I've been furious since the AIG mess. This "conservative" administration is probably going down as the most fiscally liberal in history. Anyway, here's my take:

Everyone is acting like we should be feeling sorry for the people that are losing their homes because they aren't able to pay their mortgages. Maybe I am crazy, but THESE PEOPLE BORROWED MONEY, AND AREN'T PAYING IT BACK. I have very little respect for people that don't pay their debts, and now we are going to essentially use taxpayers' money to not only keep these middle class people (with their middle class salaries) in their Park Avenue lofts, but we are also bailing out the morons who financed them.

As usual, our government is taking the short-sighted approach. The problem is NOT that there are people out there that are going to lose their homes and financial institutions whose credit lines will dry up (without intervention), but that EVERYONE was systematically taking on far more risk than they realized they were taking. All this talk of "traditionally rock-solid" (quote from Fortune's latest article on Hanky P) money-market funds potentially losing money is driving me crazy; the only risk-free investments, as far as anyone should be concerned, are (1) FDIC-insured deposits and (2) U.S. government bonds (bills, notes, whatever). That's it. NOT money-market funds. NOT AIG's debt. NOT mortage-backed securies or an actual home. And people will never learn this as long as Uncle Sam steps in to save them whenever their "rock-solid" investments were going to cost them.

One of the most basic tenets of free market capitalism is that people and institutions will sometimes fail. This is a good thing, as it not only teaches lessons but provides opportunity to entrepreneurs and other enterprising entities (individuals, companies, etc) to pick up where the failed institutions left off, and for industries to reinvent themselves from the ground up. Paulson, Bernanke, and most other U.S. politicians claim to believe in free markets, yet their hypocrisy is unbelievable. This is far more than Paulson doing what he can to secure another cushy Wall Street job when he graduates Treasury next year - this is the grandest, most radical government foray into the private sector in U.S. history (and by a long shot at that).

Where do these people come up with their ideas? If AIG is "too big to fail," what kind of message does that send to Citi and Bank of America? It's basically implicit government backing should anything go wrong. We should all very seriously consider moving any money we have in Treasury bonds into more lucrative bonds issued by these two institutions...

And what does "too big to fail" mean, anyway? Clearly, AIG wasn't too big to fail, since it would have failed without that $85 billion (that could have paid for almost 1 million college educations, saved the world from global warming, or gone towards any number of not only more noble causes but much better long-term investments) Hypocritical Hank tossed at them. If you really want to endorse that view, then the long-term solution is NOT to make these institutions even bigger by brokering enormous mergers and takeovers, but rather to make them smaller. People act as if the "standalone investment bank" business model is broken, and that the solution is to fully complete the integration of commercial and investment banks, but THAT'S EXACTLY THE PROBLEM. If investment banks were investment banks, and commercial banks were commercial banks, we wouldn't be having this problem. People's deposits and pension funds and IRAs wouldn't be at risk, since it would be the investment banks taking on the enormous risks and failing when shit hits the fan.

"No pain, no game" is what free market capitalism is all about. If you want to take on enormous risk, you'll occasionally reap enormous profits but also occasionally suffer enormous losses. By stepping in right now and spending over a trillion dollars (they've spent ~$600B so far and are working on this $500B plan) to basically relieve the pain these risk-takers are feeling (and, by risk takers, I am talking every bit as much about Joe Schmoe taking out a subprime loan to buy a house he can't afford as I am about the speculators who financed that purchase), you are sending the completely wrong message. If these guys honestly believe that these companies should all be bailed out right now, then they also need to tax the hell out of them when times are good. If you are going to limit risk, you also need to limit reward (so when we go through an even more catastrophic mess in 10 years [since no one outside of Lehman Brothers will have learned any sort of lesson besides "if I fuck up, the taxpayers will save me"] we can just take the money made from those tax increases to bail them all out again, rather than taking my money). And that is a dangerous road to walk down, considering America has traditionally been so strong for its relative embrace of risky behavior and all of the ups and downs that come with it.

For a second Hanky P had me fooled; I thought we'd really stick to our word, and show Japan that if they had let their failing institutions fail 10 years ago they'd have recovered much more quickly. But it looks like we'll be riding the same shitty roller coaster they did...

