Consumer confidence in every section of New York state crumbled in the first quarter of 2008, according to a poll released today by the Siena Research Institute in Loudonville.
In fact, the numbers, which measure willingness to spend on big-ticket items like computers and cars, are so bad that the institute described them as a collapse.
Kind of like Harry Potter in Book 5? Kind of like Tanta after her "instant menopause" surgery?
Nothing good ever comes from anyone going through a "difficult period." You can tell yourself "it's just a phase," but the U.S. economy is a big toddler.
What other possible reason for lowering interest rates could he have had? That was clearly not directed at any short-term investment bank problems, right?
No one really knows what would happen if Bear Stearns failed. He himself said "Our financial system is extremely complex and interconnected",. It's difficult to believe that six months ago Bernanke didn't understand the impact of falling home prices, hence his claim that "subprime was contained and the spillover would be minimal", and then all of the sudden he has detailed understanding of the impact of a single IB going bust....so much so that he is willing to throw taxpayer dollars at it.
So he went from clueless about the problem, to someone who has a detailed grasp of the consequences and is willing to spend our money to prevent it.
From: "You're in no danger"
To: "I will save you!"
The fact that a banker is the focal point for addressing economic concerns illustrates the fundamental problem the US has right now:
The US economy has become focused on the creation of money as opposed to the creation of actual wealth.
Money being a proxy for wealth it's easy to confuse the two, but in the end money is just a promise of wealth, not actual wealth.
Turning to an instituation that only has the ability to create promises of wealth as the lead in "making the economy better" is simply going to lead us to poverty as all our hard work and best minds are sucked up by the financial system.
The financial system is just supposed to play a supporting role to wealth creation -- financial instruments and all the effort that go into them create no actual wealth directly.
If the financial system continues to play the lead role in the economy, with productive economic output merely a bit player, we don't have much of a future to look forward to.
Clarity: " "It not appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,"
I called Senator Dodd's office this morning. After being transferred four times, I spoke with his assistant who is preparing for the Bernanke testimony tomorrow before the Senate Banking Committee. This fellow is very well educated and understands the constitutional issues that are at stake with the BSC bailout using taxpayers dollars and bypassing Congress.
Unless this transaction is reversed, the future is even more ominous than any of us can imagine.
Note that forecasts continued to be ratcheted downward!
BTW, I can't help but continue to note how the Fed (implicity) cites the "systemic risk" in a BSC failure and yet fails to acknowledge any part in allowing such circumstances to arise in the first place.
have you read American Theocracy by Kevin Phillips? A third of the book tells the same story of the perils of letting the financial sector rule the nation.
You are very politely saying that Bernanke ans Wall Street have no regard for the American taxpayer, which is normal because he never had citizens call his office and complain. We are here to do the dirty work and call out Bernanke on this careless view of the world, where taxpayer bail-outs are perfectly normal.
Do we really want or need a financial system that is "extremely complex and interconnected"?
If we are going to have such a system, in which the society in general must take on the burden of seeing that corporations don't fail, shouldn't the society in general receive a greater share of the benefits? After all, the party at risk usually gets the biggest rewards.
You know the part about how he sat back and watched everything become interconnected.
He omitted the fact that now the job is to partition off taxpayer liable institutions(banks) from those which are not(everything else).
Surely he is not so foolishly optimistic nor arrogant enough to believe that the Fed has even the slightest fraction of the capacity necessary to 'repo' ALL of the horrible investments made over the last 8+ years. The existing leverage in the system demands no less than damn near ALL of it to be 'repo'ed' to prevent insolvency.
Can someone with testicular fortitude please take control of this lunacy?
I thought Greenspan told us it was good to have a system that "distributed risk"?
I guess the resulting system is actually "extremely complex and interconnected," and that distribution of risk simply means that no player in the game can be allowed to fail due to the interconnected nature of the new, improved system.
Interesting that BSC went to Fed on Thursday and said they would have to file on Friday. Of course they didn't bother to mention this to their owners... The stock should have been halted on Thursday or before.
Presumably JPM also has on its own "thousands of counterparties", and now it has assumed thousands more. One of the (purported) advantages of the huge notional value of e.g. CDS contracts was that the risk was spread around. Not so much anymore, apparently.
"Normally, the market sorts out which companies survive and which fail, and that is as it should be," Bernanke said. "However, the issues raised here extended well beyond the fate of one company."
Why even have markets Ben let's just set all prices buy government decree and get it over with.
ac: yes, money is usful as a measure of relativewealth. Some people have more claims upon present and future production than others. But more money in total does not mean more wealth for everyone. Only rises in productivity do.
have you read American Theocracy by Kevin Phillips? A third of the book tells the same story of the perils of letting the financial sector rule the nation.
No... maybe I should.
It just seems like basic common sense that a country which begins devoting all its effort to playing with pieces of paper that don't even represent any kind of research or intellectual effort has a bleak outlook.
What would you think if your neighbor told you he was starting a business where all the managers and employees spent all day playing Monopoly and poker?
You'd laugh at the idea.
Yet when it's an entire nation doing it suddenly it becomes serious business.
From: "You're in no danger"
To: "I will save you!"
This is truly an amazing time we live in.
Average Joe | 04.02.08 - 10:16 am | #
This is the adaptability and flexibility that is required to CYA. No one has succeeded up the pro-verbial ladder without this ability. Well except maybe Dick Cheney.
When exactly did "spreading the risk" around become a means of ensuring taxpayer bailout to minimize the risk of default instead of minimizing exposure in case of default?
Interesting Times writes:
"...flexibility that is required to CYA. No one has succeeded up the pro-verbial ladder without this ability. Well except maybe Dick Cheney."
Careful, Dick gets wind he may pull out his shotgun..... The Texas incident stemmed from Dick loosing a hand of cards, imagine his anger when he gets wind of his inability to CYA...
"With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence."
If a two foot dwarf has confidence he can dunk a basketball then he tries and cannot, is it a bad thing that he has "severely shaken confidence"? Confidence in an illusion is the worst type of confidence to have. Just go ask the kid who was so confidence that the Mack truck would bounce off his chest that he walked onto the highway to prove it.
When exactly did "spreading the risk" around become a means of ensuring taxpayer bailout to minimize the risk of default instead of minimizing exposure in case of default?
"The moment of regulatory capture" =)
I place it somewhere in the late Clinton admin when the megabank consolidation really got underway, but you will always be able to push back the starting gun further, at least until you hit day 1 of the current financial regime and have to start blaming the human condition. =)
Tanta -- if this is withdrawal, they are currently in the denial phase, where they are planning to set up a tobacco plantation and grow for profit. Or something. I don't know how to metaphorically contextualize the burning desire to confute "avoid a depression" with "climb back up on this insane credit bubble and head for the sunset." It's been like 15 years since many of the people involved saw economic sobriety, and it shows.
Here we were, humming along last year, no extraneous issues like 911 to blame, no terrorist attacks, the war going quietly if not well, Stock markets hitting all time high as the DOW breaks 14,000. Unemployment at record lows, homeownership at record highs, interest rates low....I mean nothing going wrong at all.............and then all of the sudden, six months later, for no reason at all, we are facing a crisis compared to the Great Depression, recessionary growth, with taxpayer bailouts for IB's and homeowners....
Why?
It's obvious that it's the financial system itself that is causing the problem.
There is so much crap allowed to happen now in the interest of "what's good for the markets" it is rapidly descending into a parlor game at this point.
Stock halt comes from two places, the CO. or SEC....since neither one of them would have the balls to halt the stock (thus causing a sell off once it opened back up) it's was no surprise to me that the same "business as usual" sign got hung out shortly there after. Just like the CEO at C providing non-public information to a group of "analysts" about coming asset sales.
There is no consequence at all for breaking what little rules there are. That LEH outright lied about it's circumstances last week and then paid no price ( in share price terms) for that is what is wrong. In fact it was very lucrative for them to lie....about 10% more.
You know, critical systems aren't supposed to be interconnected. Or if they are, they're supposed to be able to decouple quickly in case of catastrophic failure to one component.
I'm sure some systems analyst could help me out here. But this is a pretty well known fact. It's the basis of the redesign of power grids, and it was also the basis of some New Deal legislation.
"With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence."
That's the same damned excuse they made for bailing out LCTM and look where it got us.
Instead of attempting to fix our markets we focus all our efforts on making people artificially confident when it's not warranted.
And our markets continue to get more and more broken.
As I've said many times before:
The Federal Reserve has been screwing up in exactly the same way over and over again for a decade now.
I might suggest that we are going to hit a confidence wall this time around the point that the rest of the world no longer finds us useful...you know, that point where their banks, pensions, funds are adversely impacted by this...
...I think a few large countries are going to pull the trigger on this dying horse...
...I think a few large countries are going to pull the trigger on this dying horse...
Not as long as we own the guns. While I philosophically agree with ac's comments, we don't need to produce anything except bullets. Why not have our best minds working on looting the world? Isn't that more productive than actually working for a living?
The fed has been a total failure for the past decade. I have no faith in the fed. They seem to always be fighting the last war. no foresight.
The level of financial fraud and misinformation has been astounding. First in the tech & telecom bubbles. Second in the real estate bubble.
By example, the typical yearly mutual fund fees are 1.5%. This represents 50% of the annual after tax return of the S&P 500 over the last ten years. The fees also total approximately a TRILLION dollars over the past decade.
Interesting Times - I was thinking of that film when people were calling Alphonso Jackson a 'bovine face' the other day. I always thought he looked more like the guy whose face melted when they opened the Ark. I think it's the glasses.
Looking at this from distributed systems theory, if the system really is that interconnected, then it should in fact be more rather than less reliable. (No single point of failure.)
Unless the increase in network traffic caused by a single failure would over load the communication capacity of the system (aka broadcast storm), or the failure of one entity increases the load on the rest above their individual threshold, causing a failure cascade.
I suspect it was the last case they were afraid of, especially, as others have pointed out, wrt credit default swaps. With low latency communication networks in particular, it's very hard to prevent that, without carefully managing load across the system to prevent it ever happening in the first place. Load translating as leverage in this case i suspect.
The Federal Reserve does not have the authority to arbitrarily and unilaterally cut a deal which leaves taxpayers liable for the outcome.... end of story. This is the whole stink of the matter.
It's obvious that it's the financial system itself that is causing the problem.
It's never been just the financial system that caused the problem.
It's also the fragile finances of U.S. households based on too much borrowing, too little savings, slow income growth, high inflation.
It's also the decline of the U.S. manufacturing base which has created an economic wasteland in the heartland.
It's also the overextended state of public finance at every level, with too few taxes supporting too much deficit spending, borrowing, and future entitlements.
It's also the short-sightedness of leaders and policymakers at every level.
safe_as_apartments:
Not as long as we own the guns
Very good point, but I disagree. It's red giant syndrome...same as a lot of large civilizations expanding the number and frequency of foreign adventures. Bullets are made of metals, and they cost money to produce. Soldiers are inherently expensive to train, feed, supply, and what's worse, outside of looting there is no value-added to blowing stuff/people up...under international law, we can't even loot...We're not sending cheap commodities and oil back to the US are we? No, more importantly the US citizenry owns a lot of guns...that is far more intriguing.
You know, critical systems aren't supposed to be interconnected. Or if they are, they're supposed to be able to decouple quickly in case of catastrophic failure to one component.
I'll take an analogy from scalable software as a service design:
1) Single Point of Failures (SPoF), i.e. those than can bring down the entire system are systematically removed through a combination of redundancy and incessant systems monitoring
2) No database designer in their right mind would segment the data and then put in it 10 different places such that one disk failure would destabilize the entire storage system. That's just crazy talk.
warlock - I studied and develop distributed systems for a living.
There can be significant risks associated with that model.
Think of CDOs and MBSs as cancer cells or even as a virus. Sure one cell won't kill the host, but it duplicates exponentially when the immune system does not immediately recongize it can kill it.
The FED/Treaury/SEC are that immune system. The deregulation that has occurred, basically turned off the financial immune system and let the risk spread until system shock.
Yes, I too understand the basics of clustering, fault-tolerance, resilience, disaster recovery, COOP....blah blah blah...mirror stiping with parity across 10 disks...sad. Very sad.
Ron Paul talking principles. Important? Of course. Relevant during this testimony where there's an opportunity to expose details of the Fed's recent panic moves. I don't think it was worth spending 5 scarce minutes of Q&A.
Here is a very scary report from David Walker (our govt. appointed bean counter). He has given up trying to talk to elected officials and now is telling the general public the true state of the US financial situation. Very scary and depressing...
Like some other poster, I find that what gets me is the 'shaken confidence' statement, with the implication that confidence is the paramount thing. Isn't that why the band played while the Titanic went down? In reality, there are times when confidence legitimately should be shaken. As in when the 5th largest investment bank is going BK in the morning.
I have to say, overall Ron Paul wasn't as good at grilling Bernanke as he usually is.
The best question was asked by a different congressperson (sorry, not sure who).
He asked (paraphrasing)
1) who valued the collateral for the Bear Stearns deal- was it Bear using their old obviously faulty models, or an independent advisor
-Ben's answer: it was Bear and an advisor, but the advisor didn't have much time to do due dilly
2) how much did they pay that advisor, and how was the advisor chosen
-Ben's answer: he didn't know, it was done in NY and he wasn't there.
3) what if these securities were poorly valued? if there are major losses on these can the Fed go back and get more collateral?
-Ben's answer: no.
Maybe the economy is more like a chain smoker who just saw the last pack of Camels on earth head for the incinerator.
Tanta | 04.02.08 - 10:31 am | #
I have a funny story about that - I have a buddy who was a chain smoker & was forever trying to quit.
Talk big will power not so much.
We suggested he go somewhere to kick where he absolutely couldn't find smokes... We suggested backpacking in the wilderness FAR from any convenience stores or bars with only non-smokers like us (so he couldn't bum)... making sure he has thrown all smokes away before heading out.
He spent the whole week running up and down the trails looking for other hikers and asking them if they had any smokes be could bum - he was willing to trade them a $500 'expedition' tent of a smoke...
Guess what he learned? The kind of folks crossing 10,000 foot passes with 50 packs on their backs aren't likely to be 2-3 pack a day smokers.
Its funny now - wasn't so funny then 'cause he got kinda cranky.
How can anyone have confidence in our super leveraged economy. It's so fragile that repeated & historic actions by international governments & central banks are required to keep it from imploding.
I have yet to get an answer to one simple question, especially from people who argue the failure of Bear Stearns would have caused the death of all first-born, the breakup of the moon, and widespread cable outages during "The Biggest Loser."
Why could the Fed not have guaranteed Bear's counterparty guarantees and simply let the shareholders and bondholders eat cake?
Ted Kennedy really doesn't get it. The American people are responsible for the economy and the country's prosperity.
Sadly, we have wasted our wealth. Financial hucksters and politicians can not produce prosperity. EVER.
Faith in the economy has been shaken. The wealth has not been shared. The answer is managerial prudence, hard work and savings. A relative period of austerity. No more, no less.
First off, when you parse the following clip, it seems obvious that Bear was involved in fraud, and then sucked The Fed into a last second, forced negotiation, i.e, blackmail.
America should say NO to Bear, No To The Fed, No to Treasury!
Re: "On March 13, Bear Stearns advised the Federal Reserve
and other government agencies
that its liquidity position had significantly deteriorated and that it would have to file for Chapter 11 bankruptcy the next day unless"
Furthermore, if Bear was focused enough at that point to seek last second help and look to other agencies, they had a plan in place to force this type of negotiation leverage, with the assumption that a blackmail threat of failure would result in extorted cash!
See: Etymology:
Latin extortus, past participle of extorquēre to wrench out, extort, from ex- + torquēre to twist to obtain from a person by force, intimidation, or undue or illegal power : wring; also : to gain especially by ingenuity or compelling argument
Finally, Bear's blackmail negotiation circumvented the proper authority necessary for paying the ransom, i.e, Dodd, et al, have a process defined by The American Constitution!
So BSC and JPM people couldn't value the toxic crap on the balance sheet so the Fed just took it on its balance sheet? If anyone at the Fed was any good, they would be working at Goldman or Morgan Stanley. Yes, I know there are smart people there but come on, just like the clowns at Moodys and S&P, those that can't get big jobs at the best banks go to the junior varsity. Heck, even Greenspan was a joke in the private sector.
BSC bondholders got the biggest gift of them all thanks to US taxpayers. Sweet.
Very good point, but I disagree. It's red giant syndrome...same as a lot of large civilizations expanding the number and frequency of foreign adventures. Bullets are made of metals, and they cost money to produce.
My quasi-facetious point is a bit different: we don't actually have to shoot the bullets to loot the world. The grasshoppers never eat the ants--it would be counter-productive.
My (simplistic) view of the world is that the U.S. provides a stabilizing force, built on the threat of destruction for those entities that step out of line. And, God bless, it's worked reasonably well for all parties for decades. As such, other countries are happy to give us real wealth in order to maintain the stability. Hence, they hold dollars that they must know (given the system) will lose real value in time.
Alas, it turns out the ants are a bit too pliant. This has left us in a world where our American greed and sense of entitlement can go unchecked.
But, regarding the present state of the U.S. economy, I ask myself: is it really the grasshoppers fault? Or the ants? Really, their respective actions are just in their natures.
