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America's Financial Mess

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Increasingly, long-term (10/20 year) U.S. government securities looks like the worst investment in the world (except if one is going to hold them for a very short while).

I think that's why Jim Rogers was out the other day on CNBC saying he'd covered all his shorts in the financial sector last Thursday, and he has sold 20 and 30 year Treasuries. He's calling a bubble in Treasury debt securities.

Edited by adrock3215
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The Government has now decided to put half of the $250 billion (first tranche of the $700 billion) into 9 large banks.

Given no choice, and forced to be subject to pay restrictions. You're watching Atlas being chained to his desk.

Most of these guys will take it of course, since in any private scheme they would have lost their positions altogether.

Wells Fargo too! If I was their CEO, I'd quit.

Edited by KendallJ
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You're watching Atlas being chained to his desk.

This is a monumental disaster. For those of us who are working toward an MBA, the plan has thrown some uncertainty into the mix. Surely the value of an MBA has dropped drastically in the last month. We aren't going to need experts in finance anymore; we're going to need bureaucrats. My bet is that the value of a Government and Politics degree or a Law degree just skyrocketed.

What we need right now is a Francisco D'Anconia. Some huge bank (Bank of America would be good) to blow up from within, and take down everything else.

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This is a monumental disaster.

I agree. Here is the story as written up by Fox News Business section. Basically, they are forcing banks to comply with getting an injection at the price of some of the bank belonging to the government so that Congressional power can apply to them.

"The government is taking a stake in all those banks, regardless of the condition of their balance sheet, in the hopes of removing the stigma of that equity investment."

So, even if you ran your bank well, it doesn't matter, the government is taking it over!

The article even acknowledges that this was not the original intent of the Emergency Economic Stabilization Act of 2008, but it is the government and I guess they can do whatever the hell they want to do.

And no word yet of buying up those toxic assets....

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From http://biz.yahoo.com/ap/081014/financial_meltdown.html?.v=24

The government put itself four-square into the country's banking business Tuesday, resorting to what President Bush conceded was the unwelcome choice of a partial nationalization in order to loosen paralyzed channels of credit.

The president said the decision to to buy shares in the nation's leading banks -- a kind of federal intervention not seen since the Depression era -- was "not intended to take over the free market but to preserve it."

Said Treasury Secretary Henry Paulson: "We regret having to take these actions. Today's actions are not what we ever wanted to do -- but today's actions are what we must do to restore confidence to our financial system."

Famous last words. :P

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I don't really understand that. I thought the whole point of the bailout was that it would be voluntary; i.e. banks that were in trouble could get government help. Are they basically forcing banks to accept the proposal now, no matter how well they are being run and how solvent they are? What good does that accomplish??

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As soon as I read the proposed bailout I knew this was going to happen. It explicitly gave the treasury secretary unilateral power to seize ANY bank it deemed necessary according to his own whims, thereby forcing it to comply with the other stipulations of a bank getting bailout money.

So now what? All those SUCCESSFUL CEOs have to abide by the salary caps because their banks were forced into this without their consent? How does this happen in America? It just boggles my mind.

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It explicitly gave the treasury secretary unilateral power to seize ANY bank it deemed necessary according to his own whims, thereby forcing it to comply with the other stipulations of a bank getting bailout money.

Granting someone the power to violate the rights of others? It's rather like Jesus forgiving criminals without consideration for the victims. The government is our savior!

Edited by brian0918
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I don't really understand that. I thought the whole point of the bailout was that it would be voluntary; i.e. banks that were in trouble could get government help. Are they basically forcing banks to accept the proposal now, no matter how well they are being run and how solvent they are? What good does that accomplish??

Megan McCardle has a nice exaplanation, at least of what the thinking is, not whether it's right or not (which it isn't).

http://meganmcardle.theatlantic.com/archiv..._plan_youve.php

Basically, only giving money to some, signals which are weak, and the fear is that that could trigger a panic. So "give" money to all (or should I say "force" them to take it) so no one knows who's good.

