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America's Financial Mess

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Wotan

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I agree that the CRA by itself, even with the steep penalties for breaking it, was not the only culprit int this debacle. There are many other regulations that the market had to contend with that forced them to make very bad decisions. But the Democrats are trying to place the blame on the victims.

"Frank said that lawmakers "are building strong oversight" into the measure, including establishing an oversight board that will report to Congress at least monthly.

"The private sector got us into this mess," Frank said, "The government has to get us out of it. We do want to do it carefully.""

So they want to limit how much executives can make and also want to bailout the home owners who cannot pay their mortgage.

They act as if nationalizing everything will be a solution, but it is just going to cause more problems down the road as mortgages get guaranteed by the Feds and they won't be able to get the best of the best executives by limiting their pay.

This whole thing is sick, and I'm interested if the market is down today because investors realize this is going to be another government boondoggle that won't solve anything, but rather break the backs of the taxpayers and the executives who were forced to give loans to people who couldn't pay them back.

They are pushing heavily for socialism in this crisis that the government brought about, and it looks like that may well be the outcome.

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This whole thing is sick, and I'm interested if the market is down today because investors realize this is going to be another government boondoggle that won't solve anything, but rather break the backs of the taxpayers and the executives who were forced to give loans to people who couldn't pay them back.

My suspicions as to why the stock market is down is confirmed in this news story.

Evidently, Wall Street is against the plan as more details come about, especially the Democrats wanting to guarantee mortgages and limit executive pay.

Still no word on backing out those regulations that led to the debacle in the first place.

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The Feds have made another major move late Sunday before the markets open Monday morning, though I'm not sure exactly what it means.

I couldn't wrap my mind around this one, either, and it was too late to start researching investment banks v. investment firms. The line that grabbed me, from WSJ was:

"With the move, Wall Street as it has long been known ... will cease to exist."

(shudder)

In a nutshell, Goldman Sachs and Morgan Stanley were declared "banks," subject to bank regulation and insured by the fed. Think Nazi Germany, vs. Fred/Fan as Communist Russia. So that's not so bad. :lol:

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I was not able to access the WSJ piece, since I am not a subscriber, but looking up the definition of an investment bank versus a regular bank left me wondering who is now going to be handling the issuing of new stock and bonds if there are no more investment banks? Evidently, Wall Street doesn't much like the news either, as it was down around 350 points Monday close.

From venturechoice.com: investment banks - An Investment Bank is a financial investment institution which acts as an intermediary, and performs a variety of services which includes underwriting (underwrites the securities by buying all the available shares at a set price and then reselling them to the public.....Unlike a commercial bank or a savings and loan company, an investment bank doesn't usually provide retail banking services to individuals. In this way Investment banks and traditional banks are separated financially because they handle different type of economic transactions.

From businessdictionary.com: investment bank Definition - Financial institution that provides large amounts of long-term fixed capital , primarily for established firms. Investment banks generally take an equity stake in the borrower firm to exercise some influence on its direction and operations . They also act (often jointly) as financial intermediaries by underwriting the sale of new securities . Called merchant bank in the UK.

But, of course, a definition alone is not enough, but I can't currently find an analysis of what exactly this means for the future of issuing stocks and bonds on the open market.

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Well, the Democrats are going to wind up getting their mortgage bail-out, but that's not enough, as they want there to be a bail-out of bad credit card debt and bad car loans. And since they want a piece of each of the companies they are proposing to help, this may lead to a complete nationalization of any major company that is involved in credit issuance.

We may wind up with a kind of socialism written into law by the end of the week!

I hope the stock markets come down hard tomorrow, at a minimum as a protest to this broad scale nationalization of the credit markets.

The details are not in yet, so at this point I have no idea what this means for any future attempt on anyone's part to get a loan or a credit card. I guess we'll have to salute the credit czar every time we make a purchase using credit.

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The Pols keep suggesting things like foreclosure moratoriums and subsidies to people who get behind on their mortgage. What the hell, I think I'll stop paying my mortgage now that I can access the big welfare nipple in the sky. Free housing, free healthcare, free retirement income.... this country is great!

