Answers adapted from posts by some really smart people at the Actuarial Outpost.
Asset Backed Securities take future cash flows (lease payments, mortgage payments, etc) and accelerate them. You get money today for cash flow in the future. This is borrowing from the future. And all that liquidity came rushing into the global markets today. It needed a place to be invested. Boom - huge investment bubbles formed as the money chases yield. Risk blossomed, but the money had to be invested someplace.
Companies working on very small margins but using leverage to increase profits on those small margins (This is the ONLY spot where I'll accept government regulation being lax, but it was the rating agencies and counterparties fault more than anyone.)
Congress created the GSEs and then assiduously failed to regulate them. No private entity could have behaved the way Fannie Mae & Freddie Mac behaved (not producing financials for THREE YEARS, cooking the books with little or no repercussions, amassing mind-boggling levels of debt).
Crooked mortgage brokers.
Freddie Mac and Fannie Mae forcing the 'market' for lower rates and underwriting guidelines. The market won that battle.
Government wanting EVERYONE to be able to afford homes they could not afford.
People who (a) took out a loan with low initial payments in the beginning because they believed they could refinance in a few years right before the payments blew up... but, oops, now they can't get a refi because the house isn't worth as much as they owe or (b) were making their mortgage payments and living off credit cards, and then refinancing to pay off the credit cards, repeat. Now that they can't refinance the house to pay the credit cards anymore, they've got credit card bills and mortgage bills together that they can't pay.
Rating agencies that gave AAA and AA ratings to paper that should have been rated B or CCC at the most.
Tuesday, September 30, 2008
Monday, September 29, 2008
S&P500
On March 24, 1998, the S&P500 closed at a then-record value of 1106. Today, 10.5 years later, the S&P500 closed at 1106. That doesn't take into account dividends, but it also doesn't take into account inflation, whose eroding value far exceeds the positive value of dividends. So it's been truly a lost decade, just like Japan's a while back. With no sign of the end in sight.
Blood on the Street
Dow down 778 points (6.98%) after House kills the very very bad bill, its 12th worst day in history.
In news unrelated to the bailout bill...
GOOG down $50 (11.6%) to $381, almost 50% down from its all time high last November of $747 and below $400 for the first time in two years.
AAPL down $23 (17.9%) to $105, almost 50% down from its all time high of $203 last December, a 16-month low. This one, I called back in December. It was just too high; it's at a much more reasonable valuation now.
| Oct. 19, 1987 | -22.60 |
| Oct. 28, 1929 | -12.80 |
| Oct. 29, 1929 | -11.70 |
| Nov. 6. 1929 | -9.90 |
| Aug. 12, 1932 | -8.40 |
| Oct. 26, 1987 | -8.00 |
| July 21, 1933 | -7.84 |
| Oct. 18, 1937 | -7.75 |
| Oct. 5, 1932 | -7.15 |
| Sept. 24, 1931 | -7.07 |
| July 20, 1933 | -7.07 |
| Sept. 29, 2008 | -6.98 |
In news unrelated to the bailout bill...
GOOG down $50 (11.6%) to $381, almost 50% down from its all time high last November of $747 and below $400 for the first time in two years.
AAPL down $23 (17.9%) to $105, almost 50% down from its all time high of $203 last December, a 16-month low. This one, I called back in December. It was just too high; it's at a much more reasonable valuation now.
It's mark-to-market's fault
A provision in the bill, whose adoption is in doubt after the House of Representatives rejected it Monday, gives the SEC the right to suspend mark-to-market accounting under Statement Number 157 of FASB. The SEC would be allowed to step in front of mark-to-market accounting standards if it was in the public interest and consistent with the protection of investors, the House bill said. Mark-to-market accounting, or "fair-value" accounting, is cited as one of the major reasons for the meltdown in the U.S. banking system. The rule, which went into effect Nov. 15, 2007, forces financial institutions to put a fair value on their assets or liabilities each quarter.
Isn't blaming mark-to-market accounting just a fancy form of shooting the messenger? It's not FASB's fault that banks are carrying assets that ain't worth diddly. That doesn't mean they should be allowed to carry them at cost, or face, or mark-to-fantasy like they did prior to FAS157.
Isn't blaming mark-to-market accounting just a fancy form of shooting the messenger? It's not FASB's fault that banks are carrying assets that ain't worth diddly. That doesn't mean they should be allowed to carry them at cost, or face, or mark-to-fantasy like they did prior to FAS157.
Update on Alitalia
Alitalia has been struggling in negotiations with CAI, a business consortium designed to take over. CAI secured the endorsement of the pilot union Saturday. Rocco Sabelli, CAI's CEO, said the endorsement will help the consortium find an international counterpart, naming Air France - KLM and Lufthansa. It is looking to get the endorsement of the flight-attendant union this week.
Source: The Times (London)
Source: The Times (London)
Wendy's and Arby's merge
The merger between Triarc Companies (Arby's parent company) and Wendy's International was completed today. In connection with the merger, Wendy's became a wholly owned subsidiary of Triarc and Triarc changed its name to Wendy's/Arby's Group.
USA Today Poll
33% of respondents to a USA Today poll think we're already in a depression.
Conclusion: 33% of respondents to USA Today polls are too stupid to have their opinions taken seriously.
Unemployment is 6%. In the Great Depression it was 25%. In the Carter and Bush Sr recessions it was aroun 8%.
GDP is still growing, albeit modestly. During the Great Depression it fell 29%.In 1990 GDP fell 3%. In 1980 it fell 8%.
Not to mention that during a depression prices fall; in 1929-1933 prices fell 30%. We still have inflation.
Conclusion: 33% of respondents to USA Today polls are too stupid to have their opinions taken seriously.
Unemployment is 6%. In the Great Depression it was 25%. In the Carter and Bush Sr recessions it was aroun 8%.
GDP is still growing, albeit modestly. During the Great Depression it fell 29%.In 1990 GDP fell 3%. In 1980 it fell 8%.
Not to mention that during a depression prices fall; in 1929-1933 prices fell 30%. We still have inflation.
Good thing the government is looking out for me
Georgia did not allow "price gouging" in the wake of the refinery crisis. The effect was predictable (by anybody with a brain, but apparently not by our politicians). There was a run on gas, and no nobody can buy gas AT ANY PRICE. Thanks a lot.
Between this and the federal bailout BS, I'm not sure I'll survive any more government "assistance". The road to hell certainly is paved with good intentions.
Between this and the federal bailout BS, I'm not sure I'll survive any more government "assistance". The road to hell certainly is paved with good intentions.
Bill fails first vote
Normally I'd say bill dies, but I am positive they are going to bring it to another vote. There were 205 in favor of the legislation and 228 against. Among Democrats, 140 voted in favor and 95 against. Among Republicans, 65 voted in favor and 133 against.
Two things that would make the bill more likely to pass (even I'd support it) -
1) Provide specifics about what kinds of securities can be bought and at what price (market price and not a penny more) and from whom (no major investment banks and no foreign banks)
2) Accompany it with Paulson and Bernanke resignations
Two things that would make the bill more likely to pass (even I'd support it) -
1) Provide specifics about what kinds of securities can be bought and at what price (market price and not a penny more) and from whom (no major investment banks and no foreign banks)
2) Accompany it with Paulson and Bernanke resignations
It's happening all over
The UK government said that mortgage bank Bradford & Bingley is being nationalized after investors and lenders lost confidence in the group, leaving it unable to continue funding its operations. The bank's retail deposit business and branch network is being sold to Banco Santander's Abbey division for 612 million pounds ($1.12 billion), while the remaining assets and liabilities, including its roughly 42 billion pound mortgage book, will be taken into public ownership.
