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Thread: Good Layman's guide to the financial crisis

  1. #101
    Council Member reed11b's Avatar
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    Quote Originally Posted by tequila View Post
    With all due respect, the credit market is enormously influential in the "real" economy, and it is seizing up at the moment.
    Only becouse it has been artificially grafted onto it. Mostly by Congress.
    Reed

  2. #102
    Council Member tequila's Avatar
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    Quote Originally Posted by reed11b View Post
    Only becouse it has been artificially grafted onto it. Mostly by Congress.
    Reed
    Can you explain this statement? I'm having a hard time understanding it.

  3. #103
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    Quote Originally Posted by Ken White View Post
    This one isn't likely to be as bad as either the 1953 or 1973 models. This too will pass...
    Absolutely right. Rather than tear my hair out and watch the antics of Congress with baited breath, I've been writing and buying options on E-Trade. When the market hands you lemons, make lemonade and sell it while the capital gains tax is still relatively low.

  4. #104
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    Default Couldn't help chiming in.

    Wouldn't want to be taken for one who has a clue about financial markets.

    Just got this link. The music makes it easier for guys like me to wade through.

    All this sounds like smart people trying to defend their description of energy.

    When that starts happening I usually find the simple explanation that makes the most sense is closest to the truth.

    Social engineering that made influential people rich and had unintended consequences because the socialists who wrote the laws don't have the first clue about economics 101. Passes the smell test for me.

    Not sure we need to go much beyond that, it has the lesson we need to take away. When professionals prostitue their profession for government gain the profession becomes corrupted. See the German officer Corps in WWII.

    Yup, gonna have to bail everyone out who writes loans for paychecks on Friday or their will be a lot of people not getting paid. That's what the urgency is about. Truth is, if the rich guys can't pay the poor guys, this whole thing gets real sticky.

    Wonder if they'll ever start teaching economics again?

  5. #105
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    Default Oh yeah

    Here's that link to the video.

    Turns into a campaign add at the end. Still pretty illuminating for what its worth.

    http://www.youtube.com/watch?v=kYdsU8996zo

  6. #106
    Council Member tequila's Avatar
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    Lightbulb

    Social engineering that made influential people rich and had unintended consequences because the socialists who wrote the laws don't have the first clue about economics 101. Passes the smell test for me.
    Just wrong, wrong, wrong. Sad to see how quickly propaganda becomes accepted dogma because it fits certain social prejudices.

    The housing bubble was not created because of some government program that sought to increase home ownership. Sorry, the type of monetary flows required to balloon something as large as the U.S. housing market are not going to respond simply to a government requirement that works against the market.

    Quite simply:

    1) Massive pool of capital looking for a profitable investment. China, Japan, the Gulf, big U.S. fortunes made in the past 25 years, the fruits of globalization, etc.

    2) Largely unregulated shadow financial system that grew up to service this pool of capital.

    1+2 has been creating financial bubbles for the past 15 years as it has grown larger and larger. Remember the dot-com bubble? The vast funds poured into the Federal Reserve, financing the ginormous U.S. government debt? What was the largest, safest place to lend money in the U.S. economy back in the 1990s? The U.S. housing market, because housing always goes up, right?

    An avalanche of money came cascading through that shadow financial system, largely unregulated and unseen. It is hardly a secret that credit became available in the U.S. in unprecedented levels --- that's 1+2 at work, pouring hundreds of billions of dollars into the U.S. economy that has fueled our massive spending binge at both the personal, corporate, and governmental level over the past 15 years.

    Lending standards were loosened across the board, not just in real estate. Why?

    Not because of some governmental regulation.

    A) More money was out there to lend. MUCH more money. See point 1 above.

    B) Securitization allowed banks but especially unregulated mortgage brokers and other institutions to package loans and sell them upstream. Who cares about lending standards if you're not going to get the payments? Thus the birth of "liar loans", NINAs, NINJAs, etc. Also the systemic and widespread use of fraud. Typical is the inflation of a loan applicant's income or bank statement by the broker in order to get a loan through.

