Global Financial Crisis (Was: Subprime Meltdown)

[cheesehead]

Originally Posted by ewmayer

If Congress decided to make it legal to use the trust fund in other ways, the alternative would no longer be moot, would it?

Right, but that would be an _enormous_ change making all kinds of differences in the financial markets.

The above "promise to pay the trust fund later" is the "bill comes due" moment I refer to in my naive way.

So it's part of something that some people argue, with no fixed definition agreed upon by all parties. Let me know when you can ask about something well-defined in this respect.

And to my naive brain, the above still sounds like classic Ponzi finance, with a recursive twist.

You're still mixing financial procedures, reporting procedures, and political rhetoric in this regard.

Perhaps I'm conflating your meaning, but "Ponzi finance" and "nothing wrong with the financial operations" are mutually exclusive

My "Ponzi" references are to the aspect that taxes from current workers are used to pay current receivers of benefits, not solely invested in anticipation of future obligations to the workers from whom those taxes were collected as they would be in a proper retirement fund (see next paragraph). This is a long-term (decades) policy scam that is independent from the short-term, current financial and accounting procedures that I have been discussing.

A proper retirement fund invests worker's contributions to pay the expected future benefits after the worker retires. (I'm aware that some non-governmental retirement funds are not properly run this way.) Though Social Security has been politically propagandized in the past as following this scheme, it in truth never has -- that is the Ponzi aspect, not the financial operation details of using trust fund money to purchase Treasury bonds.

I always look at fundamentals: If there were truly "nothing wrong with the financial operations", then there would be no solvency worries now, would there?

They're not "wrong" if "wrong" means illegal, immoral, or underhanded.

They are "wrong" if "wrong" means that the long-term plan is not that of investing worker's contributions to pay the expected future benefits after the worker retires as some politicians used to pretend, but is instead using current contributions to pay current recipients (ignoring revenue vs. disbursement imbalances due to demographics). The financial and accounting procedures described where I linked above do NOT fit this latter category.

The solvency worries are a long-term problem, and are related to the "Ponzi" aspect, not to the current financial and accounting procedures as is implied by some of the statements in this discussion.

[cheesehead]

Originally Posted by wblipp

Having a Social Security Trust Fund is exactly like not having a Social Security Trust Fund.

The trust fund is where the Social Security taxes ("FICA" on paychecks) go. Its assets include some cash, but mostly Treasury bonds purchased with cash in the past.

Suppose we had no Social Security Trust Fund.

Then the Social Security system couldn't operate, so effectively you're saying, "Suppose we had no Social Security, period."

When the Boomers retire, there isn't any money to pay them.

Because there's no Social Security system.

And apparently, you're supposing there are no payments to anyone older than Boomers.

So the Social Security Administrator

... who, in your scenario, has never had a place to put any FICA tax revenue ...

goes to Congress and says "I can't pay the bills - we gotta do something" and Congress does some combination of raising taxes and borrowing and printing money to pay off the Social Security obligations.

Okay, if there had never been any FICA taxes collected, that would be true.

But we DO have a Social Security Trust Fund.

... into which FICA taxes are deposited and from which Social Security benefits are paid.

So when the Boomers retire, the Social Security Administrator takes a handful of those special, zero coupon treasury bonds to the Treasurer and says "I'd like to cash these in." Then the Treasurer

... insofar as there is insufficient cash in the general fund at that time to pay for bonds redeemed by Social Security ...

goes to Congress and says "I can't pay the bills - we gotta do something." And Congress does some combination of raising taxes and borrowing and printing money to pay off bonds from the Social Security obligations.

Yes, this is the future prospect ... when there are not enough general funds.

Then there's the later future when Social Security has redeemed all its Treasury bonds and still (maybe) has insufficient current income to meet its current obligations.

There isn't any "there" to the trust fund

There are several hundreds of billions of dollars of cash and bonds in the trust fund right now.

it's a promise that future generations will pay the social security bills, and it doesn't really matter that the promise is secured by one particular bookkeeping convention or another.

Okay, that's the political promise. But the trust funds are a reality and are in operation right now.

[cheesehead]

Originally Posted by Prime95

P.S. Ernst, I've found your thread here quite entertaining and enlightening even though I have a vested interest in hoping you are dead wrong as to the severity.

I second that.

[ewmayer]

Dear Citigroup Customer... - Evidence that Citigroup may be engaging in a pattern of deceit with respect to soon-to-reset ARMs.