The governments of Belgium, the Netherlands and Luxembourg launched an 11.2 billion euro ($16.4 billion) rescue for Fortis, acting after confidence in the banking and insurance group evaporated and potential bidders reportedly walked away from a deal. The three governments agreed to inject capital to buy 49% interests in Fortis-owned banking subsidiaries operating in each of their jurisdictions.
A consortium of lenders offered a lifeline to Germany's Hypo Real Estate.
The Icelandic government came to the rescue of Glitnir, buying a 75% stake in the country's third-largest lender for 600 million euros.
The governments of Belgium, the Netherlands and Luxembourg launched an 11.2 billion euro ($16.4 billion) rescue for Fortis, acting after confidence in the banking and insurance group evaporated and potential bidders reportedly walked away from a deal. The three governments agreed to inject capital to buy 49% interests in Fortis-owned banking subsidiaries operating in each of their jurisdictions.
A consortium of lenders offered a lifeline to Germany's Hypo Real Estate.
The Icelandic government came to the rescue of Glitnir, buying a 75% stake in the country's third-largest lender for 600 million euros.
Citi to acquire Wachovia Banking Operations
Citigroup will acquire the banking operations of Wachovia according to a press release from the FDIC this morning. Citi will acquire "the bulk of Wachovia's assets and liabilities." Under the agreement, Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, while the FDIC will take losses beyond that.
Citi will pay $1 per share for the bank.
According to a Wachovia press release, "Wachovia Corporation will remain a public company with two main operating subsidiaries: Wachovia Securities, the nation's third largest brokerage firm, and Evergreen Asset Management, a leading provider of asset management services." So they will be like Fidelity or Vanguard.
WB stock is not trading this morning. Not sure what that means.
In related news, Standard & Poor's Ratings Services on Monday placed Citigroup's AA rating on review for a possible downgrade.
Citi will pay $1 per share for the bank.
According to a Wachovia press release, "Wachovia Corporation will remain a public company with two main operating subsidiaries: Wachovia Securities, the nation's third largest brokerage firm, and Evergreen Asset Management, a leading provider of asset management services." So they will be like Fidelity or Vanguard.
WB stock is not trading this morning. Not sure what that means.
In related news, Standard & Poor's Ratings Services on Monday placed Citigroup's AA rating on review for a possible downgrade.
Sunday, September 28, 2008
Bend Over, America!
Here it comes.
http://www.house.gov/apps/list/press/financialsvcs_dem/press092808.shtml
In all honesty, though, this bill is a lot better than the crap Paulson first put forward. He should have been fired for even sending such a bill to Congress.
http://www.house.gov/apps/list/press/financialsvcs_dem/press092808.shtml
In all honesty, though, this bill is a lot better than the crap Paulson first put forward. He should have been fired for even sending such a bill to Congress.
Saturday, September 27, 2008
Friday, September 26, 2008
Response from Senator Isakson
My comments are indicated by brackets in the body of the letter and footnoted at the bottom so as not to break the flow of Sen. Isakson's letter.
Thank you for your letter regarding the economy, the financial markets and the proposal from the Treasury Secretary to the Congress.
We are in difficult financial times, and I am committed to protecting the savings and jobs of the people of Georgia by making sound decisions on both immediate actions as well as long-term actions.
First, our economic stress is rooted in the decline of the housing market. The cause of the decline was the funding of marginal credit mortgages (subprime) through the creation of mortgage-backed securities that were sold around the world. As the default and foreclosure rate on these mortgages increased, the value of the securities declined. As the values declined, the balance sheet of the financial institutions that bought them deteriorated. The market for these securities declined and ultimately evaporated, thus causing a liquidity problem for the financial institutions and a credit crisis for American consumers and small businesses.
In the immediate term, we must address the credit and liquidity crisis. In the long term, we must put in place the oversight and safeguards to ensure the transparency and accountability necessary to prevent this from happening again. The Treasury has proposed using up to $700 billion dollars to purchase, at a discount, these mortgage-backed securities. This would provide liquidity to the financial institutions and improve their balance sheets. The important question is this: "Is the taxpayer of Georgia protected?" If the Treasury properly discounts the securities to, say, 50 or 60 cents on the dollar, and holds the securities to maturity there should be little or no cost to the Treasury.[1] More importantly, investors will return to the market and will compete with the Treasury to by [sic] these discounted securities and the market will be reestablished.[2] I am working to ensure the safeguards necessary for maximum security for the taxpayer.
In the long term, we must bring transparency and accountability to Wall Street. While I am not a big government regulator, if the investment bankers on Wall Street were held to the same standards of transparency and accountability as our national banking system, this would not have happened. The security rating agencies such as Moody's and Standard and Poor also share some of the blame for the way they rated the subprime mortgage-backed securities, and they should be held accountable. I will work hard for the right reform of Wall Street.
The term bailout has been used a lot in this debate. Not a dollar of the $700 billion will go to the brokers who created the securities. Instead, they will go to the investors who bought them[3], and then only after they take a significant discount or loss. Properly executed, the Secretary of the Treasury and the Chairman of the Federal Reserve believe this proposal will restore liquidity to the credit markets and return confidence in the financial system. [4]
I will continue to work for the best interest of our economy and the safety of the savings of the citizens of Georgia.
Thank you again for contacting me.
[1] This is incorrect. Secretary Paulson has already said that he wants to buy these securities at their "hold to maturity" value. That means that even if the Treasury pays 50c or 60c on the dollar it is still paying the theoretically maximum value that the security will ever be worth. Under a best case scenario taxpayers break even. Bad experience would mean that the taxpayer takes a bath.
[2] This claim is absurd in the extreme. I cannot believe he even said this. Why would these folks come forward to compete AFTER a competing buyer appears and drives prices up? Wouldn't those buyers if they existed have come forward now BEFORE a competing buyer appears when they can make whatever lowball offer they want? This is ridiculous on the face of it.
[3] This is not relevant. The banks all bought and sold these securities to each other. The investors who bought MBSs on deal A are the same companies who served as brokers on deal B. And why do I need to bail them out anyway? These investors employ Harvard mathematicians and MIT rocket scientists to figure out what price to pay for these things. If they made a mistake, too bad. As I've said before, boo freakin' hoo.
[4] Who really cares what Paulson and Bernanke think? Just a month ago they were telling us that FNM and FRE would not need to be taken over. A couple of months before they were telling us that the economy was sound and the subprime crisis was contained. Before that they were telling us there was no housing crisis at all. They are either fools or liars. Either way I am not inclined to trust them with $700 billion of taxpayer money.
Thank you for your letter regarding the economy, the financial markets and the proposal from the Treasury Secretary to the Congress.
We are in difficult financial times, and I am committed to protecting the savings and jobs of the people of Georgia by making sound decisions on both immediate actions as well as long-term actions.
