Making Sense of Our Financial Mess
At last: a (somewhat) simple explanation of what caused the credit meltdown and where we go from here.
Really, what the general public has got to be asking after the financial news of the last week is “wha’ hoppen?” — accompanied by grogginess, head shaking, and animated birds circling their heads, chirping.
It started ten days ago, with a series of events that had the result of “freezing” the credit market. What that means is that banks and other financial institutions stopped lending one another money and people started moving away from money markets and similar kinds of accounts — the savings accounts of really big companies — and moving their money into Treasury bills. They were so frantic to get out that, for a short while, Treasury bills were down to zero yield. This is pretty much the definition of fear on Wall Street: they were so worried about losing money that they were willing to lose money.
If this goes on, here’s what could happen.
We depend on credit lines more than most people realize. Credit lines dry up: businesses that depend on them grind to a stop. That means: grocery stores start to empty — they depend on short-term credit to buy food for the shelves; paychecks bounce, or aren’t delivered at all — many companies, especially very big and very small ones, use short-term credit to pay payroll against receivables. People will be out of work.
When something similar happened in 2000 in Argentina, within a few months Argentina had 25 percent unemployment and middle-class people were reduced to recycling cardboard and picking rags in order to get money to eat. We’re talking Great Depression here: bread lines and soup kitchens.
Now, that hasn’t happened yet. Faced with the possibility of a new Depression, Ben Bernanke, chairman of the Federal Reserve, and Hank Paulson, secretary of the Treasury, got their attention wonderfully focused; the last weeks have been spent laying out a plan and attempting to sell it.
Before we talk about that, though, let’s talk about what did happen.
Basically, it was a run on the bank, like happened at IndyMac a few months ago, like the one in It’s a Wonderful Life. People started asking big financial firms for cash, until they ran out of cash; because the markets weren’t working and credit wasn’t available, the big financial firms didn’t have it. This frightens people, and markets don’t like fear.
So how did it happen?
The history of this really starts back in the ’70s. For various apparently good reasons, Congress in its wisdom decided that banks and lenders should sell mortgages they would not have ordinarily done. Sometimes, the reason they didn’t sell the mortgages was very possibly racial prejudice; sometimes it was the bank’s observation that some neighborhoods seemed to do better than others (so called redlining); and sometimes it was for reasons of creditworthiness and income. In any case, the Community Reinvestment Act passed in 1977 during the Carter administration and was revised in 1995 during the Clinton administration. Whatever the desirable qualities of these laws, the net effect was to make home mortgages, over all, more risky.
As Wikipedia correctly says (as of September 25, 2008, at least):
Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns. The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.
The 1995 revision of the Act allows lenders other than banks to get into the business of offering home mortgages, and allows both banks and these other lenders to offer these subprime mortgages while securitizing them. “Securitizing” means the loans were collected into a financial instrument like a bond and sold on an open market. These collections of securitized loans are called mortgage-backed securities, usually abbreviated as “MBS.”
Why would you do that? The answer is that it was an attempt to reduce the risk: a single mortgage could fail or not, but a lot of mortgages collected together should always be worth as much, or nearly as much, as the face value of the bond. If a few mortgages failed, it didn’t matter to the bond, because the face value included an allowance for some failures.
Still, some people felt the risk was too high, so another “innovative financial instrument” was invented, called the credit default swap, or “CDS.” In a CDS, I insure my MBS by finding another company, like AIG, to effectively write me an insurance policy: if certain things happen to my MBS that make it have less value, AIG promises to pay me the full value of my MBS in cash, swapping it for the MBS itself. (A “credit default swap” works like this: since I believe in the good credit of the issuer, I’ll let you pay me a small fee, with the promise that if the issuer defaults, I’ll swap the full amount in cash for the security. In other words, if something bad happens to the bond, I’ll buy it back from you, paying cash for it.)
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Charlie Martin is a Colorado computer scientist and nearly-successful screenwriter who contributes to the Flares Into Darkness political blog as ‘Seneca the Younger,’ and blogs under his own name at the aggressively non-political Explorations blog.
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53 Comments
1. heather:Thanks for this explanation: it is the first time I have seen a lucid description of the “dominoes” involved in this disaster. Also, I THINK I’m starting to ‘get’ what ‘derivative’ may mean. One problem may be that the whole system is so huge and interwoven, and complex. “Regulation” of this entity will be very difficult.
As to Pelosi and her amazing speech. I vote for a combination of malice larded with great dollops of stupidity. I don’t think she is capable of thinking of the advantages of causing a Depression. I think she really believed what she said in that speech. She is a shallow stupid woman and should be fired from her job.
Oct 2, 2008 - 1:49 am 2. Allison Makepeace O'Finnehan:Fine so far. But you forgot to mention that all the ingredients for the disaster remain in place. The process is being bailed out, only to begin again on a more massive scale.
