Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

As the crooked banksters and their cronies in Washington like to tell us, unprecedented times call for unprecedented measures. In that spirit, I am awarding a second Moron of the Week [hell, I may have to award one each day this week] to "Uncle" Ben Bernanke:

Treasury Should Avoid Paying `Fire Sale' Prices for Assets, Bernanke Says

Federal Reserve Chairman Ben S. Bernanke signaled that the government should buy devalued assets at above-market values to make its proposed $700 billion rescue package most effective in combating the financial crisis.

``Accounting rules require banks to value many assets at something close to a very low fire-sale price rather than the hold-to-maturity price,'' Bernanke said in testimony to the Senate Banking Committee today. ``If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.''

"Substantial benefits" to whom, exactly? Certainly not the taxpayer.

Bernanke's remarks, an unusual departure from his prepared testimony, come as lawmakers and the Bush administration negotiate a rescue plan aimed at easing the worst financial crisis since the Great Depression. The Fed chief said paying prices higher than the bad assets would fetch in the open market would help ``unfreeze'' credit markets and aid the economy.

Analysts said Bernanke is essentially advocating that government use a pricing model that assumes that the debt will be paid in full over a long period of time. That is different from the mark-to-market model used by investment banks that prices assets at what they are worth on a given day.

If that pricing model were remotely appropriate for the kind of debt we`re talking about, WE WOULDN`T BE IN THIS MESS TO BEGIN WITH. Hey Ben, you clueless fool [or complete "Tool of Wall Street" - take your pick], remember the other "pricing model" you and your mentor Greenspan were advocating for most of the past decade? The one about "historically speaking, housing prices will always go up"?

The risk is that the model does not provide transparent pricing of the assets taxpayers are taking on, said Ann Rutledge, partner at R&R Consulting in New York, a firm that specializes in structured finance. Many of the securities ``are not going to pay at maturity,'' Rutledge said.

In slightly less politic language than used by Mr. Rutledge: Are you frickin' out of your mind?

Der Spiegel | The World Shouldn't Have to Bear the Burden for America's Lapses: The US government is buying bad debt for $700 billion. Now Washington is asking other countries to jump in and help, too, but the Germans are bowing out. Believing that the rescue package sends the wrong signal, experts from the country's leading economics think tanks argue it's the right call.

[only_human]

Originally Posted by ewmayer

As the crooked banksters and their cronies in Washington like to tell us, unprecedented times call for unprecedented measures. In that spirit, I am awarding a second Moron of the Week [hell, I may have to award one each day this week] to "Uncle" Ben Bernanke:

Treasury Should Avoid Paying `Fire Sale' Prices for Assets, Bernanke Says

"Substantial benefits" to whom, exactly? Certainly not the taxpayer.

If that pricing model were remotely appropriate for the kind of debt we`re talking about, WE WOULDN`T BE IN THIS MESS TO BEGIN WITH. Hey Ben, you clueless fool [or complete "Tool of Wall Street" - take your pick], remember the other "pricing model" you and your mentor Greenspan were advocating for most of the past decade? The one about "historically speaking, housing prices will always go up"?

Perhaps "substantial benefits" refers to the trickle down theory. Something is trickling down alright and the people getting wet don't like it.

So this is now the big conflation of two problems:

• Wall Street is choking on toxic paper that strangles trade and economic growth
• Wall Street has partied hard and is running out of cocaine and needs more cash

Remember the last big conflation? Al Qaeda & Iraq

If toxic paper is clogging the system, buying that at market prices supposedly would solve the problem. So the companies take a massive loss. So they are takeover candidates. At least the logjam would be gone.

Seems to me that if the powers that be really want to bail out these companies they could do it cleanly in two separate stages:

• buy the toxic paper at market prices
• give them cash

Then the people stuck with the bill could at least cleanly see where the money is going. The mortgage backed securities are toxic supposedly because of late payments, etc. How about a bailout of a month or two of payments there instead? Wouldn't that make the paper less toxic? Or bring back usury laws. 20% interest on a mortgage? The Fed has been giving cheap money to banks supposedly to help out the little guy and they in turn get credit card rates on mortgages?

