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Adrift in a sea of lunacy
Posted by: McQ on Thursday, October 02, 2008

OK, here's the obligatory bailout post. Instead of me talking, I'll let former Treasury Secretary Paul O'Neill say it:
``If they pass this thing, it's awful what the consequences are going to be in terms of an ongoing federal relationship that doesn't need to exist with the institutions,'' O'Neill said. ``Are we going to insist on having a federal representative on boards of directors to protect our investment?''

The main component of the legislation now under consideration is giving the Treasury secretary authority to purchase distressed mortgage-related assets with an amount of money equivalent to about half of Canada's annual gross domestic product.

``We have no capacity in the federal government and it's not possible to create a capacity to manage a $700 billion property portfolio,'' said O'Neill, who was chairman of Alcoa Inc., the largest U.S. aluminum producer, from 1987 to 2000. ``It's crazy. It's like we've lost our moorings.''
 
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McQ, quoting O’Neill:
with an amount of money equivalent to about half of Canada’s annual gross domestic product.
Fortunately, it’s less than 5% of U.S. GDP. Over ten years that’s less than .5% of GDP, if the financial system has sufficient liquidity.

As to what to do with the (potentially) $700 billion in assets: throw them to the dogs for what you paid for them, for all I care. There are plenty of entrepreneurs who know how to turn those assets into cash.

The issue is liquidity in the system, which is what supports that $15 trillion GDP, and will have it at upwards of $22-$23 trillion ten years from now.
 
Written By: Martin McPhillips
URL: http://newpaltzjournal.com
with an amount of money equivalent to about half of Canada’s annual gross domestic product.
Fortunately, it’s less than 5% of U.S. GDP. Over ten years that’s less than .5% of GDP, if the financial system has sufficient liquidity.
I don’t presume to be able to evaluate adequately the pertinence to this matter of these sorts of comparisons and statistics. Nor do I really understand how directly relevant are the following, which I’m taking from this source and throw out because, heck, why not:

According to last year’s estimate, U.S. public debt stood at 60.8% of our GDP.

The $700,000,000,000.00 that Paulson begged from Pelosi on bended knee amounts to more than a quarter (27%) of the federal government’s budgeted annual revenues ($2.568 trillion).

Relevant in any way? Matters for concern, one way or another?
 
Written By: Linda Morgan
URL: http://
Over ten years that’s less than .5% of GDP, if the financial system has sufficient liquidity
I see nothing there to prevent us being right back here in 2-3 years with a bailout just as high (if not higher) than this one.

The only lesson learned I see, is that the financial sector can use the US treasurey as their personal ATM machine, especially if they allow things to fester to ridiculous proportions.
 
Written By: jpm100
URL: http://
Linda,

Of course it’s a matter for concern, but much less a matter for concern than a systemic financial collapse.
 
Written By: Martin McPhillips
URL: http://newpaltzjournal.com
I see nothing there to prevent us being right back here in 2-3 years with a bailout just as high (if not higher) than this one.
Which goes, I think, to the points I’ve been making on the matter here all along.

The key element in the repair of the problem, past paying to repair the damage as I suggested, was keeping government out of the banking industry going forward so that such tings don’t happen again. In reading the bill as passed by the Senate last night I see exactly the opposite happening.



 
Written By: Bithead
URL: http://bitsblog.florack.us
I’m at least willing to talk bailout when somebody, somewhere actually talks about how we’re going to stop making these bad loans in the future!

So far, I’ve seen precisely none of that. Without that, well, the metaphor I’ve been using is that if you have a fire, you can make it look like you’ve put it out by dumping a lot of wood on it. Look, the fire’s out, nothing but some smoke!... for about half an hour.

I want to see Congress talking about putting out the fire, not just dumping fuel on it and then bragging about their leadership.
 
Written By: Jeremy Bowers
URL: http://www.jerf.org/iri
I see nothing there to prevent us being right back here in 2-3 years with a bailout just as high (if not higher) than this one.
Neither do I, but if I were smart enough to know how this will turn out I wouldn’t be here commenting, but down on my own island in the South Pacific and Mrs. McP would be able to afford a team of private detectives to oversee my conduct.

The U.S. government took on the role of central bank via the Federal Reserve in 1913. It’s meeting an obligation under that role to restore confidence and liquidity to the financial system during a financial panic.