The problem is that the next subprime mortgage crash will happen at the same time as the social security crash, the medicare crash, the demographic crash of the productive classes, and the full-out Obamanation socialist explosion of a neo-tribalist multicultural nation.
The center cannot hold, if the infrastructure of financial destruction remains in place–regardless of the size and frequency of the bailout. Reform hurts, but without it, the system is a ticking time bomb. Much worse than anything you describe here.
Oct 2, 2008 - 2:58 am 3. Akatsukami:So a new bill with ACORN subsidies, union control of corporate boards, and a purely partisan oversight commission is not only going to bring the “blue dogs” to heel, but keep enough Repubican support that defections counter the swarming back to the trough of left-wingers hungry for power and money? I express skepticism.
Oct 2, 2008 - 3:16 am 4. john from cinncinati:where is that mandate of 06? we now have a democratic congress and they fiddle, while Rome burns. they can just blame Bush. it has been George Bush’s failed ideology of the last thirty years….Sarah Palin doesn’t have experience…. we can hope and change. i feel like the little donkey in the video. you know the one where the load is not balanced and he is up in the air. its the owners fault that the cart is on the ground and his ass is in the air.
Oct 2, 2008 - 4:02 am 5. Sydney Weinberg:Not a bad summary Charles, but your are still missing a few key ingredients. I think you understate the CDS issue by a huge factor. Credit default swaps are just one part of the derivative overhang built ontop of MBSs. Paulson, most certainly, and Bernanke, probably have been aware of this since the beginning of the current crunch back in the winter of 06/07. They chose a policy of pumping the investment banks with liquidity to allow them to attempt to trade out of their positions. This built a big spike in new derivatives, including CDSs.
How does the Paulson Plan intend to deal with all the opaque trading of unregulated derivatives. It does not. And so it won’t work.
The fundamental problem is not “pricing” and “illiquidity.” The problem is counterparty risk, which you do identify but do not really address. The credit markets are frozen by the banks because they cannot meet their respective counterparty obligations. As you know, we put some controls in place after the Depression to enforce certain debt to equity ratios at the Banks. I-Banks blew through those with the advent of derivatives, and their ratios were more liberal.
Ultimately, like everything in Washington this is about power. And it is a bi-partisan power play. The common people consensus is essentially correct. It is a bailout of Wall Street, but it will only benefit the few: qualified investors all, mostly associated with Goldman Sachs, and Hank Paulson gets to decide who at his sole discretion.
There are other solutions, all of them ugly, but none so heavily weighted to benefit so few. But you have to approach the issue from a different view.
Oct 2, 2008 - 4:15 am 6. jeff:sydney hit the nail on the head. counter party risk. Only one thing can assuage that-a clearing house. It should be private too! We have had enough of government run entities.
Oct 2, 2008 - 4:40 am 7. Charlie (Colorado):Thanks for the kind words, folks. Sydney, Jeff, the thing is, it’s like doing first aid on a burn victim: you stop the bleeding first. A clearing house, and accounting transparency for weird-ass derivatives, definitely are needed.
Oct 2, 2008 - 7:01 am 8. Making Sense of Our Financial Mess | Explorations:[...] long piece on the financial crisis is up at Pajamas [...]
Oct 2, 2008 - 7:03 am 9. Barb:I may be nuts but whatever happened to making a living by making something and selling it or by providing a service?
Oct 2, 2008 - 7:22 am 10. Charlie (Colorado):The government is the problem.
Oh, by the way, Akatsu, the bill ended up not having the toxic stuff in it.
Oct 2, 2008 - 7:33 am 11. patrick:You say, “when you can buy $20 worth of something for $7, that’s a good deal anywhere.”
That’s true. But if it’s a good deal, why aren’t private buyers lining up to make the deal? Buffet made his play, but the market hasn’t followed suit.
That’s because the market expects that the value of the assets is much lower than the price Treasury will pay. Whatever price the Treasury pays it will be higher than the market value of the assets. The assets aren’t trading because everyone is waiting to see whether or not they’ll be able to sell the assets to the government at an inflated price.
If it’s a good deal, then there’s no need for a bailout.
Oct 2, 2008 - 7:34 am 12. Cowcup:To be honest, this is not even a bailout for Wall Street, it is a bailout for … who?
Oct 2, 2008 - 7:54 am 13. Cowcup:Why every author seems to assume that the bailout can save us?
If we simply having a bank-run, then a low-rate loan can save us all already. No bailout.
If we are having more than a bank-run (by the various institutions), say, a Pyramid Selling, then neither a bailout nor a low-rate loan can save us. We need to like ‘em go down. By growing the Pyramid Selling by bailout, we could only make things worse!
