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A financial meltdown
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CommentNovember 21st, 2008
November 20th, 2008
November 6th, 2008
November 3rd, 2008
10.22.08, 10 a.m.I have been trying to sort out what happened to cause nearly the biggest economic meltdown in history. I talked to the owner of an investment bank this weekend and he said, "do you realize how close we came to the abyss?"
After reading lengthy documents full of terms like CDO‚s and Credit Default Swaps, and other financial jargon difficult to wade through, like this, I think I finally figured out the bottom line as to why it was so bad.
After reading lengthy documents full of terms like CDO‚s and Credit Default Swaps, and other financial jargon difficult to wade through, like this, I think I finally figured out the bottom line as to why it was so bad.
The credit markets froze, no one could borrow money, or better put, all the banks were afraid to lend money. Those not involved in the financial world may not realize how much daily business depends on massive amounts of loans of varying lengths, from one day to three days to t10 years or more.
For example, in Napa a lot of the vineyard management companies borrow against their expected crop to pay their bills for the year, including worker pay. They may get money quarterly or even monthly.
For example, in Napa a lot of the vineyard management companies borrow against their expected crop to pay their bills for the year, including worker pay. They may get money quarterly or even monthly.
The local bank that gets that money gets it from a bigger bank, which gets it from a bigger bank, all the way up to the Federal Reserve, which is the lender at the top of the heap. What happened one day last week is that no one wanted to lend money.
If suddenly banks stop lending that money, no one gets paid. Business shuts down. Now multiply that on a massive scale.
If suddenly banks stop lending that money, no one gets paid. Business shuts down. Now multiply that on a massive scale.
The market was within 500 trades of freezing altogether, which could have caused world wide economic collapse.
I listened to Henry Paulson on "Meet the Press," and he said despite the massive intervention he and Fed Chairman Ben Bernanke began, credit markets are still fragile, still stagnant.
What the bailout consists of is the government is buying the illiquid assets of troubled financial institutions, and will sell them at some future date — we are buying low. But what are we paying, are we paying high for worthless mortgages and their investment derivatives? That is the key question. If we are paying high and paying the most for the worst managed, most greedy companies — because after all they have the most of this stuff — is that fair to the taxpayers?
Rupert Murdoch says all these big financial boys are losing lots of money, so they are hardly getting away with it. Some may go to jail.
Paulson says we need the legislation within a week. We are over a barrel, and won't have much time to question this, and I think there is no choice but to move forward. However unsavory some of the consequences may be of the bail out, the alternative is worse.
Look to the Democrats to take the whip to anyone who seems like they are rich in the financial industry, and for the Republicans to start decrying "the biggest government entitlement program in history." That is what the Congress will be babbling about this week.
But we need this. We have to have it and afterwards we have to start analyzing what went wrong and fix it. I am starting to think we need to have a whole new economic system, that there are systemic problems and they need to be changed.
But there is time for that after we save the credit market.
I listened to Henry Paulson on "Meet the Press," and he said despite the massive intervention he and Fed Chairman Ben Bernanke began, credit markets are still fragile, still stagnant.
What the bailout consists of is the government is buying the illiquid assets of troubled financial institutions, and will sell them at some future date — we are buying low. But what are we paying, are we paying high for worthless mortgages and their investment derivatives? That is the key question. If we are paying high and paying the most for the worst managed, most greedy companies — because after all they have the most of this stuff — is that fair to the taxpayers?
Rupert Murdoch says all these big financial boys are losing lots of money, so they are hardly getting away with it. Some may go to jail.
Paulson says we need the legislation within a week. We are over a barrel, and won't have much time to question this, and I think there is no choice but to move forward. However unsavory some of the consequences may be of the bail out, the alternative is worse.
Look to the Democrats to take the whip to anyone who seems like they are rich in the financial industry, and for the Republicans to start decrying "the biggest government entitlement program in history." That is what the Congress will be babbling about this week.
But we need this. We have to have it and afterwards we have to start analyzing what went wrong and fix it. I am starting to think we need to have a whole new economic system, that there are systemic problems and they need to be changed.
But there is time for that after we save the credit market.
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a teacher wrote on Sep 22, 2008 11:22 AM:
Now that we are all stock holders in this mess, I'm wondering if we will all get golden parachutes or lead balloons. "
freeport56 wrote on Sep 22, 2008 1:08 PM:
Different World
If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.
But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee. Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.
But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years. "
freeport56 wrote on Sep 22, 2008 1:26 PM:
Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.
