who used easy loans to buy 2nd and 3rd investment homes.

This deal will not be easily done!
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Re: The crumbling of the US financial system (NC)
« Reply #166 on: September 26, 2008, 08:13:29 AM »

WaMu is largest U.S. bank failure

By Elinor Comlay and Jonathan Stempel

Thu Sep 25, 11:25 PM ET
 

NEW YORK/WASHINGTON (Reuters) - Washington Mutual Inc was closed by the U.S. government in by far the largest failure of a U.S. bank, and its banking assets were sold to JPMorgan Chase & Co for $1.9 billion.

Thursday's seizure and sale is the latest historic step in U.S. government attempts to clean up a banking industry littered with toxic mortgage debt. Negotiations over a $700 billion bailout of the entire financial system stalled in Washington on Thursday.

Washington Mutual, the largest U.S. savings and loan, has been one of the lenders hardest hit by the nation's housing bust and credit crisis, and had already suffered from soaring mortgage losses.

Washington Mutual was shut by the federal Office of Thrift Supervision, and the Federal Deposit Insurance Corp was named receiver. This followed $16.7 billion of deposit outflows at the Seattle-based thrift since Sept 15, the OTS said.

"With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business," the OTS said.

Customers should expect business as usual on Friday, and all depositors are fully protected, the FDIC said.

FDIC Chairman Sheila Bair said the bailout happened on Thursday night because of media leaks, and to calm customers. Usually, the FDIC takes control of failed institutions on Friday nights, giving it the weekend to go through the books and enable them to reopen smoothly the following Monday.

Washington Mutual has about $307 billion of assets and $188 billion of deposits, regulators said. The largest previous U.S. banking failure was Continental Illinois National Bank & Trust, which had $40 billion of assets when it collapsed in 1984.

JPMorgan said the transaction means it will now have 5,410 branches in 23 U.S. states from coast to coast, as well as the largest U.S. credit card business.

It vaults JPMorgan past Bank of America Corp to become the nation's second-largest bank, with $2.04 trillion of assets, just behind Citigroup Inc. Bank of America will go to No. 1 once it completes its planned purchase of Merrill Lynch & Co.

The bailout also fulfills JPMorgan Chief Executive Jamie Dimon's long-held goal of becoming a retail bank force in the western United States. It comes four months after JPMorgan acquired the failing investment bank Bear Stearns Cos at a fire-sale price through a government-financed transaction.

On a conference call, Dimon said the "risk here obviously is the asset values."

He added: "That's what created this opportunity."

JPMorgan expects to incur $1.5 billion of pre-tax costs, but realize an equal amount of annual savings, mostly by the end of 2010. It expects the transaction to add to earnings immediately, and increase earnings 70 cents per share by 2011.

It also plans to sell $8 billion of stock, and take a $31 billion write-down for the loans it bought, representing estimated future credit losses.

The FDIC said the acquisition does not cover claims of Washington Mutual equity, senior debt and subordinated debt holders. It also said the transaction will not affect its roughly $45.2 billion deposit insurance fund.

"Jamie Dimon is clearly feeling that he has an opportunity to grab market share, and get it at fire-sale prices," said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati. "He's becoming an acquisition machine."

BAILOUT UNCERTAINTY

The transaction came as Washington wrangles over the fate of a $700 billion bailout of the financial services industry, which has been battered by mortgage defaults and tight credit conditions, and evaporating investor confidence.

"It removes an uncertainty from the market," said Shane Oliver, head of investment strategy at AMP Capital in Sydney. "The problem is that markets are in a jittery stage. Washington Mutual provides another reminder how tenuous things are."

Washington Mutual's collapse is the latest of a series of takeovers and outright failures that have transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.

These include the disappearance of Bear, government takeovers of mortgage companies Fannie Mae and Freddie Mac and the insurer American International Group Inc, the bankruptcy of Lehman Brothers Holdings Inc, and Bank of America's purchase of Merrill.

JPMorgan, based in New York, ended June with $1.78 trillion of assets, $722.9 billion of deposits and 3,157 branches. Washington Mutual then had 2,239 branches and 43,198 employees. It is unclear how many people will lose their jobs.

Shares of Washington Mutual plunged $1.24 to 45 cents in after-hours trading after news of a JPMorgan transaction surfaced. JPMorgan shares rose $1.04 to $44.50 after hours, but before the stock offering was announced.

119-YEAR HISTORY

The transaction ends exactly 119 years of independence for Washington Mutual, whose predecessor was incorporated on September 25, 1889, "to offer its stockholders a safe and profitable vehicle for investing and lending," according to the thrift's website. This helped Seattle residents rebuild after a fire torched the city's downtown.

It also follows more than a week of sale talks in which Washington Mutual attracted interest from several suitors.

These included Banco Santander SA, Citigroup Inc, HSBC Holdings Plc, Toronto-Dominion Bank and Wells Fargo & Co, as well as private equity firms Blackstone Group LP and Carlyle Group, people familiar with the situation said.

Less than three weeks ago, Washington Mutual ousted Chief Executive Kerry Killinger, who drove the thrift's growth as well as its expansion in subprime and other risky mortgages. It replaced him with Alan Fishman, the former chief executive of Brooklyn, New York's Independence Community Bank Corp.

WaMu's board was surprised at the seizure, and had been working on alternatives, people familiar with the matter said.

More than half of Washington Mutual's roughly $227 billion book of real estate loans was in home equity loans, and in adjustable-rate mortgages and subprime mortgages that are now considered risky.

The transaction wipes out a $1.35 billion investment by David Bonderman's private equity firm TPG Inc, the lead investor in a $7 billion capital raising by the thrift in April.

A TPG spokesman said the firm is "dissatisfied with the loss," but that the investment "represented a very small portion of our assets."

DIMON POUNCES

The deal is the latest ambitious move by Dimon.

Once a golden child at Citigroup before his mentor Sanford "Sandy" Weill engineered his ouster in 1998, Dimon has carved for himself something of a role as a Wall Street savior.

Dimon joined JPMorgan in 2004 after selling his Bank One Corp to the bank for $56.9 billion, and became chief executive at the end of 2005.

Some historians see parallels between him and the legendary financier John Pierpont Morgan, who ran J.P. Morgan & Co and was credited with intervening to end a banking panic in 1907.

JPMorgan has suffered less than many rivals from the credit crisis, but has been hurt. It said on Thursday it has already taken $3 billion to $3.5 billion of write-downs this quarter on mortgages and leveraged loans.

Washington Mutual has a major presence in California and Florida, two of the states hardest hit by the housing crisis. It also has a big presence in the New York City area. The thrift lost $6.3 billion in the nine months ended June 30.

"It is surprising that it has hung on for as long as it has," said Nancy Bush, an analyst at NAB Research LLC.

(Additional reporting by Paritosh Bansal, Christian Plumb and Dan Wilchins; Jessica Hall in Philadelphia; John Poirier in Washington, D.C. and Kevin Lim in Singapore; Editing by Gary Hill and Carol Bishopric)

http://news.yahoo.com/s/nm/20080926/ts_nm/us_washingtonmutual_jpmorgan_news
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RicePlateReddy

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Re: The crumbling of the US financial system (NC)
« Reply #167 on: September 26, 2008, 04:12:00 PM »

An article from an extreme right wing commentator (the "jihadi chic keffiyeh" blogger if you recollect). I wish we had credible stats to determine is the percentage of illegal immigrants defaulting on mortgages is truly appreciable, or all bluster.

Illegal Immigration and the Mortgage Mess
http://townhall.com/columnists/MichelleMalkin/2008/09/24/illegal_immigration_and_the_mortgage_mess

The Mother of All Bailouts has many fathers. As panicked politicians prepare to fork over $1 trillion in taxpayer funding to rescue the financial industry, they've fingered regulation, deregulation, Fannie Mae and Freddie Mac, the Community Reinvestment Act, Jimmy Carter, Bill Clinton, both Bushes, greedy banks, greedy borrowers, greedy short-sellers and minority home ownership mau-mauers (can't call 'em greedy, that would be racist) for blame.

But there's one giant paternal elephant in the room that has slipped notice: how illegal immigration, crime-enabling banks and open-borders Bush policies fueled the mortgage crisis.

It's no coincidence that most of the areas hardest hit by the foreclosure wave -- Loudoun County, Va., California's Inland Empire, Stockton and San Joaquin Valley, and Las Vegas and Phoenix, for starters -- also happen to be some of the nation's largest illegal alien sanctuaries. Half of the mortgages to Hispanics are subprime (the accursed species of loan to borrowers with the shadiest credit histories). A quarter of all those subprime loans are in default and foreclosure.

Regional reports across the country have decried the subprime meltdown's impact on illegal immigrant "victims." A July report showed that in seven of the 10 metro areas with the highest foreclosure rates, Hispanics represented at least one-third of the population; in two of those areas -- Merced and Salinas-Monterey, Calif. -- Hispanics comprised half the population. The amnesty-promoting National Council of La Raza and its Development Fund have received millions in federal funds to "counsel" their constituents on obtaining mortgages with little to no money down; the group almost succeeded in attaching a $10-million earmark for itself in one of the housing bills past this spring.

For the last five years, I've reported on the rapidly expanding illegal alien home loan racket. The top banks clamoring for their handouts as their profits plummet, led by Wachovia and Bank of America, launched aggressive campaigns to woo illegal alien homebuyers. The quasi-governmental Wisconsin Housing and Economic Development Authority jumped in to guarantee home loans to illegal immigrants. The Washington Post noted, almost as an afterthought in a 2005 report: "Hispanics, the nation's fastest-growing major ethnic or racial group, have been courted aggressively by real estate agents, mortgage brokers and programs for first-time buyers that offer help with closing costs. Ads proclaim: "Sin verificacion de ingresos! Sin verificacion de documento!" -- which loosely translates as, 'Income tax forms are not required, nor are immigration papers.'"

In addition, fraudsters have engaged in massive house-flipping rings using illegal aliens as straw buyers. Among many examples cited by the FBI: a conspiracy in Las Vegas involving a former Nevada First Residential Mortgage Company branch manager who directed loan officers and processors in the origination of 233 fraudulent Federal Housing Authority loans valued at over $25 million. The defrauders manufactured and submitted false employment and income documentation for borrowers; most were illegal immigrants from Mexico. To date, the FBI reported, "Fifty-eight loans with a total value of $6.2 million have gone into default, with a loss to the Housing and Urban Development Department of over $1.9 million."

