Rolling US Economy Into The Shitbin Thread

Banning short sales is just short-term varnish over a long-term problem - exactly the sort of thing you'd prescribe if, say, you were an incumbent party with only 6 weeks to go before an election.

Why you cynic.

BAN WOLVES FROM EATING
THIS WILL HELP DEER TO BECOME FAT

hahaha

Greider calls the bailout plan a "historic swindle"...

http://www.thenation.com/doc/20081006/greider

...all sugar for the villains, lasting pain and damage for the victims. My advice to Washington politicians: Stop, take a deep breath and examine what you are being told to do by so-called "responsible opinion." If this deal succeeds, I predict it will become a transforming event in American politics--exposing the deep deformities in our democracy and launching a tidal wave of righteous anger and popular rebellion. As I have been saying for several months, this crisis has the potential to bring down one or both political parties, take your choice.

Christopher Whalen of Institutional Risk Analytics, a brave conservative critic, put it plainly: "The joyous reception from congressional Democrats to Paulson's latest massive bailout proposal smells an awful lot like yet another corporatist lovefest between Washington's one-party government and the Sell Side investment banks."

TO HELP SAVE ON GASOLINE I PROPOSE LEGISLATION TO REMOVE THE BRAKES FROM ALL AUTOMOBILES

There's your four horsemen:

http://www.latimes.com/media/alternatethumbnails/photo/2008-09/42454452-19110815.jpg

"...and if I could ask the current GOP candidate to stop trashing the guy on the right..."

l-r: Impotence, Ignorance, Corruption, and Idleness

Greider calls the bailout plan a "historic swindle"...

The potential for historic swindling is definitely there, but it's not clear what alternatives exist, other than just waiting for the crisis to snowball further. Buying the troubled assets, while it presents moral hazard problems, at least allows for a more surgical intervention, versus AIG type rescues, where the government takes over the whole company. It seems like the best compromise might be a combination of fair-value pricing for the assets being sold (a reference point could be the recent sale by Merrill Lynch of a batch of similar assets at an average price of around 20 cents on the dollar), which would force the selling institutions to take large up-front losses, with a program of government buying of preferred stock at high rates of interest in order to shore up those institutions' capital. The high interest rates on the preferred shares could compensate taxpayers for the risk being taken on the asset purchases.

Jim Cramer on CNBC just said "we're seeing more moves from the President now than we saw from FDR..." somebody buy me drinks

It's amazing those $600 checks didn't prevent this.

while it presents moral hazard problems
to say the least

xp lol beat me to it

Well, the punitive rates of interest on the preferred (or, if you prefer, dilution of the common) would go some ways towards reducing the moral hazard.

many xposts

at least they finally found weapons of mass destruction

Well, the punitive rates of interest on the preferred (or, if you prefer, dilution of the common) would go some ways towards reducing the moral hazard.

have you been following the credit-derivatives market?

Not sure what that's supposed to mean in context.

sry i misread yr post

o nate you have been OTM a lot on this thread.

anyone who thinks that Paulson is trying to save the GOP with any of these moves is willfully ignorant. Blame can be cast widely for the source of this problem, but it doesn't get us any closer to a solution. And doing nothing will absolutely cause the crisis to snowball out of control and turn us all into serfs.

not really sure there's a fucking moral hazard to anything anymore. And where there might be one, we just ignore anyway because it's way easier to expect someone else to not only take the blame, but the responsibility for whatever fuckup happens in our lives.

also Tombot I will buy you a drink.

Blame can be cast widely for the source of this problem, but it doesn't get us any closer to a solution.

Though it might get us closer to understanding how to prevent it from happening again.

not really sure there's a fucking moral hazard to anything anymore

Fair point. I think that people are already angry enough that there is going to be a real push for reform, no matter who gets bailed out at this point. Punishing the shareholders is probably the fair thing to do, but it will only really be effective if it goads the shareholders into reforming corporate governance and compensation structures that allow CEOs to profit from taking excessive risks without adequate shareholder oversight.

