Good Layman's guide to the financial crisis

[Ken White]

end-all in any event.

Either way, that's an inflammatory and twisted article you linked to, it does not address the fact the Force Protection's vehicles are not the most commonly used MRAP -- or that they're still selling MRAPs

Flaky.

[bourbon]

Hi Ken,

It was a flaky article, it was inflammatory, and in a sense that was the point. MRAP’s are not the issue, the undermining of the capitalization process via stock manipulation is. Dr. Byrne previously had posted a near identical article along the lines of: “Hedge Funds to Cancer Patients: Die.” In that case it was a biotech company developing treatments for cancer.

The same stock manipulation scourge of delivery failure and phantom stock has recently been a factor in bringing down the largest banks in the land. Jim Cramer almost noted almost as much today:
Cramer on Shorts: The short-selling assault on the financials was and is rule, and this is something the next SEC chairman must examine, says Cramer. (Video)

Cramer focuses on short selling, but does not mention delivery failure, which is the key part as it allows for ‘naked short selling’. And it is understandable why Cramer doesn't after reading The Story of Deep Capture. Cramer also barely spits out:
"....the government was completely captive to the hedge funds and the brokers because that's the way the government was; this is the best government money can buy."

That sounds like regulatory capture in public choice theory. Regulatory capture happens when politicians and bureaucrats act in favor private-vested interests over the public interest. The theory has been further expanded to “Deep Capture”, whereby not just regulatory institutions are held captive, but all institutions are susceptible to capture. Including; academia: mainstream, financial, and social media.



(Ken: btw, a man by the name of C. Austin ‘Bud’ Burrell has been a major player in exposing these failures in the delivery system, has done groundbreaking work. Apparently he served as an SF officer during Vietnam, and later spent 30+ years on Wall Street. Do you know him? He has done great work.)

[Ken White]

journalistic failure and cited my gripe. I did get the real point, honest. I apologize for wandering off on a tangent.

No, I don't know Burrell but I know of him -- not through his Army time but through a friend who's a fellow UK Business School grad (and booster). All favorable...

I appreciate your posts on these failures -- most of 'em set me to growling so I don't comment much. I'm also not terribly sympathetic to those who knew they were overextending themselves. Nor am I inclined to feel sorry for detroit who have refused for almost 40 years to get real. Generally I find it hard to accept the stupidity and cupidity -- and the fact that Congress and the Government are bailing these clowns out instead of jailing them.

[Schmedlap]

Regulatory capture happens when politicians and bureaucrats act in favor private-vested interests over the public interest.

I think that train arrived a long time ago.

[bourbon]

Bud Burrell has a blog of sorts at The Sanity Check. His posts, in addition to a series of interviews with him from several years ago, have helped me get a feel for the delivery failure problems. So, if one has a spare nine hours I recommend them.

Also at the The Sanity Check, the pseudonymous Bob O'Brien has recently posted his take on the subprime meltdown. His theory involves the same issue of delivery failure; the equivalent of naked short selling but the bond market. He further performs an exercise with MS Paint, whereby he puts into graphics "the complex series of issues and moral conundrums" discussed in the blog post. I will reproduce it here:


Good for a laugh after an otherwise maddening post.

[bourbon]

Sorry, I got focussed on one of my pet peeves, journalistic failure and cited my gripe.

Here is a case of what smells like not journalistic failure, but journalistic corruption.

This blog entry is from emails recently unsealed in a lawsuit between Fairfax Financial and SAC Capital, et al. Fairfax claims a conspiracy (the legal kind, not the tinfoil hat kind) involving short-selling hedge funds, and compromised business analysts and journalists, engaged in a plot to destroy the company’s stock for profit.

The journalist in the emails is Bethany Mclean, who was then at Fortune, she is also known for being the first reporter to break the story on Enron’s corruption.

[Wildcat]

McLean's a cutie. She looked really good on the Colbert Report a couple months ago. Unfortunately, it looks like she jumped the gun on that investigation, and received some backlash. (Can anyone remind me what journalistic integrity looks like? I seem to have forgotten.)

I have an interesting perspective on the financial crisis, seeing as I just spent the past year of my life working at a law firm in Charlotte that represented Wachovia, in the group that handled the bank's commercial mortgage transactions. Ended up getting laid off back in October because we had no work to do and weren't making any money. Then the firm started getting rid of attorneys, too. Fortunately for me I had already signed my contract with the Marine Corps, so my next job was on the horizon and it didn't hurt me too much.