No Way
No How
No Bailout (on these terms)

This way stinks.

[ewmayer]

http://media.tumblr.com/h7M8Wzwmle62...TTv3o1_400.jpg

[Robert Holmes]

This *is* pretty scary:

http://www.forbes.com/home/2008/09/2...23bailout.html

In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.
"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

...

[cheesehead]

I apologize for having termed recent Bush administration actions "communistic" at one time. I get it now: "Cronyistic".

[only_human]

Originally Posted by 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.

Originally Posted by Robert Holmes

This *is* pretty scary:
http://www.forbes.com/home/2008/09/2...23bailout.html

From the above quoted link:

He (Committee Chairman Chris Dodd, D-Conn) also points to one other concern: Paulson, the bill's chief architect, is scheduled to leave office in just four months.

"I'm not about to give a $700 billion appropriation to a secretary I don't know yet," says Dodd.

That is yet scarier -- unchecked power in a soon to be open position. By mentioning Godwin's Law, theoretically I can't self-invoke it but it would be nice to not have another surname or mustache grooming style effectively outlawed for near perpetuity.

Bloomberg.com says that Warren Buffet's holding company (investing in Goldman Sachs) is "buying $5 billion of perpetual preferred stock with a 10 percent dividend. Berkshire also gets warrants to buy $5 billion of common stock at $115 a share at any time in the next five years. The common stock closed yesterday at $125.05, providing Buffett with an instant paper profit of $437 million."

Now I respect Warren Buffet, His holding company is cash rich at the moment and making strategic purchases with no funny business. Also he warned everyone about a possible meltdown quite some time back. But remind me again why we are bailing out these companies when people are buying into them.

[ewmayer]

Originally Posted by only_human

Bloomberg.com says that Warren Buffet's holding company (investing in Goldman Sachs) is "buying $5 billion of perpetual preferred stock with a 10 percent dividend. Berkshire also gets warrants to buy $5 billion of common stock at $115 a share at any time in the next five years. The common stock closed yesterday at $125.05, providing Buffett with an instant paper profit of $437 million."

Now I respect Warren Buffet, His holding company is cash rich at the moment and making strategic purchases with no funny business.

Maybe not by Buffett himself, but I noticed GS shares spike up by around $10 in the last half-hour of trading yesterday, so someone [likely quite a few people, courtesy of the Blackberrys which are ubiquitous on Wall Street] knew something and made a whole lot of money by piling in before the retail investors got the news.


Bush may talk bailout on prime time: The President might speak to the public about the proposed $700 billion bailout on TV as early as tonight to urge skeptical senators.

Let me guess: Grave threats to our national economy ... bailout is bad, but alternative is worse ... must act NOW! NOW! NOW! ... Have full confidence in fellow liars Paulson and Bernanke ... Economy is fundamentally sound|strong|resilient|really-quite-sexy, but faces "unprecedented headwinds" ... American workers are the greatest on earth ... this is not a reward to Wall Street speculators, it`s a *bailout* of Wall Street speculators ... whole world is watching and waiting for us to act ... decisive action is required ... cannot delay ... you`re either for the bailout or a supporter of terrorists ... God bless the frickin` U. S. of A, y`all!


FBI probing bailout firms: Investigators start search for fraud at Fannie Mae, Freddie Mac, Lehman Brothers and AIG, sources say.

Uh, isn`t that kind of thing the SEC`s job? Oh wait, they`re run by an incompetent buffoon whose playbook reads "No overvalued stock left behind."


Buffett Calls Credit Crisis an "Economic Pearl Harbor," Backs Paulson Plan Billionaire investor: Warren Buffett, likening the market turmoil to an ``economic Pearl Harbor,'' said his $5 billion investment in Goldman Sachs Group Inc. is a vote of confidence in the Treasury's $700 billion bank rescue plan.