I see nothing wrong with looting the ants; in fact, I would rather our best minds go in to financial services to rob them. It is a sad situation, but I believe that the only way to bring about its end is to encourage it until the ants have been squashed or they employ a crack team of circus bugs.
Ron Paul talking principles. Important? Of course. Relevant during this testimony where there's an opportunity to expose details of the Fed's recent panic moves. I don't think it was worth spending 5 scarce minutes of Q&A.
Load translating as leverage in this case i suspect.
Thinking along these lines, I think available credit is band, and the "free market" is like the network traffic management heuristic. Trading patterns are the transmitted information.
A major station was found to have received fatal information at some point in the past. Traffic has been allowed to grow outside the scope of the management protocol, and there is much information moving now that has "hacked" priority and trustworthiness signatures.
In this context, the failure of a major node due to pre-received data would cause dynamic hysteria (who else got the kill signal? will they send it to you?) in the automated ("free") management algorithm, setting the management protocol doing senseless things akin to flapping. Long term, would it find subnet stability? Who knows? Cutting every or almost every station off from the minimum band required to stay signed on will moot the point, when signing off the financial network also involves signing off on bankruptcy papers.
So the regulators (hapless network admins with 900 books and a single retransmission rate rheostat to steer the network) have some other station to take up the failed station's responsibilities and identity.
The questions from that perspective, I guess, are what happens when you create bandwidth by fiat (carrier medium saturation?), what is the failure point of switching nodes with spare capacity, and who got a kill signal that can't be flushed.
And Schumer refrains from commenting after that eloquent description of the inability of regulation to curb the human instinct to bubble. That was possibly the most pregnant pause I've heard in my entire life. Gorgeous.
There's an amazing number of people here who apparently believe Wall Street doesn't add value. What's the difference between being a net exporter of cars and being a net exporter of financial services? Well, financial services are even more sensitive to the network effect than auto manufacturing is. They're less sensitive to currency fluctuations and insensitive to commodity prices. At the top, they require a very high level of education, so they're an area where a country with high labor costs can remain competitive.
Obligatory sympathy declaration: I have no sympathy for those who would say "good riddance" if high finance were to decamp to London, Dubai, Singapore, Shanghai and Tokyo. Contemplate how many well paying jobs with opportunity for advancement would be lost. Contemplate how bitter Americans would be seeing their monthly payment going to a processor in Mumbai.
Were mistakes made? Sure. Tanta summed it up very well when she pointed out that if, after risk-assessing the turnip and determining an appropriate interest rate of 20% yet discovering that the turnip can only pay 12%, the appropriate strategy is NOT to fund the loan at 12%. No amount of slice and dice CDO and CDO^2 can turn such turnip paste into gold, even though those innovations and associated pricing models, by themselves, represented significant beneficial innovation.
Sheesh, all y'all really want to go back to the bank in the town with the mill by the floss? When the mill shuts down the bank goes bust and the whole town fails.
Does anyone know anything about this collateral? Maybe I missed something, but it seems I have read in the comments here and last night things like "toxic crap" and "toiletpaper".
What if it is just private-label AAA-rated MBS? Would we still be freaking out?
Bernanke is a recent Fed Chair, beginning his term on Feb 1, 2006. He is not the one who created the situation. His appointment may have been due to concern over the systemic risks, because his favorite field of study was the Great Depression.
The bailout was LTCM, not LCTM. In 1998. It was partly precipitated by the Asian currency crisis.. Reading up on these two events would be helpful to understand what is now happening. You might note that the techniques used to cope with the Asian currency crisis are similar to those being used by CBs today.
Bear Stearns shareholders weren't the ones that got bailed out. A price of $2 per share was probably less than residual value. It was everyone else that got bailed out.
Stuff that's really good in this discussion:
The question of how interconnected we want the financial system to be gets right at the crux of the matter. Requiring reserves, segregating functions and examining enough to ensure that risks are properly reported do create firewalls to these types of meltdowns. Firewalls also limit growth, but exchanging slower rates of growth for panic-avoidance panics was the basic theory behind the Glass-Steagall legislation in the first place. I don't like the results of its dismantling.
I would dearly love to see a Calculated Risk discussion focusing on how the current situation of correlated and aggregated unknown risks (a la Tanta's brilliant post on the information-destroying function of liar loans) could be addressed long term to prevent a reiterated cycle of financial panics.
Re: So BSC and JPM people couldn't value the toxic crap on the balance sheet so the Fed just took it on its balance sheet?
That is another great point, the complexity of this inter-connected mess:
Re: "Our financial system is extremely complex and interconnected"
If this last second extortion was so complicated, why was a solution forced, as if a hostage had a gun to a head? Why were complex derivatives unraveled and sorted out, to a point where everyone felt they had a backroom deal? This was not a negotiation!
I would like to call to your attention the following:
in the context of contract law is a common law defense, and if one is successful in proving that the contract is vitiated by duress, the contract may be rescinded, since it is then voidable.
Duress has been defined as a "threat of harm made to compel a person to do something against his or her will or judgment; esp., a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition." - Black's Law Dictionary (8th ed. 2004)
Although hard bargaining occurs legitimately in commercial contracts, duress may be in the form of breaching an existing contract between the two parties unless the innocent party agrees to enter into another contract. The contract is voidable if the innocent party can prove that it had no other practical choice (as opposed to legal choice) but to agree to the contract.
The Elements of Economic Duress (breakdown):
1. Wrongful or improper threat: No precise definition of what is wrongful or improper. Examples include: morally wrong, criminal, or tortuous conduct; one that is a threat to breach a contract "in bad faith" or threaten to withhold an admitted debt "in bad faith."
2. Lack of reasonable alternative (but to accept the other party's terms). If there is an available legal remedy, an available market substitute (in the form of funds, goods, or services), or any other sources of funds this element is not met.
3. The threat actually induces the making of the contract. This is a subjective standard, and takes into account the victim's age, their background (especially their education), relationship of the parties, and the ability to receive advice.
4. The other party caused the financial distress. The majority opinion is that the other party must have caused the distress, while the minority opinion allows them to merely take advantage of the distress.
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The Vanguard High Yield Bond Fund has returned 1.35% annually after taxes over the past decade. Remember, this is at the top of a cycle also.
They call them junk for a reason.
How do you think the most recent junk bonds will perform over the next ten years? Think private equity, toggle bonds & historically loose underwriting standards.
Blackmail is the crime of threatening to reveal substantially true information about a person to the public, a family member, or associates unless a demand made upon the victim is met. This information is usually of an embarrassing or socially damaging nature. As the information is substantially true, the act of revealing the information may not be criminal in its own right nor amount to a civil law defamation; the crime is making demands to withhold it.
Blackmail is similar to extortionthe difference being that extortion involves an underlying, independent criminal act, while blackmail does not.
"Mr. Chairman you said last spring that the mortgage problem was small and CONTAINED to the subprime arena. You forecasted limited impact from the housing decline. You predicted inflation to moderate. Tell Me Mr. Chairman, why should anyone on this panel, or in America for that matter, give credence to any forecast, predcition, or statement you make here today?"
FYI - Ron Paul has not asked anything in today's hearing. He's a rep not a senator. The quotes above attributed to Ron Paul were Bob Casey, a sen. from Pennsylvania.
BSC bondholders sue got bailed out. Also, any preferred stock (if they had any) holders were bailed out. In a bk they would be in line at the courthouse.
I've asked that question and I can't get anything that resembles an answer. They did it to keep the books private. Look at the books and you get a glimpse of how this system was held together for the last 15 years or so. Add that it was BSC, the most hated firm on WS, and you really get an idea of the crap that went on to keep it solvent (or the appearance of it)
Freezing transactions would have been fine but we keep hearing that it would have been too big for the market to absorb however based on the bailout we will never know.
Ties up very nicely for those involved...get tax payer money to make your worthless stock worth something and continue to prime a system that is broken and allows these problems to continue and only get worse.
In 1980, financial profits were approximately 10% of national profits. In 2006, financial profits accounted for approximately 40% of national profits. Remarkable. Inconceivable really.
Are the current fiancial profits real? Are they sustainable?
BSC bondholders sue got bailed out. Also, any preferred stock (if they had any) holders were bailed out. In a bk they would be in line at the courthouse
It's a shame those investors are not on the hook for potential Fed losses.
BSc shareholders also got bailed out....at $10. BSC was going to file Ch 11, so the equity was worth less than zero. The Fed is saying that the $29b it took on its balance sheet is investment grade. Of course rated by S&P/Moodys just like they rated MBIA and AMBAC. This is such a load of crap. The Financial system would not have gone under of BSC bondholders, pref holders and equity holders got zero. The counterparty risk could have been transferred to JPM and BSC would have been no more. What a load of crap this whole thing is.
Since people are asking about Ron Paul: I went back to his speech. (I have DVR)
this is not verbatum, but fairly close... I'm like a secretary here!
Ron Paul's points:
1) we've lost a lot of civil liberties since 911 (habeous,
2) there has been an insidious progressive combination of business and government. Over the last short while, we're seeing a rapid merging of govt/business
3) examples: the military-industrial complex, now the medical-industrial complex, and now media
4) original purpose of govt was to regulate govt, NOT for govt to regulate people.
5) if we believe in markets, they should be self regulating.
6) we don't regulate the govt, but we should
7) you as fed chairman can do things, and they are UN-audited with poor if any oversight.
8) the President's Working Group is a WORKING group, not an advising group. Why? we don't have minutes of what they do, whe don't know what they do, they have a LOT of power, but we don't know what that power is
9) we've given up freedom so that business and govt can collude together.
10) My concern: we've now gotten to a point where we only ask if a regulation is good or bad. the problem is that the general rule is that "when govt creates a regulation, it creates the need for 2 more regulations"
11) the problem: we allow the Fed to inflate, which causes bubbles, which causes the need to re-inflate
12) the basic question we should ask that we don't ask is "why do we have a business cycle".
-the answer over last 100 years, the conclusion has been (philisophically and practically) that it's a consequence of freedom and capitalism, and we need govt to save us from this freedom, the freedom of choice of individuals and businesses.
13) do YOU think (q to bernanke) that the business cycle is due to freedom, or gov't intervention?
BERNANKE
1) first, the Pres working group is only an informal operation. they have no statutory authority but do represent our thinking from our various agencies. it's a chance to get together and talk about issues.
2) certainly large parts of bus. cycle fluctuation are due to free markets.
3) some are due to govt intervention. (spending during wars for example)
4) particularly relevent to this discussion, in the 19th century there were many bank failures that caused general real economy issues which led to creation of Fed in 1913.
5) this led to Fed that needed regulation to ge rid of moral hazard that
6) we should not try to control the business cycle.
PAUL:
does the Fed contribute to the business cycle?
does excessive credit and artificially low interest rates cause malinvestment
BERNANKE:
the question is where should rates be. we're trying to balance things but we can make mistakes causing negative effects.
our goal is full employment and stabiliity
PAUL
someday we could try letting the market control this? thank you Mr. Bernanke.
FYI - Ron Paul has not asked anything in today's hearing. He's a rep not a senator. The quotes above attributed to Ron Paul were Bob Casey, a sen. from Pennsylvania.
Acheson | Homepage | 04.02.08 - 11:37 am | #
That makes sense...
He'll have his crack at BB tomorrow?
If so I hope he (and the others don't rant on & on). A few very good & target questions will bring out FAR more than a wind bag rant. My quess is there will be wind tomorrow...
The question I'd like him to answer is:
"What is your opinion as to whether we are, in aggregate, in an inflationary or deflationary environment? And given your view how do the current ongoing fed actions (TOMO, TAF, etc.) fit with that assessment?"
Sheesh, all y'all really want to go back to the bank in the town with the mill by the floss? When the mill shuts down the bank goes bust and the whole town fails.
Ralph Cramdown
Ralph-- I agree wholeheartedly with the gist of your post.
That said, don't you find it a little disconcerting that there is more money to be made in providing financial services to the makers of widgets than in actually making the widgets themselves?
MaxedOutMama said: "...I would dearly love to see a Calculated Risk discussion focusing on how the current situation of correlated and aggregated unknown risks (a la Tanta's brilliant post on the information-destroying function of liar loans) could be addressed long term to prevent a reiterated cycle of financial panics."
Given how many of these things have occurred within the memory of market participants, I would argue that they can't be prevented.
To which I would further add that I don't want them to be prevented, since they serve a useful purpose, as well as provide profit-making opportunities.
That said, don't you find it a little disconcerting that there is more money to be made in providing financial services to the makers of widgets than in actually making the widgets themselves?
4runner | 04.02.08 - 11:48 am | #
No surprise there - the guys running the widget makin' company would rather make deals than make widgets too. Widgets are SOOOOO BOOOOORING.
Acheson:
you are incorrect. Ron paul spoke. He really had a little speech not many true questions.
see my post above at 1146am. it's not verbatum, but it's the gist of almost everything he said.
The best questions were asked by Senator Casey (sp?), I posted those above but perhaps it was unclear that I meant that Casey asked the good questions, not Paul.
Tanta: any way you could edit my above post at 1118am so that people realize that it was Casey speaking, not Paul? (in my 1118post...)
So if the FED only had a day or so to get the Deal done for Bear Sterns, how was Blackstone able to adequately value the collateral??? The FED was unaware of Bear Stern's dire situation, until Bear Sterns advised them that they were in Big Trouble.
Why doesn't anybody ask Bernanke why cpi inflation is up over 4% yoy. Clearly they have NOT provided stable prices OR stable financial markets.
The median family has almost zero in financial net worth. Yet they are forced to endure falling real wages and rising inflation. A deadly & toxic combination.
The fed is killing the lower four quintiles in order to preserve ficticious asset values.
[D]on't you find it a little disconcerting that there is more money to be made in providing financial services to the makers of widgets than in actually making the widgets themselves?
Should I? I thought it was basic economic theory that, given sufficient competition, prices tend toward the marginal cost of production. If there's more innovation in the financial services than in the car alternator, there's more profit, too.
The Old Game:
Bunch of guys stand around a table throwing dice. Shooters throw and win or lose. The loser passes the dice to the next shooter.
The game goes on.
The New Game:
One guy bets on a guy who bets on a guy who bets on a guy who bets on the shooter.
The shooter just rolled craps.
Some random thoughts:
You can't have "moral hazard" without morals.
"Spreading the risk" has been spread
to just about everyone in the world.
And we lost.
If the banks are too big to fail, then they are a money monopoly and should be split into smaller financial institutions. Why are the regulators taking the smaller BS and merging it into the larger JPM? Doesn't having a larger institution increase the moral hazard of a larger bailout or collapse in the next economic crisis? Congress and the "unregulators" should be breaking the "unfailable" larger organizations into a smaller units that can be digested without moral hazard. IMO
Here is a very scary report from David Walker (our govt. appointed bean counter). He has given up trying to talk to elected officials and now is telling the general public the true state of the US financial situation. Very scary and depressing...
David Walker I believe has now resigned from the GAO. He has helped make a movie to increase awareness, IOUSA. I saw it at the Sundance Film Festival and met him. Despite the gloomy message he was optimistic that there was a solution. The others involved in the movie didn't think so though; they thought crisis.
It seems a difficult conundrum that the gov MUST pay down debt AND the American consumer MUST pay down debt. hhhhhmmmmmmmmm We might have a problem.
Or should I believe instead that they're lying, because they make more money ignoring the problem and getting handouts afterwards?
I would think it's very much a matter of ignoring the problem until it gets out of hand. In the short-term, things may be working fine, everyone's making money, but the the long run you could face a serious derailing event.
If a scalable system is designed properly (which in the short run takes more time & money than say management desires), then the system can handle the load as it increases - one can add components to deal with increased utilization. Software routinely fails because of scalability issues that could have been prevented with common sense foresight and planning.
Perhaps there is a proper analogy to financial institutions & regulatory bodies?
How about a proportional bailout for all American taxpayers, i.e, dcrease our taxable income by either a percentage or dollar amount based on this bailout blackmail.
E.g,
How much does the federal government take in through income tax? During fiscal year 2007 (Oct. 1, 2006, to Sept. 30, 2007) the IRS reported collecting a total of almost $2.4 trillion after refunds, with $248.6 billion of that coming from individual taxpayers.
As in recent years, about $350 billion in taxes due went uncollected, representing an annual phenomenon the IRS calls the "tax gap."
In processing more than 235 million individual and business tax returns, the IRS spent an average of 40 cents to collect each $100 of taxes, the lowest cost per $100 in seven years.
$29 billion/ 235 million/
\t \t
29 000 000 000 / 235 000 000 = 123.404255
We the people, should all get a refund next year of $123 for the bail, but Im very open to other ways of excluding corporations from this refund.
Lloyd, no, the equity was not worth less than zero. The shareholders would have got whatever was left, which apparently the market now thinks is somewhere around $10.
Going to bankruptcy would have pushed the effective losses off to other players in the short term, causing a rolling cycle of disaster.
The fact that Bear's collateral was mostly MBS probably implicates Alt-A. The Alt-A debacle is overshadowing subprime. Default rates in Alt-A are escalating rapidly and early indications are that loss severity is converging with subprime.