It's the tip of the iceberg. Thanks to lax Bush administration-approved policies allowing illegal aliens to use "matricula consular cards" and taxpayer identification numbers to open bank accounts, more forms of mortgage fraud have burgeoned. Moneylenders still have no access to a verification system to check Social Security numbers before approving loans.

In an interview about rampant illegal alien home loan fraud, a spokeswoman for the U.S. General Accounting Office told me five years ago: "[C]onsidering the size of Los Angeles, New York, Chicago, Houston and other large cities throughout the United States known to be inundated with illegal aliens, I don't think the federal government is willing to expose this problem for financial reasons as well as for fear of political repercussions."

The chickens are coming home to roost. And law-abiding, responsible taxpayers are going to pay for it.


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LosingNow

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Re: The crumbling of the US financial system (NC)
« Reply #168 on: September 26, 2008, 04:36:25 PM »

An article from an extreme right wing commentator (the "jihadi chic keffiyeh" blogger if you recollect). I wish we had credible stats to determine is the percentage of illegal immigrants defaulting on mortgages is truly appreciable, or all bluster.

Illegal Immigration and the Mortgage Mess
http://townhall.com/columnists/MichelleMalkin/2008/09/24/illegal_immigration_and_the_mortgage_mess

The Mother of All Bailouts has many fathers. As panicked politicians prepare to fork over $1 trillion in taxpayer funding to rescue the financial industry, they've fingered regulation, deregulation, Fannie Mae and Freddie Mac, the Community Reinvestment Act, Jimmy Carter, Bill Clinton, both Bushes, greedy banks, greedy borrowers, greedy short-sellers and minority home ownership mau-mauers (can't call 'em greedy, that would be racist) for blame.

But there's one giant paternal elephant in the room that has slipped notice: how illegal immigration, crime-enabling banks and open-borders Bush policies fueled the mortgage crisis.

It's no coincidence that most of the areas hardest hit by the foreclosure wave -- Loudoun County, Va., California's Inland Empire, Stockton and San Joaquin Valley, and Las Vegas and Phoenix, for starters -- also happen to be some of the nation's largest illegal alien sanctuaries. Half of the mortgages to Hispanics are subprime (the accursed species of loan to borrowers with the shadiest credit histories). A quarter of all those subprime loans are in default and foreclosure.

Regional reports across the country have decried the subprime meltdown's impact on illegal immigrant "victims." A July report showed that in seven of the 10 metro areas with the highest foreclosure rates, Hispanics represented at least one-third of the population; in two of those areas -- Merced and Salinas-Monterey, Calif. -- Hispanics comprised half the population. The amnesty-promoting National Council of La Raza and its Development Fund have received millions in federal funds to "counsel" their constituents on obtaining mortgages with little to no money down; the group almost succeeded in attaching a $10-million earmark for itself in one of the housing bills past this spring.

For the last five years, I've reported on the rapidly expanding illegal alien home loan racket. The top banks clamoring for their handouts as their profits plummet, led by Wachovia and Bank of America, launched aggressive campaigns to woo illegal alien homebuyers. The quasi-governmental Wisconsin Housing and Economic Development Authority jumped in to guarantee home loans to illegal immigrants. The Washington Post noted, almost as an afterthought in a 2005 report: "Hispanics, the nation's fastest-growing major ethnic or racial group, have been courted aggressively by real estate agents, mortgage brokers and programs for first-time buyers that offer help with closing costs. Ads proclaim: "Sin verificacion de ingresos! Sin verificacion de documento!" -- which loosely translates as, 'Income tax forms are not required, nor are immigration papers.'"

In addition, fraudsters have engaged in massive house-flipping rings using illegal aliens as straw buyers. Among many examples cited by the FBI: a conspiracy in Las Vegas involving a former Nevada First Residential Mortgage Company branch manager who directed loan officers and processors in the origination of 233 fraudulent Federal Housing Authority loans valued at over $25 million. The defrauders manufactured and submitted false employment and income documentation for borrowers; most were illegal immigrants from Mexico. To date, the FBI reported, "Fifty-eight loans with a total value of $6.2 million have gone into default, with a loss to the Housing and Urban Development Department of over $1.9 million."

It's the tip of the iceberg. Thanks to lax Bush administration-approved policies allowing illegal aliens to use "matricula consular cards" and taxpayer identification numbers to open bank accounts, more forms of mortgage fraud have burgeoned. Moneylenders still have no access to a verification system to check Social Security numbers before approving loans.

In an interview about rampant illegal alien home loan fraud, a spokeswoman for the U.S. General Accounting Office told me five years ago: "[C]onsidering the size of Los Angeles, New York, Chicago, Houston and other large cities throughout the United States known to be inundated with illegal aliens, I don't think the federal government is willing to expose this problem for financial reasons as well as for fear of political repercussions."

The chickens are coming home to roost. And law-abiding, responsible taxpayers are going to pay for it.

From anecdotes, in the phoenix market the home flippers (mostly investors from CA who were sitting on "home equity" from the massive appreciation in houses there) have brought the downfall. Donno how much of this was done through "illegal" residents acting as frontmen.

I know of a Desi guy who bought 3 houses putting as low as 5% down with the intention to flip ...and didn't sell on time and now cant get out .. and has now rented one of them (which doesnt cover his mortgage) and is paying mortgage on the other 2.

I also heard from one guy (a restaurateur)  - "I knew something was wrong when the doorman and the waiters/waitresses at the hotel I frequently go to said that they bought houses. There is no way in hell these people would have the 'steady-verifiable' levels of income required to support a mortgage".

There were mortgage brokers making $100K in commissions per month here in Phoenix.

Clearly unqualified people were getting loans - whether they were predominantly illegals or not.. don't know.
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prfsr

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Re: The crumbling of the US financial system (NC)
« Reply #169 on: September 26, 2008, 10:52:07 PM »

Krugman is solidly behind a bailout in this case.

http://www.nytimes.com/2008/09/26/opinion/26krugman.html?_r=1&oref=slogin

It’s true that we don’t know for sure that the parallel is a fair one. Maybe we can let Wall Street implode and Main Street would escape largely unscathed. But that’s not a chance we want to take.

So the grown-up thing is to do something to rescue the financial system. The big question is, are there any grown-ups around — and will they be able to take charge?

Earlier this week, Henry Paulson, the Treasury secretary, tried to convince Congress that he was the grown-up in the room, come to protect us from danger. And he demanded total authority over the rescue: $700 billion to be used at his discretion, with immunity for future review.

Congress balked. No government official should be entrusted with that kind of monarchical privilege, least of all an official belonging to the administration that misled America into war. Furthermore, Mr. Paulson’s track record is anything but reassuring: he was way behind the curve in appreciating the depth of the nation’s financial woes, and it’s partly his fault that we’ve reached the current moment of meltdown.

Besides, Mr. Paulson never offered a convincing explanation of how his plan was supposed to work — and the judgment of many economists was, in fact, that it wouldn’t work unless it amounted to a huge welfare program for the financial industry.

But if Mr. Paulson isn’t the grown-up we need, are Congressional leaders ready and able to fill the role?

Well, the bipartisan “agreement on principles” released on Thursday looks a lot better than the original Paulson plan. In fact, it puts Mr. Paulson himself under much-needed adult supervision, calling for an oversight board “with cease and desist authority.” It also limits Mr. Paulson’s allowance: he only (only!) gets to use $250 billion right away.

Meanwhile, the agreement calls for limits on executive pay at firms that get federal money. Most important, it “requires that any transaction include equity sharing.”

Why is that so important? The fundamental problem with our financial system is that the fallout from the housing bust has left financial institutions with too little capital. When he finally deigned to offer an explanation of his plan, Mr. Paulson argued that he could solve this problem through “price discovery” — that once taxpayer funds had created a market for mortgage-related toxic waste, everyone would realize that the toxic waste is actually worth much more than it currently sells for, solving the capital problem. Never say never, I guess — but you don’t want to bet $700 billion on wishful thinking.

The odds are, instead, that the U.S. government will end up having to do what governments always do in financial crises: use taxpayers’ money to pump capital into the financial system. Under the original Paulson plan, the Treasury would probably have done this by buying toxic waste for much more than it was worth — and gotten nothing in return. What taxpayers should get is what people who provide capital are entitled to: a share in ownership. And that’s what the equity sharing is about.

The Congressional plan, then, looks a lot better — a lot more adult — than the Paulson plan did. That said, it’s very short on detail, and the details are crucial. What prices will taxpayers pay to take over some of that toxic waste? How much equity will they get in return? Those numbers will make all the difference.

And in any case, it seems that we don’t have a deal.

This has to be a bipartisan plan, and not just at the leadership level. Democrats won’t pass the plan without votes from rank-and-file Republicans — and as of Thursday night, those rank-and-file Republicans were balking.

Furthermore, one non-rank-and-file Republican, Senator John McCain, is apparently playing spoiler. Earlier this week, while refusing to say whether he supported the Paulson plan, he claimed not to have had a chance to read it; the plan is all of three pages long. Then he inserted himself into the delicate negotiations over the Congressional plan, insisting on a White House meeting at which he reportedly said little — but during which consensus collapsed.

The bottom line, then, is that there do seem to be some adults in Congress, ready to do something to help us get through this crisis. But the adults are not yet in charge.
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prfsr

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Re: The crumbling of the US financial system (NC)
« Reply #170 on: September 26, 2008, 11:05:33 PM »

The financial types are still doing well  ;D

http://money.cnn.com/2008/09/26/news/companies/fishman_wamu/index.htm?postversion=2008092615


"Washington Mutual Chief Executive Alan Fishman could walk away with more than $18 million in salary, bonuses and severance after less than three weeks on the job, according to the terms of his employment agreement. "
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prfsr

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Re: The crumbling of the US financial system (NC)
« Reply #171 on: September 27, 2008, 07:21:22 PM »

Inspired by WN, I read the following blog from a UChicago heavyweight. The govt is not to blame as per the author. :notworthy: :notworthy:

http://www.becker-posner-blog.com/archives/2008/09/

The Financial Crisis: the Role of Government--Posner
I agree with Becker that capitalism will survive the current financial crisis, even if it leads to a major depression (which it may not). It will survive because there is no alternative that hasn't been thoroughly discredited. The Soviet, Maoist, "corporatist" (fascist Italy), Cuban, Venezuelan, etc. alternatives are unappealing, to say the least. But capitalism may survive only in damaged, in compromised, form--think of the spur that the Great Depression gave to collectivism. The New Deal, spawned in the depression, ushered in a long era of heavy government regulation; and likewise today there is both advocacy and the actuality of renewed regulation. I would like to examine the possibility that government is responsible for the current crisis; for if it is, this would be a powerful intellectual argument against re-regulation, though not an argument likely to have any political traction.

