Tilted Forum Project Discussion Community - meanwhile, back in reality (bank crisis round 2)

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- - meanwhile, back in reality (bank crisis round 2) (https://thetfp.com/tfp/tilted-economics/140336-meanwhile-back-reality-bank-crisis-round-2-a.html)

literally maybe.

wonderful.

The bailout seems necessary, but the lack of oversight and the lack of a framework for dealing with the underlying problems is disturbing. Since they've botched everything that has come their way so far, why should we trust this administration to do the right thing? The bailout looks more than a little like the non-plan for the Iraq war.

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Originally Posted by rune (Post 2529530)

literally maybe.

wonderful.

So, every business transaction involving money or credit was going to come to a complete halt? The money in my checking account was at risk of being frozen? Auto dealers were at risk of not being able to fund car loans on the spot? Las Vegas was going to close their doors and turn off the lights? China was going to stop shipping goods to the US in exchange for dollars? OPEC was going to stop shipping oil? I don't think so.
-----Added 22/9/2008 at 03 : 23 : 56-----

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Originally Posted by guyy (Post 2529532)

The bailout seems necessary,

The question we should get a clearer answer to is why? Companies should be allowed to fail.

Quote:

but the lack of oversight and the lack of a framework for dealing with the underlying problems is disturbing.

As more information comes available, we start to see problems other than the word of the day "regulation". In some cases the risks being taken actually had the blessing of the government and in some cases businesses were being forced to conduct business in ways that they would not have ordinarily. One example is our government mandating mortgage lenders lend and develop products to make home ownership more available to more people. Sub-prime in part was a product of government regulation.

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Since they've botched everything that has come their way so far, why should we trust this administration to do the right thing? The bailout looks more than a little like the non-plan for the Iraq war.

The seeds of this crisis may have been sown years prior to Bush taking office. Also, Congress has been controlled by the other party for about two years. Perhaps we had one too many hearings on things like steroids, fired attorney generals, or oil company executives explaining oil prices over and over again so politicians could look like they were being tough on big oil. They accomplished nothing from most of these hearings in relationship to what they could have done.

the seeds of this were sown by the rise of neoliberalism during the fucking mid-1970s, by its rise to hegemony under ronald reagan, by every institution that has operated as if that ideology was an accurate description of either markets or the world or the relations between them. this enormous turd of a situation is squarely and unavoidable a republican production. clinton-the-centrist was and remains a neoliberal, but not a "fundamentalist" in the way the wacky right economic libertarians might prefer--but maybe--just maybe--we're approaching the moment where those folk will no longer be confused with anything serious.

meanwhile, the 2-page proposal from the administration for the "bailout"---you know, the one that said "you congress will let us do whatever we want"---hasn't passed and probably won't pass for a couple more days because "we can do whatever we want" really isn't much of a plan. there are alternatives---like maybe a bank holiday in the course of which auditors might try to get some realistic idea of what's being maybe taken on---and protection for social solidarity--and a reduction of the explicit obscenity of this in the form of "executive compensation" packages---and these **could** be getting discussed publicly. but instead, it seems that we are now involved in a game of chicken. and as happens in such games:

Quote:

Stocks Fall as Rescue Plan Is Negotiated
By DAVID M. HERSZENHORN

This article was reported by David M. Herszenhorn, Stephen Labaton and Mark Landler, and written by Mr. Herszenhorn.

WASHINGTON — Senate and House Democratic leaders said on Monday that they had reached an agreement on their conditions for approving a $700 billion rescue plan for the financial system, including more oversight of the program and a requirement that the government do more to help troubled borrowers refinance their mortgages.

But even as Congressional Democrats and the administration began to narrow their differences, Democrats are bracing for a battle over efforts to limit the pay of executives whose firms seek help and over whether to grant bankruptcy judges authority to modify the mortgages of borrowers in danger of foreclosure.

Investors were skeptical. Concerns that the bailout plan may not move smoothly through Congress contributed to the anxiety in the markets that pushed the Dow Jones industrial average down more than 372 points and pushed crude oil up more than $16 a barrel.

President Bush on Monday morning urged legislators to resist the temptation to add provisions that, he said, “would undermine the effectiveness of the plan.” Still, Treasury officials indicated a willingness to negotiate.

Within hours, Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said he had reached a general agreement with the Treasury Department over mortgage aid and Congressional oversight.

But Mr. Bush may find that members of his own party are among the holdouts. Some conservative Republicans criticized the plan, raising the stakes for Treasury Secretary Henry M. Paulson Jr., who has been trying to persuade lawmakers and an increasingly frustrated American public that the rescue package was needed.

Newt Gingrich, the former House speaker, said he expected Republican lawmakers to oppose the plan in increasing numbers. “I think this is going to be a much bigger fight than he expected,” Mr. Gingrich said, referring to President Bush, who called again for swift action on Monday morning. “I think this bill is a long way from done,” Mr. Gingrich added.