But the net impact on investors is much higher for Alt-A, because Alt-A tranching structures stuck much less as a percentage of the pool into the non-investment grade tranches. So the valuation on some of these investment-grade Alt-A tranches is worse than for subprime investment-grade tranches. You might have 6-10% in reserve on Alt-A, vs 20% for subprime.
Please see Housing Wire's coverage: Both subprime and Alt-A borrower delinquencies continued to rise during February, with Alt-A delinquencies rising from 15.94 percent in January to 17.40 percent. According to a report released Thursday by risk management and due diligence provider Clayton Holdings, Inc., subprime delinquences now represent an eye-opening 33.14 percent of loans on a UPB basis, as well.
...
Alt-A loss severity, in fact, is now even approaching average severity numbers for subprime across all collateral. Clayton reported that subprime first lien average loss severity increased to 45.80 percent in February, up from 42.56 percent in January; Alt-A first lien average severity rose to 36.66 percent, in contrast.
The timing makes it likely that the Stern and Sad Bear's demise was intimately related. I think the Feb remittance reports came in, Bear got margin calls, Bear tried to shop some stuff around, and bing-bang, it got offers that were pitiful, and trala! it was BK. That's why the Fed is taking this stuff at the window, and why the Fed extended the facility to broker-dealers. It's rapidly turning into toxic waste.
It amazes me how easily human can have their heads turned with fancy speech and performance.
A leaky boat in imminent danger of sinking, is the same unless substantial performance of repair is done.
Housing can't mend itself, because
(1) A massive glut; nationwide oversupply is severe
(2) Reduced demand. Interest rates are very high. Rate drop doesn't drop through. Less scrupulous loans gone. No subprime, Alt-A. Intense new lending standards. Speculators and second home buyers are urgent to liquidate--not buy.
(3) Rate reset teaser loans allowing homeowners to "ride up" and appreciation drove purchasing.
(4) Buyers are assuming much greater risk, knowing they are entering a market that is falling.
(5)# of homes coming to market by large and small builders will further glut market, defaults in process of foreclosure will further depress.
(6)Home pricing in fall, constrains equity withdrawal and the spending it has supported for more than 7 years.
(7)Demand for securitized mortgage products is gone. Trickle down means credit contraction. Credit contraction has greatest impact of large consumer purchases.
(8)Home related purchase will remain deeply depressed. Furniture, home improvement et al.
(9)Wealth losses due to home price contraction has barely begun.
(10) Incomes will soon contract deeply, further hampering spending.
Still a leaky boat. "Talking fancy" and monetary palliatives are only horizon dilating mechanics. The large tree in the forest is falling, can we really stop it now with FED and Treasury wizardry?
the senate hearing is asking Ben 'what should we do"
Per Senator Cummings:
"I know it's our role to help out, and I know that we are the ones in charge of a lot of this, but I'm asking you, because you're the expert, you're the superstar! can you give us 3-4 examples of what you think we can do to help in this situation. what you you like to see us do, or what would you recommend to us?"
also
"people in my district can't afford gas! how can we help them?"
and so on.
this ismore of a hearing of congress alternating yelling at BenB and then asking him what they as Congress should do.
I disagree regarding Bear. Absent the 29 billion guarantee from the fed & treasury, equity would be at zero and the bondholders would be looking at significant haircuts. Prior to the bailout, Bear's bonds were all trading at dicounts.
How is it you think you know more than the market?
he central cella is flanked by two others. In one, Lincoln's Gettysburg Address is inscribed on the south wall, and in the other, Lincoln's second inaugural address is inscribed on the north wall. On the latter, the word Future was carved with an E instead of F and had to be filled in and can still be seen today.
Ben is just human, but he needs to resign and Paulson needs to be questioned as to why usurping power is not a crime!
I agree with Angry Saver. How on Earth can anyone know what Bear is/was worth?
it is very possible that they were worth LESS than zero, given their liabilities and leverage.
It is very possible that if nothing had been done then Bear would have went BK. In that case, then Bear stock would possibly have gone to penny stock status, and a lot of the bond holders could have lost out as well.
as it is:
the bondholders are all made WHOLE, and the stock holders get $10.
do you think they would have had this leverage if there wasn't a $29B Fed Backstop?
Regardless of what we call this, it was a bailout.
One student to the other: "Things? I don't want to make things. I want to make money."
MLM | Homepage | 04.02.08 - 12:07 pm | #
LOL! I was in a machine shop yesterday with some career bean counter types... as we walked in I said to them "Doesn't that smell great? I LOVE the smell of machine shops..."
They looked at me like I'd spent half my life 'sniffing glue'... maybe they are right.
"We're not sending cheap commodities and oil back to the US are we?"
not yet. but we're sure doing our damndest to shove the new Oil Law down the Iraqis' throats that will enable western oil bigs to tap Iraq's oil under extremely generous terms. looting is subtler nowadays. doesn't mean it isn't happening.
"I just wonder how artificially stabilizing housing at historically high valuations is going to make us more prosperous."--Angry Saver
Well one thing's for sure, it's going to make the tax collector more prosperous, since ad valorem taxes are determined as a percentage of the valuation.
Sorry for my confusion...and I stand corrected re Ron Paul. Yes he spoke. I think it was casey on those questions. Can I blame a constriction of the blood vessels to the brain caused by anger & frustration watching Bernanke?
Asked in a Bloomberg Television interview about the IMF's analysis, U.S. Treasury Secretary Henry Paulson said today that sounds overblown to me.'' Federal Reserve Chairman Ben S. Bernanke said in testimony to Congress's Joint Economic Committee that the U.S. economy maycontract slightly'' in the first half.
The International Monetary Fund cut its forecast for global growth this year and said there's a 25 percent chance of a world recession, citing the worst financial crisis in the U.S. since the Great Depression.
The world economy will expand 3.7 percent in 2008, the slowest pace since 2002, according to a document obtained by Bloomberg News
Obama said that if the Federal Reserve is going to make credit available to investment banks, those institutions should be subject to the same liquidity and capital requirements faced by commercial banks.
WASHINGTON - Orders to U.S. factories fell for a second straight month, a worse-than-expected performance that reinforced worries that the risk of recession is rising.
ADVERTISEMENT
The Commerce Department reported Wednesday that factory orders dropped by 1.3 percent in February, about double the downturn that economists had been expecting. Orders had fallen an even bigger 2.3 percent in January, the largest decline in five months.
Finally! A congressman talking about rising CPI costs and stagnating incomes.
I own a house. BFD if it rises or falls in value. I'm going to live in and enjoy the house regardless. But to have continually rising fixed monthly costs for the sake of maintaining ficticious asset values is ludicrous. That's the real problem at hand.
You have no idea what they were worth...just because someone put a price tag on it (thanks Fed, Paulsen et al) doesn't mean that's what they are worth either.
The real value was much closer to $2 than $10. Otherwise why even place a $$ amount value on it. JPM knew enough to value it at $2 but hold on that was not enough to insure that the shareholders.bondholders get there slice.
This deal was nothing more than legalized rape of all of us. We got spoon fed the notion that if it did'nt go off (at that price- $10) than the value assigned to it would have been in question as well. SO no soup for any of the people who stood by and watched it all happen-that goes for the stupid shareholders who watched it get cut in half the previous week, If ever you had a sign to sell that was it...instead we got crying by the rich to bail them out of there non-action of the previous week.
If you held BSC stock and did not sell on that Friday (when it was worth between 25-33) you deserve to loose all of it. But not according to Paulsen and the Fed.
Sorry but just because someone said the sun rose in the west does not make it so.....apparently that is what is used as an excuse in this case.
MOM, thank you for restoring my faith in the ability of CR posters to offer up things that I can read, are thoughtful, and I can learn from. I start to yawn about the fawning over the crackpot Ron Paul...I mean really, talk about tilting at windmills. Give us something that can actually happen instead of pandering to the "shoot the Fed" mini-micro-minority.
And to those who disagree about BSC's value at $10, can you give me an analysis of their latest 10K that shows me where the residuals wouldn't add up to that valuation? I'd be interesting in seeing this analysis you've done after all y'all have written.
Can someone please explain to me why stocks are up this week?
Increasingly crude intervention, and a populace so poorly-educated and smug that the groundlings down in equities still haven't figured out where the intermittent smell of smoke is coming from.
MS you have no idea what they are worth either, or at least I can gather that by reading your posts. If I were an editor, I'd take your last post and make it this: "The real value was much closer to $2 than $10." and then add in the analysis you did to come to your conclusion and strike all the histrionics that follow. Please post your analysis, or were you over at Barry's blog posting the same things there and not left with enough time?
What if it is just private-label AAA-rated MBS? Would we still be freaking out?
Shnaps | Homepage | 04.02.08 - 11:31 am | #
AAA as rated by who, those clowns at Moddy's and S&P? The folks who said MBI was AAA even as it has to raise money at 12% and then promptly see that paper trade for 70 cents on the $. The stuff they receive big fees for rating knowing that if they don't give out nice high grades, that there will be no lucrative business in the future.
Look at the bigger picture. The market is lower today than it was nine years ago. In real terms, the market is down almost 40% over the past nine years. So much for purchasing power.
BTW, on a historical basis the stock market is still overvalued.
I think Dodd and anyone thinking about this bear bailout/extortion should ponder the logic of what might or may occur if a company like VISA or American Express was or could be in the position of Bear Stearns.
What if, American Express had over leveraged itself and placed itself in a very weak financial position?
Do we as a nation want corporations to be so unregulated that within the passing of one day, the accountability of an organizations understanding of its complex financial affairs is either totally unknown or a mystery?
Should we as taxpayers bail out unregulated corporations, or should we offer lines of credit to corporations that play by the rules, versus gamble with complex risks and distortions of accounting?
Why don't you tell us where you got information that values them at $10
So far as I can see, I'm not arguing about the dollar value YOU are. I'm merely of the opinion that if this is what the deal got done at, then this is the "mark to market" that you're all screaming about. You just don't like the mark. So prove why or give it a rest.
The only thing you're complaining about is that someone got some money and you didn't. Otherwise you'd put out a thoughtful analysis of the assets and be able to put a valuation statement together.
"And to those who disagree about BSC's value at $10, can you give me an analysis of their latest 10K that shows me where the residuals wouldn't add up to that valuation?"
Ipodius:
the onus is not on us to prove that BSC was worth $10 or not. The onus is on Maxed out Mama.
our claim is that nobody knew the valuation of BSC, including the Fed and JPMorgan Chase. (which by the way equates to what Ben Bernanke just admitted in his testimony to the Senate)
Maxed out Mama's claim was that we don't know what we're talking about, and that BSC was worth at least what they got, thus no bailout.
MoM is in error here, as s/he has no more ability to value BSC than the Fed/JPMorgan Chase
and those with the most knowledge valued BSC at $2. not $10.
"It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly. ... However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside."
"JPM thought they were worth $2...how come you know more than them???
"
jpm offered to do the deal at $2 with the fed backstopping $30billion in mbs. you can be sure that jpm thought they were worth a hell of a lot more than $2 with a huge cushion to boot.
the change in price to 10 was a deal between jpm and some shareholders of bsc. they basically took a billion dollars and handed it to bsc ahareholders and left the original collateral at the fed at 30b put took a first call hit on the first 1b of losses to the fed mbs book. so the fed did nothing to change the deal from 2 to 10. other than to insist that jpm essentially indemnify them for the 1b in capital that was heading out of jpm to bsc shareholders. this deal actually improved the feds position. it made things worse for jpm but since they were scoring so huge on bears assets they could be 'gracious',
And to those who disagree about BSC's value at $10, can you give me an analysis of their latest 10K that shows me where the residuals wouldn't add up to that valuation? I'd be interesting in seeing this analysis you've done after all y'all have written.
No I have an offer from JPM that said they were worth $2 which is a reflection of what they were willing to pay, not a trumped up figure that includes a backstopped loan and values created out of thin air ala BSC 10-k or I suppose you need a lesson on how to read that too.
That you trust the values in BSC filings is where you are in dire need of education. Someone else (cough JPM cough) decided that it was a crap valuation too and bid $2......end of story.
I like your posts; however, I disagree with you & MOMA on Bear.
Within the past hour, Bernanke admitted that the 30 billion of Bear assets could not be liquidated at this time without a loss. Hence the Blackrock deal. A five percent discount on the 30 billion alone would have made the Bear equity value zero.
Moody's Is Least Accurate Subprime-Bond Rating Firm
"Fitch was rated the most accurate also because it doesn't have AAA ratings on any securities tracked by ABX indexes that UBS expects to default, while Moody's has 35 ranked the equivalent Aaa and S&P has 24 with top ratings, the report said. Fitch also rated the fewest ABX subprime bonds -- only 200 of the 400 rated by Moody's and S&P -- meaning it was the ``most conservative'' when assessing new deals in 2005, 2006, and 2007."
No, JPM offered to PAY 2. Given their business model, they obviously thought it was worth more. Keep in mind that this was a situation where interested bidders had to pay cash and value a complex trillion dollar balance sheet in 12-24 hours. There was barely enough time to phone your board members, never mind arrange financing.
Do you own a house? How much would you get for it if you had to sell in the next ten minutes?
I don't see what the issue is here. BSC just got marked to market. So what's the problem? Isn't this what a market is about...it sets the price? If you don't like the price, don't be involved in the deal. I have no idea what BSC is worth, and neither do any of you. Jamie Dimon might have a better idea, because JPM got to see the Bear naked. None of you did.
I might add that the Fed got to see the Bear naked too. It also got to see it in such a way as to fully appreciate the effect it would have if others saw it naked too. They decided to cover him back up. I suspect their analysis was better than anyone's here (at least from what I've read) and, again, I have no business second-guessing BB at this point. I reserve, however, the right to in the future. The rest of this is just hot air.
The only thing you're complaining about is that someone got some money and you didn't.>>
On the contrary I am complaining that someone STOLE money without any authorization other than "trust me" and then had the balls to hand it over to the people who presided over all of this.
But as long as your mom gets access to her money than it's all ok.....
Think of Bear as a gambling addict. They believed they had money to back bets, they believed they could continue accounting fraud to cover losses, like Enron, they believed that luck would change, they believed that another bigger bet would pay off the prior bad bets, they believed up until the last second that they could keep betting worthless chips.
Enter The Fed, with a gun held to its head by an addict that was in a panic, who told The Fed to get on its knees and give up money.
Enter Treasury with a suitcase of cocaine and cash and a jet with no strings attached.
Treasury wants to keep the casino open for gamblers and will use taxpayer funds to support collusion and corruption.
Bernanke admitted that the 30 billion of Bear assets could not be liquidated at this time without a loss
Thank you AS, I enjoy yours. I think the key to that statement is at this time. I think Ralph just said it best: if you had to sell your house in 20 minutes what is the value? If you could wait 5 years what would be the value?
So the Fed just stepped in and took the house off the market.
So Ipodius, you then agree with me and disagree with Maxed out Mama, who claimed to know what Bear was worth?
there are 3 arguments going on here
1) MoM claimed to know what Bear was worth, hence that it wasn't a true bailout
2) people like me claimed that nobody knows what BSC was worth
3) a few people claimed that BSC was worth less than what they got.
IMO the most accurate answer is #2. Nobody knows what they are/were wroth.
BenB and JPMorgan Chase got at most a flash of BSC's naked body... it was nowhere near enough to make an accurate valuation of BSC.
Nobody will know what BSC is worth until far into the future IMO.
On the contrary I am complaining that someone STOLE money
From whom MS? From you? If so, how much? Tell me what you just lost! The only people that got screwed and I feel bad for are the people that spent 15 years there and were relying on their shares to retire on. They were probably completely in the dark about the real story.
Again, ask a shareholder how they feel about 10 a share. And again, wave your boohoo "i was on the wrong side of these trades" stuff somewhere else. No one cares.
I've been researching how much exposure the U.S. life insurance industry has to mortgage-backed and asset-backed securities and real estate.
The best estimate is total industry assets of $600 billion in mortgage-backed and asset-backed securities plus about another $50 billion in direct mortgage participation or real estate equity (mainly commercial for both). These holdings account for about 30-35% of total industry general account assets.
The only company that has yet announced writedowns is AIG and they are $2 billion last quarter and an anticipated $550 million this quarter.
According to a recent Ernst & Young report: "Where life insurance traditionally relied on high-quality corporate bonds and mortgage-backed securities, there is now greater emphasis on aggressively structured asset-backed securities, hedge funds, private equity, real estate and other related classes."
About 5% of industry assets are in BIG (below investment grade) bonds.
It would appear that the industry is heading for its worst financial crisis ever over the next 2-3 years, with many downgrades and probably several failures. Is this important?
Yes, because:
The Fed has no jurisdiction over insurance companies and no ability to prevent failures.
Insurance companies are vulnerable to runs, when policyholders cancel annuities and life insurance contracts or strip out cash values. Companies have no defense to prevent dumping illiquid securities on the market at fire sale prices to meet runs.
Insurance companies are by nature highly leveraged. The vast majority of their assets are owed to investors (liabilities). Typically, their capital is only about 10% or less of assets.
Mutual companies can't replenish capital by selling common stock. They don't have any.
Insurance companies are the only private entities that can provide guarantees,and loss of confidence in guarantees would make consumers even more nervous.