I do not think that the government does bear much responsibility for the crisis. I fear that the responsibility falls almost entirely on the private sector. The people running financial institutions, along with financial analysts, academics, and other knowledgeable insiders, believed incorrectly (or accepted the beliefs of others) that by means of highly complex financial instruments they could greatly reduce the risk of borrowing and by doing so increase leverage (the ratio of debt to equity). Leverage enables greatly increased profits in a rising market, especially when interest rates are low, as they were in the early 2000s as a result of a global surplus of capital. The mistake was to think that if the market for housing and other assets weakened (not that that was expected to happen), the lenders would be adequately protected against the downside of the risk that their heavy borrowing had created. The crisis erupted when, because of the complexity of the financial instruments that were supposed to limit risk, the financial industry could not determine how much risk it was facing and creditors panicked. Compensation schemes that tie executive compensation to the stock prices of the executives' companies but cushion them against a decline in those prices (as when executives are offered generous severance pay or stock options are repriced following the fall of the stock price) further encouraged risk taking. Moreover, even when businesses sense that they are riding a bubble, they are reluctant to get off while the bubble is still expanding, since by doing so they may be leaving a lot of money on the table. Finally, if a firm's competitors are taking big risks and as a result making huge profits in a rising market, a firm is reluctant to adopt a safe strategy. For that would require convincing skeptical shareholders and analysts that the firm's below-average profits, resulting from its conservative strategy, were really above-average in a long-run perspective.

It should be noted that because of the enormous rewards available to successful financiers, the financial industry attracted enormously able people. It was not a deficiency in IQ that produced the crisis.

Becker makes incisive criticisms of the government's responses to the crisis. He points out that those responses create moral hazard, specifically a bias toward financing enterprise by bonds rather than by stock because the government's bailouts are limited to the bondholders and other creditors; create additional moral hazard because the responses include extending government insurance of deposits to money market funds; impede hedge funds by forbidding short selling, which enables the funds to hedge their risks; reduce information about stock values (another consequence of forbidding short selling); increase regulation of financial markets, which will carry with it the usual heavy costs of heavy-handed regulation; blur the role of the Federal Reserve Board by increasing its powers and duties; and increase the federal deficit.

But here is a remarkable thing about these responses. To a great extent they are not responses by government, really, but by the private sector. Bernanke and Paulson are neither politicians nor civil servants; Bernanke is an economics professor and Paulson an investment banker. Their principal advisers are investment bankers rather than Fed and Treasury employees. Even the prohibition of short selling, which seems like a product of the kind of mindless hostility to speculation that one expects from politicians, has been strongly urged by Wall Streeters, including the CEO of Morgan Stanley. The White House, the Congress, and even the SEC have been only bit players in the response to the crisis. In effect, the government's power to repair the crisis that Wall Street created has been delegated to Wall Street.

It is true that the top financial officials of our government have usually come from the financial industry or academia. The difference is how recently Bernanke and especially Paulson were appointed, how heavily they are relying on financial experts from the private sector rather than on civil servants, and how small a role the politicians in Congress and the White House have played in shaping the response to the crisis.

I do not criticize the delegation of the handling of the crisis to (in effect) the finance industry. I imagine that Bernanke and Paulson and their private-sector advisers are the ablest crisis managers whom one could find. I merely want to emphasize that the financial crisis is indeed a "crisis of capitalism" rather than a failure of government, though it will not and should not lead to the displacement of free-market capitalism by an alternative system of economic management. But it is already shifting the boundary between the free market and the government toward the latter.


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prfsr

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Re: The crumbling of the US financial system (NC)
« Reply #172 on: September 28, 2008, 12:41:07 PM »

http://www.nytimes.com/2008/09/28/business/28view.html?8dpc

What’s Free About Free Enterprise?
 
By PETER L. BERNSTEIN
Published: September 27, 2008

THERE was a time, in my childhood during the Great Depression, when the streets of Manhattan were filled with unshaven men in threadbare clothes, their coat collars turned up against the cold, their shoes stuffed with newspaper to plug holes in the soles. And there were bank failures.

A huge bailout plan is being hammered out in Washington precisely to avert this kind of economic calamity. The plan is needed, and it needs to be put in place quickly. But at the same time, we need to ask how the financial system came to require a rescue of this magnitude.

This time around, assets are evidently so rotten in so many places that no financial institution wants to risk doing business with any other financial institution without a government backstop.

Such fear recently threw a huge bucket of sand into the wheels of commerce, because business cannot function without credit and banks cannot function without the ability to draw on one another’s resources as needed. Some radical, comprehensive step from government was necessary, or else outcomes as bad as — and perhaps even worse than — those of 1931 and 1932 would have been inescapable.

Naturally, a plan of this magnitude has stirred a storm of commentary, but two important potential results deserve more attention than they have received.

The first is the risk of moral hazard within the bailout itself. That is, if government is going to make good so many losses throughout the system, why would anyone set limits on future risk-taking? The situation could turn into a free-for-all that makes the recent disregard of risk look like child’s play.

The second problem is more philosophical, involving what the bailout plan reveals about the functioning of the free enterprise system. This raises disturbing questions. Although I agree with President Bush’s observation that “the risk of not acting would be far higher,” we should be aware of the secondary effects of what we are getting into.

My position on government bailouts of institutions on the verge of failure has been clear ever since the procedure was formalized in the savings-and-loan crisis in 1989, under the first President Bush. I have favored these steps, even though such rescues reward those who took more risks than they should have and are ultimately paid for by those who were more prudent.

FROM this viewpoint, government bailouts create moral hazard and therefore might seem a mistake. If the government always comes to your rescue when the chips are down, why limit your risks? Why not go for the gold every time? What does it matter if you put the system over the edge, so long as you have a chance to make money and Uncle Sam will take care of everything if you lose? How could any rational individual pass up those kinds of opportunities?

We could avoid this conflict of interests by refusing to bail out the risk-takers and letting the financial miscreants squirm in their own juice. That might provide satisfaction to moralists, but life is not so simple. An epidemic of unpaid bad debts would devastate lenders and ignite a conflagration that could pull down the economic and financial structure, ruining everybody.

We were on the verge of such an outcome in the last few weeks, as banks froze up in fear that every piece of paper was tainted. As a result, they refused to enter into the most routine kinds of transactions with one another. The choice is between two cruel outcomes: the high probability of an irreparably damaged financial system, or an overload of moral hazard. I prefer dealing with moral hazard later; preserving the system — and society — must now have top priority.

My views have developed over the years, from the bailouts of single entities like Long-Term Capital Management or Bear Stearns, or small groups of companies like savings institutions. But these relatively simple transactions have only a distant family resemblance to the Paulson-Bernanke plan for a huge bailout of countless financial institutions, to say nothing of possible help to households that took on mortgages that would work out only if the home price kept rising.

There is an immense difference between a plan for a comprehensive bailout and the far simpler process of bailing out Bear Stearns or even a dozen or so Bear Stearnses. The justification is the same, but the grim consequences in terms of moral hazard are of an incomparably greater order of magnitude.

Once the federal government declares, “Thou shalt not fail,” there are no limits to how far future risk-takers will go. Who will see any need to pay attention to the possible consequences for the government’s budget, the market for its bonds, the taxpayers, its creditors and, indeed, the whole economic structure?

Furthermore, there are limits to how freely Washington can dispense largess. We no longer owe the national debt to ourselves, as we did in the 1930s, when deficit financing was first proposed as viable policy to overcome the Depression. Financing the government today depends heavily on foreigners’ willingness to buy our bonds, but foreigners accept our obligations only when they see some kind of control over the volume of issuance. They will perceive very little control in plans whose limits are porous and uncertain.

My second issue goes to the foundations of the economic system in which most Americans believe and take for granted. Though we sometimes give it more lip service than respect, it is rooted in individual decision-making in free markets. In theory, at least, the less government intervention, the better; the mantra is that markets know best.

We often hear this refrain, and history confirms its importance in the most profound issues of economic policy. It justifies our revulsion with Communism, our philosophical distance from the current Chinese system, and our distaste when politicians, not markets, try to shape our system.

Faith in free markets made icons of Ronald Reagan and Margaret Thatcher, who made deregulation a policy cornerstone. An echo in our own time was the 1999 repeal of the Glass-Steagall Act, legislated in 1933 to separate investment banking and commercial banks. Its repeal was a key contributor to the calamities now gripping the banking system.

TODAY’S crisis thus emerged from a combination of disasters operating in free markets, but wreaking ruin as they developed. The subprime mortgage mess, the huge leverage throughout the system, the insidious impact of new kinds of derivatives and other financial paper, and, at the roots, the vast underestimation of risk could not have happened in a planned economy. A superjumbo bailout is the inescapable result, but at some point we must confront its more profound implications.

As we move into the future, and as the crisis finally passes into history, how will we deal with this earth-shaking blow to the most basic principle of our economic system? I do not know how to answer that question. But we need to ask it.
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RicePlateReddy

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Re: The crumbling of the US financial system (NC)
« Reply #173 on: September 28, 2008, 04:01:54 PM »

Why does the US financial market allow the concept of derivatives? What is the fundamental value to the economy in these instruments -- they only promote risky debt taking behavior.

Mr. Buffett has forever warned that they are the weapons of mass financial destruction. If the system has become too complex for its own good, how about making it much simpler and eliminating these?
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prfsr

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Re: The crumbling of the US financial system (NC)
« Reply #174 on: September 28, 2008, 05:58:24 PM »

SSL,
This addresses your question

http://www.cato.org/pubs/pas/pa-283.html
Not posting the article because of tables and graphs inline.
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pipsqueak

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Re: The crumbling of the US financial system (NC)
« Reply #175 on: September 28, 2008, 11:03:14 PM »

Dr. Doom
By STEPHEN MIHM

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.