Republican leaders who support the administration’s plan warned Democrats on Monday to exercise restraint and not slow the bailout package, even as they prepared for an aggressive internal campaign to rally Republican support.

“When there’s a fire in your kitchen threatening to burn down your home, you don’t want someone stopping the firefighters on the way and demanding they hand out smoke detectors first or lecturing you about the hazards of keeping paint in the basement,” Senator Mitch McConnell of Kentucky, the Republican leader, said in a speech on the Senate floor. “You want them to put out the fire before it burns down your home and everything you’ve saved for your whole life.”

Mr. McConnell added: “The same is true of our current economic situation. We know that there is a serious threat to our economy, and we know that we must take action to try and head off a serious blow to Main Street.”

The Senate Democrats’ proposals includes two bold provisions. One would grant the Treasury "contingent shares" of stock in any financial institution that wants to sell bad debt to the government; the other would grant bankruptcy judges the authority to modify the terms of primary mortgages, a step aimed at helping homeowners at risk of foreclosure.

The bankruptcy provision is staunchly opposed by the banking, lending and securities industries and by many Republicans in Congress, but Democrats insist that it is one of the few mechanisms to provide direct assistance to homeowners caught in the foreclosure crisis.

The contingent shares would give taxpayers an equity stake in companies seeking help through the rescue program, potentially allowing the government not only to recoup however much of the $700 billion it spends on bad debt, but also to profit should the financial firms prosper in years ahead. The legislation would require the value of the contingent shares to equal the value of the assets purchased by the government.

The 44-page Senate proposal, pulled together by Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the banking committee, would require the Treasury to run the rescue plan through a new "Office of Financial Stability" to be headed by an assistant treasury secretary. It would also establish an "Emergency Oversight Board" to monitor the bailout effort, made up of the Fed Chairman; the chairman of the Federal Deposit Insurance Corporation; the chairman of the Securities and Exchange Commission; and two non-government employees with "financial expertise" in the public and private sectors, one each appointed by the majority and minority leadership in Congress.

In addition, the Senate proposal would require monthly reports to Congress, rather than the biannual reports that would be required under the Bush administration’s proposal.

Amid continuing concerns over the deep global ramifications of the crisis, the finance ministers and central bank governors of the Group of Seven major industrial nations said on Monday that they were maintaining “heightened close cooperation.” In a joint statement, they pledged to take “whatever actions may be necessary, individually and collectively, to ensure the stability of the international financial system.”

The ministers and governors welcomed the “extraordinary” actions proposed by American officials to take illiquid assets off bank balance sheets, Reuters reported. But the statement made no other mention of any specific steps to be taken by the group’s member nations.

The Bush administration’s proposal could prove to be the largest government bailout of private industry in the nation’s history. It calls for nearly unfettered powers for the Treasury secretary in managing the bailout.

Though the jittery state of the financial markets put pressure on officials and legislators to move quickly, some lawmakers said they did not want to be rushed into approving extraordinary new powers for the Treasury secretary and the government without full consideration of the consequences.

Both presidential nominees, who face the prospect of inheriting an enormous program, said there had to be more oversight of the Treasury Department than the Bush administration had proposed.

Financial companies were already lobbying to broaden the plan. And the Bush administration did indeed widen the scope by allowing the government to buy out assets other than mortgage-related securities as well as making foreign companies eligible for government assistance.

Banks and traders also braced themselves for another tumultuous week in the markets. But early signs indicate that investors in Asia were reacting positively to the developments in Washington. Meanwhile, top Democrats and Republicans on Capitol Hill said on Sunday that they would act swiftly on the administration’s request, but not without setting their own conditions.

“We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome,” House Speaker Nancy Pelosi said.

Top administration officials and senior lawmakers said that the markets could be devastated if Congress and the administration failed to reach agreement on the plan.

Mr. Paulson said he hoped that the government would recoup much of the cost of buying distressed mortgage-related assets. But he did not rule out that the initial cost of the bailout could rise beyond $700 billion, the limit set in the terse proposal sent by the Treasury to Congress on Saturday.

“That doesn’t mean we’ll go all the way there, or it doesn’t mean it will stop there and we won’t ask for more,” Mr. Paulson said Sunday on the CBS program, “Face the Nation.” “What we need is something that is big enough to get the job done. We’ll ask for what we think is a right amount to give us plenty of flexibility.”

http://www.nytimes.com/2008/09/23/bu...nted=2&_r=1&hp

there's nowhere near enough discussion about options or implications. the administration is in high panic mode. they need to have panic around them so their panic is amenable to being framed as a coherent response. but why not more a discussion? here are the problems--here are the options---here are the consequences of each---in a democratic society, you'd think this would be routine, since in the end it is the citizens--who are more than taxpayers--the citizens who are supposed to have some power--whose consent this lay with...and it'd calm the fuckwits on what's left of wall street.

but hey, why do that?

