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***US financial crisis/bail-out master thread***

^^if it passes and the economy tanks anyways, americans will be pissed. remember how angry everyone got about 9-11? Those were lives, now were talking about money. I think heads will roll
 
On Monday when the bill was rejected, the Dow shed $1.2 trillion anyway. Granted it rebounded again the next day, but didn't the SEC put a hold on short-selling? Doesn't look like it worked.
 
(just when I thought I was out, they pull me back in...)

Like Bel, and SA I can't believe they added on a bunch of seemingly random tax breaks to an already expensive bill, when there's a big budget deficit. Did you guys know Hollywood gets a tax break here? I still think something needed to be done to improve liquidity, urgently. I'm not at all convinced by this particular plan.

Minor caveat to those saying "now it begins" - we've already seen a lot of post credit crunch litigation, and we were sure as hell expecting a lot anyway. I suspect that it's certainly going to accelerate now, but that was happening anyway (huge amount of litigation coming out of Lehman Bros, for example). And I suspect the US auto industry would have been in trouble anyway.

Meantime, the largest and oldest SIV, Sigma Finance, has collapsed. The end of an era, as the FT says?

To neonads: short selling is selling stocks that you don't own. (you borrow them, sell them (which decreases the price) then buy them back at a lower price and return them to the owner. You're essentially betting that the market goes down. The drop in the Dow this week was people selling their own shares.

(Incidentally, anyone looking for easy to read background material, there's good debate on Metafilter, especially this guy's posts). This other post is interesting on why giving the money direct to homeowners might not be such a great idea.
 
Oh, so only the shareholders were able to shortsell, or there were genuine change of ownerships.

JP Morgan Chase and Goldman Sachs seem to be the ones chosen to survive this.
 
septembermadnessb.jpg
 
lol to the diagram

However, upon further research, I've found that only 6% of US mortgages are in default... So where exactly is this massive crisis? As long as all the bankrupt money-lending institutes are bought out by another that can respect the terms of deposit of all its creditors, what are we so worried about? Sure the people that took out mortgages they couldn't afford get fucked, but that's really their own problem, and it's still only 6% of mortgage holders...

Can someone shed some light on what I'm apparently missing?
 
rant*N*rave said:
lol to the diagram

However, upon further research, I've found that only 6% of US mortgages are in default... So where exactly is this massive crisis? As long as all the bankrupt money-lending institutes are bought out by another that can respect the terms of deposit of all its creditors, what are we so worried about? Sure the people that took out mortgages they couldn't afford get fucked, but that's really their own problem, and it's still only 6% of mortgage holders...

Can someone shed some light on what I'm apparently missing?

This is where I am confused about all of this as well. From what I understand the problem is assets =/= liability, but since liability is only potential, they should still be taking in profits for the most part.
 
neonads said:
Oh, so only the shareholders were able to shortsell, or there were genuine change of ownerships.
.

By definition, if you own the shares, you're not short-selling :).

You're selling your property, that you no longer want. So yes, there would be genuine changes of ownership.

The whole problem with short-selling was that it allowed people to sell things that they didn't own, meaning they could sell a huge number of shares, driving the price down rapidly.

rant n rave: a 6% default rate is still very high (by comparison, in the UK, which is in recession, there's a 1.1% default rate. In New Zealand, it is 0.1%). But the real problem is the derivatives that have been sold on the basis of those mortgages (an analogy I saw on Metafilter: if I bet $1 million dollars that you can buy dinner tonight, and you can't, then it doesn't matter if someone else buys you dinner - I still lose my $1 million. Basically, there were a lot of (in hindsight) very bad bets. Among other problems).

The problem started with mortgages, but it's way past that now. It's currently a liquidity problem - banks will not lend money to each other, full stop (and banks lending money to each other is a trivial, but vital, part of our system. Normally it would just happen with no problems). We have a situation where banks will accept a loss on their money to leave it somewhere "safe" like the Bank of England or the European Central Bank. If banks won't lend to each other, they sure as hell won't lend to you or me, or (more importantly) to our employers - to expand their business or to pay our wages.

You also asked whether we could let institutions fail, and just let someone take them over. That's not a bad argument, and I don't know enough to comment. But our problems really accelerated when Lehman's was allowed to go bankrupt, and other banks (etc) realised that they won't get back money that Lehman's owes them. There has been an incredibly serious domino effect - which, as far as I can see, is why the Fed has stepped up now with this bailout plan. (Of course, if they'd just bailed out Lehman's for $100bn or so, we maybe wouldn't need the $700bn. But hindsight is easy). Also, the more extreme analyses I've seen claim that if nothing was done, the US would quite simply lose all its banks. Sure, the Chinese, Japanese and Arabs would step in and buy up the bankrupt banks, but that doesn't seem like a desirable outcome from an American point of view. (As I said, that's the extreme analysis - but you would surely see some more bank failures).
 