There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.
Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.
Bllomberg.com 9/22/2008 "How Democrats created the Financial Crisis" "
Dwayne wrote on Sep 22, 2008 1:31 PM:
As we have leaned more and more toward a cashless society, this isn't like 1929 at all... That was a cash-crash, and this as you stated is a credit crash...
I have toyed with the idea of calling a local title company and finding out if any real estate deals are closing... They likely don't want to be bothered, and probably wouldn't be truthful anyway... Most of what is being spoon-fed to us through the media is psychological, to prevent people from pulling out of everything...
It is interesting to note that it's only credit that's affected, and the evidence is that the election campaigns are still attracting hoards of cash, mostly from us little people... That ought to make you scratch your head a bit... "
Bill wrote on Sep 22, 2008 1:50 PM:
“Obama is the largest individual recipient at about $112,000, federal campaign finance reports show.
The candidate has "consistently supported stepped-up regulation for Fannie Mae and Freddie Mac to ensure that instead of rewarding speculators who relied on the government to reap massive profits, taxpayers and struggling homeowners are protected," the aide said.
Republican nominee John McCain has taken $16,400 from Freddie and Fannie employees since 2005. McCain campaign manager Rick Davis is past president of the Homeownership Alliance, an advocacy group whose members included Freddie and Fannie. In that role, he defended the companies against increased regulation.
Obama's running mate, Joe Biden, took just one donation, for $500, from one Freddie employee”. From the Los Angeles Times of Sept 9
Money is the root of all evil, unless you have plenty of it. "
Bill wrote on Sep 22, 2008 2:06 PM:
Leveraging is much different from small farmers who depend upon regulated Banks to advance credit (many time short term) for a wide variety of operations, for which they provide assets as security against they take on expected returns on future harvests.
The current crisis is larger than a party squabble neither of the candidates should be making drastic statements on this crisis. Right now it looks like the Treasury Secretary will become the new financial Czar. The Treasury along with the Fed will be the powerhouse of political dalliance in the future especially if they are given total unregulated control.
The financial sharks are circling now looking lucrative management contracts William Kristol has become a semi populist (his words) this morning calling for any administrator’s salary to be limited to that of the president. How much is the salary of the fed chairman and the Secretary of the Treasury divided by 2? Hope its less.
The goat entrails and tealeaves are not serving the smart people in the know very well or are they really in the know. It is looking like there are better odds in the lottery or the crap tables in Vegas, at least they are somewhat regulated. "
Bill wrote on Sep 22, 2008 2:25 PM:
Leveraging is much different from small farmers who depend upon regulated Banks to advance credit (many times short term) for a wide variety of operations, for which they provide assets as security against they take on expected returns on future harvests. They actually risk their own collateral the present crises pulls down even the less risky loans and affects those who have been prudent.
The current crisis is larger than a party squabble neither of the candidates should be making drastic statements on this crisis. Right now it looks like the Treasury Secretary will become the new financial Czar. The Treasury along with the Fed will be the powerhouse of political dalliance in the future especially if they are given total unregulated control.
The financial sharks are circling now looking lucrative management contracts William Kristol has become a semi populist (his words) this morning calling for any administrator’s salary to be limited to that of the president. How much is the salary of the fed chairman and the Secretary of the Treasury divided by 2? Hope its less.
The goat entrails and tealeaves are not serving the smart people in the know very well or are they really in the know. It is looking like there are better odds in the lottery or the crap tables in Vegas, at least they are somewhat regulated. "
kevin wrote on Sep 22, 2008 3:07 PM:
This bill REQUIRED lenders to make loans to people who didn't qualify. It was supposed to stop "redlining", which was what lenders did to people that couldn't afford loans. Community activists used this law to virtually blackmail banks into not just financing bad loans, but giving them money.
You've heard of ACORN? (B.O.'s old employer) this law is where they get their money and their power. "
abouttime wrote on Sep 22, 2008 3:10 PM:
kevin wrote on Sep 22, 2008 3:14 PM:
Bill wrote on Sep 22, 2008 4:40 PM:
Thanks My facts are correct as I quoted the source. They may be wrong and it supports the contention that McCain also takes from the same people.
You support that contention more forcefully but need to source it. Merely laying out a number is not particularly convincing.
If my source is wrong or questionable then the "facts" may be wrong. I would like to believe your facts but there is no attribution lent to them.
Any more than googling this or that is a valid support other than leading to more information.
I am interested in information on how and why we got to this crisis not who is to blame. there is plenty of that to go around and should be left to the idealouges.
