A 2004 meeting at the SEC sets the stage for the current crisis- with eerie foreboding:

"We've said these are the big guys," said one commissioner, Harvey Goldschmid, provoking nervous laughter, "but that means if anything goes wrong, it's going to be an awfully big mess."

"I'm very happy to support it," said Commissioner Roel Campos, a former U.S. government prosecutor and owner of a small radio broadcasting firm in Houston who then deadpanned: "And I keep my fingers crossed for the future."

And leading the five investment banks asking for exemption from capital reserve requirements- Goldman Sachs, then headed by Henry Paulson Jr, now in charge of the bailout.

http://www.iht.com/articles/2008/10/03/business/sec.php

Argh- the $700 billion bailout is being outsourced to the same asset managers etc that caused the mess
http://www.nytimes.com/2008/10/04/business/economy/04pl...RSEYnaK2sKy0wyv6hnmA

Out of the big five investment banks, only two are still open as of today. The last time investment banker cared about what they did was when the partners had personal interest in the profitability and longevity of their firms.

Yes. The essence of free market capitalism - the ultimate interest is to maximize shareholder profit:

quote:

On one occasion, a hedge fund manager telephoned a senior Fannie executive to complain that the company was not taking enough gambles in chasing profits.

"Are you stupid or blind?" the investor roared, according to someone who heard the call, but requested anonymity. "Your job is to make me money!"

Capitol Hill bore down on Mudd as well. The same year he took the top position, regulators sharply increased Fannie's affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.

It looks like Bush's effort to create "ownership society" didn't work too well. How come he doesn't talk about this any more?

The conservative doctrine of maximum market self-regulation is delusional, as visible by the conduct of SEC chief:

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

In the process, 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.

On Sept. 26, 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," Cox said.

This message has been edited. Last edited by: idealab,

And those same guys are running the $700 billion bailout.

People in finance like to think themselves as risk taker and innovative. Most of them are not, they are just sheeps like the politicians who only follow the popular trend. When few were willing to even touch risky mortgage, you couldn't beg those investment companies to get into subprime loans. When the trend formed, they can't get enough of it!

Now, the politicians are just as sheepish to agree to a bailout so quickly. I think it would be more beneficial to divide the $700 billion among Americans making less than $50000 a year than to give these capital to the big corporations to fix their own mess.

I'll repeat the saying, "If you own the bank $300, it's your problem. If you own the bank $300 million, it's the bank's problem.". Now it's time for me to figure out how to owe $3 billion to somebody so someone else will bail me out.

quote:

I think it would be more beneficial to divide the $700 billion among Americans making less than $50000 a year

Wouldn't work- Joe Six-Pack would waste all of his on beer, and Hockey Mom would squander hers on lipstick and ammo.

Hmmm - spur the engine of American economy with consumer spending.

Lack of spending isn't the problem- it's lack of credit. The whole point of the bailout is to buy up bad mortgage-based debt instruments where all the credit is locked up. Not a bad idea, but it's being administered by the same asset-managers and investment bankers who caused the problem in the first place. Without stringent regulations in place they're likely to screw it up again. Letting the foxes guard the henhouse is bad policy.

Bill, I was being sarcastic. :-)

quote:

When few were willing to even touch risky mortgage, you couldn't beg those investment companies to get into subprime loans.

I'm hoping this is sarcasm. Bankers were pushing subprime mortgages on anyone with a pulse.

quote:

When few were willing to even touch risky mortgage, you couldn't beg those investment companies to get into subprime loans. When the trend formed, they can't get enough of it!

I think you might have missed the last sentence above.

What trend? The govt's policy was to lower criteria for granting mortgages to keep the housing boom rolling. Characterizing that as a trend that became popular among investment companies misrepresents what happened.

See

quote:

Fannie and Freddie didn't have to be led to the water to drink; they ran. The two were determined to thwart the spirit, if not the letter, of a 1992 federal law that permitted them to take "less than the return earned on other activities" to assist "mortgages on housing for low- and moderate-income families."

Instead of taking less of a return, Fannie Mae and Freddie Mac decided to take more of a return on affordable housing by issuing more than $400 billion in debt to finance higher-cost, higher-yield subprime mortgages, helping to fuel the subprime feeding frenzy.

Ironically, Fannie Mae and Freddie Mac were rewarded for their efforts by a lax regulator. The Department of Housing and Urban Development, which oversaw Fannie and Freddie's annual affordable-housing goals, allowed them to count triple-A-rated securities backed by higher cost, subprime loans, as meeting their "affordable housing" goals.

http://www.washingtonpost.com/wp-dyn/content/article/20...AR2008100303555.html

BTW, European investors also hold much of the US mortgage-based toxic debt. The prime ministers of France, Germany, Britain and Italy are discussing their own bailout package. German lender Hypo Real Estate is already tanking. More to come.

Friend sent me this photo from a Wall Street demonstration last week. I had to smudge it with Photoshop in order to post it, but you get the idea.

They need to demonstrate at the Capitol, White House, and Treasury as well. They bear equal responsibility.

Not sure why a topic on US politics ended up here, but FWIW:

the underlying problem was an attempt to get lower income people into the housing market: there is apparently something about home ownership being part of the American Dream or some such and everyone deserves a crack at it. Noble sentiment but you can see where it can lead, especially if someone spots an easy way to make a buck. And that's what happened, and here we are.

I think it's pointless to tar either side with the blame, if you ask me (not that you did) there are huge swathes of folks who brought about this mess on both sides of the aisle in Congress, on Wall St., in banks, etc--the list is endless.