    C) Upstream, the buyers of these securities often repackaged, sliced and diced, and sold these on in the form of exotic derivative contracts. The pricing models for MBS, especially subprime MBS, were outdated and foolhardy. The ratings agencies and institutions buying them couldn't accurately price the risk involved, and everything in the end involved housing prices rising forever.

    D) The shadow financial system existed largely outside the boundaries of regulations, both in the U.S. and abroad. They were not banks and thus could be much more highly leveraged than banks. The sheer profitability involved, however, encouraged more and more institutions to seek to join the shadow financial system by either investing in MBS as a sideways entry into the great housing casino (see Freddie, Fannie, AIG and many foreign broker/dealers and investment houses).

    What makes this housing bubble different from all the others are the enormously large and complex securitization that went on combined with massive overleveraging. Those are the two things that have brought the financial system to the brink of collapse, and neither is attributable to homeowners, socialism, or even politicians.

  7. #107
    Council Member Ron Humphrey's Avatar
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    Question A very well articulated argument

    Quote Originally Posted by tequila View Post
    Just wrong, wrong, wrong. Sad to see how quickly propaganda becomes accepted dogma because it fits certain social prejudices.

    The housing bubble was not created because of some government program that sought to increase home ownership. Sorry, the type of monetary flows required to balloon something as large as the U.S. housing market are not going to respond simply to a government requirement that works against the market.

    Quite simply:
    Now would you be so kind as to explain the current bill and what it will or at least is supposed to do, (just as clean and with the clarity you have made your other points.)?

    PReeetttyy PLeeeaase
    Any man can destroy that which is around him, The rare man is he who can find beauty even in the darkest hours

    Cogitationis poenam nemo patitur

  8. #108
    Council Member Ken White's Avatar
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    Default That's all correct, Tequila -- but you wrongly let the USG slide...

    Therefor, it's also disingenuous. The US Government began during the Carter Presidency to pass laws, change Regulations and jawbone the finance industry to be more 'inclusive' (i.e. less restrictive) in their lending practices. The first appearance of this relaxed credit was in consumer finance because the Banks and Credit Card issuers jumped in with both feet.

    A host of Federal and Federal Reserve initiatives during the 80s (some) and 90s (many) continued the trend and the several laws in the 80s and 90s including but not limited to the Depository Institutions Deregulation and Monetary Control Act, 1980; the Garn-St. Germain Depository Institutions Act, 1982 (The S&L debacle...) and of course, the Gramm-Leach-Bliley Act in 1999 which eliminated Glass-Stegall and which had been pushed by Robert Rubin and Larry Summers and was signed by Clinton.

    That omits any mention of Fannie and Freddy whose fingerprints are all over this mess -- and who some folks tried to rein them in earlier LINK. That let mortgage bundling really take off. Social engineering did indeed play a part -- a big part; Your comments are mostly correct but you should not gloss over reality because it's ideologically uncomfortable for you.

    You said:
    Those are the two things that have brought the financial system to the brink of collapse, and neither is attributable to homeowners, socialism, or even politicians.
    I suggest that those two things are the principal issues behind the problem but that, alone, could not create the problem; to do that required the willing assistance of some homeowners, some politicians -- and a bit of socialism.

    There's enough egg in this one for everyone's face...

  9. #109
    Council Member wm's Avatar
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    Quote Originally Posted by Ken White View Post
    A host of Federal and Federal Reserve initiatives during the 80s (some) and 90s (many) continued the trend and the several laws in the 80s and 90s including but not limited to the Depository Institutions Deregulation and Monetary Control Act, 1980; the Garn-St. Germain Depository Institutions Act, 1982 (The S&L debacle...) and of course, the Gramm-Leach-Bliley Act in 1999 which eliminated Glass-Stegall and which had been pushed by Robert Rubin and Larry Summers and was signed by Clinton.


    There's enough egg in this one for everyone's face...
    I agree that there's plenty of egg to be worn by a host of folks, not least of whom is "we the people."