I would like to see these threads show more real information about the what and how not the who is the blame. I can play that game but it is not very rewarding. "
Bill wrote on Sep 22, 2008 4:49 PM:
Perhaps you should take issue with the $112,000 not being spit in the bucket of campaigning at the presidential level that might or might not buy a couple of radio spots in Tucumcary.
That's not a lot of influence. McCain Bandwagon? You got to be new out here in the NVR cyber sphere.
If you want to touch me up your gonna have to do better than that. "
Bill wrote on Sep 22, 2008 5:05 PM:
McCain made a bad strategy decision early on but was forced to by the lack of support these partisans supplied now he is stuck with them and can’t get at the money. Romney would have been a different story for many of them. If they try to hard they may have to take more responsibility than they are willing to fess up to.
The redlining was done to prevent overt discrimination by banks not to sucker people into loans they could not afford. It took some creative thinking ginn the books there. "
cameltoedoc wrote on Sep 23, 2008 6:00 AM:
Raven wrote on Sep 23, 2008 8:16 AM:
kevin wrote on Sep 23, 2008 9:17 AM:
Dwayne wrote on Sep 23, 2008 9:46 AM:
Things will be so much better now that the government owns everything... "
BILL wrote on Sep 23, 2008 9:53 AM:
Attempting to point the finger at the discriminatory practice of redlining or looking for ghosts in a programs that have brought millions of Americans the opportunity to purchase homes is the fraudulent aspect of the argument.
"excessive exuberance" and the author of this phrase might be more culpable in the financial morass perpetrated by innovative free marketeers.
Lack of suffecient oversight and blind advocates of a mis understood dead economist is where the blame should lie and move on to solving the problem. "
freeport56 wrote on Sep 23, 2008 10:06 AM:
By the way, Paulson whoi is leading this charge was the head of the OFHFC, the oversight board for Fannie and Freddie! "
Raven wrote on Sep 23, 2008 5:32 PM:
Raven wrote on Sep 23, 2008 5:43 PM:
this just showed up in teh NY Times....
One of the giant mortgage companies at the heart of the credit crisis paid $15,000 a month from the end of 2005 through last month to a firm owned by Senator John McCain’s campaign manager, Rick Davis, according to two people with direct knowledge of the arrangement.
The disclosure undercuts a statement by Mr. McCain on Sunday night that the campaign manager, Rick Davis, had had no involvement with the company for the last several years.
Davis’s firm received the payments from the company, Freddie Mac, until it was taken over by the government this month along with Fannie Mae, the other big mortgage lender whose deteriorating finances helped precipitate the cascading problems on Wall Street. "
kevin wrote on Sep 23, 2008 6:27 PM:
kevin wrote on Sep 23, 2008 6:32 PM:
I say NO bailout without some changes first. Get rid of CRA at a minimum.
What's to prevent these banks from turning around, after being bailed out, and CONTINUING to make loans to people who can't pay them back? "
NVGal wrote on Sep 23, 2008 7:36 PM:
I think that that is a big reason why banks are afraid to lend, especially to marginal customers, not just the public trying to buy a house, but companies that are trying to make a payroll. If banks can’t resell their loans, because no one wants an asset that can be easily devalued, how are the credit markets going to even recover and start to lend again? This bailout from what I have read doesn’t seem to address this.
I am not saying that FAS 157 is a bad thing, it sure has done what it was suppose to do, and it sure did scrub that old boys club clean.
If you want more info on FAS 157, google an article called “FAS 157 Could Cause Huge Write-offs” by Stephen Taub "
Todd Adams wrote on Sep 23, 2008 8:12 PM:
Think for yourself and stop looking for reasons why the other party caused this mess. The only reason Wall Street is going to get away with fleecing taxpayers to the tune of nearly a trillion dollars is because most of America debating over which party should get most of the blame. Cable news has turned politics into some kind of spectator sport where the "fans" root for "the team". Disgusting.
Moving on.....why are we bailing out the bankers on Wall Street and not the families that are being foreclosed on? If I'm going to spend my money to bail anyone out of this mess I would rather it be my hard-working friends in Am Cyn who were foreclosed on. I think it's outrageous that the former CEO of Goldman Sachs, who is now the Secretary of the Treasury, is asking us for a $700 billion BLANK CHECK to bail out his old buddies on Wall Street. Incredible! "
Raven wrote on Sep 23, 2008 10:24 PM:
napablogger wrote on Sep 23, 2008 11:52 PM:
I agreed with Todd til he got on the part about bailing out homeowners. I don't object to giving them some help, but the problem is the whole economy is in serious crisis and I wonder if people are really getting that. That is why I wrote the piece here the way I did.