First, our economic stress is rooted in the decline of the housing market. The cause of the decline was the funding of marginal credit mortgages (subprime) through the creation of mortgage-backed securities that were sold around the world. As the default and foreclosure rate on these mortgages increased, the value of the securities declined. As the values declined, the balance sheet of the financial institutions that bought them deteriorated. The market for these securities declined and ultimately evaporated, thus causing a liquidity problem for the financial institutions and a credit crisis for American consumers and small businesses.
In the immediate term, we must address the credit and liquidity crisis. In the long term, we must put in place the oversight and safeguards to ensure the transparency and accountability necessary to prevent this from happening again. The Treasury has proposed using up to $700 billion dollars to purchase, at a discount, these mortgage-backed securities. This would provide liquidity to the financial institutions and improve their balance sheets. The important question is this: "Is the taxpayer of Georgia protected?" If the Treasury properly discounts the securities to, say, 50 or 60 cents on the dollar, and holds the securities to maturity there should be little or no cost to the Treasury.[1] More importantly, investors will return to the market and will compete with the Treasury to by [sic] these discounted securities and the market will be reestablished.[2] I am working to ensure the safeguards necessary for maximum security for the taxpayer.
In the long term, we must bring transparency and accountability to Wall Street. While I am not a big government regulator, if the investment bankers on Wall Street were held to the same standards of transparency and accountability as our national banking system, this would not have happened. The security rating agencies such as Moody's and Standard and Poor also share some of the blame for the way they rated the subprime mortgage-backed securities, and they should be held accountable. I will work hard for the right reform of Wall Street.
The term bailout has been used a lot in this debate. Not a dollar of the $700 billion will go to the brokers who created the securities. Instead, they will go to the investors who bought them[3], and then only after they take a significant discount or loss. Properly executed, the Secretary of the Treasury and the Chairman of the Federal Reserve believe this proposal will restore liquidity to the credit markets and return confidence in the financial system. [4]
I will continue to work for the best interest of our economy and the safety of the savings of the citizens of Georgia.
Thank you again for contacting me.
[1] This is incorrect. Secretary Paulson has already said that he wants to buy these securities at their "hold to maturity" value. That means that even if the Treasury pays 50c or 60c on the dollar it is still paying the theoretically maximum value that the security will ever be worth. Under a best case scenario taxpayers break even. Bad experience would mean that the taxpayer takes a bath.
[2] This claim is absurd in the extreme. I cannot believe he even said this. Why would these folks come forward to compete AFTER a competing buyer appears and drives prices up? Wouldn't those buyers if they existed have come forward now BEFORE a competing buyer appears when they can make whatever lowball offer they want? This is ridiculous on the face of it.
[3] This is not relevant. The banks all bought and sold these securities to each other. The investors who bought MBSs on deal A are the same companies who served as brokers on deal B. And why do I need to bail them out anyway? These investors employ Harvard mathematicians and MIT rocket scientists to figure out what price to pay for these things. If they made a mistake, too bad. As I've said before, boo freakin' hoo.
[4] Who really cares what Paulson and Bernanke think? Just a month ago they were telling us that FNM and FRE would not need to be taken over. A couple of months before they were telling us that the economy was sound and the subprime crisis was contained. Before that they were telling us there was no housing crisis at all. They are either fools or liars. Either way I am not inclined to trust them with $700 billion of taxpayer money.
Wachovia is Next
Their stock plummetted 30% to $9.26 today. Now Marketwatch is reporting that they are in early merger talks with Citigroup. Put a fork in them; they're done too.
It's pretty difficult to get 192 economists to agree on anything...
Yet here you are...
To the Speaker of the House of Representatives and the President pro tempore of the Senate:
As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:
1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.
2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.
3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.
http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm
To the Speaker of the House of Representatives and the President pro tempore of the Senate:
As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:
1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.
2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.
3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.
http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm
Thursday, September 25, 2008
God Help Me - I agree with Robert Reich
Talk about the Bailouts of All Bailouts eased market fears and generated a rally on the Street, but how realistic is it? On Capitol Hill, Senator Charles Schumer suggested that government inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable. At the other end of Pennsylvania Avenue, Hank Paulson is considering an agency like the Resolution Trust Corporation to take bad debts off the balance sheets of financial institutions. Problems are:
(1) It's not likely to do all that much good because no one knows how much bad debt there is out there. Even if the government bought a lot of it, investors and lenders still couldn't be sure how much remained. After all, big banks have already written down hundreds of billions of bad debts, and that hasn't restored confidence in the Street. As the economy slows, bad debts will grow. Again, the problem isn't a liquidity or solvency crisis; it's a crisis of trust.
(2) However much bad debt there may be, that amount is surely far greater than the $394 billion of real estate, mortgages, and other assets that the old RTC bought from hundreds of failed savings-and-loans -- thereafter selling them off form whatever it could get for them. The Bailout of All Bailouts would therefore put taxpayers at far greater risk than they are even today, and require an unprecedented role for government in reselling assets. Another major step toward socialized capitalism.
A better idea would be for the Fed and Treasury to organize a giant workout of Wall Street -- essentially, a reorganization under bankruptcy, for whatever firms wanted to join in. Equity would be eliminated, along with most preferred stock, creditors would be paid off to the extent possible. And then the participants would start over with clean balance sheets that reflected new, agreed-upon rules for full disclosure, along with minimum capitalization. Everyone would know where they stood. Bad debts would be eliminated. Taxpayers wouldn't get left holding the bag. And there would be no "moral hazard" incentive for future financial wizards to take giant risks with other taxpayers' money.
Congress, the Fed, and the Administration shouldn't be giving more help to Wall Street. Policymakers should focus instead on people who really need a safety net right now -- workers who have lost or are about to lose their jobs, who need extended unemployment insurance and health insurance for themselves and their families; homeowners who have lost or are likely to lose their homes, who need additional help meeting mortgage payments and reorganizing their debts; and people who have lost or are in danger of losing their savings or pensions, who need better insurance against possible loss. The only way Wall Street's meltdown doesn't spill over to Main Street is if policymakers begin to pay adequate attention to the people whose wallets really keep the economy going, and who merit more help than the Wall Street tycoons whose carelessness and negligence have put it in such jeopardy.
http://robertreich.blogspot.com/2008/09/bailout-of-all-bailouts-is-bad-idea.html
(1) It's not likely to do all that much good because no one knows how much bad debt there is out there. Even if the government bought a lot of it, investors and lenders still couldn't be sure how much remained. After all, big banks have already written down hundreds of billions of bad debts, and that hasn't restored confidence in the Street. As the economy slows, bad debts will grow. Again, the problem isn't a liquidity or solvency crisis; it's a crisis of trust.
(2) However much bad debt there may be, that amount is surely far greater than the $394 billion of real estate, mortgages, and other assets that the old RTC bought from hundreds of failed savings-and-loans -- thereafter selling them off form whatever it could get for them. The Bailout of All Bailouts would therefore put taxpayers at far greater risk than they are even today, and require an unprecedented role for government in reselling assets. Another major step toward socialized capitalism.
