Thursday, September 25

Money go round

Obama has made a plea for bipartisan support for the passing of the current $800 billion package being debated before congress providing it includes 4 key points.

An overseeing independent board.

Taxpayers are to be treated like Investors-(This would be relatively simple by the issues of non voting warrants).

Additional measures to help those facing current foreclosures

Reward packages eliminated for those CEOs previously involved in the failed companies.

I notice Bill Clinton is currently doing the celebrity rounds and I listened to him the other night on the Letterman late show. He is more or less saying the same thing; to support the package and add those bells and whistles.

The question of those outrageous remuneration packages reminds me of the lectures we got from Management Recruiters who told us if we only pay peanuts we will get monkeys. It hasn't worked very well has it !! Still I have to admit those Wall Street guys were very clever to successfully export so much of their misery all over the world; sizable portions of AAA rated contagious toxic debt to so many eager buyers overseas.

But that reminds me of the fact many Americans don’t seem to fully appreciate it’s caused such severe indigestion overseas, to individual investors and provided the fuel for a possible severe world wide recession. This has meant both the Fed and its counterparts represented by central banks in Australia, Denmark, Norway and Sweden have had to set up additional currency exchange funding to provide a buffer to current pressures.

The other point that is not well understood is the likely eventual cost of this bail out. What is it? A trillion. – NO – It is very likely that it won’t cost anything at all since you can buy up most of these packaged impaired assets for a pittance, and eventually you’re likely to make squillins in the next 3- 4 years. This was clearly evident in aspects of the Savings and Loans crisis.

So why can’t the private sector do that ?
Fear!! Those who could and are sitting on mountainous piles of money don’t want to risk it. For instance Buffet finds it easier to take a stake in Goldman- this complements and fits in with Berkshire's profile - with assets of around $US278 billion including significant stakes in companies such as Wells Fargo & Co, American Express and the Washington Post Co. Foreigners are also becoming choosey

Don’t forget your overall debt is 375 % of GDP (the highest level ever as percentage) so there are limits (outside of government) with much to spare. !

It always been that markets overshoot on the way down and the reverse on the upside. That’s why you need regulation!! Hand on regulation that can pull the levers when they are needed, hardly a novel approach but one sadly lacking in the past. It’s also hard to spot a better opportunity for permanently changing the current regulatory system for the better and making it more transparent.


Seraphine said...

i saw bill clinton on letterman too. it made me feel nostalgic.

Cart said...

You are far more forgiving than I. It seems we have been presaging this mess for some time now and you have consistently managed ‘kindish’ words for the market operatives and political protectors. Not a criticism, I admire your less emotional response.
I’m still gobsmacked that the experts could not see it coming. I guess they probably did and hoped like hell Santa would sweep in with a bag full of remedial presents. My concern now is that those market operatives will simply shift activities to other, still profitable, greed ventures.
I wish I could share your kind nature.

Sera, I would have agree about a year ago. Now it concerns me that even Clinton was part of the process leading to the current mess.

Seraphine said...

i'm reading about all the money that's been withdrawn from washingtom mutual bank. people are scared. and so far, the sovereign wealth funds and other monied investments into our financial sector have been disasters. once you lose a billion or seven, your appetite for risk decreases dramatically.
so maybe paying peanuts for monkeys isn't so bad afterall. if you wait long enough, maybe one of those monkeys will evolve into a higher life form. humans could use the help.

numb said...

g'day, mate!...

posting to say that i'm in agreement with cart's comments (up to & including the clinton one - his kinder, gentler corporatism never really appealed to me). as you're aware, i'm not very pleased by how this's been presented to the public (the 'bad mortgage' emphasis) by all, including bush himself. the over-all attitude in washington (dems as well) seems to be that there is fundamentally nothing wrong with things like bundling mortgages, & any number of others of these 'instruments', that it's all fine as long as it's all somewhat regulated. which, to my ears, says that washington is solidly in wall street's pocket, & that the thrust of the bailout is an attempt to maintain the current, penultimately non-maintainable, 'money for nothing' status quo, where ponzi schemes are legitimatized as such things as credit default swaps, & 'gambling' is re-envisioned as 'investing'...

i feel there's something being 'sold' here: & the sales pitch is incredibly familiar...

lindsaylobe said...

Hi Sera Cart & Numb ~Thanks for your interest in this complex and yet highly frustrating matter.

Sera- Clinton I thought gave a rather succinct summary of it didn’t you think.

I agree with you on the Sovereign Wealth Funds. Imagine the due diligence that went into those investments and the assurances given by those highly paid Wall Street executives. Yet the Asian governments witnessed their entire investment wiped out in the space of just a few months!!

It gives the USA a shocking name and engenders deep distrust. !! It’s ironic to realize just about the only concern at the time by the regulators and the public was about Foreigners taking prized stakes in USA companies!! Who was fooling who?

Thanks for pointing out this important point.


I guess my conclusions relate to a lack of regulation and transparency rather than lambasting those responsible. That flawed system has been building for such a long time, I tend to think of it as inevitable systemic failure. It will happen again unless the system is changed and the regulator becomes more hands on and anticipatory.

There were many within the ranks of the Financial Services Industry who knew the system was going to collapse eventually but were happy to cream off what they could and sit back and wait or exit. Without wishing to be unduly harsh on the USA system that has been the position for a very long time because of a relative insular focus from within to only regulate on a prescriptive style basis and react to breaches rather than be preemptive.