Equity Loans as Next Round in Credit Crisis | NYTimes

Little by little, millions of Americans surrendered equity in their homes in recent years. Lulled by good times, they borrowed — sometimes heavily — against the roofs over their heads.

Now the bill is coming due. As the housing market spirals downward, home equity loans, which turn home sweet home into cash sweet cash, are becoming the next flash point in the mortgage crisis.

Americans owe a staggering $1.1 trillion on home equity loans — and banks are increasingly worried they may not get some of that money back.

To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. In the past, when home prices were not falling, lenders did not resort to these measures.

Such tactics are impeding efforts by policy makers to help struggling homeowners get easier terms on their mortgages and stem the rising tide of foreclosures. But at a time when each day seems to bring more bad news for the financial industry, lenders defend the hard-nosed maneuvers as a way to keep their own losses from deepening.

It is a remarkable turnabout for the many Americans who have come to regard a home as an A.T.M. with three bedrooms and 1.5 baths. When times were good, they borrowed against their homes to pay for all sorts of things, from new cars to college educations to a home theater.

Lenders also encouraged many aspiring homeowners to take out not one but two mortgages simultaneously — ordinary ones plus “piggyback” loans — to avoid putting any cash down.

The result is a nation that only half-owns its homes. While homeownership climbed to record heights in recent years, home equity — the value of the properties minus the mortgages against them — has fallen below 50 percent for the first time, according to the Federal Reserve.

Lenders holding first mortgages get first dibs on borrowers’ cash or on the homes should people fall behind on their payments. Banks that made home equity loans are second in line. This arrangement sometimes pits one lender against another.

When borrowers default on their mortgages, lenders foreclose and sell the homes to recoup their money. But when homes sell for less than the value of their mortgages and home equity loans — a situation known as a short sale — lenders with first liens must be compensated fully before holders of second or third liens get a dime.

In places like California, Nevada, Arizona and Florida, where home prices have fallen significantly, second-lien holders can be left with little or nothing once first mortgages are paid.

In December, 5.7 percent of home equity lines of credit were delinquent or in default, up from 4.5 percent in 2006, according to Moody’s Economy.com.[Full Article]

[ewmayer]

Citigroup Fires Prime Brokerage Group Co-Chiefs, NYT Reports: Citigroup, which has cut 4,000 investment banking jobs, will probably fire 2,000 more employees by the end of March -- about 10 percent investment bank workforce, the Times said.

Cayne Sells Entire Bear Stearns Stake for $61 Million Prior to Buyout Vote: James ``Jimmy'' Cayne, chairman of Bear Stearns Cos., sold his shares in the crippled securities firm for $61 million prior to a vote on the company's pending takeover by JPMorgan Chase & Co.

Looks like he's gonna have to cut back on smoking high-end weed - a pound a day's your new limit, Jimmy Boy. The mavens of the Yahoo! Finance message boards weigh in with sorrowful commiseration:

How can Cayne live on only 61 million dollars...

duckfan00
Poor guy...

robwalter99
Ramen noodles and Pabst Blue Ribbon, he must sacrifice.

duckfan00
Wow!! That was exactly my college diet.

[ewmayer]

JP Morgan has nearly $100 Trillion [that's right, trillion, as in 10^12, as we use it here in the U.S. - no Million/Milliard/Billion/Billiards played here] in derivatives exposure:

NakedCapitalism.com | "Grim Outlook" for J.P. Morgan


Another "As good as cash, only better!!" vehicle bites the dust:

UBS Cutting Value Of Auction Rate Securities In Brokerage Accounts: In the first confirmation that problems in the auction-rate securities markets has eroded the principal holdings of individual investors, UBS AG is marking down the value of the securities in its brokerage customers' accounts.

This is bigger news than it might seem to the eye of Joe Schmoe Warketwatcher, because a lot of very wealthy folks' money is in these kinds of not-available-to-the-unwashed-masses issues.

Me, I'm getting my lounge chair and umbrella ready, looking forward to watching the next round of the Big Financials downgrading each other, and shorting each other's stock. [And perhaps even their own.]

Update: UBS now also in trouble with German tax authorities, for allegedly conspiring to help German tax dodgers stash their cash - sorry, too lazy to do a translation from zee Deutsch, and Babelfish choked when I tried to feed it "Steuerhinterziehungsförderungsverschwörung" [I just love doing that - German Scrabble r00lz]:

Blick.ch | Deutsche Steuer-Polizei ermittelt gegen UBS

Maybe they could just give back a little of that Nazi gold they picked up from Germany in WW2 at below-market rates ... that would be a nice gesture. Plus, with the recent runup in gold prices they would only have to return a little of their stash.