My prediction has come true, we have broken down into partisan wrangling and you know, we really can't afford to do that with this one.
We are at the edge of a world wide economic meltdown. If we dont fix the credit markets, fast, we are going to have a lot more than a recession. We already have a recession most likely.
I think some review of Paulsens proposal by Congress is ok but it is already getting too political. Sooner or later playing politics catches up with you.
We need to pass this thing and stabilize the markets, the new President can play around with it next year.
Todd, I thought we had already passed some help for individual mortgage holders but if not the problem now is that if the big banks are not secure then everyone is in trouble and a break on a mortgage when no bank can lend money at any rate with any requirements isn't going to help much.
We have to fix the bigger picture first. "
a teacher wrote on Sep 24, 2008 6:22 AM:
AND, I never want to hear how the free market always works and government is always the problem. Especially from people asking me for money. "
a teacher wrote on Sep 24, 2008 6:24 AM:
cab e-girl wrote on Sep 24, 2008 10:01 AM:
“Mr. Davis has seen no income from Davis Manafort since 2006. Zero. Mr. Davis has received no salary or compensation since 2006. Mr. Davis has received no profit or partner distributions from that firm on any basis — weekly, bi-weekly, monthly, bi-monthly, quarterly, semi-annual or annual — since 2006. Again, zero. Neither has Mr. Davis received any equity in the firm based on profits derived since his financial separation from Davis Manafort in 2006,” said McCain campaign spokesman Michael Goldfarb.
“Further, and missing from the Times’ reporting, Mr. Davis has never — never — been a lobbyist for either Fannie Mae or Freddie Mac. Mr. Davis has not served as a registered lobbyist since 2005.” "
freeport56 wrote on Sep 24, 2008 10:22 AM:
If these guys are so great, where have they been? "
Raven wrote on Sep 24, 2008 10:23 AM:
cab e-girl wrote on Sep 24, 2008 10:30 AM:
Instead of dividing as a population and choosing sides, we the people should be uniting against the policies our politicians have been allowed to put into place. Both sides are guilty. Those that have voted for the congressional excrement that has led to this meltdown should not receive any of our votes, whether there is a D or R behind their name. Research voting records before voting. Make your vote count in November. Stop watching the evening news, which has become pure propaganda, get onto your computer and research your Representative’s voting record! It’s easy to do; you just need to take the time to do it. "
a teacher wrote on Sep 24, 2008 11:39 AM:
Or not so implied... "
kevin wrote on Sep 24, 2008 3:09 PM:
"Thomasdotgov" does not keep records of previous congress'. How convienient.... "
NVGal wrote on Sep 24, 2008 7:47 PM:
The assets are devalued and unstable because of homeowners trying to stay in their homes. Help the homeowners out first, stabilize the assets and then see what needs to be done.
I don’t know why Congress is letting Paulson get away with this horrific plan. Paulson’s plan will create higher interest rates, lower home prices and higher prices in general. If I am getting all of that, then I say keep people in their homes. "
NVGal wrote on Sep 24, 2008 7:52 PM:
Google "John McCain Voting Record" and choose the Washington Post link. It will take you to their data base "
Raven wrote on Sep 24, 2008 9:39 PM:
Raven wrote on Sep 24, 2008 9:43 PM:
skeptic wrote on Sep 25, 2008 8:30 AM:
the 700 billion could be raised by raising the interest rate to 10% temporarily. this would give the small banks immediate cash to loan out for those paychecks right here locally. goldman sachs and morgan stanley should be allowed to go under just like the other investment banks. derivatives are ponzi schemes and never should have been unregulated. most local banks and all credit unions avoid the phoney cdos and credit swaps as used on wall st.
paulson is blackmailing us into bailing out friends on wall st. with the spectre of a total freeze in the economy. some democrats and republicans have told paulson that his proposal would give more power to bernanke than king george had before the revolution.both parties got us into this mess and are now proposing congress be allowed some oversight over the federal reserve policies.
neither mccain nor obama nor bush had a clue about a meltdown but ron paul predicted it years ago. "
freeport56 wrote on Sep 25, 2008 12:40 PM:
Time to catch up with the facts. The story you reference appeared, in of all places, the New York Times. It is completely false and was fabricated. All the media knows this now.