This time they claim it was falling real estate prices that brought them down. It's not their fault it was that nasty unreliable unpredictable real estate market. One would think they were loaning money for bridges to nowhere. It makes one wonder what future investments these millionaire CEOs will want us to bail them out of next since we are ultimately responsible for the decisions they make.

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roachboy said above : it seems that we are now involved in a game of chicken...
there's nowhere near enough discussion about options or implications. the administration is in high panic mode. they need to have panic around them so their panic is amenable to being framed as a coherent response. but why not more a discussion? here are the problems--here are the options---here are the consequences of each---in a democratic society, you'd think this would be routine, since in the end it is the citizens--who are more than taxpayers--the citizens who are supposed to have some power--whose consent this lay with...and it'd calm the fuckwits on what's left of wall street.

Ive seen this this before from this administration regarding another huge international fiasco.

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Originally Posted by girldetective (Post 2529797)

Ive seen this this before from this administration regarding another huge international fiasco.

Wait a minute—are you insinuating that this administration has mismanaged something before?

I don't see them doing anything reasonable while they're in power. They have a myopic view of how things should be run. What do you expect?

I'm expecting little from the remnants of the team whose captain is George W. Bush. A change of hands is long overdue.

Whether it's a gamble or not, any other administration has to be better than this one.

Right? Come on, what do you honestly expect from a group who thought deep tax cuts was a great strategy while simultaneously blasting military spending through the already ridiculously vaulted ceiling.

At the risk of sounding like a conspiracy theorist, it's as though they orchestrated this disaster.

Has it come time that the military industrial complex has come to a screeching halt? You can't keep that ball rolling forever. Or can you?

Historically, power becomes concentrated within an environment of crises.

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Originally Posted by Baraka_Guru (Post 2529818)

At the risk of sounding like a conspiracy theorist, it's as though they orchestrated this disaster.

Oddly enough, I just made a thread about that.

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Originally Posted by Baraka_Guru (Post 2529818)

Historically, power becomes concentrated within an environment of crises.

Crises are often a pretext for concentration of power, but the word crisis means a life or death situation. Other actors may feel legitimated by crisis and intervene, bringing a more pluralist arrangement. Or, power, concentrated or not, may be inadequate, and the ensuing collapse could just as well bring a power vacuum. The vacuum may or not end in concentration of power. There are all sorts of scenarios.

It didn't take long...

Here is the word from Newt Gingrich suggesting that the cure is more deregulation and even less government oversight. He also taps the other big platforms of the neoliberal cadre: privatize the schools, privatize social security, stronger border security, etc.

Nothing like a bit of panic in the streets and blood in the water to bring on the calls for cutting social spending and privatizing public wealth.

this is the real thing though, folks.
the statements from the g7 alone should tell you as much.
this is a real live crisis of an entire regime of accumulation.
nothing is entirely obvious yet.
i think this is the part of a crisis that most histories like to make go away to the greatest possible extent, since they start getting written at the point there's an end to the story, so you can start talking about how everything works out.

guyy, yes, concentration of power isn't always the outcome of crises; yet, I'd say the attempt is bad enough.

Willravel, yes, I saw that. I'll be visiting eventually.

Charlatan, no, it didn't take long. What is the size of that man's audience again?

roachboy, no, nothing is obvious yet. There are some who would still claim that this is a bear long cycle that we could have predicted. The system cannot appear to be broken over a course of a few days. We'll have to see what happens over the next few months, no?

yeah, but at the same time, it's almost like you can see crisis happening, like it's a huge movie. if you run through the factoids that comprise that ny times account of the afternoon, it's like a wind is blowing through arrangements--including political arrangements--that are customarily more stable-seeming. it's a strange state of affairs.

I want to see how the markets play out the rest of the week. If it keeps taking hits despite that $900-billion band-aid, I'm going to start to question the differences of influence between "natural" bear long cycles and neoliberalism. :)

This current cycle is supposed to be coming to an end soon. (It started at around 2000.) But if things go to shit at the end of it like this, then perhaps what we're seeing now is less about cycles and more about politics.

after a curious and mind-altering day away from watching the wall street has a seizure show...

first off, what's with this investigation being launched at this particular moment?

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FBI investigates four Wall Street firms over sub-prime meltdown

* Julia Kollewe

The FBI is investigating four Wall Street institutions at the heart of the financial crisis over their role in the sub-prime mortgage meltdown, it emerged today.

Reports said preliminary investigations into potential corporate fraud at the US mortgage finance giants Fannie Mae and Freddie Mac, the insurer American International Group and the investment bank Lehman Brothers had been opened.