Oct 2, 2008 - 7:59 am 14. Cowcup:If they are honest, they should have asked for a low-rate fixed-term loan!
The bailout plan does not make any sense!
The current bill passed by Senate is a Huge Earmark! They’re trying to turn the ashes of bailout into an ugly bird with big earmarks?!
Oct 2, 2008 - 8:05 am 15. kwh:Thank you for this explanation.
Its been truly amazing how poorly the MSM has been in communicating the issues. I’m sure it’s by design: J-school grads learned in college that greedy boogy men and capitalism is the root of all evil, so they keep re-telling that story.
Conversely, the clarity of your explanation demonstrates how important it is to have perspectives external to Washington/New York template.
One point: The “foundation of the house” was built by making essentially bad loans. There is little that clever people can do to fix that by “engineering” anything above the foundation; in fact, the consequence of said engineering is to defer and magnify the ultimate catastrophe.
Oct 2, 2008 - 8:36 am 16. Cowcup:“Thanks for the kind words, folks. Sydney, Jeff, the thing is, it’s like doing first aid on a burn victim: you stop the bleeding first.”
It’s like doing first aid on a Con Man. You check first.
It’s like doing first aid on a coughing patient. Stop Smoking Right Now!
It’s like doing first aid on a drunkard. Get rid of the bottle!
Guess who’s the come-back kid in this election season? Socialism!
After their bitter defeat in 1990, they are back! In a surprise!
Oct 2, 2008 - 8:38 am 17. RAH:This is a problem because too many banks and Investment banks got into MBS that was based on an inflated real estate market. The correction will not occur if liquidity, which was basically cause by the Fed with 1% Fed Funds rates in 2001, to softens the financial blow of 9/11 continues to be pushed into the system wily nilly. The Fed continued to pump liquidity and only recently started to tighten rates. This did create a crisis with liar loans that basically got loans for 150% of an inflated real estate appraisal. Thus the real estate markets drop in 2006/07. The homeowners no longer could count on the house to increase in value to prop up the fact they over leveraged the house.
These liar loans encouraged the moral risk of lack of investment by the homeowners and they decide when their income was insufficient to pay the increased rates on the subprmes that it was better to default and let the bank hold the loss.
The banks deserve the loss it was an obvious risk. These bad loans need to written off and losses have to occur. Otherwise you just propping up the house of cards higher with higher long term costs.
Those companies that failed to have sufficient reserves to pay of the CDS need to be liquidated on their default. However the Fed decided to provide the guarantee to AIG without any backup from the US government.
Understand that the government has been indulging in a Ponzi scheme with covering current costs by allowing debt and printing money. The magnetizing the debt does work but the cost is a devalued dollar and inflation as the dollar is worth less.
Now that the dollar was worth less, imports of gasoline cost more and consumers had increase costs. However the market did work with increase costs and reduced demand, which reduce the dollar deflation and the barrel of oil inflation.
The real estate market needed a severe correction and reduced values. What the government is trying to manage the correction.
The bailout is not necessarily the best method. Government can unfreeze credit lines that are frozen with insurance of all deposits and transactions accounts with a premium paid by the banks and depositors. That would protect the money in money markets and since cash does not earn money, depositors would be willing to trust the banks with their deposits, which frees up the cash for overnight loans.
Then better underwriting standards and reimposition of the barriers that prevent this happening in the past.
Tax policy to reduce taxes to encourage business investment will also help to diversify the risk and new business mean increase jobs and more income.
But I do not see a rationale for taxpayers to buy the risky MBS. Let the insurance on these pay off to the best of ability and then write off the bad loans. The faster the banks and Wall street get a proper accounting of these assets the better off everyone will be. So in-depth analysis will need to be done on these bundled MBS and split off the non-performing loans and write those off. And rebundle the good loans and revalue to a more realistic market value.
A REIT may be needed for those defaulted mortgages. The bailout just does the same mistake and the cost will be higher when the next implosion occurs.
This needs to better targeted to solve the immediate credit crunch but straighten the underlying bad valuations of securities. So far none of the plans floated do that.
As to businesses working on credit lines rather than maintain reserves to pay for inventory and payrolls then they also need to change their business model. Any business that does not maintain sufficient reserve to meet payroll is in trouble. That is not a healthy business.
Oct 2, 2008 - 10:11 am 18. Ex-fetus:“Credit lines dry up: businesses that depend on them grind to a stop.”
Those that don’t make gobs of money, since they will have the supply to meet the demand. In the great depression, there was no money to spend to satisfy that demand, even for those businesses that had the supply covered. That is why things got so nasty.
