Global Financial Crisis (Was: Subprime Meltdown)

[only_human]

One thing I haven't been paying attention to is the Credit Default Swap obligation market. I'm currently looking around to remedy my inattention. So far I don't like what I see:
Buffett's "time bomb" goes off on Wall Street

As it grew -- according to the industry's trade group, the credit default market grew to $46 trillion by the first half of 2007 from $631 billion in 2000 -- all that changed.

An over-the-counter market grew up and some of the most active players became asset managers, including hedge fund managers, who bought and sold the policies like any other investment.

And in those deals, they sold protection as often as they bought it -- although they rarely set aside the reserves they would need if the obligation ever had to be paid.

It's the Derivatives, Stupid! Why Fannie, Freddie, AIG had to be Bailed Out

We the taxpayers are on the hook for the Fed’s "enhanced liquidity facilities," meaning the loans it has been making to everyone in sight, bank or non-bank, exercising obscure provisions in the Federal Reserve Act that may or may not say they can do it. What’s going on here? Why not let the free market work? Bankruptcy courts know how to sort out assets and reorganize companies so they can operate again. Why the extraordinary measures for Fannie, Freddie and AIG?

The answer may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an "event of default" that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.

[ewmayer]

Stocks Jump in U.S., Worldwide on Bank-Bailout Measures, Short-Sale Curbs: U.S. stocks surged in the biggest two-day global rally in 38 years as the government announced plans to purge banks of bad assets and crack down on speculators who drove down shares of financial companies.

In the quotes within the article, we find our moron of the week:

``For sentiment the worst could be over for financials,'' said Neil Dwane, chief investment officer for Europe at Allianz Global Investors' RCM unit, where he helps oversee $65 billion.

You moron - today was 100% a government-forced short-covering rally. NOTHING about the fundamentals has changed, except that the government is now ready and willing to use taxpayer money to buy unlimited amounts of the toxic assets held by banks. Consumers are still massively in debt, banks are still unwilling to lend to each other, foreign central banks are still dumping our agency paper, and the credit rating of the United States is now at risk - would you rate the colossal, practically-unpayable debt of a nation like ours, which is still busily digging itself into the debtor hole, AAA? I sure as hell wouldn't. Luckily, there are still enough non-morons out there to call bullshit on the "bull market is back!" pumptards:

John Bogle, who created the $106 billion Vanguard 500 Index Fund in 1976, said the U.S. government is ``punch drunk'' given its proposals to rescue the financial system.

``We're playing a game of casino capitalism, interfering with the way the market is working,'' Bogle, 79, said in a telephone interview today from Valley Forge, Pennsylvania. ``The government seems punch drunk. It doesn't seem systematic.''

However, by eliminating the possibility for even the usual hedging-of-long-positions-using-shorts, the fascists making up the "new rules just out today!" financial markets rules as they go have removed an important shock-dampening mechanism from the markets. If financials resume their fall without any shorts to cushion the blow by covering their positions, things could get interesting very quickly indeed.

By the way, the Bloomberg article didn't mention when the biggest 2-day rally of all time was, so let me tell you: October 1929. That one did not end well...

So shorts Are To Blame, Eh? SEC should Look In the Mirror Instead

Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers: 'They constructed a mechanism that simply didn't work'

The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch.

The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

Making matters worse, according to Mr. Pickard, who helped write the original rule in 1975 as director of the SEC's trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker-dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies.

"They constructed a mechanism that simply didn't work," Mr. Pickard said. "The proof is in the pudding — three of the five broker-dealers have blown up."

[cheesehead]

Originally Posted by jasonp

Whenever the world gets me pissed off, I go back to Richard Hamming's famous speech:

WOW! Great speech! And I haven't even gotten to the part you quoted.

In fact, I'd recommend to everyone here that they start at the beginning and read the whole thing!

[ewmayer]

Some nice commentary [not yet banned by government decree, but that could change at any moment] on the Naked Capitalism blog about the possible unintended consequences of the SEC's latest knee-jerk short-selling ban:

Ban on Short-Selling Will Hurt Rather Than Help Broker-Dealers

One possible consequence is that hedge funds forced to exit positions by the SEC ban on short-selling might take losses big enough to lead to a run of the fund, forcing liquidation of positions. That rapid selling could produce distressed prices, and in a worst-case scenario, brokers could take losses if collateralized positions fell in value and hedge funds were unable to meet margin calls.

Note Morgan Stanley and Goldman are far and away the biggest prime brokers.

John Hempton sets forth another unintended consequence which is more certain to happen and broader in its impact and puts none to fine a point on it in his post title, "SEC Tries to Bankrupt Wall Street":

Last I looked when I was short a stock the broker borrowed the stock (yes, Virgina you do get a borrow) and sold it. They then had cash.

That cash was not available to me - it was pledged to whoever provided the stock to remove or reduce the risk that the stock won't be returned.