^Without the zero uptick rule, short sellers can slam things down even more. The SEC is missing the boat on that one.

So the bill passed, we'll see where things go from here.
 
Infinite Jest said:
rant n rave: a 6% default rate is still very high (by comparison, in the UK, which is in recession, there's a 1.1% default rate. In New Zealand, it is 0.1%).
It's high, but is it a crisis?

But the real problem is the derivatives that have been sold on the basis of those mortgages (an analogy I saw on Metafilter: if I bet $1 million dollars that you can buy dinner tonight, and you can't, then it doesn't matter if someone else buys you dinner - I still lose my $1 million. Basically, there were a lot of (in hindsight) very bad bets. Among other problems).
That's all well and good, but who made those bets? I'm assuming it's not the average American. In fact, I'm pretty sure it's personnel at all the lending companies. If so, why aren't those people eating it? Did the slew of mistakes create a problem that the company couldn't possibly solve, either through other financial activities or by selling out to another company? I guess, in essence what I'm saying is: what is the bailout for? The people (or the company they represent) that fucked up should be taking the blame, and the companies should simply fail if necessary. And a buyout should not pay anyone's salaries. The people that fucked up took a risk, and they lost. Why am I paying for it? Especially if I had no money or any interest in any of the banks. If I take on loans to open a restaurant and my restaurant fails, I don't get a check from the government to pay off my debts. And chances are my restaurant didn't fail due to sheer negligence...

The problem started with mortgages, but it's way past that now. It's currently a liquidity problem - banks will not lend money to each other, full stop (and banks lending money to each other is a trivial, but vital, part of our system. Normally it would just happen with no problems). We have a situation where banks will accept a loss on their money to leave it somewhere "safe" like the Bank of England or the European Central Bank. If banks won't lend to each other, they sure as hell won't lend to you or me, or (more importantly) to our employers - to expand their business or to pay our wages.
They certainly will. My dad personally spoke to the VP of one of the largest banks in the Midwest (even in America), and he said that they are most certainly still supplying loans, and would in fact supply a loan to my dad a quarter point below prime with a $50,000 minimum.

You also asked whether we could let institutions fail, and just let someone take them over. That's not a bad argument, and I don't know enough to comment. But our problems really accelerated when Lehman's was allowed to go bankrupt, and other banks (etc) realised that they won't get back money that Lehman's owes them. There has been an incredibly serious domino effect - which, as far as I can see, is why the Fed has stepped up now with this bailout plan. (Of course, if they'd just bailed out Lehman's for $100bn or so, we maybe wouldn't need the $700bn. But hindsight is easy). Also, the more extreme analyses I've seen claim that if nothing was done, the US would quite simply lose all its banks. Sure, the Chinese, Japanese and Arabs would step in and buy up the bankrupt banks, but that doesn't seem like a desirable outcome from an American point of view. (As I said, that's the extreme analysis - but you would surely see some more bank failures).
Basically what I'm thinking is that there are monopoly issues (looks like we'll end up with only one or two lending institutions owning everything) and the problems with foreign banks owning us, as you mentioned. However, I still don't see why that warrants MY money being given to people that fucked up and still made millions of dollars a year in salary. If all our banks get sold to foreign companies, I would hope that would be enough of a fucking wake up call to American citizens to stop being so ragingly ignorant. We let our government officials do pretty much whatever the fuck we want, and we let our financial managers do pretty much whatever the fuck we want. When you don't pay any attention, you get what you pay for.

I'm willing to see America collapse under complete foreign control of our money. Especially since the alternative is to see America collapse under its own inability to finance itself (if we go through with the bailout, it is certain to fuck up our government programs nearly irreparably and our economy as well). And especially since that alternative involves taking MY money for something I didn't get us into. MY money is all safe. I bank at an institution that doesn't do this kind of shit, and I pay attention to this kind of shit for a reason. Everyone else should too if they don't want to take it up the ass. The government's only duty is to keep us alive and make sure our Constitutional rights aren't violated, not to make sure we don't gamble our money away. I'm getting pretty tired of the culture of irresponsibility that is encouraged at every turn. If We the People demand that the government analyzes these risks and lets us know about them, that's great, but the government is not here to bail us out from fucking up or meddle in the companies that are fucking up.

And the killer is, the government stands to make money/interest on this buyout, but do you think the people whose tax money is being used are going to get anything back? No. It's going to go into government programs that give money to people who didn't pay in. If I put my money in an investment, I get the return, not the homeless guy up the street begging for change on the corner. I'd be more than willing to pay that money back in taxes and have it go into social programs then, or donate it all to charity, which I probably would, but we all know full well that that's not going to be my choice to make, which grinds my gears even more because I didn't even have the choice whether or not to make the damn investment in the first place. Where the fuck is MY vote?
 
