Good Layman's guide to the financial crisis

[Cavguy]

NY Times has an excellent article on how risk management models failed:

http://www.nytimes.com/2009/01/04/ma...t.html?_r=1&em

[jkm_101_fso]

Army Major pens Op-Ed on military family struggles during housing crisis.

Housing and our military
Collapse especially burdens those who serve

By David S. Johnston

The collapsing housing market has prompted many political and financial leaders to make urgent pleas to aid those owners who are facing the loss of their homes. But there is one group that gets little attention in that regard: the military family.

When change-in-duty-station orders arrive, these families do not have the option of waiting out the market for a return to pre-slump prices. Many military homeowners have lost equity in their houses and now owe more for their home than they are worth.

I know this firsthand. Like many other servicemembers, I purchased a home near a military installation before the 2006 real estate decline. My family was too large to be given on-post housing in the Washington, D.C., market in 2004. But at the time, we thought, "No problem," since we had just received a small inheritance that we could use for a down payment. If we got orders to move, we planned to rent or sell the house because we had equity and the market was climbing.

http://blogs.usatoday.com/oped/2009/...ur.html?csp=34

[Ski]

I was lucky with selling my house in the DC area last April. Had to take a $25K cut but still made out very well.

I have a friend who just deployed to Afghanistan who is 200K upside down on a house in Northern Virginia. He's basically told his assignements officer that he can't ever have an assignment outside MDW because he can't sell his house without going into bankruptcy, and no one is buying in his development even at the vastly reduced price points we've seen.

I am certain he is not alone.

[Surferbeetle]

From today's WSJ, written by Damian Paletta and Michael R. Crittenden

The report faulted Treasury on a variety of fronts, saying it has: no ability to ensure banks lend the money they've received from the government; no standards for measuring the success of the program; and that it ignored or offered incomplete answers to panel questions.

These shortcomings, the report suggests, could undermine the goal of various programs. "For Treasury to advance funds to these institutions without requiring more transparency further erodes the very confidence Treasury seeks to restore," the report said.

[bourbon]

Strange Occurrences, and a Story about Naked Short Selling, by Mark Mitchell. Deep Capture, January 27th, 2009.

Evidence suggests that Bernard Madoff, the “prominent” Wall Street operator and former chairman of the NASDAQ stock market, had ties to the Russian Mafia, Moscow-based oligarchs, and the Genovese organized crime family.

And, as reported by Deep Capture and Reuters, Madoff did not just orchestrate a $50 billion Ponzi scheme. He was also the principal architect of SEC rules that made it easier for “naked” short sellers to manufacture phantom stock and destroy public companies – a factor in the near total collapse of the American financial system.

* * * * * * * *

I don’t know why, but this seems like a good time to tell you a little about my personal history. Along the way, I’ll mention a murder, two suicides (or “suicides”), a punch in the face, a generous bribe, three Armani suits in bar, and a “prominent” billionaire who might know something about a death threat and a Russian matryoshka doll.

[Bullmoose Bailey]

Friends, I cannot speak authoritatively to this subject but have made some distrbing observations; i.e. massing Asian & Europaean ownership of US Debt, negative savings, high inflation.

I cannot find a solid answer as to where the "bailout(s)" cash is coming from.

Is the BEP merely printing it ?

Or is the FRB merely typing it into existence ?

If so what projections will you make as to the effect on inflation ?

[Watcher In The Middle]

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time

Link to Term

If demand isn't there (and for most items defined as "goods and services"), right now it's not, it's hard to see any immediate inflation in terms of price inflation.

Course, you pump $800 to $900 bil into the economy, who knows what's going to happen. Looks like we're going to find out.

[Ski]

The cash is coming from the traditional sources - the Gulf States and China. This is probably the last time they will lend to us, so what ever the plan is, it better be damned good.

Right now there is no inflation. There is a good deal of deflation going on right now however, and as WITM stated, when the trillion dollars is floated into the economy, the potential for inflation is going to increase greatly.

[Bullmoose Bailey]

The cash is coming from the traditional sources - the Gulf States and China. This is probably the last time they will lend to us, so what ever the plan is, it better be damned good.

Right now there is no inflation. There is a good deal of deflation going on right now however, and as WITM stated, when the trillion dollars is floated into the economy, the potential for inflation is going to increase greatly.

Roger that sir, but I thought we were inflating the currency supply (what used to be known as M3) in order to artificially prevent deflation & support both the borrowers and lenders who suffer under inflation & deflation respectively by severity.