It is not clear that ratings will be very meaningful in helping consumers evaluate insurance company exposures, because the ratings agencies have leaned so heavily on their own estimates of underlying securities (AAA ratings in CMOs). Ratings agencies have not yet provided any transparency into insurance company writedowns.
In sum, this is not as big as the mortgage meltdown in large banks.
But it could be a pretty big story with scary legs for a couple of years.
Yearning, I completly agree. This is too soon to be saying anything about this except "I hope it works".
But the boys and girls at JPM just bet that they are worth more than $10 a share. I'd like to see what they think, but I have to say that they're in a better position to know than anyone bitching on here.
Interesting Times - Strangely designing and building distributed systems for a living is also what i do for a living.
There are multiple issues at play here - #1 being a general ignorance amongst economists about real time systems (excepting Hayek perhaps).
But it's hard to disentangle a fundamental change in the nature of the distributed system that they're trying to analyse (caused by the general communication latency drop in the last decade), and the banking community's complete failure to follow their own rules.
For instance, there's nothing superficially wrong with the notion of CDS, until you find out that people haven't correctly budgeted for the underlying risk. This is a known problem with all forms of insurance, not just financial, and might also be regarded as one of the easier financial scams to engage in.
That there are now second order effects within the financial system created by what people do with other instruments when that kind of insurance is available is clearly also a problem.
If we can't allow companies that engage in underpricing risk to go properly bankrupt, won't arrest their employees for being complicit in criminal activity, (selling something that they can't deliver is i believe a form of fraud), then the only other recourse may just be to ban this form of insurance.
Reliable, network wide multicast, is never going to be implemented for much the same reason.
he only people that got screwed and I feel bad for are the people that spent 15 years there and were relying on their shares to retire on. They were probably completely in the dark about the real story.>>
If you think the only people screwed here are BSC employees that "knew nothing"..than there is nothing I can say or present that will make you aware of the billions of dollars of money that we pay in taxes that is being shoved out the door to prop up failed organizations.
You are truly a dumbass if you think this is contained to just BSC shareholders.
Hmm, don't you think immune system may be dignifying it just a little there? Although granted the analogy with AIDS would be quite nice, since it essentially hijacks part of the immune system against itself.
But i don't see any evidence that the financial system is currently that well evolved.
It's not like anyone designed it, it just grew. Now economists are examining the equivalent of the daily traffic logs on the major routers and trying to figure out how the system behaves.
Yearining, all you say is true. And I admit that taxpayer money is at risk. But only at risk. No loss has yet occured. And, you know, the history books will write this up as brilliant if things go well. And I admire big risky moves like this. It's what made the country great. If you look at a deal that suceeds and say "wow, it took a lot of balls to do that" you have to hand it to the people involved.
On and I have a private bet with another poster on here that I can make MS swear in three posts or less. I just won the bet
No one can know for sure what BS assets are worth. $30 billion is the current book value, but on the market?... I'd be interested in knowing about their liabilities. Assuming that,if held to maturity, the MBS would net 80 cents on the dollar, then $24 billion of liabilities would set the stock price to $0.
Assuming that,if held to maturity, the MBS would net 80 cents on the dollar, then $24 billion of liabilities would set the stock price to $0.
Al, what about the counter-party payments for the losses and value of hedges against such activity? You're acting as if unwinding BSC is a simple this for that event. But it isn't. .80 on the dollar doesn't mean anything alone.
The counter party payments should be in the equation somewhere shouldn't they, either as an asset or as an offset to a liability. And of course, the value of the counter party insurance is at max 100 cents on the dollar, but possibly much less.
It's not like anyone designed it, it just grew. Now economists are examining the equivalent of the daily traffic logs on the major routers and trying to figure out how the system behaves.
Hehehe... no one designed our immune system either. (then again, if you're a creationist we might have to end this thread since we'd be going into religion topic)
The debt markets were in grave risk - to the degree that Bear Stern stock holders, who should have lost everything in bankruptcy all else being equal, actually didn't quite lose everything because they had some kind of weird bartering point in reserve. BB and HP are interested in propping up investment banks that manage federal and other government entity debt. The federal government is in debt (and at war) and must prop up the insolvent investment banks that help the government survive by managing all the government debts and deficits. Who is in charge of this economy exactly? Am I confused or what?
Thanks for the contribution. I imagine in a severe recession, policy holders will also tap policy equity just like a 401k or savings account, so we might be suprised how much this hurts insurance companies. Good post.
Who are best to evaluate these illiquid securities (MBS, etc.)? Aren't the investment banks themselves, the ones who not only originate, trade, securitize, but also leverage (to the moon on these derivatives) on them? They know what the risks on these securities are. They know the true risks on these securities, extremely bad risks that are now confirmed by weekly downgrades from the rating agencies, and refuse to trade or accept them on the market place. These junks will still remain junks after this crisis is over because of their rotten fundamentals. The market freezes because bad debts and leverages on bad debts go way beyond reserve capitals. The market functions as it should rejects these toxic junks. And the only way to left to unwind their bad bets is to have the govt. coming in taking these junks off their hands. The govt, the representative of the US taxpayers as bagholders, will, no if or but about it, hold on to these junks until their values are bottomed out according to their true junk status, which will be undoubtedly a big loss to the bagholders. Ipodius, you seem to hold out to the hope that somehow these junks will become gold after the crisis is over thus the Fed's will be made whole again as the result. Remember, these are junks, the players know they are junks, the market knows they are junks, the world knows they are junks, even the FED knows they are junks, by now almost any average American knows they are junk. That they will never be made into gold by Wall Street Alchemy is crystal clear. So by taking off these bad debts, internalize as costs to the taxpayers is a bailout.
Sometime during that weekend there was at least one news story that had Bear officials on record as saying if they didn't find a buyer by Monday morning that they would have to file bankruptcy.
Every other bankruptcy I've seen has led to the common going to the pink sheets or otc bulletin board with common shareholders getting bupkus.
Bondholders would have been in line hoping to get back some of their principal.
Based on that - bk if no buyer - I'd say Bear at that point in time was worth closer to the $2 bid JPM made...
Those Alt-A and Prime soon to be Subprime MBS that Bear held would have been liquidated one way or the other clearly establishing market clearing prices (price discovery anyone - yeah OTC markets are sooo much better than listed - NOT) which would have given everyone else a severe case of indigestion when they saw where stuff really ought to be marked...
Some older people who don't want to keep up their life insurance payments sell the policy to investors for cash, as opposed to simply cancelling the policy. Wonder how big the size of this market is?
Here's a back of the envelope calculation I have not seen. Bear has $10.441 B of captal at YE. Take a 30% writeoff of the $30 B in securities the Fed guaranteed and divide by 146M shares outstanding: 10.441-9=1.441B/146M=9.86 per share. Of course, this does not take into account any other writeoffs lurking on Bears balance sheet.
Ralph Cramdown writes:
JPM thought they were worth $2
No, JPM offered to PAY 2. Given their business model, they obviously thought it was worth more. Keep in mind that this was a situation where interested bidders had to pay cash and value a complex trillion dollar balance sheet in 12-24 hours. There was barely enough time to phone your board members, never mind arrange financing.
I have a friend who used to work in the foreign bonds division at JPMorgan. Nobody in the department had a clue what any of their deals were worth. And I don't mean within a small amount. I mean within an order of magnitude no clue (And we aren't talking about a 400 thousand dollar mortgage either, try billions).
I think it's impossible for anyone to have a clue what the value of BSC's MBS's are worth. Just looking at the WaMu pool that Mish posted and the horrifying and accelerating losses of that pool, are you telling me that anyone can assess a value for that POS.
There's a reason why the MBS market is locked up and it's not because of liquidity.
Oh come on. This is a taxpayer bailout. Before the deal the taxpayer had to pay $0. Now it will have to pay something between zero and $29 billion. This risk has a price. This price is non-zero. And the CDS market says this risk is quite substantial.
It's like Russian roulette. Even if you didn't get the bullet, you were stupid to play. But taxpayers had no choice not to play.
What is even funnier, BSC will get interest on these MBS they pledged before they default and will pay a measly Fed Funds rate in return to Fed.
I think that no one knows what Bear Stearns was worth (wasn't it $80 a share book value per a VP?) and we'll never know. We do know that at $10 a share it was worth it not to have to find out.
"The only thing you're complaining about is that someone got some money and you didn't."
You are a real piece of shit Ipodius. You have been constantly trying to reframe this debate as people crying sour grapes when there is a lot more to it than that.
If you can't see the bigger picture here and the principles involved with the outrageous Fed interventions than maybe you should just keep your mouth shut since you are coming off as almost comically ignorant and clueless.
Get a clue and quit putting peoples legitimate concerns off as whining. Wake up. The questions and issues here go way beyond mere complaining.
Re: value (ha ha) of Bear Stearns:
Reggie Middleton did a very long analysis. It convinced me, but take a look for yourselves if you want to see a numbers-based analysis. I believe its at boombustblog.com
Goldman Sachs (GS) taking the rest of Wall Street to the cleaners is nothing new, but now comes word that Goldman played a direct role in the destruction of Bear Stearns (BSC). According to Fortune's Roddy Boyd, several days before the collapse, Goldman decided to stop backing up Bear Stearns derivatives deals--and it announced this decision to hedge-fund clients in an email that spooked an increasingly panicked Wall Street:
[On the morning of Tuesday, March 11], Goldman Sachs's credit derivatives group sent its hedge fund clients an e-mail announcing another blow. In previous weeks, banks such as Goldman had done a brisk business (for a handsome fee, of course) agreeing to stand in for institutions nervous, say, that Bear wouldn't be able to cough up its obligations on an interest rate swap. But on March 11, Goldman told clients it would no longer step in for them on Bear derivatives deals. (A Goldman spokesman asserts that the e-mail was not a categorical refusal.)
"I was astounded when I got the [Goldman] e-mail," says Kyle Bass of Hayman Capital. He had a colleague call Goldman to see if it was a mistake. "It wasn't," says Bass, who is a former Bear salesman. "Goldman told Wall Street that they were done with Bear, that there was [effectively] too much risk. That was the end for them"...
When word of the Goldman e-mail leaked out, the floodgates opened. Hedge funds and other clients, eventually running into the hundreds, began yanking their funds.
The next afternoon, Bear CEO Alan Schwartz announced on CNBC that everything was hunky-dory (which, according to Boyd, it wasn't). And two days later, Bear Stearns effectively went bankrupt.
Should Goldman be blamed for this? Absolutely not. Bear Stearns was under-capitalized, over-leveraged, and stuffed to the gills with crappy debt. Once again, Goldman seems to have outsmarted the rest of Wall Street, spotting a problem before everyone else did. Because "runs on the bank" are often started when smart players cut and run, however, Goldman's decision appears to have at least contributed to the stampede.
Goldman Sachs: Giving new meaning to "crushing the competition"
The Bear Sterns - JP Morgan - US taxpayer bailout seems as if the CEOs are arguing strenously that the federal law must limit the size and scope of banks and investment banks to that the collapse of one bank will not collapse the U.S. economy. If they expect to be bailed out because they are so big, they have an incentive to engage in high leverage or other risky strategies. Taxpayers therefore have an interest to tightly limit the size and scope of such banks to prevent themselves from being fleeced by over paid bankers.
Slightly OT but thought it is relevant:
Consumer confidence in every section of New York state crumbled in the first quarter of 2008, according to a poll released today by the Siena Research Institute in Loudonville.
In fact, the numbers, which measure willingness to spend on big-ticket items like computers and cars, are so bad that the institute described them as a collapse.
"Going through a very difficult period?"
Kind of like Harry Potter in Book 5? Kind of like Tanta after her "instant menopause" surgery?
Nothing good ever comes from anyone going through a "difficult period." You can tell yourself "it's just a phase," but the U.S. economy is a big toddler.
Clearly, the U.S. economy is going through a very difficult period.
Ben Bernanke, THE ONLY Leading Indicator You Need
Time Magazine Just Six Months From Big Cocktail-Nation-Craze Story | The Onion - America's Finest News Source
Kind of like Tanta after her "instant menopause" surgery?
Much sympathy. Had an ex who went from 30 to menopause in just one surgery, it did not look fun.
Recession possible. - Bernanke
No Recession possible. - Sebastian
Sadly, I am torn as to which is the more credible.
do not be seduced by Bernanke's scholarly and fatherly manner. he is a private banker thru and thru.
I forget--is this the first, public confirmation that Bear was definitely Chapter 11? We've heard a lot of protest that it wasn't.
Did Bernanke explain why the shareholders had to be saved from wipeout?
What other possible reason for lowering interest rates could he have had? That was clearly not directed at any short-term investment bank problems, right?
No one really knows what would happen if Bear Stearns failed. He himself said "Our financial system is extremely complex and interconnected",. It's difficult to believe that six months ago Bernanke didn't understand the impact of falling home prices, hence his claim that "subprime was contained and the spillover would be minimal", and then all of the sudden he has detailed understanding of the impact of a single IB going bust....so much so that he is willing to throw taxpayer dollars at it.
So he went from clueless about the problem, to someone who has a detailed grasp of the consequences and is willing to spend our money to prevent it.
From: "You're in no danger"
To: "I will save you!"
This is truly an amazing time we live in.
Give 30B to Wall Street or 30B to Detroit. Which action would have helped more Americans?
Can't wait for Ron Paul's questions...
The fact that a banker is the focal point for addressing economic concerns illustrates the fundamental problem the US has right now:
The US economy has become focused on the creation of money as opposed to the creation of actual wealth.
Money being a proxy for wealth it's easy to confuse the two, but in the end money is just a promise of wealth, not actual wealth.
Turning to an instituation that only has the ability to create promises of wealth as the lead in "making the economy better" is simply going to lead us to poverty as all our hard work and best minds are sucked up by the financial system.
The financial system is just supposed to play a supporting role to wealth creation -- financial instruments and all the effort that go into them create no actual wealth directly.
If the financial system continues to play the lead role in the economy, with productive economic output merely a bit player, we don't have much of a future to look forward to.
Clarity: " "It not appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,"
ty bb
I called Senator Dodd's office this morning. After being transferred four times, I spoke with his assistant who is preparing for the Bernanke testimony tomorrow before the Senate Banking Committee. This fellow is very well educated and understands the constitutional issues that are at stake with the BSC bailout using taxpayers dollars and bypassing Congress.
Unless this transaction is reversed, the future is even more ominous than any of us can imagine.
Note that forecasts continued to be ratcheted downward!
BTW, I can't help but continue to note how the Fed (implicity) cites the "systemic risk" in a BSC failure and yet fails to acknowledge any part in allowing such circumstances to arise in the first place.
ac:
have you read American Theocracy by Kevin Phillips? A third of the book tells the same story of the perils of letting the financial sector rule the nation.
CR,
You are very politely saying that Bernanke ans Wall Street have no regard for the American taxpayer, which is normal because he never had citizens call his office and complain. We are here to do the dirty work and call out Bernanke on this careless view of the world, where taxpayer bail-outs are perfectly normal.
Questions for our political leaders:
Do we really want or need a financial system that is "extremely complex and interconnected"?
If we are going to have such a system, in which the society in general must take on the burden of seeing that corporations don't fail, shouldn't the society in general receive a greater share of the benefits? After all, the party at risk usually gets the biggest rewards.
And we're just s'posed to accept the fact that Bear's collapse would be catastrophic for the financial markets and the economy on Bernanke's say-so?
What heapin' helpin' o crap.
Had an ex who went from 30 to menopause in just one surgery, it did not look fun.
You could call it hormonal "cold turkey," except that "cold" is the last word that comes to mind.
Maybe the economy is more like a chain smoker who just saw the last pack of Camels on earth head for the incinerator.
Looks like Ben omitted the best parts.
You know the part about how he sat back and watched everything become interconnected.
He omitted the fact that now the job is to partition off taxpayer liable institutions(banks) from those which are not(everything else).
Surely he is not so foolishly optimistic nor arrogant enough to believe that the Fed has even the slightest fraction of the capacity necessary to 'repo' ALL of the horrible investments made over the last 8+ years. The existing leverage in the system demands no less than damn near ALL of it to be 'repo'ed' to prevent insolvency.
Can someone with testicular fortitude please take control of this lunacy?
I thought Greenspan told us it was good to have a system that "distributed risk"?
I guess the resulting system is actually "extremely complex and interconnected," and that distribution of risk simply means that no player in the game can be allowed to fail due to the interconnected nature of the new, improved system.
Nice.
Interesting that BSC went to Fed on Thursday and said they would have to file on Friday. Of course they didn't bother to mention this to their owners... The stock should have been halted on Thursday or before.
Presumably JPM also has on its own "thousands of counterparties", and now it has assumed thousands more. One of the (purported) advantages of the huge notional value of e.g. CDS contracts was that the risk was spread around. Not so much anymore, apparently.
By distributing risk, instead of having x risk in the system we can now have 1000x risk in the system.
The stock should have been halted on Thursday or before.
Yeah, there's a legal issue or two in there that hasn't been explored.
"Normally, the market sorts out which companies survive and which fail, and that is as it should be," Bernanke said. "However, the issues raised here extended well beyond the fate of one company."