    I think the really instructive point, which Ken captures in this paragraph, is that the efforts by the Rubin/Summers/Clinton gang represent an effort to pass off fiscal and monetary policy for an economic policy (which the US did not have during the Clinton White House). They ain't the same thing, and shame on those of us who got hoodwinked into believing they are/were.
    Vir prudens non contra ventum mingit
    The greatest educational dogma is also its greatest fallacy: the belief that what must be learned can necessarily be taught. — Sydney J. Harris

  10. #110
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    If the revised bill that passed the Senate last night passes the House, even with Congressional oversight added, might not the U.S. Treasury simply devolve into the world's largest "Dark Pool", anyway? The original version of the bill, with its proposition that the Secretary of the Treasury possess carte blanche to decide what to sell, when, to whom, and for how much, was unsettling enough. Adding Congressional "oversight" to said process does not necessarily put an end to the jitters.

  11. #111
    Council Member bourbon's Avatar
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    The Naked Short Selling That Toppled Wall Street, by Mark Mitchell. DeepCapture.com, October 2nd, 2008.

    In other words, hedge funds and brokers sold as many as 9 million shares that they did not possess (which is why they “failed to deliver” them), and they kept the market saturated with at least 1 million phantom shares for more than two weeks. WaMu’s stock price dropped by more than 30% during this period. Similar attacks, with similar effects, occurred one after another in the months leading up to June.
    This attack lasted long enough to put Bear Stearns on the threshold list, but by then, it was too late. The bank’s mangled remains had been swallowed by JP Morgan. Ultimately, at least 11 million shares of Bear Stearns were sold and never delivered.
    Two days after Lehman was vaporized, AIG watched its stock fall to as low as one dollar. The data through June shows that AIG was repeatedly blasted with phantom stock, often in stretches of eight days (three + five), with peak failures to deliver reaching 2 million shares. It’s a safe bet that the data will show that these attacks continued, and grew in magnitude, until a price of one buck per share resulted in paralysis, and AIG had to be nationalized. But the company never appeared on the SEC’s threshold list.

    After AIG, the rumor was that Citigroup would go down next. The data through June shows that Citigroup was bombarded – blast, pause, blast – with massive amounts of phantom stock. Failures to deliver peaked at 8 million shares. No doubt, the blasts continued and grew in magnitude in the days leading up to September 16, when Citigroup’s stock went into a death spiral.
    Wow. Just wow.

    "Notorious B.I.G. said it best: Either you're slinging crack rock, or you got a wicked jump shot.' Nobody wants to work for it anymore. There's no honor in taking the after school job at Mickey D's. Honor's in the dollar, kid. So I went the white boy way of slinging crack rock. I became a stock broker."
    - Seth Davis, Boiler Room (2000)

    These guys went the white boy way of robbing banks. They became hedge fund portfolio managers.

  12. #112
    Council Member slapout9's Avatar
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    Quote Originally Posted by bourbon View Post
    The Naked Short Selling That Toppled Wall Street, by Mark Mitchell. DeepCapture.com, October 2nd, 2008.







    Wow. Just wow.

    "Notorious B.I.G. said it best: Either you're slinging crack rock, or you got a wicked jump shot.' Nobody wants to work for it anymore. There's no honor in taking the after school job at Mickey D's. Honor's in the dollar, kid. So I went the white boy way of slinging crack rock. I became a stock broker."
    - Seth Davis, Boiler Room (2000)

    These guys went the white boy way of robbing banks. They became hedge fund portfolio managers.

    The best analysis I have seen so far. It was an attack!!! Who did it? See who ends up with the greatest concentration of wealth when the dust settles.

  13. #113
    Council Member tequila's Avatar
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    Speaking as a former Lehman employee, Lehman did not go *poof* as a result only of naked short selling. As much fun as it would to blame pirate hedge funds and evil financiers, Lehman's stock collapsed because it lost billions of dollars. Why? Because Lehman got caught holding tons of subprime MBS it could not move before the market went south. Now I was in the middle of Mojave Viper when most of this went down, but I got filled in by coworkers after the case.