Will not a new influx of currency per capita induce further inflation by increasing the monetary velocity ?

Still trying to understand and thought you might like to enlighten.

[Ski]

Look at the costs of products for an indicator of deflation. One of the best to use as a guide is food, mainly because supermarkets work on razor thin margins based on the amount of food is moved through the market. It's usually 2-4%. It's already happening in Europe. http://economics.about.com/cs/inflation/a/deflation.htm - this is a simple explanation of how deflation occurs and what effects it has on the marketplace.

The new influx of currency will cause inflation in time. Most of the money being used for the TARP is not seeing the light of day - it's being used to buy off the toxic debts and assets that the banks have accumulated over the last twenty years. Mainly in the form of derivitives and mortgages that have been sliced, diced, minced and then repackaged.

The new initiatives by the Obama crew is going to be more tailored towards people and other industries. The problem is that we, as a country, don't produce much of anything. 2009 marks the first time in US history where there are more government jobs than manufacturing jobs. So there aren't many goods being produced - all the money that is spent on goods is going to multi-nationals at best, to foreign companies at worst.

Will carry on later, have to eat dinner with the family unit.

[bourbon]

TESTIMONY OF HARRY MARKOPOLOS, CFA, CFE. CHARTERED FINANCIAL ANALYST, CERTIFIED FRAUD EXAMINER BEFORE THE U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON FINANCIAL SERVICES. WEDNESDAY, FEBRUARY 4, 2009.

Markopolos has an Army SOF background, and has been investigating Madoff and feeding info to the SEC on him since 2000. He handed Madoff to the SEC on a platter, and they did nothing with it. Accordingly, he shares his opinion of the SEC in part II of his testimony. Markopolos did an excellent job this morning. See the video here.

The SEC seems to be a captive agency that purposely ignores the large frauds....

Hmm, sounds familiar.

[bourbon]

Bernard Madoff, the Mafia, and the Friends of Michael Milken, by Mark Mitchell. Deep Capture, February 3rd, 2009.

Investors Overseas Services was the biggest Ponzi scheme in history until last month, when Bernard Madoff’s Mafia-affiliated operation was revealed to be the new all-time biggest Ponzi scheme.

Investors Overseas Services was a straight-forward swindle. Bernard Madoff’s $50 billion Ponzi was more complicated, involving not just his fund management business, but also his brokerages.

Madoff’s brokerages engaged in naked short selling (offloading stock that had not been borrowed or purchased—phantom stock), likely on behalf of miscreant hedge funds looking to drive down prices. In fact, Madoff successfully lobbied the SEC to enact a rule that allowed market makers such as himself to engage in naked short selling. At the SEC, this rule was called “The Madoff Exception.”

Moreover, a source who has seen some of Madoff’s trading records says that Madoff filled buy orders for stock by naked short selling the stock to his customers’ accounts. So, perversely, significant buying volume through Madoff’s brokerages in a firm’s stock would generate yet more phantom shares, putting downward pressure on the price of that stock.

All of this naked short selling created massive liabilities (probably accounted for as “stock sold, and not yet delivered”). Those liabilities, plus the money that Madoff simply pocketed instead of buying or borrowing real stock, surely accounted for a large chunk of that $50 billion figure.

Last summer, naked short selling (phantom stock) burst into public view as an integral factor in the implosion of the U.S. financial system. In November 2008, former SEC Chairman Harvey Pitt, echoing the words of many other experts and officials, said, “Naked short selling is what’s causing a lot of the problems in the market.”

In other words, Madoff’s operation was not just the largest known swindle in history. It was also a phantom stock machine. And that makes it but one participant in a much bigger scandal — a crime that might have brought us to the brink of a second Great Depression.

[slapout9]

December 2008 interview by Bill Moyer of James K. Gailbrath(son of John Kenneth Gailbrath) and "The Predator State". Starts off with a discussion of Ayn Rand and Alan Greenspan and how his philosophy failed him....pretty interesting stuff. Yes I am biased I am a big fan of his father John Kenneth Gailbrath. Gailbrath was one of the first truly modern economist, much more than Keynes was...IMO.

http://www.pbs.org/moyers/journal/10242008/watch2.html

[Surferbeetle]

From today's Market Watch by Ronald D. Orol: Lawmakers grill bankers about bailout funds

Rep. Randy Neugebauer, R-Texas, came up with a new name for banks receiving capital from the government. "I'm going to call you TSEs -- taxpayer-sponsored entities," Neugebauer said. "I'm looking forward to seeing you explain how you use the funds."