A better idea would be for the Fed and Treasury to organize a giant workout of Wall Street -- essentially, a reorganization under bankruptcy, for whatever firms wanted to join in. Equity would be eliminated, along with most preferred stock, creditors would be paid off to the extent possible. And then the participants would start over with clean balance sheets that reflected new, agreed-upon rules for full disclosure, along with minimum capitalization. Everyone would know where they stood. Bad debts would be eliminated. Taxpayers wouldn't get left holding the bag. And there would be no "moral hazard" incentive for future financial wizards to take giant risks with other taxpayers' money.
Congress, the Fed, and the Administration shouldn't be giving more help to Wall Street. Policymakers should focus instead on people who really need a safety net right now -- workers who have lost or are about to lose their jobs, who need extended unemployment insurance and health insurance for themselves and their families; homeowners who have lost or are likely to lose their homes, who need additional help meeting mortgage payments and reorganizing their debts; and people who have lost or are in danger of losing their savings or pensions, who need better insurance against possible loss. The only way Wall Street's meltdown doesn't spill over to Main Street is if policymakers begin to pay adequate attention to the people whose wallets really keep the economy going, and who merit more help than the Wall Street tycoons whose carelessness and negligence have put it in such jeopardy.
http://robertreich.blogspot.com/2008/09/bailout-of-all-bailouts-is-bad-idea.html
More on Paulson
On January 18, speaking about the proposed “short term growth package” - neither the White House or any members of the Administration called it a “stimulus” until it was signed into law - Paulson asserted “the long-term fundamentals of the economy are strong, and I believe our economy will continue to grow.”
At the end of July, the Bureau of Economic Analysis reported the U.S. economy did not grow, but actually shrank during the first quarter of this year.
At the end of January, Paulson was pushing the “growth” package, which included tax rebates and told the Real Estate Roundtable it “is expected to help create more than half a million jobs by the end of 2008. We know from experience that both immediate tax relief for income tax payers and incentives for businesses to invest and hire are effective in creating growth and jobs in the short-term.”
The bill was passed in February, and the first rebates were distributed at the end of April. But, in the seven months since Paulson’s forecast, instead of creating “more than half a million jobs,” the U.S. economy shed 529,000 jobs.
On January 7, Paulson spoke about housing and capital markets in remarks to the New York Society of Securities Analysts about the growing problems confronting homeowners. “To meet this challenge,” he said “this Administration - without committing any taxpayer money - helped foster an industry-wide effort to prevent this market failure. By preventing avoidable foreclosures, we will safeguard neighborhoods and communities, and fulfill our primary responsibility of protecting the broader U.S. economy.”
When Paulson offered these remarks, the national foreclosure rate, according to RealtyTrac was one for every 534 homes; in August the foreclosure rate was one per 416 homes.
But, he said, “fortunately, credit-worthy borrowers looking for a conforming mortgage will find that Fannie Mae and Freddie Mac have remained active, and traditional conforming mortgage products are readily available. Fannie and Freddie's securitization volumes have risen dramatically since June of 2007, even as other mortgage markets slowed. However, they are also experiencing stress due to the housing downturn and both companies reported substantial third quarter losses. I am pleased that Fannie and Freddie have moved quickly to raise capital and, through their securitization activities, remain a positive force for home finance.”
In September the Treasury (and the Federal Reserve) used legislative authority granted in July to nationalize Freddie Mac and Fannie Mae.
Paulson told the National Association of Business Economists in March “many in Washington and many financial institutions have been floating proposals for a major government intervention in the housing market, with U.S. taxpayers assuming the costs of the riskiest mortgages. Today, 93% of American homeowners -- 51 million households -- pay their mortgages on time. Many are on tight budgets, sacrificing other things in order to make that payment. Only 2% are in foreclosure. Most of the proposals I've seen would do more harm than good - bailing out investors, lenders or speculators who, instead of getting a free pass, should be accountable for the risks they took. Let me be clear: I oppose any bailout.” The problem, he said, was limited to subprime ARM borrowers.
According to the Mortgage Bankers Association National Delinquency Survey, the percentage of all prime loans past due increased.
Paulson in March said adjustable rate mortgage borrowers benefited from “the recent decline in short-term interest rates, which are very significantly mitigating the effects of mortgage resets.”
On March 3, when Paulson spoke, the interest rate for the 10-year Treasury - the benchmark rate for the 30-year fixed rate mortgage - was 3.54%; on Sept. 22 it was 3.81%.
Bottom line - this bozo hasn't been right about anything since he became SecTreas. Why should we trust him with $700 billion of our money that he said he didn't even need just a month ago. Screw him and the horse he rode in on, and screw President Bush for not firing him already.
Source: http://www.foxbusiness.com/story/markets/economy/paulsons-track-record-strong-facts/
At the end of July, the Bureau of Economic Analysis reported the U.S. economy did not grow, but actually shrank during the first quarter of this year.
At the end of January, Paulson was pushing the “growth” package, which included tax rebates and told the Real Estate Roundtable it “is expected to help create more than half a million jobs by the end of 2008. We know from experience that both immediate tax relief for income tax payers and incentives for businesses to invest and hire are effective in creating growth and jobs in the short-term.”
The bill was passed in February, and the first rebates were distributed at the end of April. But, in the seven months since Paulson’s forecast, instead of creating “more than half a million jobs,” the U.S. economy shed 529,000 jobs.
On January 7, Paulson spoke about housing and capital markets in remarks to the New York Society of Securities Analysts about the growing problems confronting homeowners. “To meet this challenge,” he said “this Administration - without committing any taxpayer money - helped foster an industry-wide effort to prevent this market failure. By preventing avoidable foreclosures, we will safeguard neighborhoods and communities, and fulfill our primary responsibility of protecting the broader U.S. economy.”
When Paulson offered these remarks, the national foreclosure rate, according to RealtyTrac was one for every 534 homes; in August the foreclosure rate was one per 416 homes.
But, he said, “fortunately, credit-worthy borrowers looking for a conforming mortgage will find that Fannie Mae and Freddie Mac have remained active, and traditional conforming mortgage products are readily available. Fannie and Freddie's securitization volumes have risen dramatically since June of 2007, even as other mortgage markets slowed. However, they are also experiencing stress due to the housing downturn and both companies reported substantial third quarter losses. I am pleased that Fannie and Freddie have moved quickly to raise capital and, through their securitization activities, remain a positive force for home finance.”
In September the Treasury (and the Federal Reserve) used legislative authority granted in July to nationalize Freddie Mac and Fannie Mae.
Paulson told the National Association of Business Economists in March “many in Washington and many financial institutions have been floating proposals for a major government intervention in the housing market, with U.S. taxpayers assuming the costs of the riskiest mortgages. Today, 93% of American homeowners -- 51 million households -- pay their mortgages on time. Many are on tight budgets, sacrificing other things in order to make that payment. Only 2% are in foreclosure. Most of the proposals I've seen would do more harm than good - bailing out investors, lenders or speculators who, instead of getting a free pass, should be accountable for the risks they took. Let me be clear: I oppose any bailout.” The problem, he said, was limited to subprime ARM borrowers.
According to the Mortgage Bankers Association National Delinquency Survey, the percentage of all prime loans past due increased.
Paulson in March said adjustable rate mortgage borrowers benefited from “the recent decline in short-term interest rates, which are very significantly mitigating the effects of mortgage resets.”