[ewmayer]

Paulson offers sweeping rule changes: Among Treasury chief's recommendations: Widening Fed's reach and creating a federal regulator for mortgage industry.

Let`s just say that, in the wake of the recent illegal Fed intervention in the financial markets, giving J.P. Morgan a forced-sale late-season Christmas present of Bear Stearns [when it knew full well that Bear was a counterparty to a nice chunk of JPM`s massive derivatives portfolio, i.e. that JPM had every reason to want to keep Bear from imploding - notice how JPM didn`t complain all that loudly when the threat of a Bear shareholder revolt forced it to raise its proposed buy price fivefold, from $2 to $10], I am not reassured. Especially since if the Fed had simply FULFILLED ITS LEGAL MANDATE - which includes obscure things like overseeing industry lending practices and keeping an eye out for predatory lending - during the Greenspan era, we wouldn't find ourselves in this neck-high pile of fiscal doo-doo to begin with. But hey, what do you expect from a devoted disciple of Ayn Randian Überkapitalismus [Greenspan] and an ex-Goldman-Sachs bigwig [Paulson]?


One of the few big-finance-media people who's actually been not-buying-into-the-government-and-Wall-street-spun fairy tales is Fortune senior editor Allan Sloan, who has this to say in his latest article:

Chaos on Wall Street: The big banks' fear of big losses is threatening to bring down the entire system, with dire consequences for all of us. Here's what's going on, and what we can do about it.

What in the world is going on here? Why is Washington spending billions to bail out Wall Street titans while leaving struggling homeowners to fend for themselves? Why are the Federal Reserve and the Treasury acting as if they're afraid the world may come to an end, while the stock market seems much less concerned? And finally, what does all this mean to those of us who aren't financial professionals?

Okay, take a few breaths, pour yourself a beverage of your choice, and I'll tell you what's happening - and what I think is going to happen. Although I expect these problems will resolve themselves without a catastrophic meltdown, I'll also tell you why I'm more nervous about the world financial system now than I've ever been in my 40 years of covering business and markets.

Finally, I'll tell you why I fear that the Wall Street enablers of the biggest financial mess of my lifetime will escape with relatively light damage, leaving the rest of us - and our children and grandchildren - to pay for their misdeeds.

Careers vanish after subprime 'free fall': Kent and Mysti Cope were well-paid executives at subprime lenders who never thought the industry could disappear overnight. Now they're just trying to get by.

I'm sorry, I know it's crass - an occasional personal failing of mine - but I find it difficult to feel pangs of sympathy for an ex-subprime-industry-exec, especially one named "Mysti". A distant relation of "Barbi", no doubt.


Edit: The New York Times' Paul Krugman has a similar take as mine on the Paulson Proposal: Paul Krugman | The Dilbert Strategy

Anyone who has worked in a large organization — or, for that matter, reads the comic strip “Dilbert” — is familiar with the “org chart” strategy. To hide their lack of any actual ideas about what to do, managers sometimes make a big show of rearranging the boxes and lines that say who reports to whom.You now understand the principle behind the Bush administration’s new proposal for financial reform, which will be formally announced today: it’s all about creating the appearance of responding to the current crisis, without actually doing anything substantive.

To quote the classic line from Steve Colbert's hilarious speech at the 2006 White House Correspondents' Association Dinner: "And then you write, 'Oh, they're just rearranging the deck chairs on the Titanic.' First of all, that is a terrible metaphor. This administration is not sinking. This administration is soaring. If anything, they are rearranging the deck chairs on the Hindenburg!""

[I'm still torn as to whether that one or "Reality has a well-known liberal bias" was the best line of Colbert's wickedly funny administration-and-their-pet-media-lackeys skewering presentation.]

[ewmayer]

SEC to Corporations: "If Market Prices Are Too Low, Ignore Them!"

The Securities and Exchange Commission is out today with a letter to companies that own a lot of financial instruments whose current market value must be reported to shareholders. For more than a few companies, disclosing market values is neither easy nor convenient.

...But one part of the letter stood out to me, providing an excuse for companies to ignore a market value if they don’t like it (italics added):

"Unobservable inputs" - sounds a whole lot like "faith-based-finance" to me.


