Global Financial Crisis (Was: Subprime Meltdown)

[Fusion_power]

You'll need more than just a hat before this financial meltdown wraps up.

AIG just got an $85 billion bailout from Uncle Sam.

All indications are that we will have more unprecedented bank/finance failures within the next 3 weeks. Merrill Lynch, Lehmans, Bear Sterns, Countrywide, just ask yourself who is next?

DarJones

[cheesehead]

Originally Posted by M29

Here's a different take by Thomas Sowell:

Ah, yes -- the same Thomas Sowell who thinks Democrats, including specifically Barack Obama, aid and abet people who hate America, and that Obama has done so for "decades".

http://townhall.com/columnists/Thoma...ama_and_mccain

(BTW, I've seen Obama-smears (but no McCain-smears) posted to two separate non-political mailing lists to which I subscribe; the latest quoted the article linked above.)

- - -

Hey, I heard a local right-wing radio talk show host give that same line earlier today: that the _real_ root of the current financial crisis was the bill passed in the Clinton administration that directed banks to stop redlining minority neighborhoods (my synopsis, not his). Guess he reads Sowell, too (not to mention not-mentioning which party controlled Congress, so could have killed that bill, at the time it was under consideration).

- - -

Anyone know how, exactly, Sowell thinks Democrats are responsible for any of the things Ernst listed?

... other than appointing Alan Greenspan (the first time, that is)?

(But wait! Republicans had the Senate majority then, didn't they?)

[masser]

Originally Posted by cheesehead

... other than appointing Alan Greenspan (the first time, that is)?

(But wait! Republicans had the Senate majority then, didn't they?)

I thought Greenspan was appointed by Bush 41, with a Democratic congress...

[ewmayer]

Greenspan was initially appointed by Reagan in 1987, and subsequently reappointed by every succeeding president: Bush Sr, Clinton, Bush Jr. That was when his quasi-mystical "maestro" image was still intact. And yes, the policies that led to the dotcom bubble were put in place while Clinton was in in office, so there's plenty of blame to go around. But as I recall, Clinton wasn't running up colossal current-account deficits on top of it all.

[Prime95]

Originally Posted by ewmayer

there's plenty of blame to go around

There sure is. IMO, most of the blame goes to the management of these banks, brokerages, insurance companies, and ratings agencies.

Instead of doing their fiduciary duty of wisely managing companies, they leveraged themselves to the hilt, pushed mortgages and HELOCs on customers they knew couldn't afford it, and conspired with others to repackage the crap and sell it for a profit to unsuspecting suckers.

After all, who cares if they drive a 150 year old company into the ground if they can get a few multi-million dollar bonus checks before it goes under.

[R.D. Silverman]

Originally Posted by Prime95

There sure is. IMO, most of the blame goes to the management of these banks, brokerages, insurance companies, and ratings agencies.

Instead of doing their fiduciary duty of wisely managing companies, they leveraged themselves to the hilt, pushed mortgages and HELOCs on customers they knew couldn't afford it, and conspired with others to repackage the crap and sell it for a profit to unsuspecting suckers.

After all, who cares if they drive a 150 year old company into the ground if they can get a few multi-million dollar bonus checks before it goes under.

Greed is good. Greed works.

Gordon Gecko

These managers are in good company.

[ewmayer]

On to today`s economic and market news - another history-making day unfolding. If I had to write a headline right now about recent events, it would probably read something like "2 Weeks that Reshaped the Global Financial Landscape". Make no mistake, what are witnessing here is every bit as big as 1929 was.

========================

As widely reported, the U.S. Federal Reserve and Treasury changed their minds last night and agreed to pump nearly $100 Billion [it will probably end up being more] to keep insurance giant AIG from outright collapse. While they effectively paid a hefty premium for their 80% stake in AIG [based on yesterday's market range], they drove a brutal bargain with respect to interest on the loan:

AIG Slumps as U.S. Takeover Seen Wiping Out Investors' Stakes, Dividends: American International Group Inc. fell 44 percent on speculation the government's takeover will ultimately wipe out shareholders.