If the Credit Crisis is an "Economic Pearl Harbor," then Warren Buffett is the one scooping up damaged Hawaiian shipyards at a hefty discount and pressing President Roosevelt to "declare war without delay". Recalling the Little Orphan Annie cartoons, maybe we should start calling him "Daddy Warrenbucks".


China Shuns Paulson's Free Market Message as Financial Meltdown Burns U.S.

Eighteen months ago, U.S. Treasury Secretary Henry Paulson told an audience at the Shanghai Futures Exchange that China risked trillions of dollars in lost economic potential unless it freed up its capital markets.

"An open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention," Paulson said.

LOL, how`s that whole "unfettered free market capitalism r00lz!" thing working out for ya, Hank? Hey, have you and Bennie tried on those new Mao suits Chairman Hu sent you last week? How`s the fit?


And speaking of the role reversal betwixt the U.S. and the foreign capital markets...

Rumors about the influence of FCBs on the bailout proposal:

I`m not normally a big conspiracy-theory buff, but there is enough evidence that foreign central banks put the squeeze on Paulson earlier this summer to bail out Fannie and Freddie so as to make their GSE bond bets go from bad to good that it seems not implausible that a similar thing is happening behind the scenes currently. Spotted on a Yahoo Finance message board:

Who is really putting the squeeze on Paulson and the Fed? Large foreign bondholders and they have America by the balls. That's why the Fed and Treasury are pushing to include foreign firms in the bailout.

This video lays out the story of who is really behind this latest situation and how it is likely to play out better than any explanation I have heard to date. Check out the vid:

YouTube: The Empire Strikes Out

Skip to 15:52 min if you don't care how we got here but do want to know what to expect next.

[ewmayer]

NYTimes Op-Ed | The Buck Stopped Then

By JAMES GRANT
Published: September 23, 2008

CRITICS of the administration’s Wall Street bailout condemn the waste of taxpayer dollars. But the taxpayers aren’t the weightiest American financial constituency, even in this election year. The dollar is the world’s currency. And it is on the world’s opinion of the dollar that the Treasury’s plan ultimately hangs.

It hangs by a thread, if Monday’s steep drop of the greenback against the euro is any indication. We Americans, constitutionally inattentive to developments in the foreign exchange markets, should be grateful for what we have. That a piece of paper of no intrinsic value should pass for good money the world over is nothing less than a secular miracle. We pay our bills with it. And our creditors not only accept it, they also obligingly invest it in American securities, including our slightly shop-soiled mortgage-backed securities. Every year but one since 1982, this country has consumed much more than it has produced, and it has managed to discharge its debts with the money that it alone can lawfully print.

No other nation ever had it quite so good. Before the dollar, the pound sterling was the pre-eminent monetary brand. But when Britannia ruled the waves, the pound was backed by gold. You could exchange pound notes for gold coin, and vice versa, at the fixed statutory rate.

Today’s dollar, in contrast, is faith-based. Since 1971, nothing has stood behind it except the world’s good opinion of the United States. And now, watching the largest American financial institutions quake, and the administration fly from one emergency stopgap to the next, the world is changing its mind...[Full Story]

NYTimes Op-Ed | The Power of Negative Thinking

By BARBARA EHRENREICH
Published: September 23, 2008

GREED — and its crafty sibling, speculation — are the designated culprits for the financial crisis. But another, much admired, habit of mind should get its share of the blame: the delusional optimism of mainstream, all-American, positive thinking.

As promoted by Oprah Winfrey, scores of megachurch pastors and an endless flow of self-help best sellers, the idea is to firmly believe that you will get what you want, not only because it will make you feel better to do so, but because “visualizing” something — ardently and with concentration — actually makes it happen. You will be able to pay that adjustable-rate mortgage or, at the other end of the transaction, turn thousands of bad mortgages into giga-profits if only you believe that you can.