During the Depression the Fed badly bungled that role by allowing the economy to fall into the grip of deflation. To my eye, the asset deflation in the housing market was about to set off a deflationary spiral througout the system. Blame for that should come later, but the immediate question is liquidity.

The mysticism of the moment is caused by the Congress having to get involved because the Fed’s solvency was called into question by the size of the illiquid assets held by financial institutions. So, the central bank itself faced a crisis, and that required it to turn to the politicos, who can screw up anything. In other words, the central bank could not do its job without turning to its creator and the full faith and credit of the government and the people.

On the other hand, the U.S. financial system, and economy, was founded, by Hamilton, on the basis of transforming huge debt into a positive financial flow. He’s not a big hit with the "theory hawks" either.
 
Written By: Martin McPhillips
URL: http://newpaltzjournal.com
I’m at least willing to talk bailout when somebody, somewhere actually talks about how we’re going to stop making these bad loans in the future!

So far, I’ve seen precisely none of that.
That’s the next question, and it’s why you saw Democrats making pre-emptive strikes, blaming this on "Boooosh" and free market capitalism.

There is also, unfortunately, a huge element of racial politics at work here, because so many of these bad loans were targeted for blacks and other minorities, in the usual fashion, to purchase their political affections.

So it’s all wrapped up in this absurd, potentially catastrophic, presidential election and with the Democrats control of Congress.

(I’m not by implication praising Republicans here, given their foolishness, but the problems with them are not half those we get with the Democrats.)
 
Written By: Martin McPhillips
URL: http://newpaltzjournal.com
O’Neill:
"Are we going to insist on having a federal representative on boards of directors to protect our investment?"
{spit} That guy’s an idiot.

Here’s a question for you: let’s let these creeps have that kind of an ownership stake in American homes. How long before they’re running inspections to see whether you’re smoking cigarettes in them?

Get the picture?
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
"``We have no capacity in the federal government and it’s not possible to create a capacity to manage a $700 billion property portfolio,"

Not to worry, mate, nobody else seems to have that capacity either.


"There are plenty of entrepreneurs who know how to turn those assets into cash."

Where are they hiding?

It continues to mystify me why an industry that can put a value on almost anything, including companies with NO track record (e.g. IPOs) or NO profits and bonds backed by nothing except a promise to pay, cannot put a value on securities backed by real assets that are generating income each and every month in the form of principal and interest payments.
And how can companies who put all their cash into treasury securities, driving them a record low yield, claim with a straight face that they have no money to invest or loan?




 
Written By: timactual
URL: http://
let’s let these creeps have that kind of an ownership stake in American homes
Given that a majority of Americans seem content with each individual’s economic output belonging to the collective (à la making sure everyone has their "fair share of the pie"), we may have passed the point of "letting" them.
 
Written By: huh
URL: http://
Billy;

I wonder if O’Neil isn’t being sarcastic, there.
That’s how I read it, first time.

 
Written By: Bithead
URL: http://bitsblog.florack.us
Not bloody likely, Eric. He’s not that smart about it. He’s an owl-eyed beanie-head: the kind of guy who would wake up in a camp and look around wondering what the hell hit him. The political implications wouldn’t occur to him until they were up his ass. He’s not unlike a lot of people posting online.
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
Where are they hiding?
Behind their best advantage and opportunity, which includes a stable financial system, which happens when financial institutions are bridged out of their current stasis.
 
Written By: Martin McPhillips
URL: http://newpaltzjournal.com
I like to believe the media when it says the reason the markets are tanking is because of the delay in approving the bailout. However, I don’t think that is the case. The selling volume has been moderate, not intense, which means there is not going to be a collapse. I think the fear you see in the markets is the now suddenly very high probability that Obama will be elected in 30 days time. I think the take away I give to others looking at this is that you should NOT expect the stock market to start going up anytime soon, until the political climate changes.

Even IBD came out today with the editorial stab in the back pushing for the bailout. What is the merit of this bill? Nothing, I can think of, except make Warren Buffett better off, since he made these investments and is now waiting for Congress to prove him right. Oh, and don’t expect him to lose money, if Congress doesn’t deliver, I believe he signs on the dotted line ONLY if the bsilout is approved.

A large number of CEO’s believe that Congress is looking at the wrong side of the ledger, buying assets to hold up prices artificially. Congress should tailor any approach to the capital side of the ledger, buying preffered, non voting stock or outright insurance to support the decline in the value of the liabilities of the banks and non-bank banks.
 