That was, by far, one of the most articulate posts I've ever read on this forum. I couldn't agree with you more.

wow, great post. i agree with you to an extent, but don't you think there is a certain point where the government should step in? in this case it was early, but understanding when to say enough is enough is quite difficult. the reason i say this is because we do pay taxes partially for some security in know that the government can save us if need be.

Bottom line, everybody from joe schmoe to gordon gecko was NOT respecting RISK for what it is. We have all learned, the hard way. And after all, that's the way we learn. U.S. Govt, come bail us out, because otherwise we will spiral into hell. Let us have one more second chance. We promise we'll be good this time.

Um cdw38: Middle class people who had those subprime loans didn't buy Park Avenue lofts. They bought those McMansions that were going up in New Jersey. If only they actually had the forethought to buy a Park Avenue loft (Manhattan=holds value better).....

"We are lawyers! We sue people! Occasionally, we get aggressive and garnish wages, but WE DO NOT ABDUCT!" -Boston Legal-

Well spoken, couldn't agree more. And why is it even the government's responsiblity to encourage home ownership??? Heck, if you can't buy....RENT! Everyone is talking about stabilizig the system....but with the current actions all that has been done is to destabalize the system for the long run...it's called moral hazard....tought in econ 101. If you want a stable financial system, you need to allow things to go bust, that's the only way to stabilize anything. By saving everyone, institutions will have the expectation for the long run that the government will always step in to save them....and they will act accordingly.

bravo, cdw38.

sorry

cdw, i think that we are giving the average man too much credit. talking to some of my friends from high school i see how disconnected they are from what happens in the financial world, even though at the end of the day they are the ones getting fucked over. in that case, i think the government intervention is somewhat neeeded to protect the financially ignorant. with that said, the i think the audience on this board will have a slightly harsher opinion of what is the right thing to do in terms of government intervention.

although this is an overly generalized statement, i think the reason for this financial meltdown boils down to misaligned (not sure if that's a word) incentives. the end user (the homeowner) did not see any of this happening when he stupidly took out that interest only mortgage hoping that the house would appreciate. the blame really has to rest on 3 groups, the sellers of the mortgages, the investment banks, and the rating agencies. the mortgages sellers just had to sell mortgages and make commissions, they were not taking any risks, so they started to slack on lending standards (but obviously they didn't care because they were getting paid). the rating agencies are to blame because they were willing to give out any rating so they could get the business. there is no requirement stating you have to be rated by all three rating agencies, so you might as well pick the one or two that give you the best rating. lastly the banks made the products so complex that no one knew what was going on, so the institutional investor who bought them relied only on the false ratings given by the rating agencies.

now as for the timing of the step in by uncle sam, it was too early, a few more greedy folk should have lost their jobs. i also agree that shit was getting too big and letting it go a bit further would have caused massive breakups of larger institutions. it would have allowed for the proper people to have their lessons taught to them. it's a bit unfortunate that joe schmo is actually being pulled into all of this, although i think there would be some benefit to an entry level econ requirement in high school so more people actually know what is going on

But isn't the problem that the people taking out interest-only loans didn't understand the risk? And that the institutional investor was buying debt based solely on a third party's opinion? I'm not saying the rating agencies, banks, and thrifts are blameless, but it seems they were simply satisfying the demand Joe Schmoe had for buying a home. I see what you mean - that we might be putting too much faith Joe Schmoe's ability/desire to learn these lessons - but still, if he understood risk the sorts of risk he was taking, the mortgages wouldn't have been taken out and this problem wouldn't exist.

Maybe an analogy would be drug use - drug dealers exist because drug users use drugs - it's not the other way around. Subprime loans existed not because speculators had some insatiable desire for holding the bonds (or instruments), but because Joe Schmoe wanted to buy a house and didn't understand the risk. An entry-level econ. requirement in high school could certainly help - make people understand, from a very early age, that nothing is risk-free (even FDIC-insured deposits and Treasury bonds face inflation risk).

I suppose that the price tag is just so hard to even fathom, as well as how in the world our federal government could make these institutions more efficient (this is the same government, after all, that wastes weeks holding hearings on topics as important as steroids in professional baseball and video-taping in professional football, among other things).

I guess the cliff-notes version of this post would be that if the government always intervenes to protect the ignorant (financiallly or otherwise), those people will always remain ignorant. But maybe, like you said, I'd be putting too much faith in those people to think everyone would learn their lesson without intervention...