Still, it was interesting to talk to the attorneys I worked for. They filled me in on the subprime lending stuff, explained why it was affecting the banks and thus affecting our business. But the funny thing is, they kept telling me, "Oh, it'll get better in a couple of months." I heard that about five or six times over the course of the year. I don't know if they were BS-ing me, you know, just to soothe the underlings, or if they earnestly believed that it was just a momentary dip. But by the time June rolled around, it had reached crisis proportions.

I'll say this: when I'm done with the military, I am never going back to finance or corporate law. What a complete Charlie Foxtrot.

[selil]

[Surferbeetle]

From this mornings WSJ

It is a sorry place at which we Americans find ourselves this none-too-festive holiday season. The biggest names on Wall Street have gone to their rewards or into partnership with the U.S. Treasury. Foreigners stare wide-eyed from across the waters. A $50 billion Ponzi scheme (baited with, of all things in this age of excess, the promise of low, spuriously predictable returns)? Interest rates over which tiny Japanese rates fairly tower? Regulatory policy seemingly set by a weather vane? A Federal Reserve that can't make up its mind: Is it in the business of central banking or of central planning? And to think -- our disappointed foreign friends mutter -- all of these enormities taking place under a Republican administration.

[Ken White]

I'm uncertain what your question asks.

I am certain that the linked article is written by a Financial Pundit -- and that all pundits are highly suspect -- who correctly cites some history but misses the broader history in the process.

We are where we are because we have over the last three generations cultivated excessive dependency on government and have dumbed down education to the point of danger. Most of that and many of the ills he does cite are the fault of a succession of US Congresses and Presidents from both parties who have placed the good of their party and their ideology above the welfare of the citizens of the US and of the country itself.

The only medicine that will cure that is a complete revamp of Congress and the political process, a return to truly challenging education instead of feel good - talk nice vapidity and a lessening of dependence upon government.

Good luck with that...

[SNK]

I agree with Mr White, the solution is education, not disfranchisement as bourbon apparently professes. Naked short selling is only one method out of many to corner a market: The money will always flow to the financial tool that is less regulated. During the last 200 plus years there have been financial crises every 10 years and it will continue.

In addition to previous lists of entities to blame, the press can also be included. There is a general overemphasize of the equity capital markets vis-à-vis the other capital markets. The former used to be regarded as vulgar for a reason.

[Schmedlap]

The only medicine that will cure that is a complete revamp of Congress and the political process, a return to truly challenging education instead of feel good - talk nice vapidity and a lessening of dependence upon government.

I would also add: the resurrection of personal responsibility and a renewed emphasis upon actual business ethics, rather than the recent foolishness regarded as "corporate social responsibility." Politicians, businessmen, and schools can create climates that encourage unethical behavior, but it is still a personal choice to partake in it.

[Ken White]

I would also add: the resurrection of personal responsibility and a renewed emphasis upon actual business ethics, rather than the recent foolishness regarded as "corporate social responsibility." Politicians, businessmen, and schools can create climates that encourage unethical behavior, but it is still a personal choice to partake in it.

which includes both the educational system and parental guidance having an impact will provide that sense of personal responsibility which has been eroded by the educators and psychological counselors emphasis on self esteem at great cost to self respect.

Educate people to be better parents instead of telling them that whatever they want to do is acceptable. It frequently is not.

Dependence on government only adds to that, people are ultimately responsible for and to themselves. Doesn't seem to me to be that hard to understand but apparently it is...

[Ski]

I'd also add in another factor that has been overlooked:

Major criminal penalties and sentences for those financial "gurus" who've conducted fraudulent business transactions or have committed other serious breaches of financial trust.

White collar financial crimes do not have stiff enough penalties to act as real deterrents in my limited opinion.

[Gringo Malandro]

6) There is a divergence of opinion between "experts" on if it is even needed

8) The stock market is not the economy, the credit market is not the economy, and bailing out either does not help the economy. The stock market and credit market are indicators.

That is not to say things don't have to be done. Panic and a rush to judgement though rarely makes good decisions. The financial crisis has been brewing since the early 1970s. The tendrils of the issues are like a cancer touching nearly all aspects of the economy.

George Will correctly said that financial companies are (were?) the "commanding heights" of the US economy. The stock market funds a great deal of US industry. Credit markets are much larger. Even a large conservative corporation maintains, on average, a 40/60 debt to equity ratio. Imagine what would happen if much of that debt came due in a short period of time, it would be disastrous. That's what would happen if the financial industry imploded. It would have dire consequences for the US and western civilization. That is not an overstatement.