    Repeated quarterly losses in the billions were surprises to a marketplace that thought Lehman had sufficient cash on hand to weather a beating that Richard Fuld assured all was well over with after Bear Stearns went down. Market-manipulation is hardly to blame for a falling stock price when a company has losses on the level of Lehman, with no clarity on how much further it was on the hook and no trust left in Richard Fuld.
    Last edited by tequila; 10-03-2008 at 04:38 PM.

  14. #114
    Council Member bourbon's Avatar
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    Tequila,
    Thanks for weighing in on the article. Is naked short selling really just that marginal of an issue compared to massive losses and Fuld's management?

    Here's what gets me: Lehman's stock increased close to 50% during the three week July 15 SEC order that required hedge funds to borrow real stock before they sold it. The SEC let the order expire, and as Mitchell notes:
    The day after the emergency order expired, Lehman’s stock nosedived. So did a lot of other stocks that had enjoyed a temporary reprieve.

    Mark my words, the data for August and September will show that soon after the order was lifted, rampant naked short selling began anew.

    It will show a sustained attack on Fannie Mae and Freddie Mac, with failures to deliver exceeding one million shares, until the day the two companies were nationalized. It will show Lehman getting hammered (blast-pause-blast) until its stock was so low that there was no way it could raise capital. And it will show that in Lehman’s final days, hedge funds sold unprecedented amounts of phantom stock, knowing that the stock would never, ever have to be delivered.
    If the data comes back and affirms what Mitchell is saying, naked short selling would still not be to blame Lehman's collapse?

    Mitchell says the 2.8 billion loss in the second quarter was largely a result of reducing exposure to mortgages by "marking them down to levels dictated by Einhorn’s bogus index – the CMBX". This not the case?

  15. #115
    Council Member slapout9's Avatar
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    Now here is a plan to get out of this mess by James Galbraith (son of John Kenneth Galbraith) I especially like the part about bringing in the FBI as part of the plan issue them special golden handcuffs and special privileges for water boarding



    http://www.washingtonpost.com/wp-dyn...092403033.html

  16. #116
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    Quote Originally Posted by bourbon View Post
    If the data comes back and affirms what Mitchell is saying, naked short selling would still not be to blame Lehman's collapse?
    Naked short selling can hasten the collapse of a corporation that has weak or terminal fundamentals. Note that nobody was doing naked short selling of, say, Wal-Mart in such a fashion as to "drive the price down." Companies like Lehman were lying motionless on thin ice, hoping for a passerby to throw them a line and drag them to shore. Short sellers just turned up the heat so the ice would melt quicker before a good samaritan (or politician with a bag of taxpayer dollars) could come along with assistance.

    Especially in a market where people with giant gobs of money are searching high and low for anything that will get them a better return than the market, taking out short positions, short sales, and even naked short sales on fundamentally weak stocks (like financials, particularly the ones made most vulnerable by subprime/MBS) were all perfectly logical (omitting the question of whether it was ethical). On the other hand, I doubt many of them wasted any time betting millions or billions on the collapse of Wal-Mart or Johnson & Johnson because if they did take out speculative short positions by way of options or short selling, then even if they had a significant impact on those stock prices, it would have been very short lived and would most likely have popped right back to the original price as soon as the market saw a buying opportunity.

    Naked short sellers hastened the collapse of fundamentally weak companies. The question that I think we should be asking is whether, in the long run, that is a bad thing. I don't think the answer is an obvious one and I don't think I know the answer. Would Lehman have come out of this situation intact if it could have bought a few more months of time? Or did the short sellers just rip off the band-aid and get it over with?

  17. #117
    Council Member tequila's Avatar
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    Haven't agreed w/Schmedlap much lately, but I agree on this one. Short sellers did not cost me my job - Richard Fuld and his subordinates did that.

    Evidently the market did not buy that the CMBX index was worthless. At the least, it does not appear to be any less worthless than other measures of MBS value.

    A good counterfactual from Buttonwood at the Economist: Why is naked shorting so bad, when going naked long never draws any approbation? Who's worse, a hedge fund manager shorting Lehman in the wake of massive losses, or the house flipper and mortgage broker doing all they can to inflate asset prices beyond all expectations? Who is more to blame for the current crisis?