Positive thinking is endemic to American culture — from weight loss programs to cancer support groups — and in the last two decades it has put down deep roots in the corporate world as well. Everyone knows that you won’t get a job paying more than $15 an hour unless you’re a “positive person,” and no one becomes a chief executive by issuing warnings of possible disaster.[Full Story]

SEC declares automakers, IBM as "financial firms"

The SEC`s list of short-sale-banned "financial companies" keeps expanding - a couple days ago they added the likes of Ford, GE and GM to the list. Today they added IBM and a bunch of REITs:

NYSE-Listed Companies Added to the Short Sale List as of Wednesday Morning, Sept. 24, 2008

Some interesting members of the latest list that caught my eye, along with my speculation as to the possible explanation for each:

MHS Medco Health Solutions, Inc. - "Medco Health Solutions, Inc. provides pharmacy benefit management services in the United States and Puerto Rico"; clearly this firm is vital to the national interest, and must be protected against market speculators

BEE Strategic Hotels & Resorts, Inc. - Their hotel-lobby slot machines are "too big too fail" and need protection from market turmoil

MHP The McGraw-Hill Companies, Inc - Allowing McGraw-Hill to remain a target of evil short sellers clearly puts their book publishing business and the broader U.S. economy at "systemic risk"

Moody's Corporation - Having Warren Buffett's holding company as your major institutional shareholder apparently has some benefits.

And hey, why restrict ourselves to just U.S. Banks? Many foreign banks must not be allowed to have their share prices fall: Just check out the number of foreign banks on the ever-expanding list:

Added evening of 22 Sept:
1. IVZ Invesco Ltd.
2. HBC HSBC Holdings P L C
3. MET Met Life, Inc.
4. PRS Primus Guaranty, Ltd
5. FNF Fidelity National Financial Inc.
6. BLK Blackrock, Inc.
7. AB Alliance Bernstein Holding L.P.
8. OB One Beacon Insurance Group
9. IBN ICICI Bank Limited
10. FBR Friedman, Billings, Ramsey Group Inc
11. DFR Deerfield Capital Corp
12. WBK Westpac Banking Corp
13. IDC Interactive Data Corp
14. CYN City National Corp
15. NNI Nelnet, Inc
16. NLY Annaly Capital Management, Inc
17. CSE CapitalSource Inc
18. AGM Federal Agricultural Mortgage Corporation
19. F Ford Motor Company
20. CT Capital Trust, Inc
21. UBB Uniao de Bancos Brasileiros S.A.
22. ITU Banco Itaú Holding Financeira S.A.
23. BMA Banco Macro S.A.
24. AMB AMB Property Corporation
25. MHP The McGraw-Hill Companies, Inc
26. PLD ProLogis
27. NRF NorthStar Realty Finance Corp
28. SLM SLM Corporation
29. RWT Redwood Trust, Inc
30. IX ORIX Corporation
31. STD Banco Santander S.A.
32. KB Kookmin Bank
33. NBG National Bank of Greece S.A.
34. AZ Allianz SE
35. BBD Banco Bradesco S.A.
36. BCH Banco de Chile
37. SAN Banco Santander - Chile
38. BFR BBVA Banco Frances S.A.
39. HDB HDFC Bank Limited
40. WF Woori Finance Holdings Co., Ltd

Added morning of 22 Sept:

1. GLG GLG Partners, Inc.
2. GE General Electric Co.
3. OCN Ocwen Financial Corporation
4. KBW KBW, Inc.
5. GFG Guaranty Financial Group Inc.
6. MFG Mizuho Financial Group, Inc.
7. FMR First Mercury Financial Corporation
8. STC Stewart Information Services Corporation
9. FCF First Commonwealth Financial Corporation
10. MTB M&T Bank Corporation
11. DFS Discover Financial Services
12. BMO Bank of Montreal
13. TD Toronto Dominion Bank
14. CM Canadian Imperial Bank of Commerce
15. FMD The First Marblehead Corporation
16. BBV Banco Bilbao Vizcaya SA
17. CIB BanColombia SA
18. LM Legg Mason, Inc.
19. NFP National Financial Partners Corp.
20. AXP American Express Company
21. CIT CIT Group Inc.
22. GM General Motors Corporation
23. HIG The Hartford Financial Services Group
24. ADS Alliance Data Systems Corporation
25. ALD Allied Capital Corporation
26. RAS RAIT Financial Trust
27. DRL Doral Financial Corporation
28. FSR Flagstone Reinsurance Holdings
29. MCO Moody's Corporation
30. COF Capital One Financial Corporation
31. CS Credit Suisse Group AG

What next - a blanket "this company makes financial transactions of some kind, hence it is a 'financial firm'" decree? The desperation is palpable...

