Crow here again after a nice trip to the park with my old friends Mavis and Mathilda. Just as I was getting ready to continue the description of the background of this particular collapse of human nest eggs who should happen by but susan's friend, Seraphine, who summed things up quite nicely with the following:
" ohh gosh, you only got it half right.
those guys weren't happy earning only 5% on mortgages, so the investment houses divided those pools into tranches, then they divided the tranches into subtranches, and they borrowed money to leverage those investments even further.
then, because they were borrowing money to purchase pools of already borrowed money, they decided to "insure" the pools by using as collateral the very pools they were insuring (it was a great way to add "liquidity" and generous fee income to their bottom lines).
then, of course, they'd take the income from their derivative investments and use it as further collateral to borrow even more money to lend to people who were desperate to own a home (after all, most poor people know the differance between haves and have-nots in america is home ownership. they'd do anything to own a home, and who can blame them?)
how stupid was that? the international monetary fund thinks about one trillion dollars will be lost by the time everything sorts out.
thank god america's founding fathers built square caskets, or they'd be rolling in their proverbial graves over this."
Smart lady. The end result for our homeowner friend, Clarence, was that when his mortgage payment rose more than $2000 per month and he wanted to go to the bank to refinance, nobody could figure out who owned the loan.
It turns out there's a brand new part to this story that I learned just today. A report in The NY Sun tells us that in 1975 the net capital rule was created to allow the SEC to oversee broker-dealers, or companies that trade securities for customers as well as their own accounts. It requires that firms value all of their tradable assets at market prices, and then it applies a discount, to account for the assets' market risk.
The net capital rule also requires that broker dealers limit their debt-to-net capital ratio to 12-to-1, although they must issue an early warning if they begin approaching this limit, and are forced to stop trading if they exceed it, so broker dealers often keep their debt-to-net capital ratios much lower.
In 2004, the European Union passed a rule allowing the SEC's European counterpart to manage the risk both of broker dealers and their investment banking holding companies. In response, the SEC instituted a similar, voluntary program for broker dealers with capital of at least $5 billion.
All five broker-dealers that qualified — Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley — joined. Using computerized models, the SEC, under its new Consolidated Supervised Entities program, allowed the broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1.
The new program required time-consuming oversight of the broker dealers by SEC officials and the use of subjective judgment calls. In many cases talented but low paid SEC employees left the federal government for much more lucrative jobs with the investment firms they had previously been paid to monitor.
Bear Stearns collapsed in March. Lehman Brothers and Goldman Sachs went broke earlier this week and word today is that Morgan Stanley is now in talks to merge with Wachovia.
It was only twenty years ago in 1989, and strangely enough, during the term of the other George Bush that the country suffered through the savings and loan disaster. A Senate Ethics Committee investigated the Keating Five including John McCain who wasn't convicted but never exonerated either. Now another President Bush was responsible for appointing the SEC chairman Christopher Cox who changed the net capital rule.
I think someone should tell Senator Obama about this.
Meanwhile, I've got to get in shape for a little branching out party Mavis and Mathilda have planned for the weekend.
They're expecting chicks.
Hi Susan
ReplyDeleteIn the ensuing flight to safety the interest rate on Treasuries are now .05%
Not that’s not a typo; one half of one percent.
I think there is a good chance over the weekend a new fund will be created that will buy up the rest of that dubious paper.
I am afraid there is no other way out of the mess, but to bite the bullet and get on with that cathartic experience.
I’m not making any apologies if it doesn’t happen, because sooner or later it will. To some extent it already has! But if it’s successful don’t expect the Treasuries to stay at that rate.
Best wishes
I meant buy out the rest of those toxic debt securities__________ presumably you gathered that (but best to clarify) from my previous comment.
ReplyDeleteBest wishes
yep, 30-1 ratios weren't unusual for some companies. but hey, at least the ceo got paid.
ReplyDeletemr. furst at lehman brothers cashed in almost half a billion dollars worth of stock over the last twelve years or so (using his stock options, which were only a part of his total compensation).
he got his.
the employees and shareholders, well, most of them got almost nothing for their shares because now lehman is bankrupt.
ouch.
Those financiers are in a completely different world. Anything for one more dollar. I cannot fathom that mindset.
ReplyDeleteBite the bullet indeed. Sadly, I doubt the 'less government' and 'deregulation' dogmas are going to disappear no matter if a billion, a trillion or more will be lost.
It's so very depressing. Nothing feels like a safe investment anymore. I'm treated to a daily dose of my coworker announcing how much she's lost from her investments.
ReplyDeleteI guess there's some comfort in having no investments - nothing to lose.
But John McCain was a POW.
ReplyDeleteI had another person tell me last night they were voting for McCain because he's best for the economy. My skin crawled.
lindsay - A big problem here is that lots of people's retirement plans were invested. That's very cathartic indeed. Meanwhile, CEO's walked away with real money and lots of it. Beheadings might help while we wait for the Treasury note interest rates to rise.