That is why FDIC was created. That is why the bail-out is really a scam. If the scam is topped, the badly ran business, those that run on a net 30 basis will fail. Those that FOB won’t. Since the customers will still have money, thanks to FDIC, the well ran business will be able to sell them good. Since they will be the only ones with goods, they will do LOTS of business. Being well managed, they will expand, so they can supply the demands of even more customers.
The shifty, fly by night, lets make a buck off OPM and retire to the beach businessmen will be living under the overpass. Thow them a quarter when you drive by.
Unless the scam bill is passed, in which case they will cash in their stock options before it gets worse and go live on that beach. They will wave at the suckers when they motor past in their Cigarette boat.
Regardless of what Congress does, the markets will sink.
Oct 2, 2008 - 10:31 am 19. Charlie (Colorado):25 to 30% in total. Regardless of What Congress does or however much money they pour on the fire.
ou have to be a Congress person to think putting money on the fire will put it out.
This scam is looking to be about 700Billion. Add that to last weeks 185 billion scam and the one from the week before and the months before that, one has to wonder when it will stop.
It will stop when ALL the money is gone. THEN the market will crash all the way ( 75 to 90%). The longer it is put off the worse it will be.
Those that don’t make gobs of money, since they will have the supply to meet the demand. In the great depression, there was no money to spend to satisfy that demand, even for those businesses that had the supply covered. That is why things got so nasty.
If I could have written a 10,000 word article, instead of a 2500 word article, I’d have covered this in greater detail, but the gist of this is that many businesses, like auto dealerships, depend on credit lines, among other things for what are called “floorplan” programs. If you’re following the financial news today, you’ll be hearing more and more stories about companies that depend on bridge funding getting into trouble or closing their doors.
Unfortunately, a lot of people figure that the financial news is just more lying Wall Street people, so they don’t listen.
Oct 2, 2008 - 11:19 am 20. Cowcup:Another important thing missed in the article is: by not letting the bad apples exposed, every bank is holding their wallet tight. The is making the situation worse.
The “plan” is actually spreading the uncertainty.
Oct 2, 2008 - 12:07 pm 21. The Abridged Rolling Stone Hit Piece on McCain:[...] Banking Committee in the late 1990s, Gramm ushered in — with McCain’s fervent support — a massive wave of deregulation for insurance companies and brokerage houses and banks, the aftershoc…. [Who’s in charge of Ways and Means, again?] Whatever McCain’s romantic entanglements [...]
Oct 2, 2008 - 12:08 pm 22. RAH:If a business like car dealerships live on credit lines and depend on that to pay payroll, they are living on credit and not on revenue or income. Bad business model.
I know they borrow for the car inventory, but they are stuck with getting bigger discounts for large orders that do not sell, or get smaller inventory and lose the discount.
Plus the car sellers sell to non credit worthy buyers. Often the car salesman will pay the first payment himself since that validates the insurance on the car loan. Then the buyer defaults the second month and the insurere has to pay up. Another scam based on bad business model.
I worked at a dealers for a few months and discovered that little detail.
Oct 2, 2008 - 12:11 pm 23. Cowcup:If you want technical terms to scare you, the one thing missed by this article is: the Paulson plan actually created a liquidity trap.
Or in other words, the uncertainty created by this on-and-off, the attempted covering up of bad apples, and the potential rejection of really backing those bad apples, has damaged inter-bank lending. It is actually making things worse. That’s how this mess is spreading to Europe.
Oct 2, 2008 - 12:27 pm 24. Cowcup:Oh, by the way, it not only damaged inter-bank lending, it also created the bank run, not ordinary folk running at this moment, but those banks running on each other.
Oct 2, 2008 - 12:32 pm 25. Cowcup:In summary, may I suggest to the author of this article, it’s not a communicating problem of this administration. It’s actually that they upgraded a, dare I say, ordinarily bursting bubble into a global crisis.
Oct 2, 2008 - 12:36 pm 26. Charlie (Colorado):RA, there are people who think floorplan lending, fractional-reserve banking, and paper money are all bad plans.
They’re called “cranks.”
Oct 2, 2008 - 12:54 pm 27. Cowcup:There are also people thinking price control, trade barrier, “universal” pre-school are all good plans.
For the record, I would be surprised that a person against reserve-banking and paper money could, at the same time, thinking floorplan is a bad idea.
These are of course irrelevant straw men here.
Oct 2, 2008 - 2:16 pm 28. kabud:thank you , very good and clear article
Oct 2, 2008 - 2:31 pm 29. Cranky-D » Link Dump for Credit Crunch Articles:[...] Making Sense of our Financial Mess , recommended first reading. [...]
Oct 2, 2008 - 2:33 pm 30. 888:Franklin Raines – received multi-million dollar bonuses from Fannie Mae and was caught conducting corrupt and illegal accounting practices.