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rant*N*rave said:
It's high, but is it a crisis?

On its own, arguably not, and I'd probably agree with you that people who can't pay should solve their own problems.

That's all well and good, but who made those bets? I'm assuming it's not the average American. In fact, I'm pretty sure it's personnel at all the lending companies. If so, why aren't those people eating it?

A lot of them are losing their jobs with the mergers and insolvencies. Not all, but a lot. Going forward, it's possible (I'd guess likely, but I'm no expert) that there will be far less of this type of work. And a demand for lower salaries. No bad thing. These bets (derivatives) aren't bad things in themselves, they were just completely miscalculated. And the average person benefited from them; they allowed banks to lend more money which meant more people could buy houses etc.

Basically, on a moral/logical level you're right that the companies/individuals should take the losses. But on a practical level, the loss of these companies could easily be catastrophic.

They certainly will. My dad personally spoke to the VP of one of the largest banks in the Midwest (even in America), and he said that they are most certainly still supplying loans, and would in fact supply a loan to my dad a quarter point below prime with a $50,000 minimum.

The loan market as a whole is almost totally shut down. Trust me, I read the trade press :). I was also thinking (with no disrespect intended) of much bigger loans than $50, 000. Sure, people/companies can still get loans, but the market is a lot smaller, the interest rates are higher, and the conditions are more stringent. This week we've basically seen banking industry bodies beg their members not to invoke market disruption clauses, which (if invoked) would add 2-3% to the interest rate on a loan - to already hard-pressed borrowers (I'm talking big corporate loans here, not mortgages etc). If that happens, expect borrowers to be failing to repay, and banks, desperate for cash, to put them into insolvency. We likely will see a lot of companies fail.

I'm willing to see America collapse under complete foreign control of our money. Especially since the alternative is to see America collapse under its own inability to finance itself (if we go through with the bailout, it is certain to fuck up our government programs nearly irreparably and our economy as well). And especially since that alternative involves taking MY money for something I didn't get us into.

Fair enough - it's a consistent and reasonable viewpoint, even if I don't necessarily agree (but I'm not American, so it's not my money). Just one point: AFAIK no-one's taking $700bn of your money. It's going to be raised by issuing govt bonds, so the Chinese will be paying for it. And the govt will get back a lot of that money (it will be buying distressed assets, some of which won't be worth what it pays for them, but it will make some money back on them).
 
Infinite Jest said:
A lot of them are losing their jobs with the mergers and insolvencies. Not all, but a lot. Going forward, it's possible (I'd guess likely, but I'm no expert) that there will be far less of this type of work. And a demand for lower salaries. No bad thing. These bets (derivatives) aren't bad things in themselves, they were just completely miscalculated. And the average person benefited from them; they allowed banks to lend more money which meant more people could buy houses etc.
Houses that they couldn't actually afford... ;) (Kinda serious though... and who was able to buy a house that couldn't buy a house before? And moreover, what percentage of the population does that represent, if actually larger than zero?)

Basically, on a moral/logical level you're right that the companies/individuals should take the losses. But on a practical level, the loss of these companies could easily be catastrophic.
The libertarian in me asks why I should care... We're getting fucked in the ass no matter what. I'd rather have our country fucking itself up the ass than getting fucked by the Chinese and Middle Eastern oil barons.

This week we've basically seen banking industry bodies beg their members not to invoke market disruption clauses, which (if invoked) would add 2-3% to the interest rate on a loan - to already hard-pressed borrowers (I'm talking big corporate loans here, not mortgages etc). If that happens, expect borrowers to be failing to repay, and banks, desperate for cash, to put them into insolvency. We likely will see a lot of companies fail.
Why was ANYONE taking out loans that they were already hard-pressed to pay back?? Or I guess more importantly, taking out loans that they knew would become difficult to pay back if interest rates went up (which you always have to assume)...

Fair enough - it's a consistent and reasonable viewpoint, even if I don't necessarily agree (but I'm not American, so it's not my money). Just one point: AFAIK no-one's taking $700bn of your money. It's going to be raised by issuing govt bonds, so the Chinese will be paying for it. And the govt will get back a lot of that money (it will be buying distressed assets, some of which won't be worth what it pays for them, but it will make some money back on them).
greaaaaat.... lol :) At the end of the day, I, the taxpayer, am still responsible for paying back bonds. No matter what happens, my government is responsible for the money being used, which means I am responsible for the money being used. I'm not okay with that. But again, my opinion apparently doesn't matter, so it's really irrelevant...
 
rant*N*rave said:
Houses that they couldn't actually afford... ;) (Kinda serious though... and who was able to buy a house that couldn't buy a house before? And moreover, what percentage of the population does that represent, if actually larger than zero?)
I don't know, tbh (and of course house *prices* went up a lot, so the overall cost might have been cheaper. But I can remember 18% mortgage rates...