Written By: Orlando Armaswalker
URL: http://
"financial institutions are bridged out of their current stasis"

Their self inflicted stasis. It is completely voluntary. Perhaps that is why they call it a panic. It seems Warren Buffet has found another couple of billion to invest. He must have a very lumpy mattress.

Something I think is interesting about these MBSs is that they are self-liquidating. Each month, as principal and interest income is received, the value of the security decreases correspondingly. Eventually, after about 30 years, the security will be worth nothing, as all the mortgages will be paid off. I find it difficult to believe (although not as difficult as I would have 6 moths ago) that the traders of these securities have no way to determine their current value, using discounted cash flow if nothing else.
 
Written By: timactual
URL: http://
"financial institutions are bridged out of their current stasis"

Their self inflicted stasis. It is completely voluntary.
Did these financial institutions volunteer to meet the demands of the CRA, or did Congress hold a gun to their heads?

This thing started with Congress, which needed lending standards defined down to make its good intentions work.
Warren Buffet has found another couple of billion to invest. He must have a very lumpy mattress.
Clearly a lot lumpier than the mattresses of WaMu, Bear Stearns, Lehman, Merrill-Lynch, Wachovia etc.
 
Written By: Martin McPhillips
URL: http://newpaltzjournal.com
I am so tired of hearing how the credit crunch will kill us...the credit boon hurt us.

If a company doesn’t have the ability to make payroll without taking a loan out then that company should not be in business.

Do the Republicans care about the people or about business?
 
Written By: SkyWatch
URL: http://
If a company doesn’t have the ability to make payroll without taking a loan out then that company should not be in business.
Not true...when I packed bricks our company, a general contractor, had a number of large projects. They paid in tranches , 30% down, three 20% payments, and a final 10% for example. The project(s) stretched out over months and the first tranche might go for materials, but we grunt labourers got paid weekly. The owner took a short-term note out for our salaries, several times. We were profitable, the problem was not SOLVENCY but LIQUIDITY. I have no problem if you want to oppose the bail-out I think I do too. But please cease this silly carping about what businesses should or should not be doing. Unless you have a PhD in Business Management/Finance…short-term loans work for businesses, large and small that will make money, in time, but will not make pay-roll from week-to-week by the nature of their industry.
 
Written By: Joe
URL: http://
"Did these financial institutions volunteer to meet the demands of the CRA, or did Congress hold a gun to their heads?"

Are you saying that all these bad mortgages, which from what I have read are significantly less than 10% of the total, and the subsequent problems were caused by the CRA?
 
Written By: timactual
URL: http://
Something I think is interesting about these MBSs is that they are self-liquidating. Each month, as principal and interest income is received, the value of the security decreases correspondingly. Eventually, after about 30 years, the security will be worth nothing, as all the mortgages will be paid off. I find it difficult to believe (although not as difficult as I would have 6 moths ago) that the traders of these securities have no way to determine their current value, using discounted cash flow if nothing else.
Buyers would normally be looking to acquire these assets on that basis. However there is a strong rumour that a new buyer is likely to be spending $700 billion on securities in the not too distant future and if that new buyer arrives the price of the securities will increase substantially. Hence no one is going to sell securities now unless they absolutely have to.
 
Written By: unaha-closp
URL: http://warisforwinning.blogspot.com/
Are you saying that all these bad mortgages, which from what I have read are significantly less than 10% of the total, and the subsequent problems were caused by the CRA?
Tim;

Do you really think that eligibility requirements were not affected across the board to accommodate CRA? If there was any delineation between rich and poor on that score, how long do you suppose it would be before you had lawsuits flying around like so many bats, and each of them with a big label to hang on the lender reading "Racist"?

The answer to your question is not all bad loans were because of CRA... (There are always bad loans, after all) but the lion’s share is.
 
Written By: Bithead
URL: http://bitsblog.florack.us
Assuming that the CRA is actually responsible for the majority of bad loans (which comprise less than 10% of the total), just how is the CRA responsible for the current unwillingness to extend credit? First the CRA is blamed for throwing money at anyone who applies for a real estate loan, now it is blamed for not lending to anyone for non real estate loans. How exactly does the CRA prevent financial institutions from extending credit to car dealerships, for example?


"Hence no one is going to sell securities now unless they absolutely have to."

Sounds reasonable to me, but I think that someone would have noticed any demand for the securities by now.
 
Written By: timactual
URL: http://
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Written By: 4
URL: http://rdbjefrgrchm.com/

 
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