But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”

Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go “belly up” — and six weeks later, Bear Stearns collapsed. Following the Fed’s further extraordinary actions in the spring — including making lines of credit available to selected investment banks and brokerage houses — many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. Roubini, who dismissed the rally as nothing more than a “delusional complacency” encouraged by a “bunch of self-serving spinmasters,” stuck to his script of “nightmare” events: waves of corporate bankrupticies, collapses in markets like commercial real estate and municipal bonds and, most alarming, the possible bankruptcy of a large regional or national bank that would trigger a panic by depositors. Not all of these developments have come to pass (and perhaps never will), but the demise last month of the California bank IndyMac — one of the largest such failures in U.S. history — drew only more attention to Roubini’s seeming prescience.

As a result, Roubini, a respected but formerly obscure academic, has become a major figure in the public debate about the economy: the seer who saw it coming. He has been summoned to speak before Congress, the Council on Foreign Relations and the World Economic Forum at Davos. He is now a sought-after adviser, spending much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. Though he continues to issue colorful doomsday prophecies of a decidedly nonmainstream sort — especially on his popular and polemical blog, where he offers visions of “equity market slaughter” and the “Coming Systemic Bust of the U.S. Banking System” — the mainstream economic establishment appears to be moving closer, however fitfully, to his way of seeing things. “I have in the last few months become more pessimistic than the consensus,” the former Treasury secretary Lawrence Summers told me earlier this year. “Certainly, Nouriel’s writings have been a contributor to that.”

On a cold and dreary day last winter, I met Roubini over lunch in the TriBeCa neighborhood of New York City. “I’m not a pessimist by nature,” he insisted. “I’m not someone who sees things in a bleak way.” Just looking at him, I found the assertion hard to credit. With a dour manner and an aura of gloom about him, Roubini gives the impression of being permanently pained, as if the burden of what he knows is almost too much for him to bear. He rarely smiles, and when he does, his face, topped by an unruly mop of brown hair, contorts into something more closely resembling a grimace.

When I pressed him on his claim that he wasn’t pessimistic, he paused for a moment and then relented a little. “I have more concerns about potential risks and vulnerabilities than most people,” he said, with glum understatement. But these concerns, he argued, make him more of a realist than a pessimist and put him in the role of the cleareyed outsider — unsettling complacency and puncturing pieties.

Roubini, who is 50, has been an outsider his entire life. He was born in Istanbul, the child of Iranian Jews, and his family moved to Tehran when he was 2, then to Tel Aviv and finally to Italy, where he grew up and attended college. He moved to the United States to pursue his doctorate in international economics at Harvard. Along the way he became fluent in Farsi, Hebrew, Italian and English. His accent, an inimitable polyglot growl, radiates a weariness that comes with being what he calls a “global nomad.”

As a graduate student at Harvard, Roubini was an unusual talent, according to his adviser, the Columbia economist Jeffrey Sachs. He was as comfortable in the world of arcane mathematics as he was studying political and economic institutions. “It’s a mix of skills that rarely comes packaged in one person,” Sachs told me. After completing his Ph.D. in 1988, Roubini joined the economics department at Yale, where he first met and began sharing ideas with Robert Shiller, the economist now known for his prescient warnings about the 1990s tech bubble.

The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.

Roubini’s work was distinguished not only by his conclusions but also by his approach. By making extensive use of transnational comparisons and historical analogies, he was employing a subjective, nontechnical framework, the sort embraced by popular economists like the Times Op-Ed columnist Paul Krugman and Joseph Stiglitz in order to reach a nonacademic audience. Roubini takes pains to note that he remains a rigorous scholarly economist — “When I weigh evidence,” he told me, “I’m drawing on 20 years of accumulated experience using models” — but his approach is not the contemporary scholarly ideal in which an economist builds a model in order to constrain his subjective impressions and abide by a discrete set of data. As Shiller told me, “Nouriel has a different way of seeing things than most economists: he gets into everything.”

Roubini likens his style to that of a policy maker like Alan Greenspan, the former Fed chairman who was said (perhaps apocryphally) to pore over vast quantities of technical economic data while sitting in the bathtub, looking to sniff out where the economy was headed. Roubini also cites, as a more ideologically congenial example, the sweeping, cosmopolitan approach of the legendary economist John Maynard Keynes, whom Roubini, with only slight exaggeration, calls “the most brilliant economist who never wrote down an equation.” The book that Roubini ultimately wrote (with the economist Brad Setser) on the emerging market crises, “Bailouts or Bail-Ins?” contains not a single equation in its 400-plus pages.

After analyzing the markets that collapsed in the ’90s, Roubini set out to determine which country’s economy would be the next to succumb to the same pressures. His surprising answer: the United States’. “The United States,” Roubini remembers thinking, “looked like the biggest emerging market of all.” Of course, the United States wasn’t an emerging market; it was (and still is) the largest economy in the world. But Roubini was unnerved by what he saw in the U.S. economy, in particular its 2004 current-account deficit of $600 billion. He began writing extensively about the dangers of that deficit and then branched out, researching the various effects of the credit boom — including the biggest housing bubble in the nation’s history — that began after the Federal Reserve cut rates to close to zero in 2003. Roubini became convinced that the housing bubble was going to pop.

By late 2004 he had started to write about a “nightmare hard landing scenario for the United States.” He predicted that foreign investors would stop financing the fiscal and current-account deficit and abandon the dollar, wreaking havoc on the economy. He said that these problems, which he called the “twin financial train wrecks,” might manifest themselves in 2005 or, at the latest, 2006. “You have been warned here first,” he wrote ominously on his blog. But by the end of 2006, the train wrecks hadn’t occurred.

Recessions are signal events in any modern economy. And yet remarkably, the profession of economics is quite bad at predicting them. A recent study looked at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated the severity of the downturns. Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later.

The dismal science, it seems, is an optimistic profession. Many economists, Roubini among them, argue that some of the optimism is built into the very machinery, the mathematics, of modern economic theory. Econometric models typically rely on the assumption that the near future is likely to be similar to the recent past, and thus it is rare that the models anticipate breaks in the economy. And if the models can’t foresee a relatively minor break like a recession, they have even more trouble modeling and predicting a major rupture like a full-blown financial crisis. Only a handful of 20th-century economists have even bothered to study financial panics. (The most notable example is probably the late economist Hyman Minksy, of whom Roubini is an avid reader.) “These are things most economists barely understand,” Roubini told me. “We’re in uncharted territory where standard economic theory isn’t helpful.”

True though this may be, Roubini’s critics do not agree that his approach is any more accurate. Anirvan Banerji, the economist who challenged Roubini’s first I.M.F. talk, points out that Roubini has been peddling pessimism for years; Banerji contends that Roubini’s apparent foresight is nothing more than an unhappy coincidence of events. “Even a stopped clock is right twice a day,” he told me. “The justification for his bearish call has evolved over the years,” Banerji went on, ticking off the different reasons that Roubini has used to justify his predictions of recessions and crises: rising trade deficits, exploding current-account deficits, Hurricane Katrina, soaring oil prices. All of Roubini’s predictions, Banerji observed, have been based on analogies with past experience. “This forecasting by analogy is a tempting thing to do,” he said. “But you have to pick the right analogy. The danger of this more subjective approach is that instead of letting the objective facts shape your views, you will choose the facts that confirm your existing views.”

Kenneth Rogoff, an economist at Harvard who has known Roubini for decades, told me that he sees great value in Roubini’s willingness to entertain possible situations that are far outside the consensus view of most economists. “If you’re sitting around at the European Central Bank,” he said, “and you’re asking what’s the worst thing that could happen, the first thing people will say is, ‘Let’s see what Nouriel says.’ ” But Rogoff cautioned against equating that skill with forecasting. Roubini, in other words, might be the kind of economist you want to consult about the possibility of the collapse of the municipal-bond market, but he is not necessarily the kind you ask to predict, say, the rise in global demand for paper clips.

His defenders contend that Roubini is not unduly pessimistic. Jeffrey Sachs, his former adviser, told me that “if the underlying conditions call for optimism, Nouriel would be optimistic.” And to be sure, Roubini is capable of being optimistic — or at least of steering clear of absolute worst-case prognostications. He agrees, for example, with the conventional economic wisdom that oil will drop below $100 a barrel in the coming months as global demand weakens. “I’m not comfortable saying that we’re going to end up in the Great Depression,” he told me. “I’m a reasonable person.”

What economic developments does Roubini see on the horizon? And what does he think we should do about them? The first step, he told me in a recent conversation, is to acknowledge the extent of the problem. “We are in a recession, and denying it is nonsense,” he said. When Jim Nussle, the White House budget director, announced last month that the nation had “avoided a recession,” Roubini was incredulous. For months, he has been predicting that the United States will suffer through an 18-month recession that will eventually rank as the “worst since the Great Depression.” Though he is confident that the economy will enter a technical recovery toward the end of next year, he says that job losses, corporate bankruptcies and other drags on growth will continue to take a toll for years.

Roubini has counseled various policy makers, including Federal Reserve governors and senior Treasury Department officials, to mount an aggressive response to the crisis. He applauded when the Federal Reserve cut interest rates to 2 percent from 5.25 percent beginning last summer. He also supported the Fed’s willingness to engineer a takeover of Bear Stearns. Roubini argues that the Fed’s actions averted catastrophe, though he says he believes that future bailouts should focus on mortgage owners, not investors. Accordingly, he sees the choice facing the United States as stark but simple: either the government backs up a trillion-plus dollars’ worth of high-risk mortgages (in exchange for the lenders’ agreement to reduce monthly mortgage payments), or the banks and other institutions holding those mortgages — or the complex securities derived from them — go under. “You either nationalize the banks or you nationalize the mortgages,” he said. “Otherwise, they’re all toast.”

For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd — but something between a trillion and a trillion and a half dollars. But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”

Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. “A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”

The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. “Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.”

Stephen Mihm, an assistant professor of economic history at the University of Georgia, is the author of “A Nation of Counterfeiters: Capitalists, Con Men and the Making of the United States.” His last feature article for the magazine was about North Korean counterfeiting.

http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html?_r=2&pagewanted=print&oref=slogin&oref=slogin

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RicePlateReddy

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Re: The crumbling of the US financial system (NC)
« Reply #176 on: September 28, 2008, 11:18:08 PM »

SSL,
This addresses your question

http://www.cato.org/pubs/pas/pa-283.html
Not posting the article because of tables and graphs inline.