This is the problem of providing capital without write-downs and restructure. The bad banks are still bad. Don't want to signal which those are. Of course the fact that they are still bad is why the crisis continues. This is simply throwing good money after bad.

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This is the problem of providing capital without write-downs and restructure. The bad banks are still bad. Don't want to signal which those are. Of course the fact that they are still bad is why the crisis continues. This is simply throwing good money after bad.

I think it is worse than that, as they are basically punishing well-run banks along with poorly-run banks. Imagine if you did a good job keeping your bank out of the mess of the past year, and have a healthy balance sheet, and then you are brought before the Feds and Congress and are told you will not only have a tremendous pay cut, but we are taking over your bank -- and here's a few billion dollars to keep your mouth shut about it. Just spread it around like a good boy, and we'll let you continue to work for pennies on the dollar. And don't even think about retiring, because we have yanked your personal bail-out bonuses as well.

And they think this is going to help? Who would want to be the CEO of a bank in this political environment?

Added on Edit: By the way, the supposed euphoria over the Fed bail-out is abating, as stock are down Tuesday, and more volatility is seen on the horizon as no one has quite figured out what to make of all of this.

Edited by Thomas M. Miovas Jr.
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From NPR:

The idea was to include healthy institutions in the recapitalization program so that banks that chose to accept the government's help wouldn't be stigmatized or seen as failing.

Because that would be terrible for the bank's self esteem....

Seriously though, wouldn't it help stabilize the market, to an extent at least, if people could see which banks were desperate to accept nationalization? In the short term it would probably lead to a few more collapses, but that's going to happen regardless; the nationalization would just expedite the process.

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That's ridiculous! I don't understand why the government wants to keep bad businesses in business. It's so stupid! Let's clean house while we can and while the markets are already suffering. All we're doing here is further prolonging the inevitable and making the inevitable worse!

This is all so depressing. I am having trouble keeping my normally upbeat spirit up.

I hear ya, sista! :dough:

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I'm looking for good books on the New Deal, and found out about Raymond Moley's After Seven Years (1939). Moley was the chief architect of the New Deal, and would soon resign and become a highly-conservative critic of Roosevelt and the New Deal that he helped develop. I was reading a review of Moley's later book on the subject, The First New Deal (1966), and found this timely bit:

In assessing the famous Hundred Days, Moley corrects much of the mythology that has accumulated. There was no overall plan; most measures originated outside of the White House; the Seventy-third Congress, "rich in talent and experience," was no rubber stamp [different today?]; there was no revolution; some measures were forced upon Roosevelt; most of the legislation was drastically revised later; and the emphasis was not on reform. None of these conclusions is at all startling to students of the period.

Sound familiar? Is Paulson the architect of The Second New Deal?

Edited by brian0918
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This is all so depressing. I am having trouble keeping my normally upbeat spirit up.
Yes, and you can be sure that the next President/Congress have more depressing tricks up their sleeves.

On the bright side, I think the major uncertainties are mostly out of the way; as bad as the decisions have been, I think we now have decent visibility going forward. Therefore, I think one now has to approach this by understanding the implications in a little more detail, and asking: how do I cope with the inevitable parts? how do I position myself for the next decade?

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The depressing part is always just the phase when you still apply your old views to the new situation.
I wouldn't put it quite that way, unless you're being tongue-in-cheek, or if you mean "view" as in "view of current reality".

The depressing part is when the thug is planning on breaking your legs, discussing it with his buddies, ignoring your protests, and your struggles with your bonds is only drawing blood. Then blow strikes and it would be bizarre not be depressed about what just happened, and about future possibilities lost. Nevertheless, I think it's time to figure out how to mend the leg, and how to live with the limp, and how prepare for the next attack.

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Sound familiar? Is Paulson the architect of The Second New Deal?