Jim Johnson – received multi-million dollar bonuses from Fannie Mae and was caught conducting corrupt practices there and at Countrywide Mortgage.
Both of these corrupt jerks ran Fannie Mae to the ground, and both now work for Obama’s campaign.
Oct 2, 2008 - 3:20 pm 31. Ex-fetus:“If a business like car dealerships live on credit lines and depend on that to pay payroll, they are living on credit and not on revenue or income. Bad business model.
I know they borrow for the car inventory, but they are stuck with getting bigger discounts for large orders that do not sell, or get smaller inventory and lose the discount.”
I owned a dealership. It took me 14 months of scrimping (my pocket, not the Business) to get to where I paid for the vehicle when it hit the ground, but it is possible. It is also desirable. I never had to worry about that net 90 when the customer was in the box.
Oct 2, 2008 - 4:21 pm 32. HRPIdiot:It allowed me to beat the ball every now and then. An extra deal or three doesn’t sound like much but it adds up.
You win the battle one customer at a time.
888 – Rick Davis, look up his position in the McCain campaign and his prior career. Yeah, I’m sure you’re being “fair and balanced”.
Oh, that stimulus package that Congress passed, laden with pork, has McCain “made anyone famous”. What’s stopping him?
Oct 2, 2008 - 4:58 pm 33. Charlie (Colorado):HRP, it may be wishful thinking, but I think it might be that he’d rather see the bill pass and the disaster averted before he attacks the authors of the original setup.
Oct 2, 2008 - 5:21 pm 34. JFP:Very clear article. Thanks.
Now explain why I keep hearing about LIBOR. Isn’t that something British, and isn’t the American equivalent the federal funds rate?
And how do you pronounce it (LEE bor, or LIE bor)?
Oct 2, 2008 - 8:59 pm 35. Marc Malone:Someon’s comment here was extraordinary. Actually, many were. The one that got me was the fact that the bailout doesn’t get rid of the laws and such that actually caused this mess! The securities are still opaque. I’ve heard nothing of changing the SEC position on capital/leveraging requirements. Nothing on raising the FHA standards back to where they belong. No repeal of CRA. They have talked about changing mark-to-market. Repeal Sarbanes-Oxley while they’re at it. Ugh.
Oct 2, 2008 - 10:24 pm 36. Charlie (Colorado):JFP, it’s “Lie Bore” — there’s undoubtedly a joke in that — the London InterBank Offered Rate. The big difference is that the Fed Funds Rate is (approximately) fixed by the Fed, while the LIBOR is an open-market rate.
Marc, hell, you can add to your list they haven’t eliminated capital gains taxes, implemented a flat tax, censured Reid and Schumer for unwise statements that caused major market dislocations, arrested Barney Frank for sleeping with people he’s regulating, or reintroduced the gold standard.
On the other hand, they also didn’t give billions of dollars to a slush fund, push unions onto boards, make mortgages impossible to value by letting bankruptcy judges mess with them ad lib, or nationalize all large banks. So count your blessings.
Politics remains the “art of the possible” even in a crisis; on of the things that contributed to this mess was Newt insisting (and Michelle Malkin continuing to insist) on bigger more radical changes, and thus slowing the process.
Oct 3, 2008 - 6:29 am 37. JFP:Thanks, Charlie
Oct 3, 2008 - 10:29 am 38. Charlie (Colorado):JFP, I was pre-caffeinated, so I think I missed a sentence I owed you. The LIBOR rate is particularly of interest because many variable-rate mortgages and notes base their rate off LIBOR.
Oct 3, 2008 - 11:35 am 39. Six Meat Buffet » O’Reilly Teabags My Boy Lollypop:[...] the best analysis I’ve seen of the current economic crisis is here. Thanks to Dan for the [...]
Oct 3, 2008 - 1:06 pm 40. Sydney Weinberg:Well, now that the “fix is in” both literally and figuratively we can take a breath and watch next steps. I find it extraordinary that the day the US House decides to consolidate enormous economic power in one man the market delivers a telling point about price discovery. Wells Fargo’s bid for Wachovia should have upset a few assumptions regarding the Paulson Plan. Citibank’s offer of $2 Billion backed by a Federal subsidy of $42 Billion is trumped by Wells $15 Billion stock offer.
Now, with the Plan signed by the President – who wants to bet the Citi deal goes through the market be damned. Wells will lose this battle. The nerve to step in and disrupt the narrative – They must be crushed.
Now, I will really go out on a limb… Allow me to propose that Goldman Sachs, fortified with new leverage given impending TARP purchases of its “undervalued” assets and backed by Warren Buffet (an existing large shareholder at Wells Fargo – not sure if his GS prioritized preferred is voting) pursues a friendly/hostile takeover of Wells Fargo thus expediting Goldman’s conversion to bank holding company and preserving Goldman Sachs as the preeminent financial institution in the world. And to think ten days ago the firm was on the brink of extinction.