While I generally agree with your philosophy, I think you're underestimating the importance of the financial system to the overall economy. Finance is the blood of the economy. If the interest rate on the 3 month T-bill goes to 0.05% and credit markets seize, ordinary businesses can't finance ongoing operations, let alone borrow to expand. A collapse of the banking system would lead to another Great Depression, unquestionably.

I'm not saying that I know what the solution is--but I do think you're underestimating the consequences of institutional failure.

and maybe this means that the US needs to regulate finance more closely; i'm not sure. truth is, i'm not sure what good it would do--it's not like there were all these govt guys on the sidelines saying, "hey everybody look out for those complex derivatives contracts, you're VaR models are conceptually flawed!"

it's going to be a long road ahead, thats for sure.

CDW I am going to go out on a limb and say you are still in college and don't understand the idea of counterparties yet... AIG was in fact "too big to LET fail"... they had trillions of dollars worth of counter party agreements that if allowed to fail would send a domino effect through the entire financial system. The capital markets HAVE dried up. Last week, things took a drastic turn for the worst. I saw grown men with their face cradled in their hands scared for what will happen to our financial system.

I will go out and say THANK GOD Henry Paulson is in charge right now, He is someone not scared to do the unpopular thing (at least to the ignorant) when he knows better then anyone what can get us out...

And, just for your future reference CDW (and the rest of the idiot parade on this board), the FED "bailout" of AIG you speak of is actually not a bail-out at all. The goverment is basically temporarily buying some 80% of AIG for that $85 billion. It is basically acting as a bridge loan until the markets are more receptive to AIG's assets. At which point, the FED will sell the assets (most likely at a hefty premium to what they bought if for.

And for your reference, that $85bn loan is backed by ~$1 TRILLION in assets. If I had $85 billion, I would of thrown it into that deal as well....

This is the deepest thread in WSo history.

"financial dictatorship"

Sept. 20 (Bloomberg) -- The Bush administration asked Congress for ----->unchecked powerThe bill would bar courts from reviewing actions taken under its authority

just enter the dates you wish to review.

http://www.treasurydirect.gov/NP/BPDLogin?application=np

i did a test of gw's presidential years - expensive indeed.

I wasn't getting 80% of the company with full asset coverage for that $1.25 per share; and if I was to buy the debt I would of been buying it on the basis that it would of gotten support for the government and I would of been pretty happy with my choice

and PS, the equity holders of the stock are getting basically knocked out. So good thing I didn't put that $1.25 into the stock huh? They are putting debt into the company and getting the equity in the company.... hmm.... I am really starting to question how bad the blind posting on this site is spreading misinformation;

Also- when it says they have $1.05 trillion in assets, that is their "marked-to-market" valuation, meaning hypothetically they could sell those for that value. But since some of those investments are very hard to value, I agree that that valuation may be a little inflated... but since people smarter then you or I made this desicion with a lot more then finance 101 on their transcript who are you or I to question their choice right now... DO you have a better idea?

hahahahahahahahah...i'm sorry, RossGellar, i was reading your post seriously, and then you went and invoked LTCM as a historical example.

you do know that there was a rescue/bailout of LTCM right? that all the major financial institutions (w/ the exception of ltcm's broker bear, they really showed them) were browbeat by the NY Fed and the US govt into adopting a rescue plan whereby they took over the fund's assets and slowly liquidated the positions overtime so that there wouldn't be a massive liquidation overnight that might lead to financial collapse?

you DO know that, right? or do you just like to quote buzzwords and arguments that you got from your dad with no real knowledge of situations.

i dont know who called the people here "an idiot train" but i'm slowly beginning to see their logic...more and more i get the impression that people arguing here are basically hs or college students who have little actual understanding of economics and the real world, and even worse, are ill informed but ignorant of that fact

(and to be clear, thats not to suggest that all the arguments people have put forth are necessarily idiotic or not supported by people who are not idiots, just that in general i feel like the people who are making the most in depth arguments here are well, way out of their depth)

1. From reading your previous posts, xqtrack, you are a college student and are probably just as young if not younger than most of the people that have posted here.

2. Yes, I too have read When Genius Failed. Bravo for bringing up the fed's unwinding of LTCM's positions, even though it is in no way at all similar to the bailout of Bear and the bridge loan to AIG. My apologies for leaving that out of my original post.