They are among 26 companies being scrutinised by the FBI. Freddie Mac, Fannie Mae and AIG were bailed out by the government in the last fortnight, while Lehman Brothers filed for bankruptcy.

Senior executives at the companies are also believed to be in the FBI's sights, while the securities and exchange commission is also reportedly assessing possible civil fraud claims against the four firms.

"The FBI continues to investigate a number of companies for sub-prime lending practices, but the department brings criminal prosecutions based solely on the facts and the law," Brian Roehrkasse, a Justice Department spokesman, said.

"Where we find evidence of criminal wrongdoing, we will prosecute."

Several California institutions, including IndyMac Bank of Pasadena, which collapsed in July at a cost of $8.9bn (£4.7bn), are reported to be under investigation.

Countrywide, formerly the largest mortgage lender in the US and now owned by Bank of America, is also under scrutiny.

The investigations come as Congress considers a $700bn bailout package for the financial industry.

The Bush administration's plan would allow the Treasury to buy toxic bad debts from troubled financial institutions.

Congressmen yesterday demanded safeguards, additional details and more time to scrutinise the way in which the Treasury intends to spend the money.

In the past two weeks, the government has taken over Fannie Mae and Freddie Mac to prevent their collapse.

Last week, the Federal Reserve provided an emergency $85bn loan to AIG to save it from bankruptcy, but refused to bail out Lehman Brothers.

Eight months ago, the FBI began an investigation into the sub-prime mortgage market, in which loans were given to people who were not in a position to repay them.

This prompted the credit crunch as bad debts were bundled together with higher quality assets and sold on by banks.

The FBI is known to have demanded information from Goldman Sachs, Morgan Stanley and - prior to its collapse - Bear Stearns.

In June, two Bear Stearns executives were arrested over charges that they misled investors as the subprime market began to disintegrate.

FBI investigates four Wall Street firms over sub-prime meltdown | Business | guardian.co.uk

this seems to me transparently theater. what it does is reinforce the damage-control tack within the main discourses about this mess, the ones that amount to variations on the "bad apples" thesis. the implication: the system is neutral, distortions the results of particular Actions done by Bad People.

meanwhile, this morning, in another sector of the bizarre-o discursive world inside neoliberalism, which is still the trojan horse with no name:

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Stress on Markets Threatens Economy, Bernanke Says
By REUTERS

WASHINGTON — The Federal Reserve Chairman Ben S. Bernanke on Wednesday told lawmakers on Wednesday that global financial markets were under “extraordinary stress” and were threatening an already weak economy.

“The intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant further drag on growth,” Mr. Bernanke said in comments prepared for delivery to the congressional Joint Economic Committee.

“The downside risks to the outlook thus remain a significant concern,” he said. “Action by Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy.”

Mr. Bernanke ticked off areas of the economy that are struggling or have been hit by financial turmoil, which in recent weeks felled investment bank Lehman Brothers and forced the government to take over mortgage finance firms Fannie Mae and Freddie Mac and rescue of the insurance giant the American International Group.

“More recently, economic activity appears to have decelerated broadly,” he said, speaking on the second day of testimony aimed at persuading skeptical lawmakers of the need for the government’s $700 billion rescue plan.

Labor markets are weak and unemployment is high, he said. Despite an easing of oil and gas prices since the summer, consumer spending is likely to remain sluggish, he added.

In addition, slower growth around the world is likely to blunt demand for U.S. exports, which had been helping buoy the economy.

While news on inflation has been more favorable, Mr. Bernanke said, the outlook remains highly uncertain.

Falling oil and commodity prices and the dollar’s rebound from lows hit this summer have eased pressures, but it is difficult to predict the course of commodity prices, he said.

“The upside risks to inflation remain a significant concern as well,” he added.

http://www.nytimes.com/2008/09/25/bu...gewanted=print

the center of which is on the one hand an anthropomorphic staging of markets as Giant Brains which react like we do, human beings with smaller brains. i was thinking about this while being forced to listen to some nimrod "news radio" show on my way back from deep ruralia, through thickets of mc-cain signs in what i take to be a particularly reactionary part of a particularly reactionary state---the routine usage of subjective qualities to gloss the actions of markets, the dow jones industrial average as the basis for a new astrology, worth about as much as jeanne dixon's columns, really, but somehow confused with meaningful statements, and so as "news" elements.

beyond this, it is interesting to see bernake starting to try to widen the framework in the context of which this latest financial disaster is to be situated---when attempting to sell it on the basis of panic itself did not work, and faced with growing opposition to the vagueness of the wording, the sweeping power afforded to treasury, the lack of substance/design in the plan itself, the narrowness of it's purview, the political difficulties that accompany it---bernake now presents a quick image of the american economy in general as tottering.

does this square with how you're seeing this?
what are the reactions like to this theater in your everyday life?

so far, here in tiny town, it is treated mostly as a giant tv show. things go on as if it is not happening, like it's something that can be tuned in on if the red sox game is not in question late, or during the day if a distraction from work is in order...