There is no guarantee the bailout will work, and many of its consequences are unfair. But given the choice between being "fair" and maintaining the viability of the world financial system I will go with the latter.

[Gringo Malandro]

I used to work for Lehman Brothers in the FX trading field before going on deployment.

Not in favor of the Paulsen plan --- no oversight and it is essentially a giveaway. We will overpay for the bad assets, and this is part of the plan.Socialism for the wealthy, capitalism for the little guy. No thanks. This post runs down the major reasons why this $700 bn blank check is a HORRIBLE idea.

Haven't we learned that giving this Administration a blank check to do anything is something to avoid? If Congress gets buffaloed again, I might just vote for Ron Paul after all.

From the post:

Nouriel Roubini does not think it passes the smell test:

`He's asking for a huge amount of power,'' said Nouriel Roubini, an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.''

Roubini also said that the government wasn't doing enough fast enough. His major complaint with the bailout was that he thought the government should be doing capital injections into banks the way the Europeans were instead of buying up troubled assets, which is what they eventually did anyway.

from RGE monitor http://www.rgemonitor.com/roubini-mo...nancial_crisis

I have also argued that, in order to resolve this financial crisis it is not enough to take the bad/toxic assets off the balance sheet of the financial institutions (a new RTC); it is also necessary ... [to] recapitalize undercapitalized banks with public capital in the form of preferred shares (as the RFC did with 4000 banks during the Great Depression).

There is no question that the bailout lacked oversight, and there was an excess of extra money to grease the wheels, but inaction was not an option.

[Surferbeetle]

From the December 2008 Atlantic, by James Fallows

Americans know that China has financed much of their nation’s public and private debt. During the presidential campaign, Barack Obama and John McCain generally agreed on the peril of borrowing so heavily from this one foreign source. For instance, in their final debate, McCain warned about the “$10 trillion debt we’re giving to our kids, a half a trillion dollars we owe China,” and Obama said, “Nothing is more important than us no longer borrowing $700billion or more from China and sending it to Saudi Arabia.” Their numbers on the debt differed, and both were way low. One year ago, when I wrote about China’s U.S. dollar holdings, the article was called “The $1.4 trillion Question.” When Barack Obama takes office, the figure will be well over $2 trillion.

[davidbfpo]

In the last two days the UK government has hinted at a further cash injection to the banks here; first in a "spin" story: http://news.bbc.co.uk/1/hi/business/7810651.stm and then an interview of PM Gordon Brown: http://news.bbc.co.uk/1/hi/uk_politics/7810178.stm .

So far the UK has lent the "high street" banks 37 billion UK pounds and taken large shares in several of them - a part-nationalisation without any parliamentary debate and almost no public debate.

One financial observer I know is puzzled at this apparent need for more public money to the banks and is convinced the inability to lend is more than the banks reluctance to lend, or people / businesses wanting to borrow. They suspect individuals primarily, perhaps businesses, simply do not want to put their cash in the banks. The UK interest rate has slumped and will soon, or already is 1% per annum.

Just a viewpoint from across the water here and not a field I normally comment upon - even when my savings slump.

davidbfpo

[reed11b]

which includes both the educational system and parental guidance having an impact will provide that sense of personal responsibility which has been eroded by the educators and psychological counselors emphasis on self esteem at great cost to self respect.

Educate people to be better parents instead of telling them that whatever they want to do is acceptable. It frequently is not.

Dependence on government only adds to that, people are ultimately responsible for and to themselves. Doesn't seem to me to be that hard to understand but apparently it is...

Man, this site is just brutal on both lawyers and counselors! For all of that, education is the key and if by self-respect over self-esteem you mean a healthy opportunity to compete (instead of the current "everyone’s a winner" B.S.) and a full range of educational opportunities that allow for regional differences and strengths over the current "standardized" education that I find myself in violent agreement.
Reed
P.S. Most documentation by "psychological counselors" and educators that I am aware of disagree with the current system and I think you may be looking at the wrong scapegoats.

[Ken White]

Man, this site is just brutal on both lawyers and counselors!

Hey, goats to scape, what can I say...

P.S. Most documentation by "psychological counselors" and educators that I am aware of disagree with the current system and I think you may be looking at the wrong scapegoats.

True. I should have been more clear. Showing my age; the feel good crowd ascended during the 70s and 80s, got caught out as being dangerously wrong by you Gen X-ers in the 90s and is now in fortuitous decline. Thanks to you Guys for correcting some of the ills of the Baby Boomers.