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There is a lot of skepticism about this bail-out package, especially what the Democrats want, driving the dollar down against the Euro.

I'm glad to see all this skepticism, but I don't see it leading to a reversal of the proposals nor a reversal of the laws that got us into this mess in the first place. Just more laws and regulations that at least some people are beginning to see as a long-term negative.

Are we going to have any free markets left by the time this is over?

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Firstly, underwriting can be done by bank holding companies, so this action will not affect the IPO market or debt market.

The difference between an investment bank and a commercial bank is that commercial banks fund operations by taking deposits while investment banks fund operations by borrowing heavily (from a variety of sources). The difference is mainly on the liability side of the balance sheet: a commercial bank is liable to depositors while an investment bank is liable to lenders.

Typically an investment bank has a lower equity to asset ratio than a commercial bank. In a nutshell, they operate with much higher leverage, which means that they take on more risk than a depository institution, but also make higher returns than one. For instance, an investment bank typically has $3 of equity for every $100 invested, whereas a commercial bank usually has $8-12 of equity for every $100 invested. One way investment banks make money is by operating proprietary trading desks, which are trading desks that trade firm capital for the firms own profit (as opposed to trading the capital of clients for the clients profit and taking a commission). Goldman has an oil desk, an equities desk, an options desk, a grains desk, a fixed-income desk, a stock index futures desk, etc, etc. Large positions can be taken under the investment bank model because the institutions are willing to take greater risk. By fiat, depository institutions (which Goldman and Morgan now are) cannot trade commodities. Unless regulations are changed or an exemption is made, I suppose their commodites trading operations will have to be wound up and other trading desks will be severly downsized. My suspicion is that the outrageous jump in commodities today (in particular oil) had something to do with this.

In summary: By becoming bank holding companies, Goldman and Morgan are accepting increased regulation and giving up high returns. Depository institutions are subject to heavy regulation under the Fed and cannot leverage themselves as highly as investment banks did. They cannot purchase equity in various non-financial enterprises like investment banks did. And because of the aforementioned required reserve ratios, they cannot take as much risk and achieve the high returns that investment banks did. I am really curious as to how the structure of the Street will change by this action. The American investment bank is gone.

Edited by adrock3215
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Typically an investment bank has a lower equity to asset ratio than a commercial bank. In a nutshell, they operate with much higher leverage, which means that they take on more risk than a depository institution, but also make higher returns than one. For instance, an investment bank typically has $3 of equity for every $100 invested, whereas a commercial bank usually has $8-12 of equity for every $100 invested.
Absolutely. This is why a relatively small decline in asset values can potentially wipe out the equity of a highly leveraged operation.

One way investment banks make money is by operating proprietary trading desks, which are trading desks that trade firm capital for the firms own profit (as opposed to trading the capital of clients for the clients profit and taking a commission). Goldman has an oil desk, an equities desk, an options desk, a grains desk, a fixed-income desk, a stock index futures desk, etc, etc. Large positions can be taken under the investment bank model because the institutions are willing to take greater risk. By fiat, depository institutions (which Goldman and Morgan now are) cannot trade commodities. Unless regulations are changed or an exemption is made, I suppose their commodites trading operations will have to be wound up and other trading desks will be severly downsized. My suspicion is that the outrageous jump in commodities today (in particular oil) had something to do with this.

This is a good point and one that I hadn't really considered regarding the commodity price jump yesterday. My original assumption was that the spikes in oil and gold were the market's recognition that we're in store for higher inflation and a weaker dollar as a result of this hugely expensive bail-out plan. Contrary to the popular myths about commodity speculation driving up prices, it seems that removing a large group of traders from the market may well have caused prices to increase.

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I just saw Paulson on MSNBC. He basically brought up the argument that the taxpayer will suffer either way ignoring the fact that rational financiers will suffer less when not using government to help the companies in question...

It may not happen at all, given the squabbles in DC, which would be a good thing, considering both sides of the government arguments are bad. There are only a few officials who see this as a bad thing.