The article concludes as follows:

For the most part, however, policymakers should leave derivatives alone. Derivatives have become important tools that help organizations manage risk exposures. The development of derivatives was brought about by a need to isolate and hedge against specific risks. Derivatives offer a proven method of breaking risk into component pieces and managing those components independently. Almost every organization--whether a corporation, a municipality, or an insured commercial bank--has inherent in its business and marketplace a unique risk profile that can be better managed through derivatives trading. The freedom to manage risks effectively must not be taken away.

----

Given what has transpired, I think these claims have been proven totally hollow. They have not helped manage risk, they have worsened it several fold! Regulating them is itself a complex task. Mr. Buffet, as usual, is 100% right.

http://news.bbc.co.uk/2/hi/business/2817995.stm

http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf (note the LTCM reference on page 2)
« Last Edit: September 28, 2008, 11:23:02 PM by ShortSquatLeg »
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Re: The crumbling of the US financial system (NC)
« Reply #177 on: September 29, 2008, 03:53:54 AM »

Light at the end of the tunnel for a deal? The author seems to think that we aren't going to be hoodwinked.

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/28/AR2008092802954.html

After a week of political brinksmanship and 100 pages of concessions to political reality, Treasury Secretary Hank Paulson seems to have finally won the power and money he asked for to mount an unprecedented rescue of the financial system.

.........

What was added over the past week was a panoply of procedural safeguards, taxpayer protection and structural reforms to provide an acceptable political context for the use of so much public money and the grant of such extraordinary discretion and power.

Although the Treasury secretary will have a free hand in hiring staff and outside contractors, buying assets and negotiating the terms of government investment in struggling banks, he will have to answer to a board consisting of five other top government officials, be required to post the details of everything he does on the Internet (Baidu and google cache  :icon_thumleft:) and be subject to constant oversight by two congressional committees, a battalion of government auditors and a special inspector general.

......

Finally, the legislation contains several mechanisms for the government to recoup all of its money, and perhaps even turn a profit, by collecting insurance premiums, demanding stock from participating banks and, should all else fail, slapping a new tax on the financial services industry beginning in 2014.

Normally, the mere discussion of such measures would have brought on a furious lobbying effort to kill them. But it is a measure of the industry's new-found impotence in Washington that it was forced to sit silently on the sidelines over the weekend as Republicans and Democrats, leaders and backbenchers joined hands in demanding that Wall Street foot the bill for the mess it has created.
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RicePlateReddy

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Re: The crumbling of the US financial system (NC)
« Reply #178 on: September 29, 2008, 04:02:50 AM »

I just quoted it 2 posts prior -- It is really worth reading this man's simple and clear words again. This was written in 2002, and concerns derivatives. A few cut and replace instructions and we get an apt precis of the situation today.

http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf
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RicePlateReddy

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Re: The crumbling of the US financial system (NC)
« Reply #179 on: September 29, 2008, 04:51:16 AM »

Superb 'detective' article.

http://www.nytimes.com/2008/09/28/business/28melt.html?em

Behind Insurer’s Crisis, Blind Eye to a Web of Risk
 
By GRETCHEN MORGENSON
Published: September 27, 2008


“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”

— Joseph J. Cassano, a former A.I.G. executive, August 2007


Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

Yet an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected — and astonishingly fragile — financial world that began to implode in recent weeks.

Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.

Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.

In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.

“It is beyond shocking that this small operation could blow up the holding company,” said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn. “They found a quick way to make a fast buck on derivatives based on A.I.G.’s solid credit rating and strong balance sheet. But it all got out of control.”

The London Office

The insurance giant’s London unit was known as A.I.G. Financial Products, or A.I.G.F.P. It was run with almost complete autonomy, and with an iron hand, by Joseph J. Cassano, according to current and former A.I.G. employees.

A onetime executive with Drexel Burnham Lambert — the investment bank made famous in the 1980s by the junk bond king Michael R. Milken, who later pleaded guilty to six felony charges — Mr. Cassano helped start the London unit in 1987.

The unit became profitable enough that analysts considered Mr. Cassano a dark horse candidate to succeed Maurice R. Greenberg, the longtime chief executive who shaped A.I.G. in his own image until he was ousted amid an accounting scandal three years ago.

But last February, Mr. Cassano resigned after the London unit began bleeding money and auditors raised questions about how the unit valued its holdings. By Sept. 15, the unit’s troubles forced a major downgrade in A.I.G.’s debt rating, requiring the company to post roughly $15 billion in additional collateral — which then prompted the federal rescue.

Mr. Cassano, 53, lives in a handsome, three-story town house in the Knightsbridge neighborhood of London, just around the corner from Harrods department store on a quiet square with a private garden.

He did not respond to interview requests left at his home and with his lawyer. An A.I.G. spokesman also declined to comment.

At A.I.G., Mr. Cassano found himself ensconced in a behemoth that had a long and storied history of deftly juggling risks. It insured people and properties against natural disasters and death, offered sophisticated asset management services and did so reliably and with bravado on many continents. Even now, its insurance subsidiaries are financially strong.

When Mr. Cassano first waded into the derivatives market, his biggest business was selling so-called plain vanilla products like interest rate swaps. Such swaps allow participants to bet on the direction of interest rates and, in theory, insulate themselves from unforeseen financial events.

Ten years ago, a “watershed” moment changed the profile of the derivatives that Mr. Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from J. P. Morgan, a leading bank that had many dealings with Mr. Cassano’s unit, came calling with a novel idea.

Morgan proposed the following: A.I.G. should try writing insurance on packages of debt known as “collateralized debt obligations.” C.D.O.’s. were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.

The proposal meant that the London unit was essentially agreeing to provide insurance to financial institutions holding C.D.O.’s and other debts in case they defaulted — in much the same way some homeowners are required to buy mortgage insurance to protect lenders in case the borrowers cannot pay back their loans.

Under the terms of the insurance derivatives that the London unit underwrote, customers paid a premium to insure their debt for a period of time, usually four or five years, according to the company. Many European banks, for instance, paid A.I.G. to insure bonds that they held in their portfolios.

Because the underlying debt securities — mostly corporate issues and a smattering of mortgage securities — carried blue-chip ratings, A.I.G. Financial Products was happy to book income in exchange for providing insurance. After all, Mr. Cassano and his colleagues apparently assumed, they would never have to pay any claims.

Since A.I.G. itself was a highly rated company, it did not have to post collateral on the insurance it wrote, analysts said. That made the contracts all the more profitable.

These insurance products were known as “credit default swaps,” or C.D.S.’s in Wall Street argot, and the London unit used them to turn itself into a cash register.

The unit’s revenue rose to $3.26 billion in 2005 from $737 million in 1999. Operating income at the unit also grew, rising to 17.5 percent of A.I.G.’s overall operating income in 2005, compared with 4.2 percent in 1999.

Profit margins on the business were enormous. In 2002, operating income was 44 percent of revenue; in 2005, it reached 83 percent.

Mr. Cassano and his colleagues minted tidy fortunes during these high-cotton years. Since 2001, compensation at the small unit ranged from $423 million to $616 million each year, according to corporate filings. That meant that on average each person in the unit made more than $1 million a year.

In fact, compensation expenses took a large percentage of the unit’s revenue. In lean years it was 33 percent; in fatter ones 46 percent. Over all, A.I.G. Financial Products paid its employees $3.56 billion during the last seven years.

The London unit’s reach was also vast. While clients and counterparties remain closely guarded secrets in the derivatives trade, Mr. Cassano talked publicly about how proud he was of his customer list.

At the 2007 conference he noted that his company worked with a “global swath” of top-notch entities that included “banks and investment banks, pension funds, endowments, foundations, insurance companies, hedge funds, money managers, high-net-worth individuals, municipalities and sovereigns and supranationals.”

Of course, as this intricate skein expanded over the years, it meant that the participants were linked to one another by contracts that existed for the most part inside the financial world’s version of a black box.

Goldman Sachs was a member of A.I.G.’s derivatives club, according to people familiar with the operation. It was a customer of A.I.G.’s credit insurance and also acted as an intermediary for trades between A.I.G. and its other clients.

Few knew of Goldman’s exposure to A.I.G. When the insurer’s flameout became public, David A. Viniar, Goldman’s chief financial officer, assured analysts on Sept. 16 that his firm’s exposure was “immaterial,” a view that the company reiterated in an interview.

Later that same day, the government announced its two-year, $85 billion loan to A.I.G., offering it a chance to sell its assets in an orderly fashion and theoretically repay taxpayers for their trouble. The plan saved the insurer’s trading partners but decimated its shareholders.

Lucas van Praag, a Goldman spokesman, declined to detail how badly hurt his firm might have been had A.I.G. collapsed two weeks ago. He disputed the calculation that Goldman had $20 billion worth of risk tied to A.I.G., saying the figure failed to account for collateral and hedges that Goldman deployed to reduce its risk.

Regarding Mr. Blankfein’s presence at the Fed during talks about an A.I.G. bailout, he said: “I think it would be a mistake to read into it that he was there because of our own interests. We were engaged because of the implications to the entire system.”

Mr. van Praag declined to comment on what communications, if any, took place between Mr. Blankfein and the Treasury secretary, Mr. Paulson, during the bailout discussions.

A Treasury spokeswoman declined to comment about the A.I.G. rescue and Goldman’s role. The government recently allowed Goldman to change its regulatory status to help bolster its finances amid the market turmoil.

An Executive’s Optimism


Regardless of Goldman’s exposure, by last year, A.I.G. Financial Products’ portfolio of credit default swaps stood at roughly $500 billion. It was generating as much as $250 million a year in income on insurance premiums, Mr. Cassano told investors.

Because it was not an insurance company, A.I.G. Financial Products did not have to report to state insurance regulators. But for the last four years, the London-based unit’s operations, whose trades were routed through Banque A.I.G., a French institution, were reviewed routinely by an American regulator, the Office of Thrift Supervision.

A handful of the agency’s officials were always on the scene at an A.I.G. Financial Products branch office in Connecticut, but it is unclear whether they raised any red flags. Their reports are not made public and a spokeswoman would not provide details.

For his part, Mr. Cassano apparently was not worried that his unit had taken on more than it could handle. In an August 2007 conference call with analysts, he described the credit default swaps as almost a sure thing.

“It is hard to get this message across, but these are very much handpicked,” he assured those on the phone.

Just a few months later, however, the credit crisis deepened. A.I.G. Financial Products began to choke on losses — though they were only on paper.