[Schmedlap]

Lots of talk, lately, about how TARP funds are used. I heard a great recommendation today:

Forbid companies that receive TARP funds from donating money to political campaigns or 527 organizations.

[slapout9]

Alan Greenspan has just given a speech calling for Nationalization of some large banks. I was told by a friend is that it was Greenspan's understanding that every hundred years or so this is a requirement!!!! I have not seen the report but seems to be accurate.

My comment is that the folks in the Bible figured this out a long time ago and decided that every 50 years they would have a year of Jubilation where the moneychangers (Bankers) would release the debtors from their debt and start over.

Other than outlawing interest which the church eventually did it is the only way to survive a crooked fractional banking system where the only way to get money into the system is to borrow it through the Federal Reserve, even though we have to pay it back to ourselves through taxes Maybe there is hope after all......Lincoln was the last President to do this.....Obama is a big Lincoln fan

[Ron Humphrey]

Alan Greenspan has just given a speech calling for Nationalization of some large banks. I was told by a friend is that it was Greenspan's understanding that every hundred years or so this is a requirement!!!! I have not seen the report but seems to be accurate.

My comment is that the folks in the Bible figured this out a long time ago and decided that every 50 years they would have a year of Jubilation where the moneychangers (Bankers) would release the debtors from their debt and start over.

Other than outlawing interest which the church eventually did it is the only way to survive a crooked fractional banking system where the only way to get money into the system is to borrow it through the Federal Reserve, even though we have to pay it back to ourselves through taxes Maybe there is hope after all......Lincoln was the last President to do this.....Obama is a big Lincoln fan

They rather had a tendency to every so often go through the redistribution, allocation, debt cancellation biz. Course that usually came with a major change at the top levels

[Schmedlap]

My comment is that the folks in the Bible figured this out a long time ago and decided that every 50 years they would have a year of Jubilation where the moneychangers (Bankers) would release the debtors from their debt and start over.

I suspect that if more people looked to the Bible for guidance (or the Koran or just about any other religious text or any leadership manual or even the most mundane book on personal finance or ethics) then much of this mess would not have happened in the first place. This "crisis" is the product of depravity from the top to the bottom of the financial industry and government, from the fattest cats at the top to the lowliest minions at the bottom - not every individual, but a wide cross section of each layer. None of this particularly troubles me. I think it is a nice reality check and, hopefully, somewhat of a corrective period. Capitalism - even the regulated, sometimes crony version in this country - has a tendency to eventually give the people what they deserve.

[Entropy]

Wow, ran across this and it's the best explanation of the credit crisis I've seen. It's about 12 minutes long - well worth the time.

[Surferbeetle]

From today's WSJ

Among changes under way at the CIA, the agency is now assembling a daily Economic Intelligence Brief to monitor the global economic slowdown's impact on stability. Argentina, Ecuador and Venezuela are facing "serious problems" that threaten their economic stability, Mr. Panetta said.

From the blog Credit Writedowns the Credit Crisis Timeline

There have been tremendous economic dislocations during the present banking crisis. Initially written off as a sub-prime crisis, leading policy makers said the crisis was contained. It has since spilled over into Jumbo mortgage rates, Collateralized Debt Obligations (CDOs), all asset backed securities, High Yield bonds, SIVs, the inter-bank market, commercial paper, money market funds, the auction rate market, hedge fund losses, and a massive housing bust and the real economy. Banks and financial institutions from around the world are writing down billions of dollars of losses. Housing markets are falling in the US, the UK, Spain and Ireland. This crisis is truly global.

The blog a Fistful of Euro's is always interesting.

...and in an attempt to lighten things up a bit, the Onion reports on the UN's ongoing attempt at world domination: UN Acquires Nuclear Weapon

News of the nuclear weapon first surfaced late last week when the United Nation's own watchdog group, the International Atomic Energy Agency, released startling new satellite photos of the uranium-based device. Shortly thereafter, U.N. Secretary-General Ban Ki-moon issued a short and brazen list of demands, calling on all nations to "bow down at once to social progress."

"Tremble before the awesome might of this cooperative assembly of appointed representatives," said Ban, boldly holding a stack of diplomatic resolutions in his hand. "At last, when the United Nations calls for the development of more sustainable agricultural practices, the world at large will listen."

Added Ban, "We will no longer be ignored."