One such Trader with one of the largest investment banks realized the fragility and lack of value which prompted him to take contrary positions betting against the value of Mortgage backed securities. Individually he made 4 billion dollars.


Welcome and thanks for your comments and your post.

No doubt you know a lot more about the predatory lending and underlying conditions that led to this mess than me.

Here is how I understand the current morass to have occurred.

Take 1000 poor quality mortgages.

Create Bonds to attach to those mortgages

Grade the Bonds

Grade A -85% rated AAA, ( assumed statistically 85% will not fail ) at an interest rate of 5.50 % and sold all over the world as premium AAA paper to unsuspecting buyers including self managed Super funds and even Municipal Councils in Australia .

Grade B -4% rated AA at 6.5%

Grade C -4% rated A at 8.7%
Grade D -4% rated B at 9.20%

Grade E_ 3% rated C at 10.2%

Theses mortgage backed securities (there were also credit cards, motor vehicles, Student College loans etc similarly graded) were bundled and on sold to banks (principal and interest further sliced up).

Banks entered into credit default swaps( derivatives ) to protect their investments. Some were also insured.

But bear in mind these derivatives are zero based in sum total, they cancel one another out to zero if they were all simultaneously collapsed.

But if the other party to the credit default swap becomes insolvent then you are not covered. The first crack appeared when housing diminution meant the credit swaps were overvalued and with rising foreclosures there was a further slide in the value of the securities as accelorated foreclosures gathered momentum.

The investment Banks were also highly leveraged at ratios of between 23 to over 30 to one and lacking in capital adequacey ratios to absorb even small ratio loses, yet by 2007 14% pf all sub prime mprtgages had defualted as the first tranche of reset interest rates took effect.

What is the current value of these securities?

Anywhere between 50 cents and maybe 25 cents in the dollar dependant upon the underlying housing values. In California’s it’s dropped nearly 50 % in a year!

Hence what was originally proposed may have been a succor to those pleas from desperate Wall Street Bankers, more of the same that gave us bad decisions in the past.

But what hopefully will emerge in final approved form will be a small first step to restore stability and improve the underlying system or at least makes a decent start towards much needed reform.

Best wishes

Seraphine said...

i don't think the financial industry needs to be over regulated, aside from protecting people from fraud and taxpayer's money from undo risk. part of our problem is financial products became too complex; they became esoteric in many cases. technology and regulation couldn't keep up, so peter didn't know what paul was doing, and the unregulated hedge funds could do anything they wanted. apparently, even investment bankers didn't understand what they had created and invested in (ha!). any institution that does business with public or government institutions, especially if government guarantees are involved, should be transparent in their reporting and conform to certain leverage parameters. The point of the regulation shouldn't be to restrict people from taking risk, but to provide fair trade, a level playing field for everyone, to protect the consumer (and taxpayer) from fraud and to ensure the long term viability of both the financial system and this country. Investors should be able to make informed decisions.
i also think an independent commission should be set up to explore the possibility that 'fraud by ommission' has been perpetrated on us by certain people and institutions. Someone not make full specific disclosure of the risks involved in the financial instruments they created and traded in. it's important we discover how this happened so that we can avoid repeating the same mistakes again.

Anonymous said...

Hello, Lindsay.
I am of a different mind altogether.
It is my belief that any and all bailouts should necessarily be avoided, regardless of the consequences.
Only through the experience of the consequences will the current system be able to work.
Even if mass starvation and armed rebellion were to be the inevitable outcome, still we should endure such things.
Anything less and we have doomed ourselves-- pre-doomed, if you will.
The market must be allowed to work its magic; no changing horses mid-stream.

numb said...

lindsay -

thanks for having me :) ...

your description of the process is quite complete (tho you left out the 'instrument' that took the lowest-grade bundles, broke them up into sub- a to e categories, & then re-marketed them (this trick was described in a radio program on the subject that susan's linked to in a post))...

i also really hope that any 'bailout' that's approved firmly deal with the issue of reform. but, as i said earlier, both reform & mortgage assistance to homeowners seem destined to take a back seat to the big pay-off/buy-out, unfortunately...

sera -

i agree with much of what you say. if i have a problem with 'the market' as it's structured now, it's with the way the rest of us've been basically co-opted, whether we like it or not, via deregulation & bizarre instuments, into having a stake in the whole thing - it's like finding out that, because someone you've never met lost big-time gambling in vegas, the money under your mattress is no longer worth what it once was.

if people want to invest/gamble, fine. but we need to re-establish the walls that've existed since the post-depression era up till recently between the gaming & non-gaming financial worlds, & re-establish a fundamental understanding that things like mortgages can't be converted into chips...

&, afa disclosure, there's this from henry waxman's letter to lehman (09/26):

"It is difficult to understand how Lehman Brothers is unable to produce a single internal document that went to or from the CEO's office over the past six months. It is also difficult to understand why there is no log, file, or other record documenting where these internal documents went..."

these guys just don't do disclosure...

Gary said...

Terrific post Lindsay. More exclamation points than any of your posts that I can remember :)

We're a little closer to the elephant here in Canada and more vulnerable to the dominos. But our own regulations and banking system are much more conservative (in the stewardship sense of the word).

Seraphine said...

yay numb. i agree with you. for agreeing with me. lol.

Seraphine said...

oops. sometimes congress slips up. stupid election years and political considerations. they should get some serious discussions going and solve some of these problems before too many people lose their jobs. it's jobs, mr. mccain. it's jobs, mr. obama. without jobs, nobody will be able to pay their mortgages and the economy continues to spiral.

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