That means it is generally available to the broker (who will generally lend me the stock from their inventory or margin or prime broker clients).

Now there are a few hundred billion of short-sales out there. Probably more than normal - but a lot in almost all markets.

And those short sales produce cash balances of a few hundred billion, most of which are available to Wall Street brokers.

If you ban short-selling those balances will taken away from Wall Street brokers.

That would be rather unpleasant. Last I looked the debt market was skittish and was hardly going to replace that money.

So I conclude that the SEC in their "infinite wisdom" are going to stick the knife into Wall Street and bankrupt the lot of them. For political optics. So they can be seen to be doing something about short-selling.


The only reason the damage might not be as broad-scale as Hempton fears is that the "temporary" ban is on shorting financial stock. Oh wait, financial represented (until they started hitting the rocks) 40% of S&P earnings.

And there is something far simpler that the SEC could do. Just re-implement the uptick rule (it means you can short only when the last sale price was above the immediately prior sale). That rule comported itself well for over 50 years but for some unfathomable reason (no doubt at the behest of Wall Street) was eliminated b the SEC.

One of the commentators adds a nice point reminding us who it was that removed the uptick rule to begin with:

Yes, it's a mistake to ban short selling outright.
Yes, short sellers are unfairly maligned.

What they should have done is to reinstitute the short uptick rule, which [SEC chairman] Cox repealed in summer 2007 after 70 years in force.

This would eliminate a legitimate problem: bear raids on financial firms during a general market panic. These differ from regular short selling, in that you can actually destroy the business fundamentals just by moving the price, creating a self-fulfilling race to the exits.

This is why the short uptick rule was originally created. It was an elegant, non-invasive way to slow coordinated short selling without banning it outright.

We should listen to the listen to the lessons of the Great Depression, or be doomed to relearn them.

[only_human]

Originally Posted by jasonp

Whenever the world gets me pissed off, I go back to Richard Hamming's famous speech:

Originally Posted by cheesehead

WOW! Great speech! And I haven't even gotten to the part you quoted.

In fact, I'd recommend to everyone here that they start at the beginning and read the whole thing!

Thank you for recommending it. I didn't realize that it was from the Hamming and about Bell Labs too. It is beyond calming -- it is exciting and inspiring and deft and feels very wise.

[ewmayer]

Senator Chris Dodd's top campaign contributors:

Top 5 Contributors, 2003-2008
Citigroup Inc $310,294
SAC Capital Partners $282,000
United Technologies $263,400
American International Group $224,678
Bear Stearns $205,600

Top 5 Industries, 2003-2008
Securities & Investment $4,245,796
Lawyers/Law Firms $1,976,063
Insurance $1,416,972
Real Estate $1,262,791
Commercial Banks $850,544

Senator Chuck Schumer's top contributors:

Top 5 Contributors, 2003-2008
Citigroup Inc $80,800
UBS AG $79,750
Paul, Weiss et al $67,000
Kasowitz, Benson et al $64,250
MetLife Inc $59,000

Top 5 Industries, 2003-2008
Securities & Investment $1,370,339
Lawyers/Law Firms $1,203,868
Real Estate $751,551
Misc Finance $321,948
Commercial Banks $285,500

Rep. Barney Franks' top contributors

Top 5 Contributors, 2007-2008
Brown Brothers Harriman & Co $29,300
Manulife Financial $15,000
American Bankers Assn $11,300
American Society of Appraisers $11,000
Bernstein, Litowitz et al $10,900

Top 5 Industries, 2007-2008
Real Estate $179,851
Securities & Investment $168,900
Lawyers/Law Firms $154,018
Insurance $126,298
Misc Finance $52,700

[ewmayer]

John McCain's Top 5 Contributors, 2003-2008

Merrill Lynch $293,010
Citigroup Inc $251,851
Goldman Sachs $223,995
Morgan Stanley $212,821
AT&T Inc $187,673

Barack Obama's Top 5 Contributors, 2003-2008

Goldman Sachs $689,280
University of California $531,070
JPMorgan Chase & Co $449,671
Citigroup Inc $411,504
Harvard University $407,452

[cheesehead]

Remember, folks, it is a Republican administration that is doing all these communistic things, just as it was a Republican administration that instituted our first peacetime wage and price controls during the Nixon administration.

Remember that the next time you hear a Republican claim that their party wants "smaller government" or wants to "reduce government spending".

And it's not a Republican administration that's just barely taken over from a preceding Democratic administration, so that key appointees were put in by the other party's president. This administration has had over seven-and-a-half years to replace any presidential appointees that it didn't like who are proposing these unprecedented actions.

And when Republicans protest that they're just doing what is "necessary", just as the War on Terror was "necessary", remind them that in both cases the necessity was brought about by their previous willful inattention, during their administration, to threats (terrorism, greed) known, at least by the other side, to have caused trouble in the past.