In the quarter that ended Sept. 30, 2007, A.I.G. recognized a $352 million unrealized loss on the credit default swap portfolio.

Because the London unit was set up as a bank and not an insurer, and because of the way its derivatives contracts were written, it had to put up collateral to its trading partners when the value of the underlying securities they had insured declined. Any obligations that the unit could not pay had to be met by its corporate parent.

So began A.I.G.’s downward spiral as it, its clients, its trading partners and other companies were swept into the drowning pool set in motion by the housing downturn.

Mortgage foreclosures set off questions about the quality of debts across the entire credit spectrum. When the value of other debts sagged, calls for collateral on the securities issued by the credit default swaps sideswiped A.I.G. Financial Products and its legendary, sprawling parent.

Yet throughout much of 2007, the unit maintained that its risk assessments were reliable and its portfolios conservative. Last fall, however, the methods that A.I.G. used to value its derivatives portfolio began to come under fire from trading partners.

In February, A.I.G.’s auditors identified problems in the firm’s swaps accounting. Then, three months ago, regulators and federal prosecutors said they were investigating the insurer’s accounting.

This was not the first time A.I.G. Financial Products had run afoul of authorities. In 2004, without admitting or denying accusations that it helped clients improperly burnish their financial statements, A.I.G. paid $126 million and entered into a deferred prosecution agreement to settle federal civil and criminal investigations.

The settlement was a black mark on A.I.G.’s reputation and, according to analysts, distressed Mr. Greenberg, who still ran the company at the time. Still, as Mr. Cassano later told investors, the case caused A.I.G. to improve its risk management and establish a committee to maintain quality control.

“That’s a committee that I sit on, along with many of the senior managers at A.I.G., and we look at a whole variety of transactions that come in to make sure that they are maintaining the quality that we need to,” Mr. Cassano told them. “And so I think the things that have been put in at our level and the things that have been put in at the parent level will ensure that there won’t be any of those kinds of mistakes again.”

At the end of A.I.G.’s most recent quarter, the London unit’s losses reached $25 billion.

As those losses mounted, and A.I.G.’s once formidable stock price plunged, it became harder for the insurer to survive — imperiling other companies that did business with it and leading it to stun the Federal Reserve gathering two weeks ago with a plea for help.

Mr. Greenberg, who has seen the value of his personal A.I.G. holdings decline by more than $5 billion this year, dumped five million shares late last week. A lawyer for Mr. Greenberg did not return a phone call seeking comment.

For his part, Mr. Cassano has departed from a company that is a far cry from what it was a year ago when he spoke confidently at the analyst conference.

“We’re sitting on a great balance sheet, a strong investment portfolio and a global trading platform where we can take advantage of the market in any variety of places,” he said then. “The question for us is, where in the capital markets can we gain the best opportunity, the best execution for the business acumen that sits in our shop?”
« Last Edit: September 29, 2008, 05:32:06 AM by kban1 »
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ruchir

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Re: The crumbling of the US financial system (NC)
« Reply #180 on: September 29, 2008, 07:08:37 PM »

http://www.foxnews.com/story/0,2933,430061,00.html


U.S. Stocks Plummet as House Rejects Bailout Plan

Monday, September 29, 2008

NEW YORK  —  Fear swept across the financial markets Monday, sending the Dow Jones industrials down as much as 705 points, after the financial bailout package failed the House.

As the vote was shown on TV, stocks plunged and and investors fled to the safety of the credit markets, worrying that the financial system would keep sinking under the weight of failed mortgage debt.

"Clearly something needs to be done, and the market dropping 400 points in 10 minutes is telling you that," said Chris Johnson president of Johnson Research Group. "This isn't a market for the timid."

While investors had some worries that the vote would be close, many investors appeared to believe it would ultimately pass.

The markets were highly volatile, with the Dow regaining ground then falling backing again, trading down 577.37, or 5.18 percent, to 10,565.76.

Broader stock indicators also tumbled. The Standard & Poor's 500 index declined 79.35, or 6.54 percent, to 1,133.92, and the Nasdaq composite index fell 146.72, or 6.72 percent, to 2,036.62.

The Federal Reserve declined to comment on the market's decline.

With Wall Street in turmoil, the yield on the 3-month Treasury bill fell to 0.32 percent from 0.87 percent on Friday. That showed that investors were prepared to get meager returns on an investment as long as it was secure.

Marc Pado, U.S. market strategist at Cantor Fitzgerald, said investors are worried about the spread of troubles beyond banks in the U.S. to Europe and other markets.

"Things are dying and breaking apart while they sit there and vote on this thing," he said.
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prfsr

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Re: The crumbling of the US financial system (NC)
« Reply #181 on: September 29, 2008, 07:12:19 PM »

Even though Obama and McCain and the democrats support this, I am not sold. Anybody want to convince me? ;D

PS: Not a sarcastic post.
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dextrous

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Re: The crumbling of the US financial system (NC)
« Reply #182 on: September 29, 2008, 07:30:23 PM »

should i buy a lot of stocks now or should i wait a couple of more days for the market to crash more...i'm going in with a long term view, of course!
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schumi

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Re: The crumbling of the US financial system (NC)
« Reply #183 on: September 29, 2008, 08:57:03 PM »

If you are looking at long term then better wait for the next few weeks to see all the affects of the bail out, buy in etc. This is not a market to get in or get out. Right now, bonds are the only instruments that are going up. But I wouldnt bet on those too.
« Last Edit: September 29, 2008, 09:00:20 PM by schumi »
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schumi

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Re: The crumbling of the US financial system (NC)
« Reply #184 on: September 29, 2008, 09:22:02 PM »

If you are looking at long term then better wait for the next few weeks to see all the affects of the bail out, buy in etc. This is not a market to get in or get out. Right now, bonds are the only instruments that are going up. But I wouldnt bet on those too.
Of course, my reply does not apply to Warren Buffet and Anil Ambani. You are free to join them if you want.
http://timesofindia.indiatimes.com/Buffett_Anil_Ambani_betting_big_on_US_economy_Report/articleshow/3537223.cms
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LosingNow

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Re: The crumbling of the US financial system (NC)
« Reply #185 on: September 29, 2008, 10:48:18 PM »

U.S. Stocks Plummet as House Rejects Bailout Plan
As I said earlier, the offices of all the reps are ringing off the hook.. people from both sides want the culprits - Wall street execs and the speculators who "lived large" off the boom - to pay (or rather not be bailed out).

This will be dragged out.. credit has really frozen up...and that cant be good...hope we don't end up in a deep recession.
--
IMO, the simplest solution could be - order banks that you cannot foreclose, you have to negotiate and get the best price .. this will motivate the banks/lenders to cut the "right deal" with the buyers/home owners and establish a market "value" on the properties and at least create a base for the problem magnitude..  today everyone is "guesstimating" the floor...and asking the government to cushion it. Doesn't make sense for the taxpayers to write a "blank check" since 700bn could be 2.5 trn or 300 bn... .
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Re: The crumbling of the US financial system (NC)
« Reply #186 on: September 30, 2008, 08:21:46 AM »

The article concludes as follows:

For the most part, however, policymakers should leave derivatives alone. Derivatives have become important tools that help organizations manage risk exposures. The development of derivatives was brought about by a need to isolate and hedge against specific risks. Derivatives offer a proven method of breaking risk into component pieces and managing those components independently. Almost every organization--whether a corporation, a municipality, or an insured commercial bank--has inherent in its business and marketplace a unique risk profile that can be better managed through derivatives trading. The freedom to manage risks effectively must not be taken away.

----

Given what has transpired, I think these claims have been proven totally hollow. They have not helped manage risk, they have worsened it several fold! Regulating them is itself a complex task. Mr. Buffet, as usual, is 100% right.

http://news.bbc.co.uk/2/hi/business/2817995.stm

http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf (note the LTCM reference on page 2)


I disagree.

The problem is not with derivatives ... it is with how they are regulated.

Allowing derivatives to be used for hedging purposes is, in fact, necessary. On the other hand, use of derivatives in speculation should be very tightly regulated.
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Re: The crumbling of the US financial system (NC)
« Reply #187 on: October 01, 2008, 09:39:57 AM »

The one hedge fund that stands out after all this mess

http://strategerycapital.com/index.php?slug=home
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Re: The crumbling of the US financial system (NC)
« Reply #188 on: October 01, 2008, 04:39:17 PM »

The article concludes as follows:

For the most part, however, policymakers should leave derivatives alone. Derivatives have become important tools that help organizations manage risk exposures. The development of derivatives was brought about by a need to isolate and hedge against specific risks. Derivatives offer a proven method of breaking risk into component pieces and managing those components independently. Almost every organization--whether a corporation, a municipality, or an insured commercial bank--has inherent in its business and marketplace a unique risk profile that can be better managed through derivatives trading. The freedom to manage risks effectively must not be taken away.

----

Given what has transpired, I think these claims have been proven totally hollow. They have not helped manage risk, they have worsened it several fold! Regulating them is itself a complex task. Mr. Buffet, as usual, is 100% right.

http://news.bbc.co.uk/2/hi/business/2817995.stm

http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf (note the LTCM reference on page 2)


I disagree.

The problem is not with derivatives ... it is with how they are regulated.

Allowing derivatives to be used for hedging purposes is, in fact, necessary. On the other hand, use of derivatives in speculation should be very tightly regulated.

So where do you disagree with Mr. Buffet? Look at the second article (fintools) quoted. It is succinct and he concludes by suggesting it is impossible to safely regulate this instrument - how do you suggest regulating it?
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Re: The crumbling of the US financial system (NC)
« Reply #189 on: October 02, 2008, 01:02:10 AM »

http://www.michaelmoore.com/

Here's How to Fix the Wall Street Mess ...from Michael Moore


Friends,

The richest 400 Americans -- that's right, just four hundred people -- own MORE than the bottom 150 million Americans combined. 400 rich Americans have got more stashed away than half the entire country! Their combined net worth is $1.6 trillion. During the eight years of the Bush Administration, their wealth has increased by nearly $700 billion -- the same amount that they are now demanding we give to them for the "bailout." Why don't they just spend the money they made under Bush to bail themselves out? They'd still have nearly a trillion dollars left over to spread amongst themselves!