Why even have markets Ben let's just set all prices buy government decree and get it over with.
ac: yes, money is usful as a measure of relativewealth. Some people have more claims upon present and future production than others. But more money in total does not mean more wealth for everyone. Only rises in productivity do.
have you read American Theocracy by Kevin Phillips? A third of the book tells the same story of the perils of letting the financial sector rule the nation.
No... maybe I should.
It just seems like basic common sense that a country which begins devoting all its effort to playing with pieces of paper that don't even represent any kind of research or intellectual effort has a bleak outlook.
What would you think if your neighbor told you he was starting a business where all the managers and employees spent all day playing Monopoly and poker?
You'd laugh at the idea.
Yet when it's an entire nation doing it suddenly it becomes serious business.
From: "You're in no danger"
To: "I will save you!"
This is truly an amazing time we live in.
Average Joe | 04.02.08 - 10:16 am | #
This is the adaptability and flexibility that is required to CYA. No one has succeeded up the pro-verbial ladder without this ability. Well except maybe Dick Cheney.
When exactly did "spreading the risk" around become a means of ensuring taxpayer bailout to minimize the risk of default instead of minimizing exposure in case of default?
"JPMorgan didn't assume all of Bear's financial obligations."
From what I understand JPM didn't assume most or even much of BS's financial obligations.
Interesting Times writes:
"...flexibility that is required to CYA. No one has succeeded up the pro-verbial ladder without this ability. Well except maybe Dick Cheney."
Careful, Dick gets wind he may pull out his shotgun..... The Texas incident stemmed from Dick loosing a hand of cards, imagine his anger when he gets wind of his inability to CYA...
"a default by Bear Stearns could have been severe and extremely difficult to CONTAIN"
OH NO! It is the return of "containment"! Now any and all FED action will be "contained" to averting a "systemic crisis".
We are all contained now.
"With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence."
If a two foot dwarf has confidence he can dunk a basketball then he tries and cannot, is it a bad thing that he has "severely shaken confidence"? Confidence in an illusion is the worst type of confidence to have. Just go ask the kid who was so confidence that the Mack truck would bounce off his chest that he walked onto the highway to prove it.
We are all contained now.
JJL | Homepage | 04.02.08 - 10:48 am | #
I am picturing that final scene in Raiders of the Lost arc.
The arc now contains MBS.
When exactly did "spreading the risk" around become a means of ensuring taxpayer bailout to minimize the risk of default instead of minimizing exposure in case of default?
"The moment of regulatory capture" =)
I place it somewhere in the late Clinton admin when the megabank consolidation really got underway, but you will always be able to push back the starting gun further, at least until you hit day 1 of the current financial regime and have to start blaming the human condition. =)
Tanta -- if this is withdrawal, they are currently in the denial phase, where they are planning to set up a tobacco plantation and grow for profit. Or something. I don't know how to metaphorically contextualize the burning desire to confute "avoid a depression" with "climb back up on this insane credit bubble and head for the sunset." It's been like 15 years since many of the people involved saw economic sobriety, and it shows.
What caused all this "turmoil"?
Here we were, humming along last year, no extraneous issues like 911 to blame, no terrorist attacks, the war going quietly if not well, Stock markets hitting all time high as the DOW breaks 14,000. Unemployment at record lows, homeownership at record highs, interest rates low....I mean nothing going wrong at all.............and then all of the sudden, six months later, for no reason at all, we are facing a crisis compared to the Great Depression, recessionary growth, with taxpayer bailouts for IB's and homeowners....
Why?
It's obvious that it's the financial system itself that is causing the problem.
Average Joe,
Amen.
Think a few people re-read Roubini's congressional paper, you know the 12 steps to eating out of a trash can...?
There is so much crap allowed to happen now in the interest of "what's good for the markets" it is rapidly descending into a parlor game at this point.
Stock halt comes from two places, the CO. or SEC....since neither one of them would have the balls to halt the stock (thus causing a sell off once it opened back up) it's was no surprise to me that the same "business as usual" sign got hung out shortly there after. Just like the CEO at C providing non-public information to a group of "analysts" about coming asset sales.
There is no consequence at all for breaking what little rules there are. That LEH outright lied about it's circumstances last week and then paid no price ( in share price terms) for that is what is wrong. In fact it was very lucrative for them to lie....about 10% more.
We have a ponzi scheme at best now....
Ciao
MS
You know, critical systems aren't supposed to be interconnected. Or if they are, they're supposed to be able to decouple quickly in case of catastrophic failure to one component.
I'm sure some systems analyst could help me out here. But this is a pretty well known fact. It's the basis of the redesign of power grids, and it was also the basis of some New Deal legislation.
"With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence."
That's the same damned excuse they made for bailing out LCTM and look where it got us.
Instead of attempting to fix our markets we focus all our efforts on making people artificially confident when it's not warranted.
And our markets continue to get more and more broken.
As I've said many times before:
The Federal Reserve has been screwing up in exactly the same way over and over again for a decade now.
Don't expect it to stop.
BTW LCTM is Long-Capital Term Management.
A very fine money management organization in its day.
ac,
I might suggest that we are going to hit a confidence wall this time around the point that the rest of the world no longer finds us useful...you know, that point where their banks, pensions, funds are adversely impacted by this...
...I think a few large countries are going to pull the trigger on this dying horse...
C is trading like it is "in the clear" I bet there is yet another "deal" for them too.
Ciao
MS
...I think a few large countries are going to pull the trigger on this dying horse...
Not as long as we own the guns. While I philosophically agree with ac's comments, we don't need to produce anything except bullets. Why not have our best minds working on looting the world? Isn't that more productive than actually working for a living?
The fed has been a total failure for the past decade. I have no faith in the fed. They seem to always be fighting the last war. no foresight.
The level of financial fraud and misinformation has been astounding. First in the tech & telecom bubbles. Second in the real estate bubble.
By example, the typical yearly mutual fund fees are 1.5%. This represents 50% of the annual after tax return of the S&P 500 over the last ten years. The fees also total approximately a TRILLION dollars over the past decade.
We need to break the cozy relationship of government and business.
Can't wait for Ron Paul's questions...
barely | 04.02.08 - 10:19 am | #
Ron Paul asks questions?
Raiders of the Lost Ark.
Interesting Times - I was thinking of that film when people were calling Alphonso Jackson a 'bovine face' the other day. I always thought he looked more like the guy whose face melted when they opened the Ark. I think it's the glasses.
Looking at this from distributed systems theory, if the system really is that interconnected, then it should in fact be more rather than less reliable. (No single point of failure.)
Unless the increase in network traffic caused by a single failure would over load the communication capacity of the system (aka broadcast storm), or the failure of one entity increases the load on the rest above their individual threshold, causing a failure cascade.
I suspect it was the last case they were afraid of, especially, as others have pointed out, wrt credit default swaps. With low latency communication networks in particular, it's very hard to prevent that, without carefully managing load across the system to prevent it ever happening in the first place. Load translating as leverage in this case i suspect.
Interesting times.
The Federal Reserve does not have the authority to arbitrarily and unilaterally cut a deal which leaves taxpayers liable for the outcome.... end of story. This is the whole stink of the matter.
"Why not have our best minds working on looting the world? Isn't that more productive than actually working for a living?"--safe_as_apartments
I think we already tried that in Iraq, and look where it got us.
Did Ron Paul Speak yet?
Details!?
It's never been just the financial system that caused the problem.
It's also the fragile finances of U.S. households based on too much borrowing, too little savings, slow income growth, high inflation.
It's also the decline of the U.S. manufacturing base which has created an economic wasteland in the heartland.
It's also the overextended state of public finance at every level, with too few taxes supporting too much deficit spending, borrowing, and future entitlements.
It's also the short-sightedness of leaders and policymakers at every level.
safe_as_apartments:
Not as long as we own the guns
Very good point, but I disagree. It's red giant syndrome...same as a lot of large civilizations expanding the number and frequency of foreign adventures. Bullets are made of metals, and they cost money to produce. Soldiers are inherently expensive to train, feed, supply, and what's worse, outside of looting there is no value-added to blowing stuff/people up...under international law, we can't even loot...We're not sending cheap commodities and oil back to the US are we? No, more importantly the US citizenry owns a lot of guns...that is far more intriguing.
You know, critical systems aren't supposed to be interconnected. Or if they are, they're supposed to be able to decouple quickly in case of catastrophic failure to one component.
I'll take an analogy from scalable software as a service design:
1) Single Point of Failures (SPoF), i.e. those than can bring down the entire system are systematically removed through a combination of redundancy and incessant systems monitoring
2) No database designer in their right mind would segment the data and then put in it 10 different places such that one disk failure would destabilize the entire storage system. That's just crazy talk.
Ron Paul up now -
Can't wait for Ron Paul's questions...
barely | 04.02.08 - 10:19 am | #
Ron Paul asks questions?
He'd be right at home here in the comments, wouldn't he?
"Going through a very difficult period?"
What, isn't that economist-speak for PANIC NOW! ??
When The Economist suggests investing in farmland, you know everything's in the crapper.
warlock - I studied and develop distributed systems for a living.
There can be significant risks associated with that model.
Think of CDOs and MBSs as cancer cells or even as a virus. Sure one cell won't kill the host, but it duplicates exponentially when the immune system does not immediately recongize it can kill it.
The FED/Treaury/SEC are that immune system. The deregulation that has occurred, basically turned off the financial immune system and let the risk spread until system shock.
I hope that helps.
AJ,
Yes, I too understand the basics of clustering, fault-tolerance, resilience, disaster recovery, COOP....blah blah blah...mirror stiping with parity across 10 disks...sad. Very sad.
Whew! I feel better now. Congress is going to make me rich AND prosperous again. Yessss!
Go Congress!
Ron Paul talking principles. Important? Of course. Relevant during this testimony where there's an opportunity to expose details of the Fed's recent panic moves. I don't think it was worth spending 5 scarce minutes of Q&A.
Too bad.
Here is a very scary report from David Walker (our govt. appointed bean counter). He has given up trying to talk to elected officials and now is telling the general public the true state of the US financial situation. Very scary and depressing...
YouTube - US Government Immorality Will Lead to Bankruptcy
Like some other poster, I find that what gets me is the 'shaken confidence' statement, with the implication that confidence is the paramount thing. Isn't that why the band played while the Titanic went down? In reality, there are times when confidence legitimately should be shaken. As in when the 5th largest investment bank is going BK in the morning.
I'm watching the testimony right now.
I have to say, overall Ron Paul wasn't as good at grilling Bernanke as he usually is.
The best question was asked by a different congressperson (sorry, not sure who).
He asked (paraphrasing)
1) who valued the collateral for the Bear Stearns deal- was it Bear using their old obviously faulty models, or an independent advisor
-Ben's answer: it was Bear and an advisor, but the advisor didn't have much time to do due dilly
2) how much did they pay that advisor, and how was the advisor chosen
-Ben's answer: he didn't know, it was done in NY and he wasn't there.
3) what if these securities were poorly valued? if there are major losses on these can the Fed go back and get more collateral?
-Ben's answer: no.
4) so taxpayer money is at risk here.
-no answer.
Maybe the economy is more like a chain smoker who just saw the last pack of Camels on earth head for the incinerator.
Tanta | 04.02.08 - 10:31 am | #
I have a funny story about that - I have a buddy who was a chain smoker & was forever trying to quit.
Talk big will power not so much.
We suggested he go somewhere to kick where he absolutely couldn't find smokes... We suggested backpacking in the wilderness FAR from any convenience stores or bars with only non-smokers like us (so he couldn't bum)... making sure he has thrown all smokes away before heading out.
He spent the whole week running up and down the trails looking for other hikers and asking them if they had any smokes be could bum - he was willing to trade them a $500 'expedition' tent of a smoke...
Guess what he learned? The kind of folks crossing 10,000 foot passes with 50 packs on their backs aren't likely to be 2-3 pack a day smokers.
Its funny now - wasn't so funny then 'cause he got kinda cranky.
Now THATS how I imagine the economy feels.
How can anyone have confidence in our super leveraged economy. It's so fragile that repeated & historic actions by international governments & central banks are required to keep it from imploding.
AJ, thanks. I'm around people who implement scalable systems sometimes. I have no clue about the details, but the theories make sense.
Am I supposed to believe the people watching our financial markets are that much dumber, and don't know what everybody else knows?
Or should I believe instead that they're lying, because they make more money ignoring the problem and getting handouts afterwards?
Yeah.
More errata: with 50 packs on their backs should read "with 50 lb packs on their backs".
I have yet to get an answer to one simple question, especially from people who argue the failure of Bear Stearns would have caused the death of all first-born, the breakup of the moon, and widespread cable outages during "The Biggest Loser."
Why could the Fed not have guaranteed Bear's counterparty guarantees and simply let the shareholders and bondholders eat cake?
Ted Kennedy really doesn't get it. The American people are responsible for the economy and the country's prosperity.
Sadly, we have wasted our wealth. Financial hucksters and politicians can not produce prosperity. EVER.
Faith in the economy has been shaken. The wealth has not been shared. The answer is managerial prudence, hard work and savings. A relative period of austerity. No more, no less.
First off, when you parse the following clip, it seems obvious that Bear was involved in fraud, and then sucked The Fed into a last second, forced negotiation, i.e, blackmail.
America should say NO to Bear, No To The Fed, No to Treasury!
Re: "On March 13, Bear Stearns advised the Federal Reserve
and other government agencies
that its liquidity position had significantly deteriorated and that it would have to file for Chapter 11 bankruptcy the next day unless"
See: Etymology:
Latin extortus, past participle of extorquēre to wrench out, extort, from ex- + torquēre to twist to obtain from a person by force, intimidation, or undue or illegal power : wring; also : to gain especially by ingenuity or compelling argument
So BSC and JPM people couldn't value the toxic crap on the balance sheet so the Fed just took it on its balance sheet? If anyone at the Fed was any good, they would be working at Goldman or Morgan Stanley. Yes, I know there are smart people there but come on, just like the clowns at Moodys and S&P, those that can't get big jobs at the best banks go to the junior varsity. Heck, even Greenspan was a joke in the private sector.
BSC bondholders got the biggest gift of them all thanks to US taxpayers. Sweet.
It's easy to quit smoking, I've done it a THOUSAND times.
Very good point, but I disagree. It's red giant syndrome...same as a lot of large civilizations expanding the number and frequency of foreign adventures. Bullets are made of metals, and they cost money to produce.
My quasi-facetious point is a bit different: we don't actually have to shoot the bullets to loot the world. The grasshoppers never eat the ants--it would be counter-productive.
My (simplistic) view of the world is that the U.S. provides a stabilizing force, built on the threat of destruction for those entities that step out of line. And, God bless, it's worked reasonably well for all parties for decades. As such, other countries are happy to give us real wealth in order to maintain the stability. Hence, they hold dollars that they must know (given the system) will lose real value in time.
Alas, it turns out the ants are a bit too pliant. This has left us in a world where our American greed and sense of entitlement can go unchecked.
But, regarding the present state of the U.S. economy, I ask myself: is it really the grasshoppers fault? Or the ants? Really, their respective actions are just in their natures.
I see nothing wrong with looting the ants; in fact, I would rather our best minds go in to financial services to rob them. It is a sad situation, but I believe that the only way to bring about its end is to encourage it until the ants have been squashed or they employ a crack team of circus bugs.
Angry Saver - Give credit to Mark Twain for that quote
Rob Dawg said: "Recession possible. - Bernanke
No Recession possible. - Sebastian
Sadly, I am torn as to which is the more credible."
More good news for me. Policy-makers' acceptance of a non-existent problem instead of denial of a genuine problem.
S.
Ron Paul talking principles. Important? Of course. Relevant during this testimony where there's an opportunity to expose details of the Fed's recent panic moves. I don't think it was worth spending 5 scarce minutes of Q&A.
Too bad.
barely | 04.02.08 - 11:16 am | #
Why am I not surprised?
Interesting times,
I did not know it was Samuel Clemens (AKA mark Twain)
Thanks!
Load translating as leverage in this case i suspect.
Thinking along these lines, I think available credit is band, and the "free market" is like the network traffic management heuristic. Trading patterns are the transmitted information.
A major station was found to have received fatal information at some point in the past. Traffic has been allowed to grow outside the scope of the management protocol, and there is much information moving now that has "hacked" priority and trustworthiness signatures.
In this context, the failure of a major node due to pre-received data would cause dynamic hysteria (who else got the kill signal? will they send it to you?) in the automated ("free") management algorithm, setting the management protocol doing senseless things akin to flapping. Long term, would it find subnet stability? Who knows? Cutting every or almost every station off from the minimum band required to stay signed on will moot the point, when signing off the financial network also involves signing off on bankruptcy papers.
So the regulators (hapless network admins with 900 books and a single retransmission rate rheostat to steer the network) have some other station to take up the failed station's responsibilities and identity.
The questions from that perspective, I guess, are what happens when you create bandwidth by fiat (carrier medium saturation?), what is the failure point of switching nodes with spare capacity, and who got a kill signal that can't be flushed.
And Schumer refrains from commenting after that eloquent description of the inability of regulation to curb the human instinct to bubble. That was possibly the most pregnant pause I've heard in my entire life. Gorgeous.
Hate the game, folks, don't hate the playa.