An entertaining column from Nick Leeson, who probably knows a thing or two about bank collapses:

Quite simply, the banks have traded recklessly over the past 10 years and have put everybody's wellbeing at risk. Anybody and everybody could get whatever credit they wanted as recently as three years ago. I returned from Singapore in 1999, responsible for £862m worth of losses that brought down Britain's oldest investment bank, personally liable through an injunction for £100m, and yet within the space of a week had been offered five different credit cards. Ridiculous! Any central bank will tell you that the system exists on the premise of "responsible lending"; but the experiences of the past few years clearly show this is utter rubbish.

http://www.guardian.co.uk/commentisfree/2008/sep/19/banking.creditcrunch

Nick Leeson = Ewan McGregor, no?

He wishes.

that's actually not a bad movie imo

I especially loved the trading floor costumes.

"Nick, tell me we're not the customer. TELL ME WE'RE NOT THE CUSTOMER"

Though it might get us closer to understanding how to prevent it from happening again.

I'm not nearly as optimistic as you. Probably because I really don't know who to trust anymore. The banks? The government? My fellow citizens? Me? Water rolling downhill, etc.

I think that people are already angry enough that there is going to be a real push for reform

We don't even really do a good job of enforcing the regs that are in place. What's next, banning derivatives and hedge funds and all the other vehicles? Do we ban institutional investments like pension funds or enact heavy regulation on all elements of private investment? And this doesn't even begin to address the problems that could come with overseas investment, particularly in a growing, integrated global economic system. The US might regulate itself into a knot, and then watch while China or Russia bring the world economy into chaos.

And seriously, are we now going to expect shareholders to rise to action? We've been waiting for that to happen since, like, forever.

I swore this year I'd be less cynical, but between the election and the financial crisis, I'm getting back to my old bad habits.

"YOU CAN'T HANDLE THE TRUTH!"

For something that seemed like a made for TV movie it wasn't bad.

And seriously, are we now going to expect shareholders to rise to action? We've been waiting for that to happen since, like, forever.

And did we expect them to rise to action when prices were soaring? This is always the thing: nobody wants to be the one that pops the bubble. Ever.

if it ain't broke etc etc

I think we're still in the first chapter of an unfolding story at this point, and it's too early to say what the financial landscape is going to look like in a few years time. Are we going to have traditional investment banking functions dominated by a few "universal bank" behemoths? Or are we going to see a splintering of that function into a new landscape of small, privately-owned boutique firms and hedge funds? We don't know how these entities will fund their activities and how they'll be regulated. I'm not such an optimist as to assume that the lessons of this crisis will be learned or remembered. We thought the lessons of the LTCM collapse had been learned - that excessive leverage and overconfidence in models can risk the stability of the entire financial system - instead within the next decade we saw the 5 biggest investment banks turn themselves into replicas of LTCM.

on a massively larger scale to boot.

I think that people are already angry enough that there is going to be a real push for reform

We don't even really do a good job of enforcing the regs that are in place.

we who, white man? "we" in this instance are the republican appointees who loudly and explicitly don't agree with the regulatory mission of the agencies they are running. what do we do? don't elect them anymore.

If you think that an SEC full of Democrats is going to steamroll the financial lobby then you're way more optimistic than I.

For example, the warning signs were on Fannie/Freddie for at least the last five years, if not more. Nobody cared. The defenders of Fannie/Freddie--here's looking at you Congress for your stunning lack of oversight, it's not just the SEC--have blood all over their hands but no one bothers to point it out. All those guys will get re-elected. Failing upward in this country is a grand fucking tradition.