Ah, POWER is the ultimate achievement and now one man controls an awful lot of it – more than any individual in our Nation’s history.
Oct 3, 2008 - 2:03 pm 41. Charlie (Colorado):Sydney, at least now we’ve got time to deal with it.
I’ve used this a couple times today, but I’m going to repeat it because I’m too tired to make up something new: our problem was the main ‘chute failed. It’s far better that we open the reserve ‘chute now, and consider how to repack the main later, than try to repack the main in mid air.
Oct 3, 2008 - 2:45 pm 42. Freedom is just another word...:Now, here’s the rest of the story.
The Bailout includes a Section 110.
Game Over. It’s the final nail in the coffin. Great Depression still looms…..
“General. To the extent that the Federal property manager holds, owns, or controls mortgages, mortgage backed securities, and other assets secured by residential real estate, including multifamily housing, the Federal property manager shall implement a plan that seeks to maximize assistance for homeowners and use its authority to encourage the servicers of the underlying mortgages, and considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures.” They made some modifications. The modifications are: “In the case of a residential mortgage loan, modifications made under paragraph (1) may include: (A) reduction in interest rates; (B) reduction of loan principal; and (C) other similar modifications.”
Section 110 is a loosely worded and wide scoping power that is given to a government agency the power to bully ANY mortgage company on ANY loan WHENEVER it was made.
Think a bank is going to lend you $200,000/6%/30 year….when it could be reduced to $100,000/0%,60 years? Banks are going to get out of the house mortgage business faster than Allstate left Florida after Hurricane Andrew.
House mortgages are going to dry up. Construction of new homes? Gone. Ability to sell your house? gone. Family’s biggest asset? gone.
The US government should have put some parameters on this section. Do those Senators know how to write a Grandfather Clause? Do those Senators know how to write financial guidelines (a % above Prime, appraised value, 25% debt-to-income)? Apparently not!
Geez, let’s get these folks out of office. They open more Pandora’s boxes with their well intentioned, but ill though plans.
Oct 3, 2008 - 6:14 pm 43. Sydney Weinberg:Charlie! Airborne!
I am just another leg, never made it to Airborne School – got sent to Iraq instead.
I get the parachute analogy, but first rule when deploying your reserve chute make sure your fouled and tangled main is cut away or won’t interfer with the deployment of the reserve.
Dear Freedom…. Oh, and there is more in the TARP Law (the President signed this afternoon) to love. It reads pretty quick folks. So don’t be intimidated by the length. Freedom thank you for the comment.
Remember TARP is not about economics or the market, it is all about Power – no former CEO of Goldman Sachs seriously believes $700 Billion can contain or delay a $500 Trillion derivative/credit contagion.
Watch the big C – that will be the key, should be an interesting next couple of weeks. What is the over/under on Paulson’s deployment of his first $50 Billion? Anyone care to hazard a guess as to who is first in line?
So, if Wachovia does go to Wells does Citi have to give the Federal government the $42 Billion in loan guarantees back. Hey, I thought those US Gov guarantees were meant to cover bad Wachovia loans, but Wells Fargo agreed to pick up those liabilities lock stock and barrel. Geez, what was I thinking.
Oct 3, 2008 - 6:55 pm 44. JinnyB:http://74traitors.blogspot,com
74 Traitors in the US Senate….
Big-Bada-Boom
I’ve been following the markets since the late 1960’s, and I was a professional equities and commodities analyst for Dow Jones for 9 years. I made a living as a real-time trader for another 14 years. And I have worked on a variety of market software – both CompuTrac and MetaStock.
Paulson is a Wall Street CEO, who has a 3/4 billion conflict of interest sitting in his trust fund. The only crisis around is the half billion or so he’s about to lose.
I suspect that most people would be somewhat lost if I started talking about support levels for the DJIA at about 8K in 2003, or the market making a double top, and being heading for a normal correction since this time last year, trying to build a new support level at around 10K.
What goes up, must come down. And if you try to prop the market up artificially, it’s going to cave in and fall down and smack you in the head. This bailout, which is now 850 billion dollars since it was attached to a piece of legislation that had already passed the house – is a big mistake.
There was NO indication in the market of ANY problem requiring intervention until after the “crisis” was announced. The “liquidity” problem was caused by the bailout being discussed – why should companies sell their bad paper for 20 cents on the dollar, if they could hold on to it for a few weeks, and sell it to the government for 75 cents on the dollar. That is what froze the market.
TWO BANKS FAILED. It’s an economic disaster – we must act! Really? Wow. On a black day in 1987, a little thing called the S&L crisis started. During that crisis SEVEN HUNDRED AND FORTY SEVEN Savings and Loans failed, hundreds more were merged into other companies, and ONE THOUSAND SIX HUNDRED banks failed.