Has anyone heard the new Kucinich plan?

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“Since the bailout will cost each and every American about $2,300, tomorrow I will offer legislation to create a United States Mutual Trust Fund, which will take control of $700 billion in stock assets, at market value and not higher, convert those assets to shares, and distribute $2,300 worth of shares to new individual savings accounts in the name of each and every American.”

He's like a little "think outside the box" machine. This is a really, really interesting idea.

I haven't met anyone who is happy with the bailout plan.

40 year olds are swelling enrollment at local tech colleges (who are generally only hiring temp. teachers). The big downtown theatre complex/arts centre is in financial difficulty due to the slump.

McCain signs non-existant. In Smalltown, where my folks are, the guy who owns half the town, and who is in deep with the state GOP, does not have any McCain signs up. I take it as some sort of passive commentary on the candidate and/or party.

Democracy Now! | Radio and TV News

you should check out today's webcast for the interview with naomi klein.
if you know her work, there's nothing surprising in principle--unless the statement of the obvious match between the way this crisis, such as it is, has been packaged and used by the administration through the vehicle of this 2.5 page "proposal"---if you don't know her work, it'll be pretty interesting for you. the first 22 minutes update and look at this nonsense.

the bush speech, which succumbed almost immediately to the classical state of emergency style trope, right down to pinning the origin of all this on an influx of "foreign money" which was tied to a previous state of "safety and security (for capital)"...the continuum of entertainment and infotainment was not broken for long by this, however. i am not sure if you noticed that this particular speech was not accompanied by the usual panels of network talking heads who sit around a table and tell you what you just heard.

the claim of course is that this is now an economic state of emergency, that the interests of the particular sector of the holders of capital have managed to become identical with that of all socio-economic sectors and actors within them, one big happy donut in danger of eating itself.

and then there was that touching professional of faith in "free enterprise" proffered as a kind of mea culpa i guess.

apparently, not everyone agrees with the cowboy george:

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Germans Receive Bush Speech Coldly
By ERIC PFANNER

PARIS — Transatlantic sniping over the global financial crisis intensified Thursday after President Bush cited an influx of foreign money into the United States as one of the root causes of the credit crunch.

Peer Steinbrück, the German finance minister, countered in a speech in Berlin that the conditions that gave rise to the current turmoil in the markets were allowed to develop because of a reckless pursuit of short-term profit and huge bonuses in “Anglo-Saxon” financial centers — along with a lack of political backbone to stand up to what he characterized as bankers’ greed.

“Investment bankers and politicians in New York, Washington and London were not willing to give these up,” he said. “The financial market crisis is above all an American problem”

The long-term consequences, Mr. Steinbrück added, could be serious for the United States. “The U.S. will lose its status as the superpower of the world financial system,” he told the Bundestag. “The world financial system will become multipolar.”

In its tone and emphasis, Mr. Steinbrück’s diagnosis differed markedly from that offered on Wednesday night by President Bush in a speech to the American people. Mr. Bush cited “serious negative consequences” from a credit bubble that was inflated for more than a decade when “a massive amount of money flowed into the United States from investors abroad.” He said the inflow of foreign money was driven by the attractiveness and security of U.S. financial markets to global investors.

Economists say U.S. consumers’ appetite for spending has made foreign investment necessary to finance the deficit in the U.S. current account.

The comments on both sides of the Atlantic seemed to be intended to underline contrasting positions on the response to the financial crisis.

Mr. Bush used his televised address to try to rally support for a $700 billion rescue aimed at getting banks to start lending again. The Bush administration has urged European and Asian policymakers to follow with similar measures, a call that leaders elsewhere have generally rebuffed.

Mr. Steinbrück reaffirmed Berlin’s opposition to any large-scale bailout of the financial system in Germany and across Europe, saying any intervention should be aimed at deal with specific problems. Germany has stepped in to help certain banks affected by the credit crisis, like IKB Deutsche Industriebank.

He said the German financial system had weathered the storm better in part because it is anchored by universal banks like Deutsche Bank, with operations that span everything from consumer lending to investment banking.

On Wall Street, the last two big independent investment banks, Goldman Sachs and Morgan Stanley, have taken steps to move toward such a model as the crisis deepened with the collapse of one of their smaller rivals, Lehman Brothers.