On March 3, when Paulson spoke, the interest rate for the 10-year Treasury - the benchmark rate for the 30-year fixed rate mortgage - was 3.54%; on Sept. 22 it was 3.81%.
Bottom line - this bozo hasn't been right about anything since he became SecTreas. Why should we trust him with $700 billion of our money that he said he didn't even need just a month ago. Screw him and the horse he rode in on, and screw President Bush for not firing him already.
Source: http://www.foxbusiness.com/story/markets/economy/paulsons-track-record-strong-facts/
Letter from Rep. Ron Paul
Dear Friends:
The financial meltdown the economists of the Austrian School predicted has arrived.
We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.
Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.
Still, at least a few observations are necessary.
The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?
We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.
Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).
Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."
Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?
Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.
It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.
The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.
F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:
Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.
To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.
The only thing we learn from history, I am afraid, is that we do not learn from history.
The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?
Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.
The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.
I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.
H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.
In liberty,
Ron Paul
The financial meltdown the economists of the Austrian School predicted has arrived.
We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.
Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.
Still, at least a few observations are necessary.
The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?
We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.
Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).
Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."
Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?
Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.
It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.
The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.
F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:
Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.
To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.
The only thing we learn from history, I am afraid, is that we do not learn from history.
The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?
Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.
The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.
I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.
H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.
In liberty,
Ron Paul
Paulson Has To Go!
March 13, 2007
Treasury Secretary Henry Paulson said late Tuesday the turmoil in the subprime mortgage market is no surprise given the correction in U.S housing market. Paulson also said the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained."
Apr 20, 2007
Treasury Secretary Henry Paulson said on Friday the housing market correction appears to be at or near its bottom and that troubles in the subprime mortgage market will not likely spread throughout the economy. "We've clearly had a big correction in the housing market. Retail housing was growing for some time at a level that was not sustainable," Paulson said in a speech to The Committee of 100. "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained," he added.
Aug 1, 2007 (Yahoo News)
U.S. Treasury Secretary Henry Paulson said on Wednesday that the market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades."
May 7, 2008
'The worst is likely to be behind us,' Paulson told the paper, in one of the most optimistic comments by a top U.S. finance official since sub-prime mortgage losses set a domino effect in motion in mid 2007.
Aug 10, 2008
"We have no plans to insert money into either of those two institutions [FNM and FRE]," Paulson said in an interview with NBC's "Meet the Press" broadcast today from Beijing. He added that their earnings results were "not a surprise."
ENOUGH IS ENOUGH. Paulson is either the world's biggest liar or the world's biggest idiot. I was calling the end of the real estate bubble in February 2005, and it took the former head of Goldman Sachs by surprise? He is either the world's biggest liar or the world's biggest idiot. Why exactly would we trust this SOB with $700B of taxpayer money?
Not only should his plan be defeated in Congress; President Bush should fire his sorry worthless ass. Enough, I say!
Treasury Secretary Henry Paulson said late Tuesday the turmoil in the subprime mortgage market is no surprise given the correction in U.S housing market. Paulson also said the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained."
Apr 20, 2007
Treasury Secretary Henry Paulson said on Friday the housing market correction appears to be at or near its bottom and that troubles in the subprime mortgage market will not likely spread throughout the economy. "We've clearly had a big correction in the housing market. Retail housing was growing for some time at a level that was not sustainable," Paulson said in a speech to The Committee of 100. "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained," he added.
Aug 1, 2007 (Yahoo News)
U.S. Treasury Secretary Henry Paulson said on Wednesday that the market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades."
May 7, 2008
'The worst is likely to be behind us,' Paulson told the paper, in one of the most optimistic comments by a top U.S. finance official since sub-prime mortgage losses set a domino effect in motion in mid 2007.
Aug 10, 2008
"We have no plans to insert money into either of those two institutions [FNM and FRE]," Paulson said in an interview with NBC's "Meet the Press" broadcast today from Beijing. He added that their earnings results were "not a surprise."
ENOUGH IS ENOUGH. Paulson is either the world's biggest liar or the world's biggest idiot. I was calling the end of the real estate bubble in February 2005, and it took the former head of Goldman Sachs by surprise? He is either the world's biggest liar or the world's biggest idiot. Why exactly would we trust this SOB with $700B of taxpayer money?
Not only should his plan be defeated in Congress; President Bush should fire his sorry worthless ass. Enough, I say!
Wednesday, September 24, 2008
Letter to my senators and representative
I am writing you to voice my strong opposition to the $700 billion bailout proposed by the Bush administration. The beneficiaries of this plan are multiple, yet I am not among them. Nevertheless, it is my pocket that is being picked to pay for this.
Americans who bought more house than they could afford are now at risk of losing their houses. That is not my problem. While I was living in a house that was well within my means without the need to take out a subprime or liar loan, they were not sharing their home appreciation with me.
Other Americans used their houses as an ATM and undertook refinancing after refinancing to take out their equity. That is not my problem. While I was spending the last 5 years building equity in my house, they were not inviting me on vacation with them.
Investment bankers who in past years have made bonuses in the $2-$3 million range are in danger of losing their jobs. That is not my problem. While I was bringing home much more modest (or no) bonuses, they were not sharing their bounty with me.
Investors in FNM, FRE, AIG, LEH, ML, MS and GS who reaped huge profits in recent years are now at risk of losing their investments. That is not my problem. When I was investing my money in less profitable but less risky investments, they were not sharing their capital gains with me.
I keep hearing that without this bill, there could be a deep recession or even another Great Depression. Quite frankly, that sounds like scare tactics to me. But even if it were true, then too bad. That's how capitalism is supposed to work. Perhaps the next batch of homebuyers, investment bankers and stock investors will be more careful.
All of these folks enjoyed their private gains for a long time. Now this bill is attempting to socialize their losses. I cannot find words strong enough to match my revulsion to this bill. As Rep. Bunning recently said, this bill is socialist and un-American. If you make this my problem by spending $700 billion of my and my fellow taxpayers' money to bail out those who made bad (almost criminally so) decisions, I will further make it my problem to do everything in my power to get you out of office.
Thank you for your attention to this matter. I trust you will do the right thing.
Americans who bought more house than they could afford are now at risk of losing their houses. That is not my problem. While I was living in a house that was well within my means without the need to take out a subprime or liar loan, they were not sharing their home appreciation with me.
Other Americans used their houses as an ATM and undertook refinancing after refinancing to take out their equity. That is not my problem. While I was spending the last 5 years building equity in my house, they were not inviting me on vacation with them.
Investment bankers who in past years have made bonuses in the $2-$3 million range are in danger of losing their jobs. That is not my problem. While I was bringing home much more modest (or no) bonuses, they were not sharing their bounty with me.
Investors in FNM, FRE, AIG, LEH, ML, MS and GS who reaped huge profits in recent years are now at risk of losing their investments. That is not my problem. When I was investing my money in less profitable but less risky investments, they were not sharing their capital gains with me.
I keep hearing that without this bill, there could be a deep recession or even another Great Depression. Quite frankly, that sounds like scare tactics to me. But even if it were true, then too bad. That's how capitalism is supposed to work. Perhaps the next batch of homebuyers, investment bankers and stock investors will be more careful.