[rogue]

From this article:

A Maryland bank scored a major victory in a mortgage lending case Wednesday when a federal appellate court rejected class-action status for a Cedarburg couple’s suit against Chevy Chase Bank.

In a 2-1 decision, the 7th Circuit U.S. Court of Appeals in Chicago reversed a 2007 ruling by U.S. District Court Judge Lynn Adelman, who granted the suit class-action status — a certification that could have resulted in the rescission of more than 8,000 mortgages at a cost of more than $200 million to the giant Maryland bank.

Left standing is Adelman’s ruling that the bank violated the Truth-in-Lending Act by not clearly disclosing the terms of the adjustable rate mortgage it wrote to Bryan and Susan Andrews in 2004. The Andrewses said they thought their interest rate was frozen at 1.95% for five years, when actually only their payments — not the rate — was fixed for that period.

They can still pursue a rescission of their mortgage — having their loan revoked and all of their fees and interest payments returned. Other Chevy Chase clients in the same bind, however, cannot receive the same relief unless they file and win their own legal action.

Had the suit retained its class-action status, all of the people who received adjustable rate mortgages from Chevy Chase between April 2004 and January 2007 and were given lending disclosure statements similar to those given to the Andrewses would be eligible for a loan rescission, plus attorney fees.

The case was closely watched by national lending and consumer advocate groups because of the expectation that a victory by Andrews could open the floodgates to similar class-action lawsuits.

“It was potentially a big-ticket item,” said Greg Taylor, an attorney for the American Bankers Association, one of six national trade groups to file friend of the court briefs in the case. “This was a significant decision.”

The 15-page decision by former Wisconsin Supreme Court Justice Diane Sykes brought an unusually sharp retort from Kevin Demet, the Andrewses’ lawyer.

“The opinion is a radical opinion written by a radical jurist,” he said in an interview.

“This decision is a gift to certain members of the banking industry at the expense of the consumers who were misled,” he said in a statement.

The Sykes opinion noted that although the law does not expressly prohibit using class-action suits in truth-in-lending cases, doing so in a rescission case would be unwieldy since each borrower’s situation is so different. Therefore, she reasoned, many of the class members would have to go to court to resolve their transactions, eliminating the efficiency that a class action is supposed to bring.

Supporting Sykes was Judge Daniel Manion, who like Sykes was appointed by a Republican president. Judge Terence Evans, named to the bench by a Democrat, cast the dissenting vote.

Jeffrey Sarles, Chevy Chase’s lawyer, argued the decision would benefit lenders and borrowers. A slew of class-actions suits could have cost lenders huge amounts of money, resulting in a further tightening of credit, he said.

Don't you just love the logic from Diane Sykes (appointed by GWB)? I read this as "we shouldn't punish a bank for predatory lending practices because we are in a recession". I doubt that the current financial crisis has anything to do with her decision. The continuing "let's bailout the banks to protect them" logic of the current administration is appalling.

[masser]

In the last three days, I have noticed that the rhetoric about the severity of this crisis has been ratcheted up - I have heard commentators say that if the bailout does not occur by the end of the week, we are going to have a Great Depression ("we're all screwed" - one local conservative AM radio commentator claimed). Is this just an attempt to sell the bailout plan?

Can anyone connect the dots for me? Things are bad on Wall Street and for any banks dealing with mortgages, but how does that lead to a Depression? And aren't we bypassing the "recession" stage? I am trying to stay informed (thanks Ernst, for all the links, commentary), but lately I feel like Dorothy in the Wizard of Oz. I can hear the Wizard's booming voice, but can't see behind the curtain...

[jasonp]

Originally Posted by rogue

From this article:

More info here