Very familiar. This started out as a plan to buy bad debt, which everyone said was a "do or die" type of choice. Now it turns out that what we really need is for the government to effectively nationalize the banks. Do any of these people really know what they're doing and do they know the long term consequences of their actions?

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Now it turns out that what we really need is for the government to effectively nationalize the banks. Do any of these people really know what they're doing and do they know the long term consequences of their actions?

I got a rather long letter from my Senator as to why she voted for the Emergency Economic Stabilization Act of 2008. Like the President and Mr. Paulson, who are also Republicans, Senator Kay Bailey Hutchison said she didn't want to do it but something had to be done; and that they reached a bi-partisan agreement.

"While there are provisions in the bill that I do not favor and would not have drafted, overall the need for action to stabilize the market and to protect the retirement savings of millions of Americans weighed heavily on my mind. Ultimately, I supported the Senate bill along with 73 of my colleagues."

Of course, the EESA of 2008 doesn't explicitly say that they will nationalize all important banks, but that is what they are doing and it is a Republican who is doing it. And it was the Republicans who made this possible. It is fairly well known that the Democrats want Socialism, and if the Republicans, including the President, had stood by their rhetoric of being for free markets, this monster would never have been unleashed upon our banks!

I think this represents what happens when one compromises on one's principles, if it can be said that modern Republicans have any principles. And while I don't plan on voting for any of them in the upcoming elections, I shutter to think of what the Democrats would do with this power.

Predictions are that we will have very slow growth in the economy for the next 15-20 years due to this action, which is probably why Paulson put money into the banks to get it out into the economy. But notice that the original intent of the EESA of 2008 has not been acted upon -- toxic assets are still sitting there while they nationalize the healthy banks. Have to wonder if that was their intent from the get-go.

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Very familiar.

I found another interesting contemporary description of Roosevelt by Moley, in this TIME article about his 1939 book:

Franklin Roosevelt is a changeable, charming, warmhearted, gullible, formidable man. ". . . When crossed he is hard, stubborn, resourceful, relentless," Moley wrote to his sister Nell in 1932. ". . . He seems quite naturally warm and friendly . . . because he just enjoys the pleasant and engaging role, as a charming woman does. . . . The frightening aspect ... is F. D. R.'s great receptivity. So far as I know he makes no effort to check up on anything I or anyone else has told him. I wonder what would happen if we should selfishly try to put things over on him."

Once again, sound familiar?

if it can be said that modern Republicans have any principles.

It cannot.

Edited by brian0918
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Here is a news story containing JP Morgan Chase CEO's opinion about the bail-out (from a report on how profits are sinking due to bad mortgages):

NEW YORK - JPMorgan Chase & Co.'s profit tumbled 84 percent in the third quarter after it took big hits from souring mortgage investments, leveraged loans and home loans. [empahsis added]

CEO Jamie Dimon said during a conference call that he expects market conditions to improve from its heightened turbulence after recent moves by the government, and that JPMorgan is still offering loans. But the bank, like others, is lending at more old-fashioned, disciplined standards in anticipation of an even weaker economy and accelerating loan losses.

"If you're not fearful, you're crazy," Dimon said.

The U.S. government announced Tuesday that it will spend $250 billion buying stakes in major financial institutions, including JPMorgan. Dimon said during a conference call that JPMorgan "didn't need the money," but that he didn't want to "stand in the way" of helping broader financial system.

"It's clear that the government would like us to use the money to make loans," Dimon said. But, he added, "I don't think the government is telling us what to do with the capital."

.....

They will...they willl...strings are attached, including your pay cut, and if you won't do what the government wants, the noose will tighten about your neck.

Are bankers just used to dealing with government regulations? One would think that he would complain about what they did to him and his bank. I don't know, maybe he figured out a way to get perks from the capital "investment", but if he tries to make some sort of personal profit from it, what do you want to bet there will be news stories castigating him for that?

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