All of these folks enjoyed their private gains for a long time. Now this bill is attempting to socialize their losses. I cannot find words strong enough to match my revulsion to this bill. As Rep. Bunning recently said, this bill is socialist and un-American. If you make this my problem by spending $700 billion of my and my fellow taxpayers' money to bail out those who made bad (almost criminally so) decisions, I will further make it my problem to do everything in my power to get you out of office.
Thank you for your attention to this matter. I trust you will do the right thing.
Paulson's Got it Wrong!
Why Paulson is Wrong - University of Chicago
Some thoughts of my own to follow as time permits.Monday, September 22, 2008
Morgan Stanley sells 20%
Morgan Stanley said it signed a letter of intent to sell up to 20% of the company to Mitsubishi UFJ Financial Group Inc. Financial terms of the deal were not disclosed. If the deal is completed, the price would be based on Morgan Stanley's book value after Japan's largest bank completes a due diligence review. The letter of intent signed by both banks is nonbinding.
Follow-up (9/29) ... deal reached
Follow-up (9/29) ... deal reached
Mitsubishi UFJ is buying 9.9% of Morgan Stanley's common shares at $25.25 apiece, for an estimated total of $3 billion. It also purchased $6 billion of perpetual non-cumulative convertible preferred stock with a 10% dividend and a conversion price of $31.25 a share.
End of Investment Banking
The Federal Reserve said in a statement Sunday night that Goldman Sachs' and Morgan Stanley's applications to become bank-holding companies were approved. The move effectively put an end to the industry of independent investment banking, although boutique security firms remain. The Fed will have oversight of and lend to Morgan Stanley and Goldman. The firms also will be subject to bank-capital requirements.
Friday, September 19, 2008
Paulson's Toxic Toxic Debt Plan
So, Treasury and the Fed (i.e., you and I) are going to buy toxic mortgage securities.
1) If these were priced fairly relative to their intrinsic value, an actual investor would have bought them. So we are forced to conclude that the government is going to overpay for them, regardless of the price they actually end up paying for them.
2) What is the immediate benefit? That investment bankers who make $2 or $3 million a year don't lose their jobs? Boo freakin' hoo.
3) If the government ends up owning all these mortgages, are they going to foreclose? No. They'll let folks keep their houses for pennies on the dollar. "American dream" and all that bull----, you know. Houses worth 2x or 3x what mine is, which I paid for all on my own.
4) How are they going to deal with all this debt? They'll monetize it, of course. Severely depleting my savings, to the benefit of those who didn't save squat.
Thanks again, Washington. I hate you all.
Edited to add:
One particularly appalling paragraph in the Paulson proposal: "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."
Not only is this a truly scary power grab, but it demonstrates a ridiculous lack of understanding of our system of government. Who decides whether a law is constitutional? The courts! Therefore, the paragraph in question is completely unenforceable. All a court has to do to review a decision is state that the paragraph in question is unconstitutional, and there's nothing the executive or legislative branch can do about it. We've already determined Paulson doesn't know anything about the economy; I guess now he's letting us know he doesn't understand anything about politics either.
1) If these were priced fairly relative to their intrinsic value, an actual investor would have bought them. So we are forced to conclude that the government is going to overpay for them, regardless of the price they actually end up paying for them.
2) What is the immediate benefit? That investment bankers who make $2 or $3 million a year don't lose their jobs? Boo freakin' hoo.
3) If the government ends up owning all these mortgages, are they going to foreclose? No. They'll let folks keep their houses for pennies on the dollar. "American dream" and all that bull----, you know. Houses worth 2x or 3x what mine is, which I paid for all on my own.
4) How are they going to deal with all this debt? They'll monetize it, of course. Severely depleting my savings, to the benefit of those who didn't save squat.
Thanks again, Washington. I hate you all.
Edited to add:
One particularly appalling paragraph in the Paulson proposal: "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."
Not only is this a truly scary power grab, but it demonstrates a ridiculous lack of understanding of our system of government. Who decides whether a law is constitutional? The courts! Therefore, the paragraph in question is completely unenforceable. All a court has to do to review a decision is state that the paragraph in question is unconstitutional, and there's nothing the executive or legislative branch can do about it. We've already determined Paulson doesn't know anything about the economy; I guess now he's letting us know he doesn't understand anything about politics either.
Alitalia
Alitalia, Italy's flagship airline, is bankrupt and will be liquidated, said Augusto Fantozzi, the airline's administrator. A purchase offer from a group of Italian industrialists was withdrawn, and there are no other bids. The airline was hobbled for years by labor disputes and poor management and more recently was hit by the rising cost of fuel.
Thursday, September 18, 2008
Reserve Primary Fund
The Reserve Primary Fund money market fund -- the oldest money market fund -- broke the buck. That's really bad news. Could cause a panic.
Stock Market Volatility
Even after today's very good showing, the general market trend is down AND volatility is increasing substantially (notice both the substantially broader trading ranges and the much greater volume of this week compared to the recent past). This is not a good sign.
Wednesday, September 17, 2008
Interesting day on Wall Street yesterday
The authorities, which will retain veto power over major decisions at the company, will receive equity giving them a 79.9% stake in AIG. In return, the insurer would receive a bridge loan of $85B to keep it afloat until it could dispose of billions of dollars in assets. The Fed said the loan was expected to be repaid by the proceeds of selling AIG operating companies. A senior Fed staffer said the most likely outcome was an orderly liquidation of AIG, though it was possible that the firm could survive as an ongoing business. The loan is at a punitive interest rate of three-month Libor plus 850 basis points, giving AIG a strong incentive to repay it as soon as possible. It will be secured on all AIG’s assets, including those of its subsidiary companies.
The CEO was out on his fanny. That at least is a positive first step.
The CEO was out on his fanny. That at least is a positive first step.
On paper that's 6.25 cents on the dollar, although I understand that the assets and liabilities have not been marked to market, so it's probably not quite as good a deal as that.
In other news...
Federal Reserve policymakers held the target lending rate at 2% on Tuesday. Analysts said it demonstrates that the Fed is being conscientious not to use basic monetary policy to address specific problems in the financial industry.Monday, September 15, 2008
Financial Armageddon?
Lehman files for bankruptcy and will almost certainly be liquidated. No big surprise there; I myself predicted as much when the markets closed on Thursday. Shares were trading at $7 then; they are worth 22 cents now (more likely zero, because of the bankruptcy).
But Merrill Lynch selling to Bank of America?! OMGWTF!?
On two fronts:
1) I didn't think Merrill Lynch was in such bad shape as to sell. Guess things must be worse than they look from the outside.
2) Just eight months ago Bank of America said they were scaling back in the commercial and investment banking business. Guess they changed their mind.
Keep in mind that Lehman was founded in 1850 and Merrill was founded in 1914 (and Bear Stearns was founded in 1923). All of these firms survived the Great Depression, and now they're gone in the events of the last year. That's a little scary.
But Merrill Lynch selling to Bank of America?! OMGWTF!?
On two fronts:
1) I didn't think Merrill Lynch was in such bad shape as to sell. Guess things must be worse than they look from the outside.
2) Just eight months ago Bank of America said they were scaling back in the commercial and investment banking business. Guess they changed their mind.