The other benefit was that interest rates, in general, have been much lower than in earlier decades, which certainly benefited borrowers.

The libertarian in me asks why I should care... We're getting fucked in the ass no matter what. I'd rather have our country fucking itself up the ass than getting fucked by the Chinese and Middle Eastern oil barons.
But lettng the companies fail = them getting taken over by Chinese etc :)

Why was ANYONE taking out loans that they were already hard-pressed to pay back?? Or I guess more importantly, taking out loans that they knew would become difficult to pay back if interest rates went up (which you always have to assume)...

(This is getting to the edge of my knowledge, but): they would have funded those loans at LIBOR+ x% (up until about a year ago, probably LIBOR+1 or 2%; LIBOR being the rate at which banks lend to each other). The market disruption issue I referred to above is banks refusing to fund loans at that rate any more, because they no longer trust the LIBOR calculations. So they end up charging 3-4% over LIBOR (in addition to the +x% they're already charging). This is a basically new occurence, so no-one really knows what will happen. It wasn't expected by anyone. Not to mention that LIBOR itself is going crazy (it's usually about the same as the base rate, it's now much higher).

Made worse, as I said, by being combined with banks needing cash/capital urgently; so being more likely to call in a loan, putting a borrower into insolvency. Whereas before they might not have.

(Also, I suspect there are more than a few companies who were stupid, and took out loans on good terms, that are now going to be due for renewal, and they will have to take much worse terms - so you are right along those lines).

(That's kinda off the topic of the bailout, but basically illustrates at least part of the problem, IMO)
 
SA or IJ: Does the Wells Fargo/Wachovia deal make any sense to you? The collapse of the deal with Citi seems a bit odd- I would have expected the FDIC to issue a statement with a little more balls than "we stand by...".
 
^
I don't know much about it (I really should...).

All I saw was that Wells Fargo bid for the whole of Wachovia, whereas Citi only wanted the investment banking part. So it makes sense that Wachovia would want to sell to Wells Fargo. But I thought the Citi deal was sealed. I'll let you know if I hear anything.
 
m885 said:
SA or IJ: Does the Wells Fargo/Wachovia deal make any sense to you? The collapse of the deal with Citi seems a bit odd- I would have expected the FDIC to issue a statement with a little more balls than "we stand by...".


"Wachovia's agreement to a transaction with Wells Fargo is in clear breach of an Exclusivity Agreement between Citi and Wachovia," said Citi in a statement. "In addition, Wells Fargo's conduct constitutes tortious interference with the Exclusivity Agreement."

"The Exclusivity Agreement provides, among other things, that Wachovia will not enter into any transaction with any party other than Citi, and will not participate in any discussions or negotiations with any third party," said Citi.
"The Exclusivity Agreement also provides that the parties would be irreparably harmed by any breach of the agreement and that the remedy of specific performance of the agreement is appropriate."

Shortly after it issued its statement, Citi released the Exclusivity Agreement. Read the Agreement (pdf)

marketwatch


Looks like a clear breach of Exclusivity Agreement, as the article states, m. Then comes the fine print... and the lawyers. The following comment from the above link sums it all up too well...

WB are a bunch of dopes if they didn't have an escape clause.
Citi are a bunch of dopes if they allowed an escape clause.

Which side added the more cleverly disguised language?

In their haste lawyers on both sides may have f'd up.

Lawyers ALWAYS add a clause excluding themselves from any liability.

So the Lawyers on both sides make $$$ drafting the merger.
Now the Lawyers on both sided make $$$ fighting it out.
 
My questions are:

1.) How is this being funded? Bonds or printing money?

2.) Who decides when to sell back these securities? or are they like bonds which can be held till maturity?

3.) What will be done with the proceeds from these investments? Will they pay down the debt? Will they buy back the cash in the sytstem? (probably not) Or will they just spend it on more shit?

I think we seriously need to define what is done with the proceeds in black and white.

Fair enough - it's a consistent and reasonable viewpoint, even if I don't necessarily agree (but I'm not American, so it's not my money). Just one point: AFAIK no-one's taking $700bn of your money. It's going to be raised by issuing govt bonds, so the Chinese will be paying for it. And the govt will get back a lot of that money (it will be buying distressed assets, some of which won't be worth what it pays for them, but it will make some money back on them).

Can you find me a link to support this, plz.
 
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