There's an amazing number of people here who apparently believe Wall Street doesn't add value. What's the difference between being a net exporter of cars and being a net exporter of financial services? Well, financial services are even more sensitive to the network effect than auto manufacturing is. They're less sensitive to currency fluctuations and insensitive to commodity prices. At the top, they require a very high level of education, so they're an area where a country with high labor costs can remain competitive.
Obligatory sympathy declaration: I have no sympathy for those who would say "good riddance" if high finance were to decamp to London, Dubai, Singapore, Shanghai and Tokyo. Contemplate how many well paying jobs with opportunity for advancement would be lost. Contemplate how bitter Americans would be seeing their monthly payment going to a processor in Mumbai.
Were mistakes made? Sure. Tanta summed it up very well when she pointed out that if, after risk-assessing the turnip and determining an appropriate interest rate of 20% yet discovering that the turnip can only pay 12%, the appropriate strategy is NOT to fund the loan at 12%. No amount of slice and dice CDO and CDO^2 can turn such turnip paste into gold, even though those innovations and associated pricing models, by themselves, represented significant beneficial innovation.
Sheesh, all y'all really want to go back to the bank in the town with the mill by the floss? When the mill shuts down the bank goes bust and the whole town fails.
Does anyone know anything about this collateral? Maybe I missed something, but it seems I have read in the comments here and last night things like "toxic crap" and "toiletpaper".
What if it is just private-label AAA-rated MBS? Would we still be freaking out?
Does this Congresswoman Sanchez have a question?
To correct a few odd comments:
Bernanke is a recent Fed Chair, beginning his term on Feb 1, 2006. He is not the one who created the situation. His appointment may have been due to concern over the systemic risks, because his favorite field of study was the Great Depression.
The bailout was LTCM, not LCTM. In 1998. It was partly precipitated by the Asian currency crisis.. Reading up on these two events would be helpful to understand what is now happening. You might note that the techniques used to cope with the Asian currency crisis are similar to those being used by CBs today.
Bear Stearns shareholders weren't the ones that got bailed out. A price of $2 per share was probably less than residual value. It was everyone else that got bailed out.
Stuff that's really good in this discussion:
The question of how interconnected we want the financial system to be gets right at the crux of the matter. Requiring reserves, segregating functions and examining enough to ensure that risks are properly reported do create firewalls to these types of meltdowns. Firewalls also limit growth, but exchanging slower rates of growth for panic-avoidance panics was the basic theory behind the Glass-Steagall legislation in the first place. I don't like the results of its dismantling.
I would dearly love to see a Calculated Risk discussion focusing on how the current situation of correlated and aggregated unknown risks (a la Tanta's brilliant post on the information-destroying function of liar loans) could be addressed long term to prevent a reiterated cycle of financial panics.
BB/BSC as W/NOLA--who coulda known?
Re: So BSC and JPM people couldn't value the toxic crap on the balance sheet so the Fed just took it on its balance sheet?
Re: "Our financial system is extremely complex and interconnected"
If this last second extortion was so complicated, why was a solution forced, as if a hostage had a gun to a head? Why were complex derivatives unraveled and sorted out, to a point where everyone felt they had a backroom deal? This was not a negotiation!
I would like to call to your attention the following:
in the context of contract law is a common law defense, and if one is successful in proving that the contract is vitiated by duress, the contract may be rescinded, since it is then voidable.
Duress has been defined as a "threat of harm made to compel a person to do something against his or her will or judgment; esp., a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition." - Black's Law Dictionary (8th ed. 2004)
Although hard bargaining occurs legitimately in commercial contracts, duress may be in the form of breaching an existing contract between the two parties unless the innocent party agrees to enter into another contract. The contract is voidable if the innocent party can prove that it had no other practical choice (as opposed to legal choice) but to agree to the contract.
The Elements of Economic Duress (breakdown):
1. Wrongful or improper threat: No precise definition of what is wrongful or improper. Examples include: morally wrong, criminal, or tortuous conduct; one that is a threat to breach a contract "in bad faith" or threaten to withhold an admitted debt "in bad faith."
2. Lack of reasonable alternative (but to accept the other party's terms). If there is an available legal remedy, an available market substitute (in the form of funds, goods, or services), or any other sources of funds this element is not met.
3. The threat actually induces the making of the contract. This is a subjective standard, and takes into account the victim's age, their background (especially their education), relationship of the parties, and the ability to receive advice.
4. The other party caused the financial distress. The majority opinion is that the other party must have caused the distress, while the minority opinion allows them to merely take advantage of the distress.
[show]
v d e
The fucking deal is VOID!
FYI,
The Vanguard High Yield Bond Fund has returned 1.35% annually after taxes over the past decade. Remember, this is at the top of a cycle also.
They call them junk for a reason.
How do you think the most recent junk bonds will perform over the next ten years? Think private equity, toggle bonds & historically loose underwriting standards.
Is The bear deal blackmail or extortion?
Blackmail is the crime of threatening to reveal substantially true information about a person to the public, a family member, or associates unless a demand made upon the victim is met. This information is usually of an embarrassing or socially damaging nature. As the information is substantially true, the act of revealing the information may not be criminal in its own right nor amount to a civil law defamation; the crime is making demands to withhold it.
Blackmail is similar to extortionthe difference being that extortion involves an underlying, independent criminal act, while blackmail does not.
MOM:
don't you mean $10/share?
Simple question for Bernanke:
"Mr. Chairman you said last spring that the mortgage problem was small and CONTAINED to the subprime arena. You forecasted limited impact from the housing decline. You predicted inflation to moderate. Tell Me Mr. Chairman, why should anyone on this panel, or in America for that matter, give credence to any forecast, predcition, or statement you make here today?"
I would love that one!
FYI - Ron Paul has not asked anything in today's hearing. He's a rep not a senator. The quotes above attributed to Ron Paul were Bob Casey, a sen. from Pennsylvania.
BSC bondholders sue got bailed out. Also, any preferred stock (if they had any) holders were bailed out. In a bk they would be in line at the courthouse.
Markel-
I've asked that question and I can't get anything that resembles an answer. They did it to keep the books private. Look at the books and you get a glimpse of how this system was held together for the last 15 years or so. Add that it was BSC, the most hated firm on WS, and you really get an idea of the crap that went on to keep it solvent (or the appearance of it)
Freezing transactions would have been fine but we keep hearing that it would have been too big for the market to absorb however based on the bailout we will never know.
Ties up very nicely for those involved...get tax payer money to make your worthless stock worth something and continue to prime a system that is broken and allows these problems to continue and only get worse.
Ciao
MS
*sure
In 1980, financial profits were approximately 10% of national profits. In 2006, financial profits accounted for approximately 40% of national profits. Remarkable. Inconceivable really.
Are the current fiancial profits real? Are they sustainable?
OT: Fitch wins...something.
Moody's Is Least Accurate Subprime-Bond Rating Firm (Update3) - Bloomberg.com
BSC bondholders sue got bailed out. Also, any preferred stock (if they had any) holders were bailed out. In a bk they would be in line at the courthouse
It's a shame those investors are not on the hook for potential Fed losses.
In 20006, wages as a percent of national income were at the lowest level ever since record keeping began in 1929.
I think I'll loan BB 10 million dollars so he can bail me out, too.
BSc shareholders also got bailed out....at $10. BSC was going to file Ch 11, so the equity was worth less than zero. The Fed is saying that the $29b it took on its balance sheet is investment grade. Of course rated by S&P/Moodys just like they rated MBIA and AMBAC. This is such a load of crap. The Financial system would not have gone under of BSC bondholders, pref holders and equity holders got zero. The counterparty risk could have been transferred to JPM and BSC would have been no more. What a load of crap this whole thing is.
I don't see how Bernanke or anybody can predict a housing recovery without predicting when real wages will increase.
Since people are asking about Ron Paul: I went back to his speech. (I have DVR)
this is not verbatum, but fairly close... I'm like a secretary here!
Ron Paul's points:
1) we've lost a lot of civil liberties since 911 (habeous,
2) there has been an insidious progressive combination of business and government. Over the last short while, we're seeing a rapid merging of govt/business
3) examples: the military-industrial complex, now the medical-industrial complex, and now media
4) original purpose of govt was to regulate govt, NOT for govt to regulate people.
5) if we believe in markets, they should be self regulating.
6) we don't regulate the govt, but we should
7) you as fed chairman can do things, and they are UN-audited with poor if any oversight.
8) the President's Working Group is a WORKING group, not an advising group. Why? we don't have minutes of what they do, whe don't know what they do, they have a LOT of power, but we don't know what that power is
9) we've given up freedom so that business and govt can collude together.
10) My concern: we've now gotten to a point where we only ask if a regulation is good or bad. the problem is that the general rule is that "when govt creates a regulation, it creates the need for 2 more regulations"
11) the problem: we allow the Fed to inflate, which causes bubbles, which causes the need to re-inflate
12) the basic question we should ask that we don't ask is "why do we have a business cycle".
-the answer over last 100 years, the conclusion has been (philisophically and practically) that it's a consequence of freedom and capitalism, and we need govt to save us from this freedom, the freedom of choice of individuals and businesses.
13) do YOU think (q to bernanke) that the business cycle is due to freedom, or gov't intervention?
BERNANKE
1) first, the Pres working group is only an informal operation. they have no statutory authority but do represent our thinking from our various agencies. it's a chance to get together and talk about issues.
2) certainly large parts of bus. cycle fluctuation are due to free markets.
3) some are due to govt intervention. (spending during wars for example)
4) particularly relevent to this discussion, in the 19th century there were many bank failures that caused general real economy issues which led to creation of Fed in 1913.
5) this led to Fed that needed regulation to ge rid of moral hazard that
6) we should not try to control the business cycle.
PAUL:
does the Fed contribute to the business cycle?
does excessive credit and artificially low interest rates cause malinvestment
BERNANKE:
the question is where should rates be. we're trying to balance things but we can make mistakes causing negative effects.
our goal is full employment and stabiliity
PAUL
someday we could try letting the market control this? thank you Mr. Bernanke.
Re: Are the current fiancial profits real? Are they sustainable?
FYI - Ron Paul has not asked anything in today's hearing. He's a rep not a senator. The quotes above attributed to Ron Paul were Bob Casey, a sen. from Pennsylvania.
Acheson | Homepage | 04.02.08 - 11:37 am | #
That makes sense...
He'll have his crack at BB tomorrow?
If so I hope he (and the others don't rant on & on). A few very good & target questions will bring out FAR more than a wind bag rant. My quess is there will be wind tomorrow...
The question I'd like him to answer is:
"What is your opinion as to whether we are, in aggregate, in an inflationary or deflationary environment? And given your view how do the current ongoing fed actions (TOMO, TAF, etc.) fit with that assessment?"
Make Ben pull out a lot more rope to play with.
Sheesh, all y'all really want to go back to the bank in the town with the mill by the floss? When the mill shuts down the bank goes bust and the whole town fails.
Ralph Cramdown
Ralph-- I agree wholeheartedly with the gist of your post.
That said, don't you find it a little disconcerting that there is more money to be made in providing financial services to the makers of widgets than in actually making the widgets themselves?
30 Billion of assets? Nonsense. Probably 15 Billion of worth today and 30 Billion ten years from now. A loss in real terms for sure.
Has anyone else got their "Thank You" card from JPM? I keep checking my mailbox...
Acheson
Ron Paul did ask questions after making a pretty long statement.
MaxedOutMama said: "...I would dearly love to see a Calculated Risk discussion focusing on how the current situation of correlated and aggregated unknown risks (a la Tanta's brilliant post on the information-destroying function of liar loans) could be addressed long term to prevent a reiterated cycle of financial panics."
Given how many of these things have occurred within the memory of market participants, I would argue that they can't be prevented.
To which I would further add that I don't want them to be prevented, since they serve a useful purpose, as well as provide profit-making opportunities.
Sebastia
That said, don't you find it a little disconcerting that there is more money to be made in providing financial services to the makers of widgets than in actually making the widgets themselves?
4runner | 04.02.08 - 11:48 am | #
No surprise there - the guys running the widget makin' company would rather make deals than make widgets too. Widgets are SOOOOO BOOOOORING.
OT
UK bank First Direct(owned by HSBC) is no longer taking mortgage apps because supposedly their systems can't handle the volume.
Acheson:
you are incorrect. Ron paul spoke. He really had a little speech not many true questions.
see my post above at 1146am. it's not verbatum, but it's the gist of almost everything he said.
The best questions were asked by Senator Casey (sp?), I posted those above but perhaps it was unclear that I meant that Casey asked the good questions, not Paul.
Tanta: any way you could edit my above post at 1118am so that people realize that it was Casey speaking, not Paul? (in my 1118post...)
So if the FED only had a day or so to get the Deal done for Bear Sterns, how was Blackstone able to adequately value the collateral??? The FED was unaware of Bear Stern's dire situation, until Bear Sterns advised them that they were in Big Trouble.
Investment grade?? LMFAO! After all of this, he still believes the rating agencies, he is really dumb.
Why doesn't anybody ask Bernanke why cpi inflation is up over 4% yoy. Clearly they have NOT provided stable prices OR stable financial markets.
The median family has almost zero in financial net worth. Yet they are forced to endure falling real wages and rising inflation. A deadly & toxic combination.
The fed is killing the lower four quintiles in order to preserve ficticious asset values.
[D]on't you find it a little disconcerting that there is more money to be made in providing financial services to the makers of widgets than in actually making the widgets themselves?
Should I? I thought it was basic economic theory that, given sufficient competition, prices tend toward the marginal cost of production. If there's more innovation in the financial services than in the car alternator, there's more profit, too.
The Old Game:
Bunch of guys stand around a table throwing dice. Shooters throw and win or lose. The loser passes the dice to the next shooter.
The game goes on.
The New Game:
One guy bets on a guy who bets on a guy who bets on a guy who bets on the shooter.
The shooter just rolled craps.
Some random thoughts:
You can't have "moral hazard" without morals.
"Spreading the risk" has been spread
to just about everyone in the world.
And we lost.
If the banks are too big to fail, then they are a money monopoly and should be split into smaller financial institutions. Why are the regulators taking the smaller BS and merging it into the larger JPM? Doesn't having a larger institution increase the moral hazard of a larger bailout or collapse in the next economic crisis? Congress and the "unregulators" should be breaking the "unfailable" larger organizations into a smaller units that can be digested without moral hazard. IMO
Here is a very scary report from David Walker (our govt. appointed bean counter). He has given up trying to talk to elected officials and now is telling the general public the true state of the US financial situation. Very scary and depressing...
YouTube - ? v=OS2fI2p9iVs
girlbear | 04.02.08 - 11:17 am | #
David Walker I believe has now resigned from the GAO. He has helped make a movie to increase awareness, IOUSA. I saw it at the Sundance Film Festival and met him. Despite the gloomy message he was optimistic that there was a solution. The others involved in the movie didn't think so though; they thought crisis.
It seems a difficult conundrum that the gov MUST pay down debt AND the American consumer MUST pay down debt. hhhhhmmmmmmmmm We might have a problem.
Markel,
Or should I believe instead that they're lying, because they make more money ignoring the problem and getting handouts afterwards?
I would think it's very much a matter of ignoring the problem until it gets out of hand. In the short-term, things may be working fine, everyone's making money, but the the long run you could face a serious derailing event.
If a scalable system is designed properly (which in the short run takes more time & money than say management desires), then the system can handle the load as it increases - one can add components to deal with increased utilization. Software routinely fails because of scalability issues that could have been prevented with common sense foresight and planning.
Perhaps there is a proper analogy to financial institutions & regulatory bodies?
How about a proportional bailout for all American taxpayers, i.e, dcrease our taxable income by either a percentage or dollar amount based on this bailout blackmail.
E.g,
How much does the federal government take in through income tax? During fiscal year 2007 (Oct. 1, 2006, to Sept. 30, 2007) the IRS reported collecting a total of almost $2.4 trillion after refunds, with $248.6 billion of that coming from individual taxpayers.
As in recent years, about $350 billion in taxes due went uncollected, representing an annual phenomenon the IRS calls the "tax gap."
In processing more than 235 million individual and business tax returns, the IRS spent an average of 40 cents to collect each $100 of taxes, the lowest cost per $100 in seven years.
$29 billion/ 235 million/
\t \t
29 000 000 000 / 235 000 000 = 123.404255
We the people, should all get a refund next year of $123 for the bail, but Im very open to other ways of excluding corporations from this refund.
CPI inflation for all to ensure asset inflation for a few. Some policy.
Lloyd, no, the equity was not worth less than zero. The shareholders would have got whatever was left, which apparently the market now thinks is somewhere around $10.
Going to bankruptcy would have pushed the effective losses off to other players in the short term, causing a rolling cycle of disaster.
The fact that Bear's collateral was mostly MBS probably implicates Alt-A. The Alt-A debacle is overshadowing subprime. Default rates in Alt-A are escalating rapidly and early indications are that loss severity is converging with subprime.
But the net impact on investors is much higher for Alt-A, because Alt-A tranching structures stuck much less as a percentage of the pool into the non-investment grade tranches. So the valuation on some of these investment-grade Alt-A tranches is worse than for subprime investment-grade tranches. You might have 6-10% in reserve on Alt-A, vs 20% for subprime.