"Sen. Richard C. Shelby of Alabama, the panel's senior Republican, was even more blunt. "I have long opposed government bailouts for individuals and corporate America alike," he said. Seated a few feet away from Paulson and Bernanke, he added, "We have been given no credible assurances that this plan will work. We could very well spend $700 billion, or a trillion, and not resolve the crisis."Sen. Jim Bunning, R-Ky., added, "This massive bailout is not a solution. It is financial socialism and it's un-American." "

I mean, you just got to love the checks and balances that the Founding Fathers put into the Federal government. Some might say it is inefficient, but they are those who would also claim that dictatorship is efficient.

Of course, no one is yet coming out and claiming that certain laws and regulations brought this about, and that those laws and regulations need to be reversed; but then again, modern politicians are not so concerned with individual rights and property rights.

I think they will do something, and it will be from awful to God awful -- and I think what we are heading for is a total disaster. The Dems won't budge without mortgage bail-outs; and if they do that, then this ain't over yet by a long shot. And it will be from a Republican administration that we will have a wholesale nationalization of the credit markets, especially if the Dems get their way and some stock assets must be transferred to DC in order to get the bail-out.

But, until we get individual rights principled politicians, grid lock is all that is saving us from total socialism.

Thank you Thomas Jefferson et al!

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Now the NY Times is saying heads must roll, and the heads they want to roll are the executives and stock holders of the financial companies.

Nobody is looking to roll the heads of the government officials who made this mess, and so far, no one except a few Objectivists are blaming Carter and Clinton. Blame Bush, it happened on his watch! And blame the executives, the stock holders, and capitalism because they were following the laws that forced them to negotiate so many bad loans.

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"The policies of welfare statism have brought this country (and the whole civilized world) to the edge of economic bankruptcy, the forerunner of which is inflation - yet pressure groups are demanding larger and larger handouts to the nonproductive and screaming out that their opponents lack 'compassion.' Compassion as such can not grow in a blade of grass, let alone wheat. Of what use is 'compassion' of a man (or a country) who is broke - i.e., who has consumed his resources, is unable to produce, and has nothing to give away."

Ayn Rand 1975

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Nobody is looking to roll the heads of the government officials who made this mess, and so far, no one except a few Objectivists are blaming Carter and Clinton. Blame Bush, it happened on his watch! And blame the executives, the stock holders, and capitalism because they were following the laws that forced them to negotiate so many bad loans.

Of course, the American people are blaming the party in power:

WASHINGTON (CNN) – A new CNN/Opinion Research Corporation Poll suggests that by a 2-to-1 margin, Americans blame Republicans over Democrats for the financial crisis that has swept across the country the past few weeks...

http://politicalticker.blogs.cnn.com/2008/...nancial-crisis/

Not that the Republicans are blameless, they certainly had opportunities to make the necessary changes in this system. To his limited credit, Bush can even make a case that he called for congressional action to reform Fannie and Freddie:

http://www.whitehouse.gov/news/releases/20...0080919-15.html

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Here is a very interesting opinion piece by Michael Reagan on Newsmax.com concerning how to get out of the current economic crises: FREEDOM!

"Put simply, that system is shackled around the ankles with chains fashioned by a series of Congresses, many of whose members either don't understand the principles of free enterprise or simply despise it as a mortal enemy of the Marxist dogma many of them embrace with near-religious fervor."

"The clear and simple answer to our current economic dilemma is to take those shackles off and allow our free enterprise system to function unimpaired with unnecessary bureaucratic meddling."

Wow...too bad he's not running for office, though I don't know what the rest of his views are, since I haven't been keeping up with him.

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I read this article just now. It's pretty terrible....

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency,”

Here's the whole thing: Article

That basically gives the treasury secretary a blank check to do whatever he likes without any fear of reprisal if he messes up or abuses it....