Mr. Steinbrück said that as a result of the crisis, European banks would play a greater role in the world financial system, along with sovereign wealth funds based in Asia and the Middle East. He also called for greater regulation of the financial system, as President Nicolas Sarkozy of France did earlier this week.

http://www.nytimes.com/2008/09/26/bu...26eureact.html

meanwhile, barney frank was on cnbc saying that there was a deal close to being finalized in the house....based on the ridiculous bush bailout proposal, but not identical with it. for example, i do not think the provision that appointed the secretary of treasury to the role of Master of the Universe answerable to No-one at Any Level will remain...

on the other hand, between the bus-speech and the german reaction you can see something of the ideological Problem neoliberals are still trying to navigate: separating the implosion of the derivatives sector from a systemic problem, make it over into something conjunctural through versions of the "bad apple" theory or through the "malign consequence of foreign influence" theory (the fifth column within capital flows, you see)...the inability to deal with ideology-driven problems, the refusal to see systemic issues because the ideology is not an ideology, but rather a faith in "the free enterprise system, which is the best system god has yet created" or some such trash. behind that, a refusal to acknowledge a significant blow to the united states as hegemon--first militarily, now economically.

meanwhile, from the inverted world of the right, there comes this letter from the republican study committee, which effectively argues that the problems in the derivatives sector and credit sectors are the result of regulation and that the way forward is even less of it:
http://www.house.gov/hensarling/rsc/...loutletter.pdf

which is kinda astonishing.

Well, everybody knows that alcoholism is the direct result of alcohol regulation. If we could just let the drunks sort things out amongst themselves without the government telling them where or when they could buy alcohol we'd soon see that there'd be no drunks.

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Originally Posted by filtherton (Post 2531542)

Agreed. Good analogy Filth.

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Originally Posted by jorgelito (Post 2532130)

Quote:

Originally Posted by filtherton

Agreed. Good analogy Filth.

I thought he was being ironic. You guys are being ironic, right?

my bet would be one is and one isn't.

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Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

“If I go into a bank,” said Bo Lundgren, who was Sweden’s finance minister at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

http://www.nytimes.com/2008/09/23/bu...3krona.html?em

So wait a minute....the U.S. bailout plan doesn't set up a stipulation that includes extracting equity from the banks? It's just that: a bailout?

Please help me out here on the details. I haven't been reading much because I've been super busy.

Quote:

Originally Posted by Baraka_Guru (Post 2532146)

I thought he was being ironic. You guys are being ironic, right?

Er, no. Who's being ironic? What's ironic? We both agree. I don't see the irony.
-----Added 26/9/2008 at 12 : 04 : 16-----

Quote:

Originally Posted by Baraka_Guru (Post 2532201)

I came across this piece in the New York Times. It's an interesting case that Sweden faced that was similar to the current situation in the U.S.

The key difference is highlighted.

How Sweden Solved Its Bank Crisis

http://www.nytimes.com/2008/09/23/bu...3krona.html?em

So wait a minute....the U.S. bailout plan doesn't set up a stipulation that includes extracting equity from the banks? It's just that: a bailout?

Please help me out here on the details. I haven't been reading much because I've been super busy.

I think you may have it backwards. The US has learned from Sweden's mistakes. I am under the impression that the US Gov't will have an ownership stake in any "bailout" plan. As much as 70% in one case I think.

The states govt is planning to take warrants for stock in any bank of financial company which takes over $300m in , which may, or may not be exercised.

In a teleconference intended only for the ears of investment bankers, treasury officials described how all the measures being put into the bailout bill can be easily circumvented - that they are in the bill solely for political grandstanding and unlikely to be taken up.

Bailout conference call (5 parts, about 45 minutes long in total)

If you're interested in following the crisis blow by blow, these 2 sites will be interesting:

Calculated Risk

naked capitalism

Enjoy.

Quote:

Originally Posted by jorgelito (Post 2532250)

Er, no. Who's being ironic? What's ironic? We both agree. I don't see the irony.

I thought filterton was being ironic (i.e. I thought his meaning was contrary to what he actually wrote), which is why I was confused when you actually agreed with what he said.

I found the alcoholism analogy ridiculous, and so took it as comical.

Now that I know you both were being serious, I don't know what to say...except that I find the analogy ridiculous. I don't see the connection between alcoholism, the consumption of alcohol, and the regulation of alcohol and the regulation of the economy and economic crises. It's a false analogy.

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I was hoping I had it backwards. If this is true, then I guess the plan only moderately sucks instead of really sucks.

i think that the analogy is that the credit is alcohol, and the us consumer is the alcoholilc...

they can't live without credit...

Even then, this is still a bit of a reach. (Well, I mean to say too much of one.)

a proximate condition of possibility for the pathway into this fiasco.
for your amusement.

maybe a little puzzle: how would this have been imaginable, much less implemented, without the usual wishful thinking about market rationality, ethical actors and endless growth?

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The Reckoning
Agency’s ’04 Rule Let Banks Pile Up New Debt
By STEPHEN LABATON

“We have a good deal of comfort about the capital cushions at these firms at the moment.” — Christopher Cox, chairman of the Securities and Exchange Commission, March 11, 2008.