- - -

But it's not enough to remember all that during the upcoming November election. Lots and lots of people will remember those things that long.

What's important is that you make sure you, and your children, and your grandchildren and your great-grandchildren will remember these lessons of history far into the future, and that they are, as far as possible, permanently added to what is taught about American history in schools. The current administration has made many of the same mistakes that past administrations, of both parties and even of other countries, made, and which could have been avoided if it were not so arrogant, ignorant, and ideological in its decisions.

- - -

And make very, very sure that _you_ do not think that "(y)our side" is incapable of ever making similar mistakes, though perhaps in different directions. We're all human.

Try, as hard as you can, to remind the upcoming probably-Democratic administration that swinging the pendulum to an opposite extreme is NOT a solution, but a perpetuation of the problem!

[ewmayer]

Bush's $700 Billion Rescue Plan Gives Treasury Power Unchecked by Courts: The Bush administration asked Congress for unchecked power to buy $700 billion in bad mortgage investments from U.S. financial companies in what would be an unprecedented government intrusion into the markets.

Sept. 20 (Bloomberg) -- The Bush administration asked Congress for unchecked power to buy $700 billion in bad mortgage investments from U.S. financial companies in what would be an unprecedented government intrusion into the markets.

The plan, designed by Treasury Secretary Henry Paulson, is aimed at averting a credit freeze that would bring the financial system and economic growth to a standstill. The bill would bar courts from reviewing actions taken under its authority.

``It sounds like Paulson is asking to be a financial dictator, for a limited period of time,'' said historian John Steele Gordon, author of ``Hamilton's Blessing,'' a chronicle of the national debt. ``This is a much-needed declaration of power for the Treasury secretary. We can't wait until the next administration in January.''

The plan necessitates raising the ceiling for the national debt and spends as much money as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. Paulson is asking for the power to hire asset managers and award contracts to private companies.

...

Democratic presidential nominee Barack Obama said in a radio address that he ``fully supports'' Paulson and Bernanke's efforts to stabilize the financial system. The plan, however, should benefit both main street and Wall Street, he said.

Republican Presidential nominee John McCain ``looks forward'' to reviewing the proposal while focusing at least in part on ``minimizing the burden on the taxpayer,'' said Jill Hazelbaker, communications director for the McCain campaign.

The ban on legal challenges of actions by Treasury is ``distasteful, it's unfortunate and it's bad precedent, but this is an emergency and you have to act,'' said Jerry Markham, a law professor at Florida State University and author of ``A Financial History of the United States.''

``What you don't want happen is to have lawsuits that will slow things down and cause problems,'' he said.

Great Bill Moyers interview yesterday with Kevin Phillips - talks about how both of the major parties are deeply complicit in the financial deregulation and Wall-Street-run national looting operation of the past 25 years:

Bill Moyers Journal - September 19, 2008: Bill Moyers sits down with former Nixon White House strategist and political and economic critic Kevin Phillips, whose latest book BAD MONEY: RECKLESS FINANCE, FAILED POLITICS, AND THE GLOBAL CRISIS OF AMERICAN CAPITALISM explores the role that the crumbling financial sector played in the now-fragile American economy.

[ewmayer]

Shock Forced Paulson's Hand - A Black Wednesday on Credit Markets; 'Heaven Help Us All'

When government officials surveyed the flailing American financial system this week, they didn't see only a collapsed investment bank or the surrender of a giant insurance firm. They saw the circulatory system of the U.S. economy -- credit markets -- starting to fail.

Huddled in his office Wednesday with top advisers, Treasury Secretary Henry Paulson watched his financial-data terminal with alarm as one market after another began go haywire. Investors were fleeing money-market mutual funds, long considered ultra-safe. The market froze for the short-term loans that banks rely on to fund their day-to-day business. Without such mechanisms, the economy would grind to a halt. Companies would be unable to fund their daily operations. Soon, consumers would panic.

For at least a month, Mr. Paulson and Treasury officials had discussed the option of jump-starting markets by having the government absorb the rotten assets -- mainly financial instruments tied to subprime mortgages -- at the heart of the crisis. The concept, dubbed Balance Sheet Relief, was seen at Treasury as a blunt instrument, something to be used in only the direst of circumstances.

One day later, Mr. Paulson and Federal Reserve Chairman Ben Bernanke sped to Congress to seek approval for the biggest government intervention in financial markets since the 1930s. In a private meeting with lawmakers, according to a person present, one asked what would happen if the bill failed.

"If it doesn't pass, then heaven help us all," responded Mr. Paulson.

[only_human]

Statutory Debt Limit
$9,815 Billion
10,615 Billion July 30, 2008
11,315 Billion proposed currently
Treasury’s Financial-Bailout Proposal to Congress WSJ's Real Time Economics Blog

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.