Of course, they are not going to do that -- at least not voluntarily. George W. Bush was handed a $127 billion surplus when Bill Clinton left office. Because that money was OUR money and not his, he did what the rich prefer to do -- spend it and never look back. Now we have a $9.5 trillion debt. Why on earth would we even think of giving these robber barons any more of our money?

I would like to propose my own bailout plan. My suggestions, listed below, are predicated on the singular and simple belief that the rich must pull themselves up by their own platinum bootstraps. Sorry, fellows, but you drilled it into our heads one too many times: There... is... no... free... lunch. And thank you for encouraging us to hate people on welfare! So, there will be no handouts from us to you. The Senate, tonight, is going to try to rush their version of a "bailout" bill to a vote. They must be stopped. We did it on Monday with the House, and we can do it again today with the Senate.

It is clear, though, that we cannot simply keep protesting without proposing exactly what it is we think Congress should do. So, after consulting with a number of people smarter than Phil Gramm, here is my proposal, now known as "Mike's Rescue Plan." It has 10 simple, straightforward points. They are:

1. APPOINT A SPECIAL PROSECUTOR TO CRIMINALLY INDICT ANYONE ON WALL STREET WHO KNOWINGLY CONTRIBUTED TO THIS COLLAPSE. Before any new money is expended, Congress must commit, by resolution, to criminally prosecute anyone who had anything to do with the attempted sacking of our economy. This means that anyone who committed insider trading, securities fraud or any action that helped bring about this collapse must go to jail. This Congress must call for a Special Prosecutor who will vigorously go after everyone who created the mess, and anyone else who attempts to scam the public in the future.

2. THE RICH MUST PAY FOR THEIR OWN BAILOUT. They may have to live in 5 houses instead of 7. They may have to drive 9 cars instead of 13. The chef for their mini-terriers may have to be reassigned. But there is no way in hell, after forcing family incomes to go down more than $2,000 dollars during the Bush years, that working people and the middle class are going to fork over one dime to underwrite the next yacht purchase.

If they truly need the $700 billion they say they need, well, here is an easy way they can raise it:


a) Every couple who makes over a million dollars a year and every single taxpayer who makes over $500,000 a year will pay a 10% surcharge tax for five years. (It's the Senator Sanders plan. He's like Colonel Sanders, only he's out to fry the right chickens.) That means the rich will still be paying less income tax than when Carter was president. This will raise a total of $300 billion.

b) Like nearly every other democracy, charge a 0.25% tax on every stock transaction. This will raise more than $200 billion in a year.

c) Because every stockholder is a patriotic American, stockholders will forgo receiving a dividend check for one quarter and instead this money will go the treasury to help pay for the bailout.

d) 25% of major U.S. corporations currently pay NO federal income tax. Federal corporate tax revenues currently amount to 1.7% of the GDP compared to 5% in the 1950s. If we raise the corporate income tax back to the level of the 1950s, that gives us an extra $500 billion.

All of this combined should be enough to end the calamity. The rich will get to keep their mansions and their servants, and our United States government ("COUNTRY FIRST!") will have a little leftover to repair some roads, bridges and schools.

3. BAIL OUT THE PEOPLE LOSING THEIR HOMES, NOT THE PEOPLE WHO WILL BUILD AN EIGHTH HOME. There are 1.3 million homes in foreclosure right now. That is what is at the heart of this problem. So instead of giving the money to the banks as a gift, pay down each of these mortgages by $100,000. Force the banks to renegotiate the mortgage so the homeowner can pay on its current value. To insure that this help does no go to speculators and those who have tried to make money by flipping houses, this bailout is only for people's primary residence. And in return for the $100K paydown on the existing mortgage, the government gets to share in the holding of the mortgage so that it can get some of its money back. Thus, the total initial cost of fixing the mortgage crisis at its roots (instead of with the greedy lenders) is $150 billion, not $700 billion.

And let's set the record straight. People who have defaulted on their mortgages are not "bad risks." They are our fellow Americans, and all they wanted was what we all want and most of us still get: a home to call their own. But during the Bush years, millions of them lost the decent paying jobs they had. Six million fell into poverty. Seven million lost their health insurance. And every one of them saw their real wages go down by $2,000. Those who dare to look down on these Americans who got hit with one bad break after another should be ashamed. We are a better, stronger, safer and happier society when all of our citizens can afford to live in a home that they own.

4. IF YOUR BANK OR COMPANY GETS ANY OF OUR MONEY IN A "BAILOUT," THEN WE OWN YOU. Sorry, that's how it's done. If the bank gives me money so I can buy a house, the bank "owns" that house until I pay it all back -- with interest. Same deal for Wall Street. Whatever money you need to stay afloat, if our government considers you a safe risk -- and necessary for the good of the country -- then you can get a loan, but we will own you. If you default, we will sell you. This is how the Swedish government did it and it worked.

5. ALL REGULATIONS MUST BE RESTORED. THE REAGAN REVOLUTION IS DEAD. This catastrophe happened because we let the fox have the keys to the henhouse. In 1999, Phil Gramm authored a bill to remove all the regulations that governed Wall Street and our banking system. The bill passed and Clinton signed it. Here's what Sen. Phil Gramm, McCain's chief economic advisor, said at the bill signing:


"In the 1930s ... it was believed that government was the answer. It was believed that stability and growth came from government overriding the functioning of free markets.

"We are here today to repeal [that] because we have learned that government is not the answer. We have learned that freedom and competition are the answers. We have learned that we promote economic growth and we promote stability by having competition and freedom.

"I am proud to be here because this is an important bill; it is a deregulatory bill. I believe that that is the wave of the future, and I am awfully proud to have been a part of making it a reality."

This bill must be repealed. Bill Clinton can help by leading the effort for the repeal of the Gramm bill and the reinstating of even tougher regulations regarding our financial institutions. And when they're done with that, they can restore the regulations for the airlines, the inspection of our food, the oil industry, OSHA, and every other entity that affects our daily lives. All oversight provisions for any "bailout" must have enforcement monies attached to them and criminal penalties for all offenders.

6. IF IT'S TOO BIG TO FAIL, THEN THAT MEANS IT'S TOO BIG TO EXIST. Allowing the creation of these mega-mergers and not enforcing the monopoly and anti-trust laws has allowed a number of financial institutions and corporations to become so large, the very thought of their collapse means an even bigger collapse across the entire economy. No one or two companies should have this kind of power. The so-called "economic Pearl Harbor" can't happen when you have hundreds -- thousands -- of institutions where people have their money. When you have a dozen auto companies, if one goes belly-up, we don't face a national disaster. If you have three separately-owned daily newspapers in your town, then one media company can't call all the shots (I know... What am I thinking?! Who reads a paper anymore? Sure glad all those mergers and buyouts left us with a strong and free press!). Laws must be enacted to prevent companies from being so large and dominant that with one slingshot to the eye, the giant falls and dies. And no institution should be allowed to set up money schemes that no one can understand. If you can't explain it in two sentences, you shouldn't be taking anyone's money.

7. NO EXECUTIVE SHOULD BE PAID MORE THAN 40 TIMES THEIR AVERAGE EMPLOYEE, AND NO EXECUTIVE SHOULD RECEIVE ANY KIND OF "PARACHUTE" OTHER THAN THE VERY GENEROUS SALARY HE OR SHE MADE WHILE WORKING FOR THE COMPANY. In 1980, the average American CEO made 45 times what their employees made. By 2003, they were making 254 times what their workers made. After 8 years of Bush, they now make over 400 times what their average employee makes. How this can happen at publicly held companies is beyond reason. In Britain, the average CEO makes 28 times what their average employee makes. In Japan, it's only 17 times! The last I heard, the CEO of Toyota was living the high life in Tokyo. How does he do it on so little money? Seriously, this is an outrage. We have created the mess we're in by letting the people at the top become bloated beyond belief with millions of dollars. This has to stop. Not only should no executive who receives help out of this mess profit from it, but any executive who was in charge of running his company into the ground should be fired before the company receives any help.

8. STRENGTHEN THE FDIC AND MAKE IT A MODEL FOR PROTECTING NOT ONLY PEOPLE'S SAVINGS, BUT ALSO THEIR PENSIONS AND THEIR HOMES. Obama was correct yesterday to propose expanding FDIC protection of people's savings in their banks to $250,000. But this same sort of government insurance must be given to our nation's pension funds. People should never have to worry about whether or not the money they've put away for their old age will be there. This will mean strict government oversight of companies who manage their employees' funds -- or perhaps it means that the companies will have to turn over those funds and their management to the government. People's private retirement funds must also be protected, but perhaps it's time to consider not having one's retirement invested in the casino known as the stock market. Our government should have a solemn duty to guarantee that no one who grows old in this country has to worry about ending up destitute.

9. EVERYBODY NEEDS TO TAKE A DEEP BREATH, CALM DOWN, AND NOT LET FEAR RULE THE DAY. Turn off the TV! We are not in the Second Great Depression. The sky is not falling. Pundits and politicians are lying to us so fast and furious it's hard not to be affected by all the fear mongering. Even I, yesterday, wrote to you and repeated what I heard on the news, that the Dow had the biggest one day drop in its history. Well, that's true in terms of points, but its 7% drop came nowhere close to Black Monday in 1987 when the stock market in one day lost 23% of its value. In the '80s, 3,000 banks closed, but America didn't go out of business. These institutions have always had their ups and downs and eventually it works out. It has to, because the rich do not like their wealth being disrupted! They have a vested interest in calming things down and getting back into the Jacuzzi.

As crazy as things are right now, tens of thousands of people got a car loan this week. Thousands went to the bank and got a mortgage to buy a home. Students just back to college found banks more than happy to put them into hock for the next 15 years with a student loan. Life has gone on. Not a single person has lost any of their money if it's in a bank or a treasury note or a CD. And the most amazing thing is that the American public hasn't bought the scare campaign. The citizens didn't blink, and instead told Congress to take that bailout and shove it. THAT was impressive. Why didn't the population succumb to the fright-filled warnings from their president and his cronies? Well, you can only say 'Saddam has da bomb' so many times before the people realize you're a lying sack of *e. After eight long years, the nation is worn out and simply can't take it any longer.