As rumors swirled that Bear Stearns faced imminent collapse in early March, Christopher Cox was told by his staff that Bear Stearns had $17 billion in cash and other assets — more than enough to weather the storm.

Drained of most of its cash three days later, Bear Stearns was forced into a hastily arranged marriage with JPMorgan Chase — backed by a $29 billion taxpayer dowry.

Within six months, other lions of Wall Street would also either disappear or transform themselves to survive the financial maelstrom — Merrill Lynch sold itself to Bank of America, Lehman Brothers filed for bankruptcy protection, and Goldman Sachs and Morgan Stanley converted to commercial banks.

How could Mr. Cox have been so wrong?

Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.

One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.

“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”

Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.

Annette L. Nazareth, the head of market regulation, reassured the commission that under the new rules, the companies for the first time could be restricted by the commission from excessively risky activity. She was later appointed a commissioner and served until January 2008.

“I’m very happy to support it,” said Commissioner Roel C. Campos, a former federal prosecutor and owner of a small radio broadcasting company from Houston, who then deadpanned: “And I keep my fingers crossed for the future.”

The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.

After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.

With that, the five big independent investment firms were unleashed.

In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.

Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.

The 2004 decision for the first time gave the S.E.C. a window on the banks’ increasingly risky investments in mortgage-related securities.

But the agency never took true advantage of that part of the bargain. The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority.

The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox more than a year and a half ago.

The few problems the examiners preliminarily uncovered about the riskiness of the firms’ investments and their increased reliance on debt — clear signs of trouble — were all but ignored.

The commission’s division of trading and markets “became aware of numerous potential red flags prior to Bear Stearns’s collapse, regarding its concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of certain” capital standards, said an inspector general’s report issued last Friday. But the division “did not take actions to limit these risk factors.”

Drive to Deregulate

The commission’s decision effectively to outsource its oversight to the firms themselves fit squarely in the broader Washington culture of the last eight years under President Bush.

A similar closeness to industry and laissez-faire philosophy has driven a push for deregulation throughout the government, from the Consumer Product Safety Commission and the Environmental Protection Agency to worker safety and transportation agencies.

“It’s a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs,” said Roderick M. Hills, a Republican who was chairman of the S.E.C. under President Gerald R. Ford. “The problem with such voluntary programs is that, as we’ve seen throughout history, they often don’t work.”

As was the case with other agencies, the commission’s decision was motivated by industry complaints of excessive regulation at a time of growing competition from overseas. The 2004 decision was aimed at easing regulatory burdens that the European Union was about to impose on the foreign operations of United States investment banks.

The Europeans said they would agree not to regulate the foreign subsidiaries of the investment banks on one condition — that the commission regulate the parent companies, along with the brokerage units that the S.E.C. already oversaw.

A 1999 law, however, had left a gap that did not give the commission explicit oversight of the parent companies. To get around that problem, and in exchange for the relaxed capital rules, the banks volunteered to let the commission examine the books of their parent companies and subsidiaries.

The 2004 decision also reflected a faith that Wall Street’s financial interests coincided with Washington’s regulatory interests.

“We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing,” said Professor James D. Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).

“Letting the firms police themselves made sense to me because I didn’t think the S.E.C. had the staff and wherewithal to impose its own standards and I foolishly thought the market would impose its own self-discipline. We’ve all learned a terrible lesson,” he added.

In letters to the commissioners, senior executives at the five investment banks complained about what they called unnecessary regulation and oversight by both American and European authorities. A lone voice of dissent in the 2004 proceeding came from a software consultant from Valparaiso, Ind., who said the computer models run by the firms — which the regulators would be relying on — could not anticipate moments of severe market turbulence.

“With the stroke of a pen, capital requirements are removed!” the consultant, Leonard D. Bole, wrote to the commission on Jan. 22, 2004. “Has the trading environment changed sufficiently since 1997, when the current requirements were enacted, that the commission is confident that current requirements in examples such as these can be disregarded?”

He said that similar computer standards had failed to protect Long-Term Capital Management, the hedge fund that collapsed in 1998, and could not protect companies from the market plunge of October 1987.

Mr. Bole, who earned a master’s degree in business administration at the University of Chicago, helps write computer programs that financial institutions use to meet capital requirements.

He said in a recent interview that he was never called by anyone from the commission.

“I’m a little guy in the land of giants,” he said. “I thought that the reduction in capital was rather dramatic.”

Policing Wall Street

A once-proud agency with a rich history at the intersection of Washington and Wall Street, the Securities and Exchange Commission was created during the Great Depression as part of the broader effort to restore confidence to battered investors. It was led in its formative years by heavyweight New Dealers, including James Landis and William O. Douglas. When President Franklin D. Roosevelt was asked in 1934 why he appointed Joseph P. Kennedy, a spectacularly successful stock speculator, as the agency’s first chairman, Roosevelt replied: “Set a thief to catch a thief.”