Stocks in U.S. Slide as Bank Lending Seizes Up Following Takeover of AIG: U.S. stocks tumbled as bank lending seized up in the wake of the government's takeover of American International Group Inc., raising concern that more of the nation's biggest financial companies will fail.

Sept. 17 (Bloomberg) -- U.S. stocks tumbled as bank lending seized up in the wake of the government's takeover of American International Group Inc., raising concern that more of the nation's biggest financial companies will fail.

Goldman Sachs Group Inc. and Morgan Stanley, the two largest U.S. securities firms, plunged more than 20 percent after Oppenheimer & Co. analyst Meredith Whitney cut profit estimates. General Electric Co., the world's third-biggest company, fell 8 percent and U.S. Steel Corp. slid 14 percent. Yields on three-month bills sank to at least a 54-year low and a measure of corporate borrowing costs surged to the highest since the crash of 1987.

``It's ugly,'' said Michael Mullaney, a Boston-based money manager for Fiduciary Trust Co., which oversees $10 billion in stocks and bonds. ``It's about the worst I've seen it in 25 years. You have to have free-flowing credit to lubricate the system. That's not happening right now.''

...
About $2.8 trillion of market value was erased from global stocks this week, triggered by Lehman Brothers Holdings Inc.'s bankruptcy. Russia halted stock trading for a second day and poured $44 billion into its three biggest banks in a bid to halt the worst financial crisis in a decade.

Morgan Stanley, Goldman Shares Plunge Most Ever as Credit Crisis Deepens: Goldman Sachs Group Inc. and Morgan Stanley, the two biggest U.S. securities firms, tumbled the most ever in New York after a government rescue plan for American International Group Inc. failed to ease the credit contraction.


New housing construction at 17-year low

WASHINGTON (AP) -- Construction of new homes and apartments fell to its lowest level in 17 years last month, showing the country is still gripped by a severe housing downturn that has triggered billions of dollars of losses and is reshaping the structure of U.S. finance.

The Commerce Department reported Wednesday that housing construction dropped a surprise 6.2% last month to a seasonally adjusted annual rate of 895,000 units. That's the slowest building pace since January 1991, another period when housing was going through a painful correction.

The decline is larger than the 1.6% drop analysts expected and showed weakness in all the country except the West.

[R.D. Silverman]

Originally Posted by ewmayer

Morgan Stanley, Goldman Shares Plunge Most Ever as Credit Crisis Deepens[/url]: Goldman Sachs Group Inc. and Morgan Stanley, the two biggest U.S. securities firms, tumbled the most ever in New York after a government rescue plan for American International Group Inc. failed to ease the credit contraction.


New housing construction at 17-year low

So when will the indictments begin?

What about stockholder lawsuits against these corporations and corporate execs responsible for the mess? What about Fidelity suing on behalf of its
mutual fund holders? The basis for the lawsuit would be fraud, of course.
And of course, we would need to sue S&P and Moody's for their fraudulent
ratings.......

Face it, anyone with an IRA is in deep kimchee.

We should have let AIG go belly up, IMO. The Fed bailout certainly
does not seem to have helped the many millions of people with IRAs.

[ewmayer]

Reserve's Money Fund "Breaks the Buck": Reserve Primary Fund (RFIXX), the oldest US money-market fund, became the first in 14 years to break the buck after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.

BOSTON (AP) -- The assets of a money-market fund that held $62 billion three months ago have fallen below a safety benchmark intended to ensure investors who put money in can get it all back - just the second unsettling instance in which a fund has exposed investors to potential losses in the nearly four-decade history of money-market funds.

Reserve Management Co.'s announcement that its Reserve Primary Fund had "broken the buck" after its assets fell sharply because of soured investments in Lehman Brothers Holdings Inc. marked the first such investor exposure to money-market losses since 1994.

New York-based Reserve said the value of $785 million in debt securities issued by Lehman and held by the Primary Fund were written down to zero as of Tuesday afternoon - a consequence of Lehman's collapse and bankruptcy after the federal government failed to bail out the investment bank over the weekend.

Money-market funds normally maintain assets of at least $1 for every dollar invested in funds, and are supposed to return interest to investors in the form of dividends.