Next time quote a reliable media source. The NYT is not reliable! "
a teacher wrote on Sep 25, 2008 4:55 PM:
Except that it is completely true and the media knows it. The only people pedaling that it is a lie are the McCain people. It fits their narrative that the "liberal press" is out to get them.
Nice try though... "
kevin wrote on Sep 25, 2008 6:43 PM:
freeport, sometimes the NYT gets it right:
"NYT Revealed True Cause of Fannie Mae Crisis -- In 1999!
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
"Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements," said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. "Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market."
- New York Times, September 30, 1999 "
NVGal wrote on Sep 25, 2008 8:35 PM:
mofosheee wrote on Sep 26, 2008 12:58 AM:
t's simple............
It's because all their attention was focused upon professional athletics using steroids "
kevin wrote on Sep 26, 2008 5:01 AM:
Good for them! "
Bill wrote on Sep 26, 2008 11:21 AM:
Madison Jay Hamilton wrote on Sep 26, 2008 5:21 PM:
misfit wrote on Sep 26, 2008 5:52 PM:
kevin wrote on Sep 26, 2008 10:02 PM:
tony wrote on Sep 26, 2008 10:43 PM:
skeptic wrote on Sep 27, 2008 12:50 PM:
only 5 trillion is actually going under soon, only $50,000 per taxpayer.
think of the 700 billion quoted by paulson as a "teaser rate". kind of like a 1% interest rate house loan, with no payments required until after the election.
as for derivatives , please don't mention these again until after i get my money out of the 401k, which is not insured by fdic. once the public wakes up to the fact that, what was illegal before has been made legal, and those formerly called criminals are now called "investment bankers", confidence will be reduced and it's all a confidence game. people who rely on that for their jobs used to be called "con men".
i specifically refer to the glass-steagal act, which made it illegal, after the depression, for banks to sell stocks. it was repealed in 1991. then, about 3 years ago they made 0% loans, which were a crime because so toxic to society, legal.
write your congress to ask that these rules be put back in place. one congressman on cspan checked the net and came up with 350 hits for these stupid loans still offered because the bailout will continue to inflate this bubble.
just give me a week to get my 401k money and you can explain what cdos and derivatives are to your heart's content. "
Joe B wrote on Sep 27, 2008 6:57 PM:
skeptic wrote on Sep 27, 2008 10:53 PM:
joe b brings up a good point. several well known economists agree the 700 billion is really going to be 5 trillion if we bail out every billionaire. what will happen when we add that to the 9 trillion out there already ? by crerating this money out of thin air, the fed will lower the value of the dollar overnight by over 30%. so we all get an immediate 30% pay cut just as inflation is really 15% according to an analyst on cnn yesterday. that means our cash and pay go down a total of almost 50% in buying power this year. join those of us writing to congress to say no to the bailout of wallstreet crooks.
there are good local banks all over the country that may need support soon. let's not give $10,000 apiece to keep goldman-sachs or morgan in the funny money-can't be regulated because nobody understands it-scam .
how about that republican idea to have these investment banks fund their own bailout? it is gaining a lot of momentum.
aren't these chicago boy econonomists the same ones that warn what a drag welfare is on the economy ? so let's not bail out billionaires with the biggest economic change in our history without a week or 2 to digest what is happening.
don't let these international bankers dictate terms to us. i purposely conflate the treasury(supposedly representing us) and the fed (private banks) with these would-be dictators because they seem to be together right now. "
cameltoedoc wrote on Oct 1, 2008 11:00 AM:
Raven wrote on Oct 2, 2008 9:28 PM:
skeptic wrote on Oct 3, 2008 9:32 AM:
so when they talk about the new 850 billion dollar bill, and 11% interest from the federal reserve, thats a trillion dollars at least, or 10,000$ per household, or 20 grand for 2 income families.
i really hope that those very few of our citizenry who want welfare like this just to "keep the stock market going up" that you should take advantage of the thousands we are borrowing to prop up your 401k. take it out now, because the bill will only inflate the market for a few days, and put it in your local bank. they are already safe and liquid. they do not have a credit crisis.they have tax free ira's you can roll your 401k into.
so camel, your point would have to be modified, send us each $10,000. give incentives for us to deposit in local banks and increase the insurance, because fdic is within 42 billion of being bankrupt itself.
i agree with kevin when he says this will encourage more bad behaviour. it's like feeling sorry for a drug addict and buying him drugs to get through the next week, eventually, he will crash anyway, despite our best efforts to help. "