3. It is interesting that you're calling the posters here an idiot train, when you yourself have yet to post anything useful or intelligent. Since our original thoughts are so idiotic, how about you trying to share your input with us. You know, the input that you generated yourself and didn't read out of the wall street journal?

w/ personal attacks. obviously even the smartest guys in the country dont necessarily know what to do here. that doesnt mean we cannot dissect options or opinions intelligently.

what id like to know is where are the hot shot stars on wso? i am calling you out to constructively contribute to this discussion or any discussion on "todays" massively changing financial landscape.

and now we're quoting tom friedman...this just gets better and better

cdw38, your point about AIG having $1 T in liabilities to match the assets only matters to the treasury depending on how senior they are in the capital structure--ie if the treasury has structured the deal (and i think they have, but somebody correct me if im wrong) so that they get first claim to any assets that are sold off, then the treasury has very little risk. my understanding of the deal is that with the equity stake, the treasury can essentially force aig to sell assets and pay off the loan (using equity control) way before the company even approached a restructuring

It's easier to take one side of the argument here and say "These massive bailouts are creating moral hazard, etc etc etc etc". As a student of economics, the theoretical constructs DO have validity, however, in the case of such a severe loss of confidence in such a short period of time I think the FED did the prudent thing here. Nobody can say with certainty what would have happened (or what still might happen) had the government let AIG fail and confidence was eroded even further. Nobody can say, we should have accepted short-term pain for long term theoretical prosperity. The issue here is we are in uncharted water. Judging by the magnitude of the crisis and the speed with which it came upon us, I do not think sitting on the sidelines would have led to "1 step back" -- probably more like 10 steps back.

I am sure the countries top economists are well versed in moral hazard and understand the consequences of this massive government intervention - and I believe "this administration" isn't necessarily to blame for this mess (a bunch of other fuck-ups, absolutely). I think this was the last desperate measure to try and restore confidence in the system. AND there is still no guarantee that the financial markets won't run into trouble tomorrow as soon as Congress starts dragging their feet.

This is an extremely complex and difficult issue - to say that someone is an idiot for expressing an opinion is narrow-minded. We should not assume that this is the best plan of action and we should definitely question these policies, but I also believe we shouldn't condemn the entire FED as a bunch of idiots that don't know what they're doing. At this point, the financial markets are in pure survival mode -- all we can hope is that we haven't fucked up incentives too much going forward so that we repeat these mistakes (READ: MASSIVE REGULATION ON ITS WAY - duh)

well put WSO. i agree that the "what if" scenarios would probably be too painful to realize. it already has affected a few thousand lehman employees and people at other firms and i think most of them have learned that finance is a risky business. whether these lessons will trickle down to everyone is still unknown, but many people right now are stuck with homes that have lost a ton of value and who were using them as financial investments. pension values have decreased as well. there is no knowing how much institutional investors/ pension funds have lost because of this mess and it's scary to think about how many people will be retiring in the next to decades.
the only problem is the few banks whose management teams have not learned their lessons, but i guess you cant win them all...

your argument trashes its premise. is not any easier to take the moral hazard argument side any more than its easier to take the other. you made a judgment that the "end of the financial markets" was imminent, thats based on theory. as you said, nobody knows that. moral hazard is a theory as well, yes, but it has been proven to exist - crises like these are in part a direct result of it.

the argument wasnt about intervention. it was about this particular form of intervention. example. i think the intervention last night in which the fed and the treasury somehow coerced GS/MS into being commercial banks is more appropriate for a regulator. these are the dire first steps that they are supposed to be doing if they think the sky is falling. not just taking our tax dollars and throwing at it.

and in this case, as ive said before, i think a government controlled dissolution of AIG would have been more appropriate than a junk bond investment with my tax dollars....which incidentally is probably what will occur, except as far as i know without the full control of the us government to protect our investment. doh!

i see you agree to the limits on personal attacks i said earlier...these are complex issues....and in kind that $700b+ bailout is a whole nother tangled mess we weave. im not sure i completely agree, and i obviously have problems with an il duce hank paulson but at least this seems more of a laser focused on the problem than just handing out more of our wage taxes.

People need to stop blaming people for buying houses they couldn't afford.