10. CREATE A NATIONAL BANK, A "PEOPLE'S BANK." If we really are itching to print up a trillion dollars, instead of giving it to a few rich people, why don't we give it to ourselves? Now that we own Freddie and Fannie, why not set up a people's bank? One that can provide low-interest loans for all sorts of people who want to own a home, start a small business, go to school, come up with the cure for cancer or create the next great invention. And now that we own AIG, the country's largest insurance company, let's take the next step and provide health insurance for everyone. Medicare for all. It will save us so much money in the long run. And we won't be 12th on the life expectancy list. We'll be able to have a longer life, enjoying our government-protected pension, and living to see the day when the corporate criminals who caused so much misery are let out of prison so that we can help reacclimate them to civilian life -- a life with one nice home and a gas-free car that was invented with help from the People's Bank.

Yours,
Michael Moore
MMFlint@aol.com
MichaelMoore.com

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RicePlateReddy

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Re: The crumbling of the US financial system (NC)
« Reply #190 on: October 02, 2008, 02:19:35 AM »

Why Paulson is Wrong
Luigi Zingales
Robert C. Mc Cormack Professor of Entrepreneurship and Finance
University of Chicago -GSB 

 
 
When a profitable company is hit by a very large liability, as was the case in 1985 when
Texaco lost a $12 billion court case against Pennzoil, the solution is not to have the
government buy its assets at inflated prices: the solution is Chapter 11. In Chapter 11,
companies with a solid underlying business generally swap debt for equity: the old equity
holders are wiped out and the old debt claims are transformed into equity claims in the
new entity which continues operating with a new capital structure. Alternatively, the
debtholders can agree to cut down the face value of debt, in exchange for some warrants.
Even before Chapter 11, these procedures were the solutions adopted to deal with the
large railroad bankruptcies at the turn of the twentieth century. So why is this well-
established approach not used to solve the financial sectors current problems?   
 
The obvious answer is that we do not have time; Chapter 11 procedures are generally
long and complex, and the crisis has reached a point where time is of the essence. If left
to the negotiations of the parties involved this process will take months and we do not
have this luxury. However, we are in extraordinary times and the government has taken
and is prepared to take unprecedented measures. As if rescuing AIG and prohibiting all
short-selling of financial stocks was not enough, now Treasury Secretary Paulson
proposes a sort of Resolution Trust Corporation (RTC) that will buy out (with taxpayers’
money) the distressed assets of the financial sector. But, at what price? 
 
If banks and financial institutions find it difficult to recapitalize (i.e., issue new equity) it
is because the private sector is uncertain about the value of the assets they have in their
portfolio and does not want to overpay. Would the government be better in valuing those
assets?  No. In a negotiation between a government official and banker with a bonus at
risk, who will have more clout in determining the price? The Paulson RTC will buy toxic
assets at inflated prices thereby creating a charitable institution that provides welfare to
the rich—at the taxpayers’ expense. If this subsidy is large enough, it will succeed in
stopping the crisis. But, again, at what price? The answer: Billions of dollars in taxpayer
money and, even worse, the violation of the fundamental capitalist principle that she who
reaps the gains also bears the losses. Remember that in the Savings and Loan crisis, the
government had to bail out those institutions because the deposits were federally insured.
But in this case the government does not have do bail out the debtholders of Bear Sterns,
AIG, or any of the other financial institutions that will benefit from the Paulson RTC. 
 
Since we do not have time for a Chapter 11 and we do not want to bail out all the
creditors, the lesser evil is to do what judges do in contentious and overextended
bankruptcy processes: to cram down a restructuring plan on creditors, where part of the
debt is forgiven in exchange for some equity or some warrants. And there is a precedent
for such a bold move. During the Great Depression, many debt contracts were indexed to
gold. So when the dollar convertibility into gold was suspended, the value of that debt
soared, threatening the survival of many institutions. The Roosevelt Administration
declared the clause invalid, de facto forcing debt forgiveness. Furthermore, the Supreme
Court maintained this decision. My colleague and current Fed Governor Randall Koszner
studied this episode and showed that not only stock prices, but bond prices as well,
soared after the Supreme Court upheld the decision. How is that possible? As corporate
finance experts have been saying for the last thirty years, there are real costs from having
too much debt and too little equity in the capital structure, and a reduction in the face
value of debt can benefit not only the equityholders, but also the debtholders.
 
If debt forgiveness benefits both equity and debtholders, why do debtholders not
voluntarily agree to it? First of all, there is a coordination problem. Even if each
individual debtholder benefits from a reduction in the face value of debt, she will benefit
even more if everybody else cuts the face value of their debt and she does not. Hence,
everybody waits for the other to move first, creating obvious delay. Secondly, from a
debtholder point of view, a government bail-out is better. Thus, any talk of a government
bail-out reduces the debtholders’ incentives to act, making the government bail-out more
necessary.   
 
As during the Great Depression and in many debt restructurings, it makes sense in the
current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the
financial sector. It has the benefit of being a well-tested strategy in the private sector and
it leaves the taxpayers out of the picture. But if it is so simple, why no expert has
mentioned it? 
 
The major players in the financial sector do not like it. It is much more appealing for the
financial industry to be bailed out at taxpayers’ expense than to bear their share of pain.
Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of
private property rights than a massive bailout, but it faces much stronger political
opposition. The appeal of the Paulson solution is that it taxes the many and benefits the
few. Since the many (we, the taxpayers) are dispersed, we cannot put up a good fight in
Capitol Hill; while the financial industry is well represented at all the levels. It is enough
to say that for 6 of the last 13 years, the Secretary of Treasury was a Goldman Sachs
alumnus. But, as financial experts, this silence is also our responsibility. Just as it is
difficult to find a doctor willing to testify against another doctor in a malpractice suit, no
matter how egregious the case, finance experts in both political parties are too friendly to
the industry they study and work in. 

The decisions that will be made this weekend matter not just to the prospects of the U.S.
economy in the year to come; they will shape the type of capitalism we will live in for the
next fifty years. Do we want to live in a system where profits are private, but losses are
socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live
in a system where people are held responsible for their decisions, where imprudent
behavior is penalized and prudent behavior rewarded? For somebody like me who
believes strongly in the free market system, the most serious risk of the current situation
is that the interest of few financiers will undermine the fundamental workings of the
capitalist system. The time has come to save capitalism from the capitalists. 

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Re: The crumbling of the US financial system (NC)
« Reply #191 on: October 04, 2008, 12:28:36 AM »

In case anyone hasn't heard this, the NPR show "This American Life" made a really good 1-hour radio documentary on the financial crisis, called "The Giant Pool of Money". You can listen to it here:

http://www.thislife.org/Radio_Episode.aspx?episode=355

Via Ezra Klein:

http://www.prospect.org/csnc/blogs/ezraklein_archive?month=10&year=2008&base_name=the_giant_pool_of_money#109772
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Re: The crumbling of the US financial system (NC)
« Reply #192 on: October 04, 2008, 04:17:49 AM »

I also mean to link to this, the best thing I have read on the broader issue of where our financial markets went wrong, John  Bogle's 2002 speech, "Don't Count On It! The Perils of Numeracy".
 
http://www.vanguard.com/bogle_site/sp20021018.html
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Re: The crumbling of the US financial system (NC)
« Reply #193 on: October 05, 2008, 10:19:26 PM »

One more link. This American Life has new show on financial crisis, called "Another Frightening Show About the Economy". http://thisamericanlife.org/Radio_Episode.aspx?episode=365  . It's playing on the radio this weekend, will be avaliable for listening from Monday.

via Susan  Kitchens
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RicePlateReddy

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Re: The crumbling of the US financial system (NC)
« Reply #194 on: October 06, 2008, 06:47:19 PM »

Here is the Injun gentleman chosen to direct the $700B. Do you trust him  ;D

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Re: The crumbling of the US financial system (NC)
« Reply #195 on: October 06, 2008, 07:33:35 PM »

An article called:

Financial stocks: The stars of 2008
By Tim Middleton

is at http://articles.moneycentral.msn.com/Investing/MutualFunds/FinancialStocksTheStarsOf2008.aspx

Not pasting all the crap here but it starts with
Quote
You know U.S. financial stocks are dirt cheap when Charles Lahr starts buying them. And that's what he's doing.

Read it if you want to have a laugh.

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Re: The crumbling of the US financial system (NC)
« Reply #196 on: October 07, 2008, 05:40:31 AM »

The article concludes as follows:

For the most part, however, policymakers should leave derivatives alone. Derivatives have become important tools that help organizations manage risk exposures. The development of derivatives was brought about by a need to isolate and hedge against specific risks. Derivatives offer a proven method of breaking risk into component pieces and managing those components independently. Almost every organization--whether a corporation, a municipality, or an insured commercial bank--has inherent in its business and marketplace a unique risk profile that can be better managed through derivatives trading. The freedom to manage risks effectively must not be taken away.

----

Given what has transpired, I think these claims have been proven totally hollow. They have not helped manage risk, they have worsened it several fold! Regulating them is itself a complex task. Mr. Buffet, as usual, is 100% right.

http://news.bbc.co.uk/2/hi/business/2817995.stm

http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf (note the LTCM reference on page 2)


I disagree.

The problem is not with derivatives ... it is with how they are regulated.

Allowing derivatives to be used for hedging purposes is, in fact, necessary. On the other hand, use of derivatives in speculation should be very tightly regulated.

So where do you disagree with Mr. Buffet? Look at the second article (fintools) quoted. It is succinct and he concludes by suggesting it is impossible to safely regulate this instrument - how do you suggest regulating it?

It depends on what you allow to be structured ... keep time frames short, make it mandatory for adequate margin to be provided upfront in order to enter into a transaction, make it compulsory to mark the values to market (not to model) and you can keep the risk much lower than what the Fed has allowed it to spiral to.
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Re: The crumbling of the US financial system (NC)
« Reply #197 on: October 07, 2008, 07:31:18 AM »

Here is the Injun gentleman chosen to direct the $700B. Do you trust him  ;D


Looks Jewish
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pipsqueak

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Re: The crumbling of the US financial system (NC)
« Reply #198 on: October 07, 2008, 10:32:56 AM »

Here is the Injun gentleman chosen to direct the $700B. Do you trust him  ;D



will depend on how he Karris the Kash...
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dhruvdeepak

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Re: The crumbling of the US financial system (NC)
« Reply #199 on: October 07, 2008, 11:24:37 AM »

he went to UIUC  ;D
i dont trust the bugger
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In the attitude of silence the soul finds the path in a clearer light, and what is elusive and deceptive resolves itself into crystal clearness. Our life is a long and arduous quest after Truth.
-- Mohandas K *hi
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