Please see Housing Wire's coverage:
Both subprime and Alt-A borrower delinquencies continued to rise during February, with Alt-A delinquencies rising from 15.94 percent in January to 17.40 percent. According to a report released Thursday by risk management and due diligence provider Clayton Holdings, Inc., subprime delinquences now represent an eye-opening 33.14 percent of loans on a UPB basis, as well.
...
Alt-A loss severity, in fact, is now even approaching average severity numbers for subprime across all collateral. Clayton reported that subprime first lien average loss severity increased to 45.80 percent in February, up from 42.56 percent in January; Alt-A first lien average severity rose to 36.66 percent, in contrast.
The timing makes it likely that the Stern and Sad Bear's demise was intimately related. I think the Feb remittance reports came in, Bear got margin calls, Bear tried to shop some stuff around, and bing-bang, it got offers that were pitiful, and trala! it was BK. That's why the Fed is taking this stuff at the window, and why the Fed extended the facility to broker-dealers. It's rapidly turning into toxic waste.
CRE is going belly-up too.
It amazes me how easily human can have their heads turned with fancy speech and performance.
A leaky boat in imminent danger of sinking, is the same unless substantial performance of repair is done.
Housing can't mend itself, because
(1) A massive glut; nationwide oversupply is severe
(2) Reduced demand. Interest rates are very high. Rate drop doesn't drop through. Less scrupulous loans gone. No subprime, Alt-A. Intense new lending standards. Speculators and second home buyers are urgent to liquidate--not buy.
(3) Rate reset teaser loans allowing homeowners to "ride up" and appreciation drove purchasing.
(4) Buyers are assuming much greater risk, knowing they are entering a market that is falling.
(5)# of homes coming to market by large and small builders will further glut market, defaults in process of foreclosure will further depress.
(6)Home pricing in fall, constrains equity withdrawal and the spending it has supported for more than 7 years.
(7)Demand for securitized mortgage products is gone. Trickle down means credit contraction. Credit contraction has greatest impact of large consumer purchases.
(8)Home related purchase will remain deeply depressed. Furniture, home improvement et al.
(9)Wealth losses due to home price contraction has barely begun.
(10) Incomes will soon contract deeply, further hampering spending.
Still a leaky boat. "Talking fancy" and monetary palliatives are only horizon dilating mechanics. The large tree in the forest is falling, can we really stop it now with FED and Treasury wizardry?
Ben should resign this afternoon!
Big problem:
the senate hearing is asking Ben 'what should we do"
Per Senator Cummings:
"I know it's our role to help out, and I know that we are the ones in charge of a lot of this, but I'm asking you, because you're the expert, you're the superstar! can you give us 3-4 examples of what you think we can do to help in this situation. what you you like to see us do, or what would you recommend to us?"
also
"people in my district can't afford gas! how can we help them?"
and so on.
this ismore of a hearing of congress alternating yelling at BenB and then asking him what they as Congress should do.
MAXED OUT MOMA,
I disagree regarding Bear. Absent the 29 billion guarantee from the fed & treasury, equity would be at zero and the bondholders would be looking at significant haircuts. Prior to the bailout, Bear's bonds were all trading at dicounts.
How is it you think you know more than the market?
dryfly -
You have reminded me of the cartoon that hung on my wall back when I was in the mfg biz:
B School Professor: "Today, we're going to learn about production."
One student to the other: "Things? I don't want to make things. I want to make money."
"He predicted that unemployment would probably go up in the next few months, despite having dropped in February."
Did he steal that from here:
Lincoln Memorial
Lincoln Memorial - Wikipedia, the free encyclopedia
he central cella is flanked by two others. In one, Lincoln's Gettysburg Address is inscribed on the south wall, and in the other, Lincoln's second inaugural address is inscribed on the north wall. On the latter, the word Future was carved with an E instead of F and had to be filled in and can still be seen today.
Ben is just human, but he needs to resign and Paulson needs to be questioned as to why usurping power is not a crime!
Sorry, skipping comments, but Dodd is a Wall Street tool.
Here's he's chief leash holders...er bribers...err...campaign contributors.
Why looooookey here...
4
\t
Bear Stearns
\t
$205,100
Chris Dodd: Campaign Finance/Money - Top Donors - Senator 2008 | OpenSecrets
Cheers,
MoM:
I agree with Angry Saver. How on Earth can anyone know what Bear is/was worth?
it is very possible that they were worth LESS than zero, given their liabilities and leverage.
It is very possible that if nothing had been done then Bear would have went BK. In that case, then Bear stock would possibly have gone to penny stock status, and a lot of the bond holders could have lost out as well.
as it is:
the bondholders are all made WHOLE, and the stock holders get $10.
do you think they would have had this leverage if there wasn't a $29B Fed Backstop?
Regardless of what we call this, it was a bailout.
MoM:
I am with Angry Saver on this one. Bear is only worth $10 when you include the $29 billion Paulson Put on the balance sheet.
As MP said last night, with the Paulson Put, how can you lose?
albrt - With the Paulson put, all americans lose.
One student to the other: "Things? I don't want to make things. I want to make money."
MLM | Homepage | 04.02.08 - 12:07 pm | #
LOL! I was in a machine shop yesterday with some career bean counter types... as we walked in I said to them "Doesn't that smell great? I LOVE the smell of machine shops..."
They looked at me like I'd spent half my life 'sniffing glue'... maybe they are right.
The greatest bank robbery in history, absolutely brilliant.
Does anyone else feel that congress should be asking Bernanke about the long term desirability of our asset inflation economy?
I just wonder how artificially stabilizing housing at historically high valuations is going to make us more prosperous. Same for the equity markets.
Funny video:Bohemian Financial Rhapsody
YouTube - Bohemian Financial Rhapsody
"We're not sending cheap commodities and oil back to the US are we?"
not yet. but we're sure doing our damndest to shove the new Oil Law down the Iraqis' throats that will enable western oil bigs to tap Iraq's oil under extremely generous terms. looting is subtler nowadays. doesn't mean it isn't happening.
"I just wonder how artificially stabilizing housing at historically high valuations is going to make us more prosperous."--Angry Saver
Well one thing's for sure, it's going to make the tax collector more prosperous, since ad valorem taxes are determined as a percentage of the valuation.
Sorry for my confusion...and I stand corrected re Ron Paul. Yes he spoke. I think it was casey on those questions. Can I blame a constriction of the blood vessels to the brain caused by anger & frustration watching Bernanke?
Contract Slightly'
Asked in a Bloomberg Television interview about the IMF's analysis, U.S. Treasury Secretary Henry Paulson said today that sounds overblown to me.'' Federal Reserve Chairman Ben S. Bernanke said in testimony to Congress's Joint Economic Committee that the U.S. economy maycontract slightly'' in the first half.
The International Monetary Fund cut its forecast for global growth this year and said there's a 25 percent chance of a world recession, citing the worst financial crisis in the U.S. since the Great Depression.
The world economy will expand 3.7 percent in 2008, the slowest pace since 2002, according to a document obtained by Bloomberg News
Obama said that if the Federal Reserve is going to make credit available to investment banks, those institutions should be subject to the same liquidity and capital requirements faced by commercial banks.
WASHINGTON - Orders to U.S. factories fell for a second straight month, a worse-than-expected performance that reinforced worries that the risk of recession is rising.
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The Commerce Department reported Wednesday that factory orders dropped by 1.3 percent in February, about double the downturn that economists had been expecting. Orders had fallen an even bigger 2.3 percent in January, the largest decline in five months.
Time for another rally!
Finally! A congressman talking about rising CPI costs and stagnating incomes.
I own a house. BFD if it rises or falls in value. I'm going to live in and enjoy the house regardless. But to have continually rising fixed monthly costs for the sake of maintaining ficticious asset values is ludicrous. That's the real problem at hand.
Can someone please explain to me why stocks are up this week?
"Can someone please explain to me why stocks are up this week?"
mostly short covering, but then that is almost always the initiator of intermediate term moves.
Acheson:
my first post was unclear and poorly worded which caused some confusion.
you correctly identified the first "quotes" that I posted at 1118 were Casey (Kasey? sp?) and not Paul.
the second quotes were Paul. 1146am
maxed out-
You have no idea what they were worth...just because someone put a price tag on it (thanks Fed, Paulsen et al) doesn't mean that's what they are worth either.
The real value was much closer to $2 than $10. Otherwise why even place a $$ amount value on it. JPM knew enough to value it at $2 but hold on that was not enough to insure that the shareholders.bondholders get there slice.
This deal was nothing more than legalized rape of all of us. We got spoon fed the notion that if it did'nt go off (at that price- $10) than the value assigned to it would have been in question as well. SO no soup for any of the people who stood by and watched it all happen-that goes for the stupid shareholders who watched it get cut in half the previous week, If ever you had a sign to sell that was it...instead we got crying by the rich to bail them out of there non-action of the previous week.
If you held BSC stock and did not sell on that Friday (when it was worth between 25-33) you deserve to loose all of it. But not according to Paulsen and the Fed.
Sorry but just because someone said the sun rose in the west does not make it so.....apparently that is what is used as an excuse in this case.
Try again....
Ciao
MS
MOM, thank you for restoring my faith in the ability of CR posters to offer up things that I can read, are thoughtful, and I can learn from. I start to yawn about the fawning over the crackpot Ron Paul...I mean really, talk about tilting at windmills. Give us something that can actually happen instead of pandering to the "shoot the Fed" mini-micro-minority.
And to those who disagree about BSC's value at $10, can you give me an analysis of their latest 10K that shows me where the residuals wouldn't add up to that valuation? I'd be interesting in seeing this analysis you've done after all y'all have written.
In all this Ben-the-equity-pumper watch... Factory orders weak.
Can someone please explain to me why stocks are up this week?
Increasingly crude intervention, and a populace so poorly-educated and smug that the groundlings down in equities still haven't figured out where the intermittent smell of smoke is coming from.
Iopodius-
Why don't you tell us where you got information that values them at $10.....simply stating what has already been put forth by them doesn't count.
JPM thought they were worth $2...how come you know more than them???
Ciao
MS
You have no idea what they were worth
MS you have no idea what they are worth either, or at least I can gather that by reading your posts. If I were an editor, I'd take your last post and make it this: "The real value was much closer to $2 than $10." and then add in the analysis you did to come to your conclusion and strike all the histrionics that follow. Please post your analysis, or were you over at Barry's blog posting the same things there and not left with enough time?
What if it is just private-label AAA-rated MBS? Would we still be freaking out?
Shnaps | Homepage | 04.02.08 - 11:31 am | #
AAA as rated by who, those clowns at Moddy's and S&P? The folks who said MBI was AAA even as it has to raise money at 12% and then promptly see that paper trade for 70 cents on the $. The stuff they receive big fees for rating knowing that if they don't give out nice high grades, that there will be no lucrative business in the future.
CMDC,
Regarding the market being up this week.
Look at the bigger picture. The market is lower today than it was nine years ago. In real terms, the market is down almost 40% over the past nine years. So much for purchasing power.
BTW, on a historical basis the stock market is still overvalued.
I think Dodd and anyone thinking about this bear bailout/extortion should ponder the logic of what might or may occur if a company like VISA or American Express was or could be in the position of Bear Stearns.
What if, American Express had over leveraged itself and placed itself in a very weak financial position?
Do we as a nation want corporations to be so unregulated that within the passing of one day, the accountability of an organizations understanding of its complex financial affairs is either totally unknown or a mystery?
Should we as taxpayers bail out unregulated corporations, or should we offer lines of credit to corporations that play by the rules, versus gamble with complex risks and distortions of accounting?
Why don't you tell us where you got information that values them at $10
So far as I can see, I'm not arguing about the dollar value YOU are. I'm merely of the opinion that if this is what the deal got done at, then this is the "mark to market" that you're all screaming about. You just don't like the mark. So prove why or give it a rest.
The only thing you're complaining about is that someone got some money and you didn't. Otherwise you'd put out a thoughtful analysis of the assets and be able to put a valuation statement together.
"And to those who disagree about BSC's value at $10, can you give me an analysis of their latest 10K that shows me where the residuals wouldn't add up to that valuation?"
Ipodius:
the onus is not on us to prove that BSC was worth $10 or not. The onus is on Maxed out Mama.
our claim is that nobody knew the valuation of BSC, including the Fed and JPMorgan Chase. (which by the way equates to what Ben Bernanke just admitted in his testimony to the Senate)
Maxed out Mama's claim was that we don't know what we're talking about, and that BSC was worth at least what they got, thus no bailout.
MoM is in error here, as s/he has no more ability to value BSC than the Fed/JPMorgan Chase
and those with the most knowledge valued BSC at $2. not $10.
ipodius writes:
You have no idea what they were worth
MS you have no idea what they are worth either
I think you guys just nailed the key problem with our system!
MS & ipodius....get a room.
Bear already knew its value, which was zero, and that is where the extortion strategy came about
"It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly. ... However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside."
In related news, experts find water is wet.....
"JPM thought they were worth $2...how come you know more than them???
"
jpm offered to do the deal at $2 with the fed backstopping $30billion in mbs. you can be sure that jpm thought they were worth a hell of a lot more than $2 with a huge cushion to boot.
the change in price to 10 was a deal between jpm and some shareholders of bsc. they basically took a billion dollars and handed it to bsc ahareholders and left the original collateral at the fed at 30b put took a first call hit on the first 1b of losses to the fed mbs book. so the fed did nothing to change the deal from 2 to 10. other than to insist that jpm essentially indemnify them for the 1b in capital that was heading out of jpm to bsc shareholders. this deal actually improved the feds position. it made things worse for jpm but since they were scoring so huge on bears assets they could be 'gracious',
Dirk van dijk
I see you have become another raving nutter like the rest of us.
Seems only last march that you were telling us all we were overreacting to counter party risk and a risk of system wide meltdown.
Welcome aboard!
"We're not sending cheap commodities and oil back to the US are we?"
Jose Stigliz pegs the cost of the Iraq war at $3 trillion.
That's about $35 per net barrel (assuming 25% royalty) for its 115 billion barrels of gross oil reserves.
You can buy ExxonMobil's reserves cheaper than that, and Lukoil's a hell of a lot cheaper.
And to those who disagree about BSC's value at $10, can you give me an analysis of their latest 10K that shows me where the residuals wouldn't add up to that valuation? I'd be interesting in seeing this analysis you've done after all y'all have written.
I'll do theirs if you dig up Enron's and do it...
No I have an offer from JPM that said they were worth $2 which is a reflection of what they were willing to pay, not a trumped up figure that includes a backstopped loan and values created out of thin air ala BSC 10-k or I suppose you need a lesson on how to read that too.
That you trust the values in BSC filings is where you are in dire need of education. Someone else (cough JPM cough) decided that it was a crap valuation too and bid $2......end of story.
Ciao
MS
Ipodius,
I like your posts; however, I disagree with you & MOMA on Bear.
Within the past hour, Bernanke admitted that the 30 billion of Bear assets could not be liquidated at this time without a loss. Hence the Blackrock deal. A five percent discount on the 30 billion alone would have made the Bear equity value zero.
Well, here you go
Moody's Is Least Accurate Subprime-Bond Rating Firm (Update3) - Bloomberg.com
Moody's Is Least Accurate Subprime-Bond Rating Firm
"Fitch was rated the most accurate also because it doesn't have AAA ratings on any securities tracked by ABX indexes that UBS expects to default, while Moody's has 35 ranked the equivalent Aaa and S&P has 24 with top ratings, the report said. Fitch also rated the fewest ABX subprime bonds -- only 200 of the 400 rated by Moody's and S&P -- meaning it was the ``most conservative'' when assessing new deals in 2005, 2006, and 2007."
JPM thought they were worth $2
No, JPM offered to PAY 2. Given their business model, they obviously thought it was worth more. Keep in mind that this was a situation where interested bidders had to pay cash and value a complex trillion dollar balance sheet in 12-24 hours. There was barely enough time to phone your board members, never mind arrange financing.
Do you own a house? How much would you get for it if you had to sell in the next ten minutes?
I don't see what the issue is here. BSC just got marked to market. So what's the problem? Isn't this what a market is about...it sets the price? If you don't like the price, don't be involved in the deal. I have no idea what BSC is worth, and neither do any of you. Jamie Dimon might have a better idea, because JPM got to see the Bear naked. None of you did.
I might add that the Fed got to see the Bear naked too. It also got to see it in such a way as to fully appreciate the effect it would have if others saw it naked too. They decided to cover him back up. I suspect their analysis was better than anyone's here (at least from what I've read) and, again, I have no business second-guessing BB at this point. I reserve, however, the right to in the future. The rest of this is just hot air.
On the contrary I am complaining that someone STOLE money without any authorization other than "trust me" and then had the balls to hand it over to the people who presided over all of this.
But as long as your mom gets access to her money than it's all ok.....
Again wave the flag somewhere else.
Ciao
MS
Think of Bear as a gambling addict. They believed they had money to back bets, they believed they could continue accounting fraud to cover losses, like Enron, they believed that luck would change, they believed that another bigger bet would pay off the prior bad bets, they believed up until the last second that they could keep betting worthless chips.
Enter The Fed, with a gun held to its head by an addict that was in a panic, who told The Fed to get on its knees and give up money.
Enter Treasury with a suitcase of cocaine and cash and a jet with no strings attached.