    A cautionary tale from the future

    FINANCIAL authorities in America and Europe took sweeping powers yesterday to avert a financial crisis by imposing restrictions on markets. In their sights are a peculiar brand of speculators known as “long-buyers” who buy assets not to live off the income they generate but to profit from rising prices.


    “Some of these people buy homes that they have no intention of living in,” said Lord Poohbah, chairman of Britain’s Financial Services Authority, “and others buy shares they plan to own for just days or weeks, rather than the prudent time period of several years.” Their actions force prices up above fundamental valuation levels, critics say, causing some British tabloid newspapers to call leading fund managers “greedy pigs”.


    Particular criticism has been reserved for people dubbed “naked long-buyers”, those who try to buy homes without putting up a deposit. “Such people are in effect renters with a free call option on rising house prices,” said one financial analyst, “but they expect to be bailed out by taxpayers when house prices fall.”


    Not only is this a clear case of moral hazard (the encouragement of irresponsible risk-taking) but their activities drive up house prices, putting them beyond the reach of hard-working families who have diligently saved up to put down a deposit. Also in the speculative category are “buy-to-letters” who buy a string of houses with borrowed money in the hope of making outsize gains.


    ....


    Industry analysts said that some of the damage done by long-buyers might have been prevented had a now defunct practice called “short-selling” been permitted. By speculating on falling prices, short-sellers could in theory prevent bubbles from being formed. However, their scope to trade was always limited by regulations and the tactic was killed off during the crisis year of 2008. “It drove us out of business,” recalled George Soros, a former hedge-fund manager, speaking in Central Park yesterday, before adding, “Do you want some ketchup with that?”


    Before that crisis, the standard rubric on financial products said “Warning: share prices may go down as well as up.” Afterwards, the clause “but not if the authorities have anything to do with it” was added at the end. The result was the decade-long boom in house and share prices that prompted the authorities to step in yesterday.


    Asked if he was blaming speculators for the inadequacy of American monetary policy, the treasury secretary abruptly ended the news conference.

  18. #118
    Council Member Ken White's Avatar
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    Default Interesting Map

    LINK

    Can't vouch for the accuracy but it seems reasonable

  19. #119
    Council Member AdamG's Avatar
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    Default Meanwhile, in a mountain cave...

    CAIRO, Egypt - An American member of al-Qaida pointed to economic troubles in the United States as proof that "the enemies of Islam" face defeat, in an English-language video released Saturday.

    In a half hour video message, California-native Adam Gadahn urged Pakistanis to unite against their government and U.S. forces, and taunted Americans over their economic crisis, relating it to their military interventions.

    "The enemies of Islam are facing a crushing defeat, which is beginning to manifest itself in the expanding crisis their economy is experiencing," said Gadahn, in a clip of the message distributed by the SITE Intelligence Group, a Washington-based monitor of militant Web sites.

    "A crisis whose primary cause, in addition to the abortive and unsustainable crusades they are waging in Afghanistan, Pakistan, and Iraq, is their turning their backs on Allah's revealed laws, which forbid interest-bearing transactions, exploitation, greed and injustice in all its forms."

    http://news.yahoo.com/s/ap/20081005/...american_video
    A scrimmage in a Border Station
    A canter down some dark defile
    Two thousand pounds of education
    Drops to a ten-rupee jezail


    http://i.imgur.com/IPT1uLH.jpg

  20. #120
    Council Member J Wolfsberger's Avatar
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    Quote Originally Posted by tequila View Post
    Haven't agreed w/Schmedlap much lately, but I agree on this one. Short sellers did not cost me my job - Richard Fuld and his subordinates did that.

    ...

    Who's worse, a hedge fund manager shorting Lehman in the wake of massive losses, or the house flipper and mortgage broker doing all they can to inflate asset prices beyond all expectations? Who is more to blame for the current crisis?
    And I rarely agree with Tequila, but on this one I agree. To the first, yep, Richard Fuld did do that through greed and stupidity. (Which is redundant, I know. )

    To the second, both. And the market should punish both.
    John Wolfsberger, Jr.

    An unruffled person with some useful skills.

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