The commission’s most public role in policing Wall Street is its enforcement efforts. But critics say that in recent years it has failed to deter market problems. “It seems to me the enforcement effort in recent years has fallen short of what one Supreme Court justice once called the fear of the shotgun behind the door,” said Arthur Levitt Jr., who was S.E.C. chairman in the Clinton administration. “With this commission, the shotgun too rarely came out from behind the door.”

Christopher Cox had been a close ally of business groups in his 17 years as a House member from one of the most conservative districts in Southern California. Mr. Cox had led the effort to rewrite securities laws to make investor lawsuits harder to file. He also fought against accounting rules that would give less favorable treatment to executive stock options.

Under Mr. Cox, the commission responded to complaints by some businesses by making it more difficult for the enforcement staff to investigate and bring cases against companies. The commission has repeatedly reversed or reduced proposed settlements that companies had tentatively agreed upon. While the number of enforcement cases has risen, the number of cases involving significant players or large amounts of money has declined.

Mr. Cox dismantled a risk management office created by Mr. Donaldson that was assigned to watch for future problems. While other financial regulatory agencies criticized a blueprint by Mr. Paulson, the Treasury secretary, that proposed to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan, leaving it to three former Democratic and Republican commission chairmen to complain that the blueprint would neuter the agency.

In the process, Mr. Cox has surrounded himself with conservative lawyers, economists and accountants who, before the market turmoil of recent months, had embraced a far more limited vision for the commission than many of his predecessors.

‘Stakes in the Ground’

Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks.

“The last six months have made it abundantly clear that voluntary regulation does not work,” Mr. Cox said.

The decision to shutter the program came after Mr. Cox was blamed by Senator John McCain, the Republican presidential candidate, for the crisis. Mr. McCain has demanded Mr. Cox’s resignation.

Mr. Cox has said that the 2004 program was flawed from its inception. But former officials as well as the inspector general’s report have suggested that a major reason for its failure was Mr. Cox’s use of it.

“In retrospect, the tragedy is that the 2004 rule making gave us the ability to get information that would have been critical to sensible monitoring, and yet the S.E.C. didn’t oversee well enough,” Mr. Goldschmid said in an interview. He and Mr. Donaldson left the commission in 2005.

Mr. Cox declined requests for an interview. In response to written questions, including whether he or the commission had made any mistakes over the last three years that contributed to the current crisis, he said, “There will be no shortage of retrospective analyses about what happened and what should have happened.” He said that by last March he had concluded that the monitoring program’s “metrics were inadequate.”

He said that because the commission did not have the authority to curtail the heavy borrowing at Bear Stearns and the other firms, he and the commission were powerless to stop it.

“Implementing a purely voluntary program was very difficult because the commission’s regulations shouldn’t be suggestions,” he said. “The fact these companies could withdraw from voluntary supervision at their discretion diminished the mandate of the program and weakened its effectiveness. Experience has shown that the S.E.C. could not bootstrap itself into authority it didn’t have.”

But critics say that the commission could have done more, and that the agency’s effectiveness comes from the tone set at the top by the chairman, or what Mr. Levitt, the longest-serving S.E.C. chairman in history, calls “stakes in the ground.”

“If you go back to the chairmen in recent years, you will see that each spoke about a variety of issues that were important to them,” Mr. Levitt said. “This commission placed very few stakes in the ground.”

http://www.nytimes.com/2008/10/03/bu.../03sec.html?hp

For the record, I was being ironic, and I thought jorgelito was too. It was a response to the idea that this crisis was caused by regulation, though it's been a while so I can't remember if it was tangential to the current discussion or not).

As someone who has alcoholics in the family (does anyone not have alcoholics in the family) it does seem ridiculous to me. Alcoholics can be exceptionally functional in some aspects of their lives and completely destructive in others-- it isn't an affliction that can be cured with the market.

Greed and shortsightedness are also afflictions that can't be cured with the market, and it seems ridiculous to me there are folks who can on the one hand see greed and shortsightedness as good things in that they drive our economy, but on the other hand can't see how greed and shortsightedness could possibly have a detrimental effect on the way people behave in the marketplace.

As far as I have been able to tell, there are no regulatins requiring banks to provide loans to people who weren't really qualified for them based on hopelessly optimistic predictions of housing market performance. There are no regulations requiring banks to cut up these loans into thousands of unrecognizable pieces and sell them to other people.

Claiming that this crisis was caused by regulation is ridiculous. This crisis was caused by people trying to do what free marketeers ought to do: make money. And they did make money, and even if the economy crashes they will still have that money, because it wasn't their money they were fucking around with, it was ours.

One problem with the free market is that sometimes one can ruin the economy and make quite a profit in the process.

ah i wasn't even close then...