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Jim DeMint the US Senator from South Carolina has come out against this bailout plan. I thought thefollowing paragraph was a particularly good one from his press release on the subject:

"There are much better ways of dealing with this problem than forcing American taxpayers to pay for every asset some investor doesn't want anymore. We should start by reforming government policies and programs that created this mess, including the Federal Reserve's easy money policy, the congressional charters of Fannie Mae and Freddie Mac, and the Community Reinvestment Act. Then Congress should pass a number of permanent and proven pro-growth reforms to encourage capital formation and boost asset values. We need to make permanent reductions in the corporate tax and the capital gains tax rates. We have the second highest corporate tax rate in the world, which encourages companies to take jobs and investment overseas."

http://demint.senate.gov/public/index.cfm?...1f-586e39c6c94a

The idea of making capital less expensive in the midst of this capital crisis makes perfect sense. The best way out of this mess and the best way to promote long-term prosperity would be to completely eliminate the capital gains tax and reduce or even eliminate the corporate income tax. We already tax corporate earnings twice, isn't that more than enough? Of course none of this will ever happen.

Watching his speech last night, it's hard to avoid the conclusion that Bush is simply an unprincipled dolt who is incapable of communicating with the American people. Unfortunately, Dumb and Dumber (the two current candidates for the presidency) aren't much better. I think it's safe to say that the next several years are going to be very difficult economically. In fact, whichever one of the two nitwits wins the election, the first thing he should do on November 5 is to demand a recount!

Edited by gags
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The biggest technical problem I see with this bailout realtes to the question of what price the government should pay for these securities. The market is telling us that they are not worth much. The institutions that hold the securities are saying that they don't want to sell at such low market prices. Therefore, the government is now suposed to step in and decide that it will pay more than the current market price for this debt. How much more should be paid and how is that going to be determined? Those questions are not easy ones to answer.

I suppose these prices will be determined in some sort of negotiation or bidding scheme. On the taxpayers' side we'll have a team of faceless bureaucrats who couldn't get jobs in the private sector pitted against a bunch of crack invesment bankers who will have big bonuses riding on the outcome. Gee, who do you figure is going to win in that situation?

Bend over Mr. Taxpayer, here it comes again.

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John Allison wrote a letter to congress about the bailout plan and why it's a bad idea. It's a good read :) Go BB&T!

Allison's letter

From that letter.

Corrections are not bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post "rescue" punish the poorly run institutions and not punish the well run companies.

Thank you Mr. Allison.

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Thank you Mr. Allison.

I don't think anyone in this thread were saying or implying that it was impossible to make money even in the market as bad as it is given the laws -- certainly some did, and they are to be congratulated. However, even Mr. Allison's bank lost $300 million due to the conditions, and that is not chump change. I kind of wished he would have gone into the bad laws that made those losses necessitated. However, as far as I know, he is the only major to semi-major banker who has said anything about it at all, and he is heroic for doing that. It's like they are sacred to death to say anything controversial, or afraid that if they say they managed to make money, heaven and hell will come down upon them!

Those laws need to be reversed, even if a few capitalists managed to make money in their toxic regulatory environment.

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Bloomberg reports that a group of 165 academic economists have signed a letter asking Congress not to go ahead with Paulson's plan. I liked this quote from a finance professor, reported in a Chicago Tribune editorial: "The last refuge of a scoundrel regulator is to shout 'systemic risk.' "
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As of this evening, it sounds like the deal hit some rocks. Some of the cable stations are reporting that a meeting at the White House between congressional Dems, Repubs and the president turned into a big shouting match. Good! I'd love 4 years of gridlock. While they are shouting at each other, maybe the rest of us can be free to live our lives.

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A lot of popular resistance is being reported, but I'm not sure if people understand who the culprits are, or if it is motivated by a socialist-leaning attitude of "don't bail out evil businessmen", or a capitalist-leaning "don't meddle with the economy". It is heartening to see some level of good, free-market based resistance. Apart from Allison's letter, and the one from the economists, Grant Interest Rate Observer is good, and the editorial board of the Chicago Tribune might be good if that article above is an indication (it is owned by Sam Zell now, and he's a good guy). Jim Rogers is always critical of the government, and usually entertaining (Bloomberg clip).

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This is the thing that leaves me pessimistic Snerd. Without fleshign out the cause, and given the actual cause is the guys who are now sitting around trying to "help" us, and given the election dynamics, I suspect that politics will reign over reason, and even if there's fighting now, all that means is that once everyone realizes that the options left to them by playing for political damage points are limited, they'll simply reassemble, compromise and sweep the whole mess under the rug while they throw capitalism under the bus (I love mixed metaphors!) :)

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