Keep in mind that Lehman was founded in 1850 and Merrill was founded in 1914 (and Bear Stearns was founded in 1923). All of these firms survived the Great Depression, and now they're gone in the events of the last year. That's a little scary.
Wednesday, September 10, 2008
Lehman Soundbites
Lehman down 6.9% to $7.25 in regular trading; then down a further 4.6% to $6.92 in after hours trading.
They took another $7.8 billion in writedowns, resulting in a $3.9 billion loss for the most recent quarter. (At least one highly reputable source on the web had $2.8B which is not the correct figure.) The loss amounts to $5.62 a share.
They didn't release a balance sheet!
They said they are hoping to sell 55% of the investment management business, which includes Neuberger Berman. THE CROWN JEWELS! Say it ain't so!
Business (i.e., non-trading-related) revenues declined 28% for the first 9 months of '08 vs. '07. That's bad, really bad.
Moody's put their credit rating on review, saying it would be lowered from its current A2 level unless they can negotiate "a strategic transaction with a stronger financial partner."
Lehman said it is "formally engaged" in talks to sell $4 billion in British residential real estate to money manager BlackRock, expecting to complete the sale "within the next few weeks."
They cut the annual dividend to 5 cents a share from 68 cents to save $450 million annually.
They plan to spin off more than $25 billion out of its $33 billion commercial real-estate portfolio to its shareholders early next year. The new company, Real Estate Investments Global, will include money-losing stakes in apartment-building owner Archstone-Smith and California land developer SunCal.
Not a single bright point in any of that news. I won't be posting in this blog until next Wednesday. I am almost positive that something big (REALLY big) will happen before then.
They took another $7.8 billion in writedowns, resulting in a $3.9 billion loss for the most recent quarter. (At least one highly reputable source on the web had $2.8B which is not the correct figure.) The loss amounts to $5.62 a share.
They didn't release a balance sheet!
They said they are hoping to sell 55% of the investment management business, which includes Neuberger Berman. THE CROWN JEWELS! Say it ain't so!
Business (i.e., non-trading-related) revenues declined 28% for the first 9 months of '08 vs. '07. That's bad, really bad.
Moody's put their credit rating on review, saying it would be lowered from its current A2 level unless they can negotiate "a strategic transaction with a stronger financial partner."
Lehman said it is "formally engaged" in talks to sell $4 billion in British residential real estate to money manager BlackRock, expecting to complete the sale "within the next few weeks."
They cut the annual dividend to 5 cents a share from 68 cents to save $450 million annually.
They plan to spin off more than $25 billion out of its $33 billion commercial real-estate portfolio to its shareholders early next year. The new company, Real Estate Investments Global, will include money-losing stakes in apartment-building owner Archstone-Smith and California land developer SunCal.
Not a single bright point in any of that news. I won't be posting in this blog until next Wednesday. I am almost positive that something big (REALLY big) will happen before then.
Harry Potter and the Missing Revenue
Scholastic stock down 25% since a year ago, when the last Harry Potter book was published. The company has been unsuccessful in finding the next big thing to replace that revenue.
Not particularly exciting but...
Hi Alberto,
We just posted an article, "6 Safe Places to Invest Your Money" (http://www.bankaholic.com/606/low-risk-places-invest-mone/). I thought I'd bring it to your attention in case you think your readers would find it interesting.
Either way, thanks for your time!
Helen Anderson
We just posted an article, "6 Safe Places to Invest Your Money" (http://www.bankaholic.com/606/low-risk-places-invest-mone/). I thought I'd bring it to your attention in case you think your readers would find it interesting.
Either way, thanks for your time!
Helen Anderson
Tuesday, September 09, 2008
Lehman down 40%
And I thought it was bad when I reported Lehman was down 40% for a week back in July. The stock has been flat since then. However, today Lehman plummeted 40% to $8.55 (actually, the stock is pretty much in free fall; I'm having trouble keeping this post up-to-date even as I am still writing it).
South Korean regulators said talks between government-owned Korea Development Bank and Lehman have ended. Stick a fork in Lehman; they're done!
Monday, September 08, 2008
Ron Paul is a prescient genius!
I may have found my candidate in November.
Mr. Speaker, I rise to introduce the Free Housing Market Enhancement Act. This legislation restores a free market in housing by repealing special privileges for housing-related Government Sponsored Enterprises. These entities are the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the National Home Loan Bank Board. According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone.
One of the major government privileges granted these GSEs is a line of credit to the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out these GSEs in times of economic difficulty helps them attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a massive unconstitutional and immoral income transfer from working Americans to holders of GSE debt.
The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase the debt of housing-related GSEs. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.
Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie, Freddie, and HLBB have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.
However, despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.
Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.
No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to the GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac. Mr. Speaker, it is time for Congress to act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors misled by foolish government interference in the market. I therefore hope my colleagues will stand up for American taxpayers and investors by cosponsoring the Free Housing Market Enhancement Act.
GOOG
At $422 it's down 43% from its all-time high 10 months ago. I'm guessing this is mostly a result of the flak about the Chrome browser with its highly unethical EULA.
Details on FNM and FRE
From today's WSJ...
The Treasury will acquire $1 billion of preferred shares in each company without providing immediate cash, and has pledged to provide as much as $100 billion to each of the companies as they cope with heavy losses on mortgage defaults. The Treasury's plan puts the two companies under a conservatorship, giving management control to their regulator, the Federal Housing Finance Agency.
The WSJ doesn't mention this, but the government also acquires warrants to buy 80% of both companies at a nominal price. This essentially wipes out common shareholders, as is quite proper.
The Treasury plan limits the size of each company's mortgage portfolios to a maximum of $850 billion as of the end of 2009. (Fannie currently owns about $758 billion of mortgages and related securities, while Freddie's total is about $798 billion.) After that, the Treasury intends for the mortgage holdings to shrink about 10% a year until they reach about $250 billion at each company.
Fannie's CEO Daniel Mudd is succeeded by Herb Allison, who formerly served as chairman of the investment company TIAA-CREF. Freddie's CEO Richard Syron is succeeded by David Moffett, who has been vice chairman and CFO of US Bancorp.
Potentially, Mr. Syron could walk away with an exit package totaling as much as $15 million, said David Schmidt, a senior consultant at James Reda compensation consulting. That includes a pension and deferred compensation, about $3.7 million in severance pay and a possible payment of $8.8 million to compensate for forfeiting recent equity grants. A Freddie spokesman said Mr. Syron had said he doesn't "anticipate receiving nearly that much."
Not nearly? How nice! He shouldn't get anything. If you f up so bad that the federal government has to put your company in receivership and promise to inject $100 BILLION into it, you should get jack. If I were in charge, I might be convinced to let him have his pension and not send him to jail and I'd expect him to thank me for my generosity.
Mr. Mudd's exit package, including stock he already owns, could total $14 million, Mr. Schmidt estimates. That includes $5 million in pension and deferred compensation, $4.2 million in severance pay and $3.4 million of restricted stock, based on Friday's closing price. The value of that stock could fall sharply, however.
The stock is essentially worthless already so that problem takes care of itself, but $4.2M in severance pay? Hell, no!
Saturday, September 06, 2008
FNM and FRE dead!
FNM down 22% to $5.50 and FRE down 21% to $4.04 in after-hours trading. So far, $108 billion in market cap has been wiped out. And apparently the last $8.5B will be wiped out this weekend by a government takeover of the two entities.