The market reacted to the bailout vote – it dumped on Monday when it was expected to pass, and Bush’s “DOOM DOOM” speech at the market open didn’t help. On Tuesday the market started to rebound after the bailout vote failed the previous evening, IN SPITE OF Bush giving yet another “WE ARE ALL DOOMED” speech telling us how difficult it was going to become to buy a washer and dryer if you didn’t have good credit.
Wednesday, and the market was roller coaster – a new vote on a bailout was in play.
Friday – the market came roaring back hundreds of poiints, on the expectation that this Constitution shredding POS bailout would be defeated again. Once it passed, the market dropped until the close.
I’ve pulled out of stocks, and exchanged US Dollars for Swiss Francs. Let me just suggest that it might be prudent to sell any stock you own before the market drops several thousand points next week BECAUSE of this bailout bill. The world has just had a demonstration that our lawmakers value money over integrity, and that we have the best goverment that money can buy – if you call Pelosi-Dodd-Frank-Reid-Obama-Bush and the rest of that batch of criminals “best”.
If you think I’m full of crap, well, then you might want to at least consider buying a few slightly out of the money puts, about two months out, to cover and insure any long positions you are holding. You might break even if the market really tanks, and you can sell them back a week later, with minimal losses, but you’ll sleep better for having insured things.
My suggestion is that people run, do not walk, to their brokers and at least discuss how they can be safe if everything melts down next week. Maybe switching out of stocks to something that will be safe until the smoke clears? Do it Monday morning, it may be too late by the afternoon. I hope things go OK next week, but I’m seeing money being maneuvered into the biggest hammer I’ve ever seen assembled, and you don’t want your wallet anywhere near a wound-up-tight-as-a-spring 20 Trillion dollar, country-destroying, economic sledge hammer when it drops.
Sometime next week, somewhere – can’t tell where since this is an awfully covert operation – some really BAD BAD things are going to happen to some country’s financial markets. You REALLY don’t want to get caught by that undertow and sucked down into oblivion. Insure long positions if you can’t liquidate them at the open Monday, and BE AFRAID. As I said, I count the equivalent of nearly 20 TRILLION US dollars being assembled and set up as a very big, very leveraged, Big Freaking Hammer just looking for something to smash. This thing can swat any economy on planet earth like a mosquito – with a splat like a big juicy bug hitting your windshield as you cruise down the freeway at 90, uh, 60 miles per hour.
Be cautious with your investments between now and November 6th. Put your money in your wallet, and keep your wallet the HECK away from the stock market for at least the next couple of weeks or so if you can’t afford to lose everything you have invested – because something wicked this way comes. Be afraid, be very, very afraid.
(If you’re just SO certain everything is now going to go straight up – take a little cash out of your wallet and buy options a couple of months out that are a maybe 5% out of the money. Better to lose a little spare change playing options than lose it all buying into a crooked card game that’s being played with a rigged deck…
Oct 3, 2008 - 8:01 pm 45. Sydney Weinberg:JinnyB
You see what I see? And to think those kids rioting in Seattle a couple of years ago were concerned about Nike sweatshops in Southeast Asia. Globalization? Oh boy, just wait.
Honestly, I hope you are wrong… But then I dropped out of all equities last September when the Alpha fund shut down.
Oct 3, 2008 - 10:29 pm 46. Ex-fetus:Cavito had Jack on this morning saying that this 700 Billion is just a start. Well, when the market free falls next week, we will get to vote out the bastards, which won’t fix the problem, but will help.
Oct 4, 2008 - 8:24 am 47. kabud:JinnyB:
that is exactly THE THING you described that we hear for the last year.
Well God forbid but we also hear that foreign enemies are involved and huge terror atrtack or war may follow the meltdown
God forbid
Oct 4, 2008 - 11:33 am 48. Charlie (Colorado):There was NO indication in the market of ANY problem requiring intervention until after the “crisis” was announced. The “liquidity” problem was caused by the bailout being discussed – why should companies sell their bad paper for 20 cents on the dollar, if they could hold on to it for a few weeks, and sell it to the government for 75 cents on the dollar. That is what froze the market.
Jimmy, that’s not actually true: the TED spread went nuts on the 15th/16th, before the bailout was announced, dropped back on the 19th when it was announced, and headed back up after the opposition became clear. So you’re saying the bailout tightened the screws on the credit market two days before it was announced.
Oct 4, 2008 - 12:04 pm 49. Marc Malone:Wow. You can’t get this kind of writing in the WSJ! Good work, folks.