Ok, here's a story I read awhile back (sorry, can't source it at this distance, but it was in a newpaper): a house cleaner married a taxi driver, to give you an idea of what income potential we're looking at. They ended up buying a house for $750,000. Now, could someone please explain to me: 1) what they were thinking, 2) what the real estate agent was thinking, and 3) what the loan officer was thinking. It doesn't take rocket science to figure out where that one went--south big time and fast.

So running around saying it's Democrats, no it's Republicans, no it's greedy bankers, no it's the sky falling, is kinda pointless imho.

quote:

a house cleaner married a taxi driver, to give you an idea of what income potential we're looking at. They ended up buying a house for $750,000. Now, could someone please explain to me: 1) what they were thinking, 2) what the real estate agent was thinking, and 3) what the loan officer was thinking. I

This scenario happened to my vet's retired mother in New Jersey. She wanted to sell her house and move to Florida. Their little house was valued at $350,000. The realtor sold it to a couple with wife working as cashier and husband as assembler in factory. When his mother picked up her check for the house, she asked the bank why they were giving the couple a loan they couldn't afford and they told her it's no problem, if they couldn't pay, the bank would take it back and sell it to someone else. Sure enough in a about 3 years that's what happened. What the bank wasn't counting on was falling demand for housing and the market value decreasing. So the bank couldn't sell the house for the amount of the original mortgage. Consider that the bank had probably sold the original mortgage as a mortgage bond on Wall Street, and the investment bank on Wall Street had likely bundled it into a $100 million dollar collateralized debt obligation and sold it to a hedge fund, sovereign fund or foreign bank, and you'll see how this practice led to the global shakedown we are experiencing today.

quote:

I think it's pointless to tar either side with the blame, if you ask me (not that you did) there are huge swathes of folks who brought about this mess on both sides of the aisle in Congress, on Wall St., in banks, etc--the list is endless.
So running around saying it's Democrats, no it's Republicans, no it's greedy bankers, no it's the sky falling, is kinda pointless imho.

Not sure how you get that out of this thread- the whole cast of those involved has been mentioned, not one particular group has been given sole blame.

Thanks for posting these articles, Bill. I meant the trend of investing in (increasingly profitable at that time) higher risk mortgages was what motivated the investment banks and other traditional banks to put more money into such investment. Whereas before this practice became so profitable, they were more of an exotic and risky investment. In addition, over the last decade, derivative trading has become more complicated and the risks are packaged and re-packaged. Companies, especially hedge funds have accerlerated the growth of highly leveraged investments which are sold in the financial market in various forms. So from the first mortgage company who makes its profit from approving the loan to a buyer, to the bank that underwrites the loan, and the bank packages a bunch of such loans together and make a quick profit by selling it to an investment bank, and the investment bank pools several of such packages and sell it to a hedge fund, pension fund, or another country's investment fund. Every time such package is sold, someone makes a quick and easy profit and the risk to passed to someone else. Hence such trend was formed as those big investment banks could not stand by and watch others eat the pie. The only way for them to do this legally was to push SEC to relax the capital reserve rule and standard on risk evaluation and enforcement of violations. Since they could easily pass the risk to another buyer, short term think prevailed. However, the risk does not vanish into thin air no matter how many times it is passed. Ultimately, someone has to bear the risk regardless how many formulas are used to hide its value. Now we know who is the ultimate payer of the risk.

In the technology stock boom during the late 90's, the margin trading requirement was reasonable at a 50% of the investment value, meaning the trader must have 50% of his investment in cash. Still, margin trading was very popular and many traders were highly leveraged, but that's small potatoe compare to the leverage of a company like the Lehman Brothers during the real estate bubble, which I read has a 33-to-1 ratio. While real estate is not nearly as risky as stocks as the underlying asset cannot be zero, still, a highly leveraged 33-to-1 borrowing ratio in itself is just as risky.

Yes, Wall Street bears much responsibility, but because of deregulation by free market fans, no one was around to slam on the brakes on that run-away train. And both political parties, both executive and legislative branches, consciously choose to enable that deregulation.

The spread of this collapse abroad is now in full sway. While the Dow fell over 700* points again, the falls in Europe were as bad- London's FTSE 100 ended down 7.9%, the CAC 40 in Paris skidded 9%, and the DAX in Frankfurt tumbled 7.1%.

Fairing even worse, Brazilian stocks plunged 15%, and trading was halted twice on Sao Paulo's Ibovespa index. Brazil's currency, the real, slumped nearly 7% to a near 2-year low. Mexico's IPC index dropped 9.6%, Argentina's Merval sank 9.4%, Chile's IPSA was down 6.8% and Colombia's IGBC fell 5.3%.

The dollar, freakishly, is strong, and oil has fallen below $90 per barrel.

Edited to add: the Dow fought back to only 300 point loss at the close

This message has been edited. Last edited by: Bill 2,

The guy in charge of the bailout was announced today- another former Goldman Sachs guy.

And Milan stock exchange fell 8.24% today.

quote:

Originally posted by Bill 2:

The dollar, freakishly, is strong...

Good time to buy euros... it won't last....

If you think deregulation of the financial system and subsequent collapse is bad, check out the wondrous deregulation of airline safety. Hey, the invisible hand of the market will take care of everything- airlines with unsafe planes will eventually loose business (after a few crashes).
http://ap.google.com/article/ALeqM5iIEtNPJ9LlhjWMser4SkocvwUUFAD93JO80O0