The fact is, banks pushed up the value of houses so much that people COULDNT POSSIBLY AFFORD HOUSES the last 2 years. In which case, the same shit wouldve happened, just two years prior. My parents house doubled in value in 5 years, while my school consistently had more and more drop outs...it was absurd. Housing prices became to high for the lower and middle classes, and they shouldn't have had to rent their whole life because of this bull shit.

I propose/nominate that this thread be put in the Forum of Fame. Seconds?

no you have zero banana points

so? WTF does that have to do with it?

I'm going to go out on a limb and say that companies that are doomed to fail are going to fail, bailout or not. Just look at the airline industry. Out of all 6 legacies that have gone through the bankruptcy revolving door, 4 of them are bleeding red ink. 33% isn't a very good success rate.

So the bailouts are ultimately not going to do anything other than delay the inevitable. You can't just borrow your way to prosperity and then inflate your way out of the subprime mortgage crisis.

"We are lawyers! We sue people! Occasionally, we get aggressive and garnish wages, but WE DO NOT ABDUCT!" -Boston Legal-

(Late reply, I know)

And how about the automakers. Another $25B in taxpayer-funded subsidies, and for what? Terribly run private organizations. The jobs aren't going overseas, they are simply shifting...as the Big 3 are unloading workers and losing money in Detroit, Subaru and Toyota (among others) are building huge new plants in Indiana. And so goes the world economy...

In other news, maybe Congress got the memo? Buffet just dumped $10B in this market without government support. I'm buying hand over fist tomorrow, anyone with me?

I wouldn't say communism more like increase regulation; I think that communism is bit overblown but in the future banking will probably get much more regulated (not to the extent of communism) than before.

hyperbole....

love it guys, glad we've all read 'the communist manifesto' in high school government courses.

yea

You forgot credit card companies in the mix of consumer-facing industries that will be crunched in the next few months. Consumers have continued to increase their credit debt even as the housing market has fared poorly in the last year; however consumer credit is growing at a slower rate, and delinquincies are on the rise. Which means banks will continue to tighten credit and repeating the process.

On another note, if you have 20 minutes or so, you should go over Bernacke's remarks today. It'll be review for many of you, but it doesn't hurt having a macro picture and some insight into what the Fed plans to do with TARP.

http://www.federalreserve.gov/newsevents/speech/bernanke20081007a.htm

The guy gets schooled by Ron Paul (whether you agree with him or not, he's the only person smart enough/bold enough to challenge Bernanke) EVERY TIME he testifies in front of Congress. If he wants to help the U.S. government fix prices by running some sort of distressed debt hedge fund, then good for him, but the Federal Reserve is way overstepping its bounds. Of course he thinks he is acting in the best interest of the country, but he's terribly misguided.

venturecapitalista: The point is that credit was way too loose. We need credit to tighten up, and home prices to come down. Credit was too loose => demand for homes became artificially high => home prices skyrocketed. Now, what should happen is this: Credit tightens up, people default on home loans => demand for homes goes down => prices fall => Free market capitalism. But, what the Federal Reserve and U.S. government want to make happen is this: private-sector credit tightens => U.S. government "creates" $1T+ to artificially keep credit from tightening and people from losing their houses => home prices don't fall as much as they should => central planning and socialistic price fixing.

Somehow, Bernanke, Paulson, and Co. have it in their heads that inflating our currency by creating $1T+ out of thin air and using it to help set the prices on "illiquid" (i.e., overpriced) debt is going to stave off (oh, no!) recession. To think that at country more than $10 TRILLION dollars in debt could suffer through a recession!

I've never missed a bill payment and recently had my credit limit raised. They will tighten credit for people who deserve to have their credit tightened (they still need to make money, after all).

I agree with cdw38.

We are indeed on a road to surfdom. None of the presidential candidate is saying anything against the "so called POOR" people who took those loans that they knew they wern't going to be able to pay back. And democrats talk about "Telling truth to power".

I am not a citizen of US. I'm from India. But at both places it has become a fashion amongst the political class to blame everything on the rich ... and then turnaround and tax the rich left-right-and-center and then dole out subsidies to poor.

Thomas sowell said once - “One of the sad signs of our times is that we have demonized those who produce, subsidized those who refuse to produce, and canonized those who complain”.

Democracy has become an effective mechanism to loot the rich and feed the poor. And then clib on the roofTop and complain about the rich for being too greedy.

vicks.

revive

Read Paulson's Book, On The Brink