Money funds not backed by FDIC

Money funds are normally seen as among the safest investments after cash and bank deposits because they're required under federal regulations to invest only in low-risk securities. However, they lack the federal deposit insurance that other safe investments such as bank accounts offer. Consequently, money funds typically offer smaller returns than investments such as stocks, though they have become increasingly popular amid recent market turmoil, and enable investors to easily put money in and take it out when needed.

Reserve said Tuesday night that "unprecedented market events of the past several days" had reduced the value of the fund's holdings to 97 cents for each $1 put in by investors -- an event known as "breaking the buck."
...

Reserve said Tuesday night that effective immediately, investors redeeming cash from the fund will not receive their money until as long as seven days later -- the maximum allowed by law.

...

In most instance in which a fund is in danger of breaking the buck, the fund's parent firm supplies cash from its own holdings or finds money elsewhere on the open market to maintain an adequate fund balance, said Peter Crane, president of Westborough, Mass.-based Crane Data, publisher of the money-market fund newsletter, Money Fund Intelligence.

Note: That assumes that the parent firm can *afford* to bail out the money fund. I predict that this will not be last money fund to break the buck this year, and some of the haircuts are going to to be a lot worse than the relatively small [so far] 3% loss sustained by Reserve.

Mish Weighs In on the Legality of the AIG Takeover

AIG Bailout: Fed Loophole 13.3

In light of the Fed sponsorship of AIG to the tune of $85 billion or more at taxpayer risk (See Nationalization of AIG: Treasury to get 80% stake in return for $85 billion), inquiring minds just might be asking "By what authority can the Fed lend to insurance companies?"

It`s a good question given that the Fed is widely thought to be authorized to lend only to banks. It turns out the Fed can lend to pizza parlors if it wants to, with a questionable interpretation of the Federal Reserve Act.

Basically, as long as the Fed board of governors can muster 5 votes for an "unusual and exigent circumstances" claim, they can do pretty much whatever the hell they want. It`s effectively the Federal Reserve analog of martial law. Which begs the question: if we are now seeing "unusual and exigent circumstances" on a nearly-daily basis, why does Treasury Secretary Paulson continue with the almost-daily "Our banking system is fundamentally sound" lie? Those two positions are mutually incompatible.

[only_human]

Originally Posted by ewmayer

Basically, as long as the Fed board of governors can muster 5 votes for an "unusual and exigent circumstances" claim, they can do pretty much whatever the hell they want. It`s effectively the Federal Reserve analog of martial law. Which begs the question: if we are now seeing "unusual and exigent circumstances" on a nearly-daily basis, why does Treasury Secretary Paulson continue with the almost-daily "Our banking system is fundamentally sound" lie? Those two positions are mutually incompatible.

Good question; and one that ironically echos the much lampooned McCain quote that "the economy is fundamentally sound." Here is the history of legislation involved (2002): Lender of More Than Last Resort

Section 13(b) is dead! Long live Section 13[3]!

Section 13(b) may be a memory, and a discomfiting one at that, but Section 13 paragraph 3 (that language originally found in a 1932 highway bill) is alive and well in the Federal Reserve Act. As we've seen from the above illustrations, this amendment allows, "in unusual and exigent circumstances," a Reserve bank to advance credit to individuals, partnerships and corporations that are not depository institutions. At least five members of the Federal Reserve Board must agree with the credit advance, and the Reserve bank must show that such credit was not available elsewhere.

To some this lending legacy is likely a harmless anachronism, to others it's still a useful insurance policy, and to others it's a ticking time bomb of political chicanery. Doubtless, the discount window will continue to evolve.

I got this link while reading WSJ blogs. I have been following the WSJ blogs more avidly lately because they had interesting and somewhat detailed dirt on the Fannie Mae/Freddie Mac action on the Friday before that weekend.

[cheesehead]

Originally Posted by cheesehead

... other than appointing Alan Greenspan (the first time, that is)?

My bad. Gotta remember to look up that sort of thing. I recalled that Reagan didn't reappoint Volcker in 1987, but thought there was someone else who served between Volcker and Greenspan.

(But wait! Republicans had the Senate majority then, didn't they?)

Wrong there, too -- 55 Democrats in 1987. (http://www.senate.gov/pagelayout/his...s/partydiv.htm)