The Treasury Department is expected to announce as early as this weekend a plan to bail out and recapitalize collapsing home mortgage giants Fannie Mae and Freddie Mac in one of the biggest government rescues in U.S. history. Such a plan would end a long downward spiral for the firms, which the government created to help expand home ownership and provide a secondary market for home loans. Rep. Barney Frank (D.-Mass.) confirmed in a statement Saturday that Treasury Secretary Henry Paulson is set to put the federal government in control of the two troubled mortgage owners. But Frank, who is chairman of the House Financial Services Committee, said he had no details on the intervention plan. Officials at the Treasury Dept. could not be reached for comment.
The historic takeover of Fannie Mae and Freddie Mac, which could come as soon as Sunday, moved to the forefront of the presidential campaign Saturday as candidates and congressional leaders seized on the enormous implications for taxpayers and the economy. Fannie Mae and Freddie Mac together hold or back half of the nation's mortgage debt, and have played an increasingly important role in the real estate market since the credit crisis started in August 2007. A government bailout could cost taxpayers around $25 billion, according to the Congressional Budget Office. Treasury Secretary Henry Paulson and two other regulators are working on a plan to put the troubled mortgage finance companies into a conservatorship, and remove Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee. The government is expected to control the two companies at least a year as it evaluates and debates whether Fannie and Freddie should remain government-run entities or be restructured in some fashion, Frank said in an interview. At a rally in Colorado Springs, Col., Republican vice presidential nominee Sarah Palin said, "They've gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help." Democratic nominee Barack Obama, speaking in Terre Haute, Ind., said, "These entities are so big and they're so tied into the housing market that it is probably true that we have to take steps to make sure they don't just collapse, because the housing market, which is already weakened, would be in even worse shape if we didn't take some steps."
Here's a fairly insightful piece into the collosal failure of common sense at the two entities as the housing market worked itself into a frenzy from 2001 to 2006.
Mortgage giants Fannie Mae and Freddie Mac — despite their robust cadre of economists and mortgage experts — failed to heed warnings that the most dramatic housing bubble in U.S. history would burst. The companies — particularly Freddie Mac — didn't raise enough cash to reassure Wall Street that they would be able to withstand a severe downturn in U.S. home prices. Federal regulators after scouring the companies' books with aid from investment bank Morgan Stanley — believe the companies pushed accounting conventions when calculating their financial cushion against losses, a person briefed on the matter said Saturday. The person declined to be named because details of the government's actions were not yet public. As their losses started rising at alarming rates over the past year, investors gradually lost confidence, forcing the government's historic takeover of the two companies, which could be announced as soon as Sunday and was expected to include the ouster of top executives.
Ironically, the big story on Friday was how FNM and FRE had both gone up 9.7% and 3% in what was otherwise a flat market.
The Treasury Department is expected to announce as early as this weekend a plan to bail out and recapitalize collapsing home mortgage giants Fannie Mae and Freddie Mac in one of the biggest government rescues in U.S. history. Such a plan would end a long downward spiral for the firms, which the government created to help expand home ownership and provide a secondary market for home loans. Rep. Barney Frank (D.-Mass.) confirmed in a statement Saturday that Treasury Secretary Henry Paulson is set to put the federal government in control of the two troubled mortgage owners. But Frank, who is chairman of the House Financial Services Committee, said he had no details on the intervention plan. Officials at the Treasury Dept. could not be reached for comment.
The historic takeover of Fannie Mae and Freddie Mac, which could come as soon as Sunday, moved to the forefront of the presidential campaign Saturday as candidates and congressional leaders seized on the enormous implications for taxpayers and the economy. Fannie Mae and Freddie Mac together hold or back half of the nation's mortgage debt, and have played an increasingly important role in the real estate market since the credit crisis started in August 2007. A government bailout could cost taxpayers around $25 billion, according to the Congressional Budget Office. Treasury Secretary Henry Paulson and two other regulators are working on a plan to put the troubled mortgage finance companies into a conservatorship, and remove Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee. The government is expected to control the two companies at least a year as it evaluates and debates whether Fannie and Freddie should remain government-run entities or be restructured in some fashion, Frank said in an interview. At a rally in Colorado Springs, Col., Republican vice presidential nominee Sarah Palin said, "They've gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help." Democratic nominee Barack Obama, speaking in Terre Haute, Ind., said, "These entities are so big and they're so tied into the housing market that it is probably true that we have to take steps to make sure they don't just collapse, because the housing market, which is already weakened, would be in even worse shape if we didn't take some steps."
Here's a fairly insightful piece into the collosal failure of common sense at the two entities as the housing market worked itself into a frenzy from 2001 to 2006.
Mortgage giants Fannie Mae and Freddie Mac — despite their robust cadre of economists and mortgage experts — failed to heed warnings that the most dramatic housing bubble in U.S. history would burst. The companies — particularly Freddie Mac — didn't raise enough cash to reassure Wall Street that they would be able to withstand a severe downturn in U.S. home prices. Federal regulators after scouring the companies' books with aid from investment bank Morgan Stanley — believe the companies pushed accounting conventions when calculating their financial cushion against losses, a person briefed on the matter said Saturday. The person declined to be named because details of the government's actions were not yet public. As their losses started rising at alarming rates over the past year, investors gradually lost confidence, forcing the government's historic takeover of the two companies, which could be announced as soon as Sunday and was expected to include the ouster of top executives.
Ironically, the big story on Friday was how FNM and FRE had both gone up 9.7% and 3% in what was otherwise a flat market.
IAM Strike Against Boeing
Strike started at midnight after an 80% vote against Boeing's "best offer." Apparently the biggest sticking point is outsourcing. Analysts say strike could cost Boeing $100M in revenue and $0.01 in EPS per day of the strike. Of course the costs to striking union members who make about $75K a year including overtime is equally staggering. Not what the economy needs right now. Too bad.
Wednesday, September 03, 2008
Time to buy oil?
On July 11th oil peaked at $147 a barrel. The "experts" (most notably Goldman Sachs) were loudly proclaiming $200 oil was just around the corner. Less than two months later oil is trading at $108 a barrel. Now BusinessWeek reports that these same folks "see the price of oil to be 'artificially inflated' and expect prices to fall further, even as low as $70 a barrel."
Now, I no longer think these folks are all stupid (although many are); I have recently become convinced that at least a few players are purposely trying to manipulate the market. They recommend buying when they expect prices to go down and they themselves are selling; they recommend selling when they expect prices to go up and they themselves are buying.
So, until this morning I thought prices were going down a little more, perhaps just under $100. But now that I hear about $70 oil from the "experts" I fully expect prices to go up. I seriously need to look into whether I have a good way to make at least a small bet on this guess.
Now, I no longer think these folks are all stupid (although many are); I have recently become convinced that at least a few players are purposely trying to manipulate the market. They recommend buying when they expect prices to go down and they themselves are selling; they recommend selling when they expect prices to go up and they themselves are buying.
So, until this morning I thought prices were going down a little more, perhaps just under $100. But now that I hear about $70 oil from the "experts" I fully expect prices to go up. I seriously need to look into whether I have a good way to make at least a small bet on this guess.
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