LOL, huge market rally today on news of more massive writedowns from big banks including UBS, and Lehman`s highly dilutive stock-sale-to-raise-desperately-needed-cash. "The great April Fools Day rally of `08 ... yes, I remember it it well, kids ... you may find this hard to believe, but most folks didn`t even live in caves in those days ... no, really, they didn`t!" The sentiment of the hordes of buyers today seems to be "The news is so bad, that things really couldn't possibly get any worse - time to buy!" Time will tell if they or the we-are-still-far-from-the-bottom crowd will prove to be the bigger fools.

And speaking of people who live in caves ...

Russian Doomsday Cult Calls Credit Cards Satanic - Hmmm ... You know, they may not be as kooky as the media have made them out to be...

Sticking to the Russian theme, the latest issue of Business Week has a clever cover, an ironic commentary on the Fed's in essence telling Big Finance that "Profits are private, but your losses are socialized - so gamble away, comrades!":

[ewmayer]

In support of my earlier statement to the effect that the govt CPI [inflation] figures are little better than "Soviet crop reports" [hat tip to Aaron Krowne], Fortune magazine has an article on the great inflation cover-up:

Barry Ritholtz ... puts it amusingly: "If you take everything out of the CPI basket that's going up in price, sure, you have no inflation!" Which is sort of like suggesting that if you take away insurgent fighting and the large U.S. military presence, there's no war in Iraq. Not that I want to give anyone in the Oval Office ideas for creative rhetorical devices.

Fortune | The last days of Bear Stearns: It took only a few days, a rising sense of panic - and a critical e-mail - to spell the end of the 85-year-old investment bank.

Especially interesting is the role of the ever-present Goldman Sachs in the demise of Bear - the last straw appears to have been GS pulling its previous [and highly profitable, since GS was acting as the counterparty of last resort] backstopping of Bear`s heavily leveraged derivative deals and announcing this in an e-mail to its hedge fund clients. As soon as news of Goldman`s "no confidence vote" leaked to the big-money insiders, the run on the bank began, and a few days later the end came. Also interestingly, apparently some unknown party shorted a big chunk of Bear stock the Friday before the collapse, thus ending up with a huge windfall profit. 100% it was an insider to these goings-on - but whether it was someone from Bear, Goldman or one of Goldman`s hedge fund clients remains unknown.


Salon.com: Is this recession another Great Depression?

If you read the article, note that the reader letters - especially the small "Editor's choice" subset of same - are well worth perusing.


Funny but poignant "barbaric yawp" from one of my favorite non-Ministry-of-Truth-affiliated financial bloggers:

WSE Editor Adler Has Emotional Meltdown

This is so stupid. Even if every house now on the market were sold, and all those waiting to be sold were sold, this would not change the oversupply one iota. As long at that oversupply exists we will be in an endless spiral of never ending price declines. The only way to eliminate the oversupply is to bulldoze about 3 or 4 million housing units.

Nobody, but NO BODY seems to get that basic fact.

Oh sure, you could eliminate the problem by an increase in end user demand.

Yeah, right, like that’s going to happen any time soon. Maybe when we start emerging from the depression in the year 2025.

This makes me sick. It could have and should have been prevented, but Greenspan sat there with his thumbs up his butt hole letting fraud, corruption, and thievery be the guiding principles of financial market regulation.

You’re goddam right I’m mad as hell.

I’m mad as hell, AND I’M NOT GONNA TAKE THIS ANY MO!

I think I’ll move to Pago Pago.

There is such a place, isn’t there?[Full Article]

"Mom, can they really say `butt hole` on national internetelevision?"

[ewmayer]

Unemployment Soars -- Even After Massive BLS Fudging

If you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, etc., you get a closer picture of what the unemployment rate is. The official government number is 5.1% but Table A-12 suggests it is closer to 9.1%. I believe that is on the low side.

Regardless, the trend in unemployment is now clear, it is rising sharply. Expect to see 6% this year. This report was a disaster.

U.S. Markets are, of course, *up* on the great news. Probably a couple phone calls this a.m. from the Bernanke Panky plunge protection team at the Fed to Big Finance, saying "buy a few $B more ... here, we'll lend you all the money you need to leverage yourself even deeper ..." had something to do with that.


eCONomic Scuttle Butt | Foreclosure Tours Offer Glimpse Into SoCal Housing Market: "Exiting the Reamtor van, we suddenly found ourselves pinned down by heavy sniper fire..."


Moron of the Week goes to ... wait for it ... yours truly, for underestimating the ability of the Powers That Be to manipulate the markets. My retort to Helicopter Ben and his Cronies is "You're only makin' it worse for yourself, you know..."

[masser]

Greenspan Defensive in WSJ Interview