The Accrued Interest blog makes a fair point about moral hazard:

Spare me the moral hazard arguement. What about the reverse? Should Goldman Sachs pay for the sins of Bear Stearns? Should Morgan Stanley pay for the sins of Lehman Brothers? Look maybe no one is completely innocent here, but it seems to me that Morgan Stanley is petty theft whereas Bear Stearns was a serial killer. Should we execute both?

http://accruedint.blogspot.com/2008/09/resolution-trust-jedi-seeks-not-these.html

yeah true enough. home ownership doesn't need to be and should not be subsidized at all, and it is.

xp

the financial crisis is the odd topic that is bringing conservatives + liberals in agreement about root cause, i.e. there was not enough oversight... ben stein and robert reich were practically giving each other high fives on larry king the other night trashing wall st greedheads (tho predictably reich offered obama as answer to all our problems and stein deferred on the topic)

IMO all the shit this week is on institutional investors, pension plan fuckos and charity trust numbskulls who can't admit they blow ass at their job and suck at poker

They dumped off shares on Monday, then other brokers and hedge funds picked up the cheap shit tuesday, then dumped again on Wed, whined about short sellers, and now the fund managers are probably already back at home in Greenwich just getting drunk

Which bit of this article is funnier:

I returned from Singapore in 1999, responsible for £862m worth of losses that brought down Britain's oldest investment bank, personally liable through an injunction for £100m, and yet within the space of a week had been offered five different credit cards.

Or:

Nick Leeson was the trader who brought down Barings Bank in 1995. He is now general manager of Galway United FC

This meme about "no regulation"/"lax regulation" is a terrible red herring. All the big i-banks were up to their ears in SOX, SEC compliance, internal audit, external audit, etc. Everyone was compliant and yet it was meaningless. Another 50,000 pages of regulations is only going to make lobbyists and auditors rich and all of us poorer.

The real issue was housing, where everyone was complicit--Wall Street, Washington and Main Street. Cheap money/negative real interest rates, an extremely efficient system of distributing risk, and an insanely subsidized housing market all made for the shit show we're watching now. Everything else is secondary.

Moral hazard isn't about retribution, it's about the calculations next time round. Like fucking Goldman Sachs was blameless anyway

No but unlike a lot of the other big banks, they employ a lot of risk managers, and pay them very well. They didn't lose as much money as the others. This should be rewarded because it's going to be risk managers who prevent this happening again.

they tossed the loaded dice the OTHER way!!! those guys are all right.

No, I don't think so--they were genuinely reducing their risk. It's pretty hard to 'throw the dice...the OTHER way' across an entire trading book.

you're right. in a casino, when you lose, it's instantly apparent to everyone. In high finance, you can play hide-the-hotdog for as long as your capital will stand - cf. wachovia vs. citigroup, or, more obviously, indymac vs. lehman. Why do you think it took so long for the fed to figure out AIG was fucked after they effectively took FM&FM down to zilch country? Because the government uses really slow calculators?

keep drinking the koolaid, tho. I bet it's still got a little bit of sugar left. I've been sticking to fiji water thanks to my government job.

My dad just snapped an interesting new development in trying to keep troubled US banks afloat...

http://farm4.static.flickr.com/3111/2871191980_d074421730.jpg

Only in California!

This should be rewarded because it's going to be risk managers who prevent this happening again.

They didn't prevent it the first time. They didn't prevent it at LTCM. Risk managers--yes, the very people who "mitigated" risk and "reduced exposure" through a variety of derivatives and quant modeling--are the people who guided the investment strategy at places like Goldman. Yes, it was these people who woke up one day, apparently, and found themselves leveraged 30:1. Luckily, my tax dollars will be able to pay these risk managers and they don't have to worry that the edge of the Bell Curve bit them in the ass.

The 30:1 ratio at most i-banks is misleading, and I'm seeing this reported everywhere now. The real number is the "net" leverage ratio, which at most places was around 15:1 at the peak (still high, obv). The missing piece is the firms' "matched book"--repos that the firm has effectively brokered between two other counterparties. These sit on the balance sheet but are netted out (totally another story if one of those counterparties is bust, but I digress).