Can someone tell me what they might have seen while doing recon in the liberal sites? I’m too chicken to go there. (Pwok, Pwok.) I’m interested in the comparison. Wonder if they’re railing about it the same way, or if they are perhaps more sanguine about it? I’m not sure what it might tell us, but on the other hand, it could be distinctly revealing….
Oct 5, 2008 - 8:29 pm 50. Sydney Weinberg:Marc,
The WSJ is a shill for the securities industry, that is why it is called the Wall Street Journal – oh, but I still read it cover to cover every day. I do not spend much time visiting the Leftist sites, but I did follow a bit of the commentary regarding the Paulson Plan. My vehement opposition to this particular effort to alter the course of our economic plight required me to look for allies anywhere I might find them.
Regrettably, the biggest takeaways from visiting the DailyKos, Atrios, Crooks & Liars and the Huffington Post were about what you would expect – Socialism is the answer to failed Capitalism. DialyKos was pointless, the vast majority of the posts and comments discussed that this was the end of “neocapitalism.” One interesting post concerned pension plans and 401Ks – the conclusion being that 401Ks were another way to screw the little guy and that our future retirements should rely solely on Social Security. The essential conclusion I drew from my meandering through the Kossacks – Socialism is our future! and bring it on Barak!
Atrios is posting brief remarks under the title, “Wheeeeeee…” marking each downward turn in the global stock markets with a short gleeful post under this revealing title.
Crooks & Liars linked to a 60 minutes video about Credit Default Swaps. Interesting, that will certainly stir up the populist rage. I did not watch the video, but fairly or unfairly any layman explanation of the CDS market can only shed a very bad light on Wall Street.
Huffington Post links to comments from Bob Barr. Bob is a big bailout critic, but from a libertarian bent. The comments from avowed Leftist comments are all milquetoast. Rahm Emanuel writes at Huffington, but all he could say is that GWB is not FDR?
I did find a link from one of the comment streams to a new blog that I did not know. The blog is called London Banker and I am adding it to my go to sites regarding the crisis – mainly because London Banker’s opinion of the bailout is exactly the same as mine! But then if London Banker’s bio is to be believed, I appreciate his credible reinforcement of my views. Here is the link:
http://londonbanker.blogspot.com/
Finally, we read today that Paulson is going to nominate a 35 year old former Goldman Sachs employee to manage the bailout process. I am certain that Neel Kashkari will work diligently and effectively in his new job. I guess Paulson does not want to take any chances that the bailout capital does not go to saving Goldman Sachs – even with all the apparent perceptions of conflict of interest.
Oct 6, 2008 - 8:54 am 51. kabud:London Banker said EXACTLY as McCain:
There is a fundamentally healthy economy in America – somewhere underneath all the financial excess and chicanery and all the financial/oil/military/healthcare/developer corruption of local, state and federal politics. It will be a painful and slow process to kill off the metastasising cancerous growths on the economy, but if Americans achieved that, they could embrace a healthier and more productive and more prosperous future.
—————————
McCain and Palin they got a PERFECT instincts
They just have to FOLLOW THEM
Oct 6, 2008 - 3:34 pm 52. Sydney Weinberg:Yes, you are correct. The American economy is supported by very strong fundamentals. We are a great free entrepreneurial people. A true Continental power blessed with an abundance of rich natural resources. McCain and Palin are the perfect pair to take on the vested interests on Wall Street and in Washington, but will we give them that chance?
McCain really fumbled the Paulson Plan, just about any reasonable response other than Secretary Paulson’s plan would have been better. How about $700 Billion fund to recapitalize our Banks. Buffett set the market price for emergency capital with his investments in Goldman and GE. Why not follow his lead? The current bailout plan does nothing to solve the credit crisis and in all likelihood will only make the problem worse. Imagine Treasury Secretary Dodd with the power to go to liberal judges to “re-set” principal and interest payments on select mortgages. Farfetched, we will see.
All McCain had to do was agree emphatically that we needed to implement a bailout plan and then slow the process down to consider alternatives. A half day of hearings and then a Bill larded up with “sweeteners” – what a disgrace.
Despite the news here, the real story is now in Europe. There are reports that the Germans intend to create a national financial “shield” to protect its finance institutions. If true, it will mean the end of the Euro and in all likelihood the European Union. The fall-out in Europe is one direct unintended consequence of the Paulson Plan. Ackerman and Paulson do not like each other – at all. When Ackerman saw that Paulson was building a shield around Goldman, he pursued a like response.
Ah, the venality of men….
Oct 6, 2008 - 4:34 pm 53. Marc Malone:Sydney – One CMH on the way for your brave foray deep behind enemy lines! I suspected it would be like that, but I’m glad you found a new site with a guy with solid creds to back you. You brought back a captive to interrogate. Great recon work.
Oct 6, 2008 - 11:53 pm