Treasury wants to keep the casino open for gamblers and will use taxpayer funds to support collusion and corruption.
Bernanke admitted that the 30 billion of Bear assets could not be liquidated at this time without a loss
Thank you AS, I enjoy yours. I think the key to that statement is at this time. I think Ralph just said it best: if you had to sell your house in 20 minutes what is the value? If you could wait 5 years what would be the value?
So the Fed just stepped in and took the house off the market.
You contradict you're own argument.
You are correct he saw it all and offered $2 what part of that is so difficult for you to grasp???????
dumbass....
MS
So Ipodius, you then agree with me and disagree with Maxed out Mama, who claimed to know what Bear was worth?
there are 3 arguments going on here
1) MoM claimed to know what Bear was worth, hence that it wasn't a true bailout
2) people like me claimed that nobody knows what BSC was worth
3) a few people claimed that BSC was worth less than what they got.
IMO the most accurate answer is #2. Nobody knows what they are/were wroth.
BenB and JPMorgan Chase got at most a flash of BSC's naked body... it was nowhere near enough to make an accurate valuation of BSC.
Nobody will know what BSC is worth until far into the future IMO.
Do you own a house? How much would you get for it if you had to sell in the next ten minutes?
Ralph Cramdown | 04.02.08 - 12:40 pm | #
Bingo!
That my friends is mark-to-market.
On the contrary I am complaining that someone STOLE money
From whom MS? From you? If so, how much? Tell me what you just lost! The only people that got screwed and I feel bad for are the people that spent 15 years there and were relying on their shares to retire on. They were probably completely in the dark about the real story.
Again, ask a shareholder how they feel about 10 a share. And again, wave your boohoo "i was on the wrong side of these trades" stuff somewhere else. No one cares.
OT
This is off topic but I think pretty important.
I've been researching how much exposure the U.S. life insurance industry has to mortgage-backed and asset-backed securities and real estate.
The best estimate is total industry assets of $600 billion in mortgage-backed and asset-backed securities plus about another $50 billion in direct mortgage participation or real estate equity (mainly commercial for both). These holdings account for about 30-35% of total industry general account assets.
The only company that has yet announced writedowns is AIG and they are $2 billion last quarter and an anticipated $550 million this quarter.
According to a recent Ernst & Young report: "Where life insurance traditionally relied on high-quality corporate bonds and mortgage-backed securities, there is now greater emphasis on aggressively structured asset-backed securities, hedge funds, private equity, real estate and other related classes."
About 5% of industry assets are in BIG (below investment grade) bonds.
It would appear that the industry is heading for its worst financial crisis ever over the next 2-3 years, with many downgrades and probably several failures. Is this important?
Yes, because:
The Fed has no jurisdiction over insurance companies and no ability to prevent failures.
Insurance companies are vulnerable to runs, when policyholders cancel annuities and life insurance contracts or strip out cash values. Companies have no defense to prevent dumping illiquid securities on the market at fire sale prices to meet runs.
Insurance companies are by nature highly leveraged. The vast majority of their assets are owed to investors (liabilities). Typically, their capital is only about 10% or less of assets.
Mutual companies can't replenish capital by selling common stock. They don't have any.
Insurance companies are the only private entities that can provide guarantees,and loss of confidence in guarantees would make consumers even more nervous.
It is not clear that ratings will be very meaningful in helping consumers evaluate insurance company exposures, because the ratings agencies have leaned so heavily on their own estimates of underlying securities (AAA ratings in CMOs). Ratings agencies have not yet provided any transparency into insurance company writedowns.
In sum, this is not as big as the mortgage meltdown in large banks.
But it could be a pretty big story with scary legs for a couple of years.
Even the $2 Bear bid was founded on a fed & treasury backstop.
This deal should be stopped and the 30 billion liquidated immediately. That would give an accurate mark.
The problem is, then the fed would have to re-mark its own books and make margin calls to banks and brokerages. What a joke.
Price discovery has been suppressed to maintain artificially high asset values. Prosperity baby. Just don't try & spend it.
Ralph-
read the statement again...
"No I have an offer from JPM that said they were worth $2 which is a reflection of what they were willing to pay"
Really poor analogy with the sell the house in ten minutes.......but good try.
Ciao
MS
Yearning, I completly agree. This is too soon to be saying anything about this except "I hope it works".
But the boys and girls at JPM just bet that they are worth more than $10 a share. I'd like to see what they think, but I have to say that they're in a better position to know than anyone bitching on here.
Correction
Insurance companies are by nature highly leveraged. The vast majority of their assets are owed to policyholders.
Not investors.
Interesting Times - Strangely designing and building distributed systems for a living is also what i do for a living.
There are multiple issues at play here - #1 being a general ignorance amongst economists about real time systems (excepting Hayek perhaps).
But it's hard to disentangle a fundamental change in the nature of the distributed system that they're trying to analyse (caused by the general communication latency drop in the last decade), and the banking community's complete failure to follow their own rules.
For instance, there's nothing superficially wrong with the notion of CDS, until you find out that people haven't correctly budgeted for the underlying risk. This is a known problem with all forms of insurance, not just financial, and might also be regarded as one of the easier financial scams to engage in.
That there are now second order effects within the financial system created by what people do with other instruments when that kind of insurance is available is clearly also a problem.
If we can't allow companies that engage in underpricing risk to go properly bankrupt, won't arrest their employees for being complicit in criminal activity, (selling something that they can't deliver is i believe a form of fraud), then the only other recourse may just be to ban this form of insurance.
Reliable, network wide multicast, is never going to be implemented for much the same reason.
"So the Fed just stepped in and took the house off the market."
true. but there is risk in what they did.
sure, you may get less for your house if you have to sell in 5 minutes versus 5 years.
but that doesn't mean you won't lose money on your house 5 years from now.
none of us has any idea about what was posed as collateral for that deal.
we do know that the various groups had only 3 days to fully "value" the deal (an impossibility) and thus the valuation is clearly in question.
As BenB said: if we find out later on that the true "value" of the collateral is less than the loan, then we cannot go back for more collateral.
say what you will: Fed money (also called taxpayer money) is at risk.
If you think the only people screwed here are BSC employees that "knew nothing"..than there is nothing I can say or present that will make you aware of the billions of dollars of money that we pay in taxes that is being shoved out the door to prop up failed organizations.
You are truly a dumbass if you think this is contained to just BSC shareholders.
Done with you....
Ciao
MS
warlock - I forgot to mention that Moody/Finch/S&P are also major players in the financial immune system.
2 out of the 3 failed (and continue to fail) to perform their function.
knock off the swearing please.
we can disagree without personal attacks and swearing...
Interesting Times
Hmm, don't you think immune system may be dignifying it just a little there? Although granted the analogy with AIDS would be quite nice, since it essentially hijacks part of the immune system against itself.
But i don't see any evidence that the financial system is currently that well evolved.
It's not like anyone designed it, it just grew. Now economists are examining the equivalent of the daily traffic logs on the major routers and trying to figure out how the system behaves.
Good luck with that.
Yearining, all you say is true. And I admit that taxpayer money is at risk. But only at risk. No loss has yet occured. And, you know, the history books will write this up as brilliant if things go well. And I admire big risky moves like this. It's what made the country great. If you look at a deal that suceeds and say "wow, it took a lot of balls to do that" you have to hand it to the people involved.
On and I have a private bet with another poster on here that I can make MS swear in three posts or less. I just won the bet
No one can know for sure what BS assets are worth. $30 billion is the current book value, but on the market?... I'd be interested in knowing about their liabilities. Assuming that,if held to maturity, the MBS would net 80 cents on the dollar, then $24 billion of liabilities would set the stock price to $0.
Assuming that,if held to maturity, the MBS would net 80 cents on the dollar, then $24 billion of liabilities would set the stock price to $0.
Al, what about the counter-party payments for the losses and value of hedges against such activity? You're acting as if unwinding BSC is a simple this for that event. But it isn't. .80 on the dollar doesn't mean anything alone.
dumbass is a swear word???
Wow now I know where the delusional part comes from....
They said the same thing last year in these words:
"it's all contained"
that money is already gone and you don't even think it's at risk.....
Good luck with that ..
MS
Ipodious - care to bet how many consecutive posts MS can go without swearing?
/I'll take the under.
ipodius..simply stated, this is what you are not considering:
YouTube - Who's On First
The counter party payments should be in the equation somewhere shouldn't they, either as an asset or as an offset to a liability. And of course, the value of the counter party insurance is at max 100 cents on the dollar, but possibly much less.
It's not like anyone designed it, it just grew. Now economists are examining the equivalent of the daily traffic logs on the major routers and trying to figure out how the system behaves.
Hehehe... no one designed our immune system either. (then again, if you're a creationist we might have to end this thread since we'd be going into religion topic)
I'm off to the new thread.
Nemo,
Nice youtube collection!
Re: BSC / JPM Deal
Did the Fed violates it's so-called charter - and if yes - what are the consequences?
The debt markets were in grave risk - to the degree that Bear Stern stock holders, who should have lost everything in bankruptcy all else being equal, actually didn't quite lose everything because they had some kind of weird bartering point in reserve. BB and HP are interested in propping up investment banks that manage federal and other government entity debt. The federal government is in debt (and at war) and must prop up the insolvent investment banks that help the government survive by managing all the government debts and deficits. Who is in charge of this economy exactly? Am I confused or what?
rich,
Thanks for the contribution. I imagine in a severe recession, policy holders will also tap policy equity just like a 401k or savings account, so we might be suprised how much this hurts insurance companies. Good post.
great article; recommend (if it hasn't already by someone else), john hussman's article:
Hussman Funds - Weekly Market Comment: What Congress and Investors Should Understand About the Bear Stearns Deal - March 31, 2008
"What Congress and Investors Should Understand About the Bear Stearns Deal"
found via patrick.net
thanks
Ipodius,
Who are best to evaluate these illiquid securities (MBS, etc.)? Aren't the investment banks themselves, the ones who not only originate, trade, securitize, but also leverage (to the moon on these derivatives) on them? They know what the risks on these securities are. They know the true risks on these securities, extremely bad risks that are now confirmed by weekly downgrades from the rating agencies, and refuse to trade or accept them on the market place. These junks will still remain junks after this crisis is over because of their rotten fundamentals. The market freezes because bad debts and leverages on bad debts go way beyond reserve capitals. The market functions as it should rejects these toxic junks. And the only way to left to unwind their bad bets is to have the govt. coming in taking these junks off their hands. The govt, the representative of the US taxpayers as bagholders, will, no if or but about it, hold on to these junks until their values are bottomed out according to their true junk status, which will be undoubtedly a big loss to the bagholders. Ipodius, you seem to hold out to the hope that somehow these junks will become gold after the crisis is over thus the Fed's will be made whole again as the result. Remember, these are junks, the players know they are junks, the market knows they are junks, the world knows they are junks, even the FED knows they are junks, by now almost any average American knows they are junk. That they will never be made into gold by Wall Street Alchemy is crystal clear. So by taking off these bad debts, internalize as costs to the taxpayers is a bailout.
Sometime during that weekend there was at least one news story that had Bear officials on record as saying if they didn't find a buyer by Monday morning that they would have to file bankruptcy.
Every other bankruptcy I've seen has led to the common going to the pink sheets or otc bulletin board with common shareholders getting bupkus.
Bondholders would have been in line hoping to get back some of their principal.
Based on that - bk if no buyer - I'd say Bear at that point in time was worth closer to the $2 bid JPM made...
Those Alt-A and Prime soon to be Subprime MBS that Bear held would have been liquidated one way or the other clearly establishing market clearing prices (price discovery anyone - yeah OTC markets are sooo much better than listed - NOT) which would have given everyone else a severe case of indigestion when they saw where stuff really ought to be marked...
Some older people who don't want to keep up their life insurance payments sell the policy to investors for cash, as opposed to simply cancelling the policy. Wonder how big the size of this market is?
"which apparently the market now thinks is somewhere around $10."
No, that was decided solely by JPM, who was given the right to tax US citizens for that amount.
Here's a back of the envelope calculation I have not seen. Bear has $10.441 B of captal at YE. Take a 30% writeoff of the $30 B in securities the Fed guaranteed and divide by 146M shares outstanding: 10.441-9=1.441B/146M=9.86 per share. Of course, this does not take into account any other writeoffs lurking on Bears balance sheet.
Ralph Cramdown writes:
JPM thought they were worth $2
No, JPM offered to PAY 2. Given their business model, they obviously thought it was worth more. Keep in mind that this was a situation where interested bidders had to pay cash and value a complex trillion dollar balance sheet in 12-24 hours. There was barely enough time to phone your board members, never mind arrange financing.
I have a friend who used to work in the foreign bonds division at JPMorgan. Nobody in the department had a clue what any of their deals were worth. And I don't mean within a small amount. I mean within an order of magnitude no clue (And we aren't talking about a 400 thousand dollar mortgage either, try billions).
ar:
well that kind of explains why your friend used to work there....
I think it's impossible for anyone to have a clue what the value of BSC's MBS's are worth. Just looking at the WaMu pool that Mish posted and the horrifying and accelerating losses of that pool, are you telling me that anyone can assess a value for that POS.
There's a reason why the MBS market is locked up and it's not because of liquidity.
Oh come on. This is a taxpayer bailout. Before the deal the taxpayer had to pay $0. Now it will have to pay something between zero and $29 billion. This risk has a price. This price is non-zero. And the CDS market says this risk is quite substantial.
It's like Russian roulette. Even if you didn't get the bullet, you were stupid to play. But taxpayers had no choice not to play.
What is even funnier, BSC will get interest on these MBS they pledged before they default and will pay a measly Fed Funds rate in return to Fed.
I think that no one knows what Bear Stearns was worth (wasn't it $80 a share book value per a VP?) and we'll never know. We do know that at $10 a share it was worth it not to have to find out.
Ipodius writes
"The only thing you're complaining about is that someone got some money and you didn't."
You are a real piece of shit Ipodius. You have been constantly trying to reframe this debate as people crying sour grapes when there is a lot more to it than that.
If you can't see the bigger picture here and the principles involved with the outrageous Fed interventions than maybe you should just keep your mouth shut since you are coming off as almost comically ignorant and clueless.
Get a clue and quit putting peoples legitimate concerns off as whining. Wake up. The questions and issues here go way beyond mere complaining.
It's sad that you can't ignore certain commenters. Some are so addicted to the smell of their own farting they think everyone else enjoys it, too.
I think a killfile would be the best possible site improvement.
Here's a video summary of Mr Optimism himself from today's hearing...
YouTube -
Re: value (ha ha) of Bear Stearns:
Reggie Middleton did a very long analysis. It convinced me, but take a look for yourselves if you want to see a numbers-based analysis. I believe its at boombustblog.com
Bernake:recession possible
Me:(mugging like Jon Stewart)Tell me more.
Bernake:"Going through a very difficult period."
Me:(even dumber jon Stewart face)Oh really...
Henry Blodget | April 2, 2008 8:21 AM
Goldman Sachs (GS) taking the rest of Wall Street to the cleaners is nothing new, but now comes word that Goldman played a direct role in the destruction of Bear Stearns (BSC). According to Fortune's Roddy Boyd, several days before the collapse, Goldman decided to stop backing up Bear Stearns derivatives deals--and it announced this decision to hedge-fund clients in an email that spooked an increasingly panicked Wall Street:
[On the morning of Tuesday, March 11], Goldman Sachs's credit derivatives group sent its hedge fund clients an e-mail announcing another blow. In previous weeks, banks such as Goldman had done a brisk business (for a handsome fee, of course) agreeing to stand in for institutions nervous, say, that Bear wouldn't be able to cough up its obligations on an interest rate swap. But on March 11, Goldman told clients it would no longer step in for them on Bear derivatives deals. (A Goldman spokesman asserts that the e-mail was not a categorical refusal.)
"I was astounded when I got the [Goldman] e-mail," says Kyle Bass of Hayman Capital. He had a colleague call Goldman to see if it was a mistake. "It wasn't," says Bass, who is a former Bear salesman. "Goldman told Wall Street that they were done with Bear, that there was [effectively] too much risk. That was the end for them"...
When word of the Goldman e-mail leaked out, the floodgates opened. Hedge funds and other clients, eventually running into the hundreds, began yanking their funds.
The next afternoon, Bear CEO Alan Schwartz announced on CNBC that everything was hunky-dory (which, according to Boyd, it wasn't). And two days later, Bear Stearns effectively went bankrupt.
Should Goldman be blamed for this? Absolutely not. Bear Stearns was under-capitalized, over-leveraged, and stuffed to the gills with crappy debt. Once again, Goldman seems to have outsmarted the rest of Wall Street, spotting a problem before everyone else did. Because "runs on the bank" are often started when smart players cut and run, however, Goldman's decision appears to have at least contributed to the stampede.
Goldman Sachs: Giving new meaning to "crushing the competition"
The Bear Sterns - JP Morgan - US taxpayer bailout seems as if the CEOs are arguing strenously that the federal law must limit the size and scope of banks and investment banks to that the collapse of one bank will not collapse the U.S. economy. If they expect to be bailed out because they are so big, they have an incentive to engage in high leverage or other risky strategies. Taxpayers therefore have an interest to tightly limit the size and scope of such banks to prevent themselves from being fleeced by over paid bankers.