ReplyDeletesera - Yes, we know what they got - shafted. Thanks for participating in the post :-)
randal - You mean St. Ronnie controls from the grave?
dcup - We lived through a couple of other recessions without noticing for the same reason.
divajood - How can people be so stupid? and don't forget.. humans and dinosaurs lived at the same time. The science is called Palinontology.
Hi Susan
ReplyDeleteI think it is a cathartic experience for those who have retirement plans invested in the market.
The reason for me saying this is because once the toxic waste is eliminated there is a much better chance of recovery.
You are also bound to see much improved regulation as Randall has mentioned.
It is true those who have already realized losses by sales of stock or employees who have lost their equity in failed companies have suffered the consequences which is very sad, but the majority will only suffer the losses should they be cash out of their retirement benefits, since these losses are only paper losses for existing listed enterprises until such time they become realized through sales.
Certainly investors have suffered a diminution in value to the extent their portfolio was effected by those failed companies, but that has already happened, what I was referring to is the future and what is likely to happen going forward, at the expense of the USA taxpayer.
So people all over the world who attempt to invest in ethical companies (including myself) will naturally enough have some investments in the USA.
By way of example part of my retirement plan investments includes companies which have substantial investments in the USA(Australia after all only represents 2% of the world market)and I have other funds whose investments are directly attributable to the USA.
Naturally enough the overall result is a substantial reduction in unrealized value, so you might say I have an equal ongoing interest in the matter.
Best wishes
I have to agree with Randal here. For them, losing money is temporary pain. Losing the complacent government policies that let them keep all the money? That's just unacceptable.
ReplyDeletehi lindsay - I apologize if my previous comment appeared flippant. My husband and I have been expecting a blowout of this sort for a long time but even so, it's a very distressing situation.
ReplyDeleteThe media in this country is trying desperately to sell the idea that it's everybody's fault - that the simple fact of poor people taking out loans for homes they couldn't afford was their own responsibility and not that of the greedy brokers et al who threw away all the rule books. Beyond that, they lied and cheated their way into huge commissions for themselves knowing all along that someone else would pay. Most if not all of those shysters and CEO's will get away with their crime.
I'm not trying to imply that a lot of people weren't foolish but it's a heavy price come due. Meanwhile, we're being told that since it was our fault that it's only fair that we as taxpayers front the bills. All I can say is thank the Good Lord President Bush, John McCain and their co-conspirators didn't get to privatize Social Security as they've been attempting to do.
I hope there will be regulation as I'm hoping there are enough sensible people left in government to administer the new laws that must be passed.
Today there was an announcement that our government has invited the IMF to monitor the situation. So the US joins Argentina, Brazil, S. Korea and others as a brand new member of the economic third world.
I guess it's only fitting. As Mr. Costello in your country said, 'The US has been exporting instability in world markets'. Now the chickens have come home to roost.
I hope you and your family haven't lost a lot in this disaster.
Best wishes back to you.
ben - That's true and they'll fight any attempts at regulation every step of the way.
ReplyDeletesusan, never misunderestimate the invisible hand of the undead.
ReplyDeleteI support the suggestion that someone made at Sadly, No! about bringing back the public stock for these thugs. Sure, people might have made goofy investments or overspent their credit limit, just to bring up a couple of examples, but the problem is if the people 'screw up' they're screwed. If those who actually can afford it 'screw up' they get bailed out because supposedly our entire economy will collapse into a pile of dust if we don't save them their pain.
The dumb/fooled/pick-a-label get punished.
The malicious get rewarded.
Every time.
I'd have no problem sleeping at night if Madame le Guillotine made a return appearance because we know that this will happen again sometime in the future.
randal - I'll join you with my knitting.
ReplyDeleteaww. they're expecting chicks. somehow i missed that yesterday.
ReplyDeleteThis whole situation turns my stomach. Once again We The Sheeple bail out the Filthy F'n Rich, even as a MILLION PLUS working class families lose their homes, and of course, "There's nothing we can do about that."
ReplyDeleteThis theft of a trillion dollars will have absolutely no consequences for the perps, but swipe a loaf of bread to feed your kids and watch how fast they send your ass off to jail.
Why aren't 200,000,000 of us rioting in the streets???
Give me a canon, I want to have fun shooting some yachts...
ReplyDeleteWell, we've got a canon. that's a start.
ReplyDeletesera - Easily missed under the circumstances :-)
ReplyDeletecr - Paulson is even planning to hire them to oversee the trillion - give or take a few dollars. I'm disgusted and very worried.
zee - How about a 'Sureshot' or a real cannon?
pagan sphinx - How about a Canon as in: a body of principles, rules, standards, or norms? That would come in very handy.
I do wonder what the government is thinking allowing ridiculous economic decisions like these to go on. I mean i understand its all about money but what good is going to come of ruining the country's future? And China must be concerned. After all we're the biggest purchaser of all their shoddy goods and poisoned foods and toys. Who's gonna buy all their garbage when our economic system finally collapses? But then again since when did the Chinese government care one bit for their people? If they loose some to an economic crisis they have plenty more right? Ah well things are gonna be interesting in the future.
ReplyDelete