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  • Current Events & Politics Moderators: deficiT | tryptakid | Foreigner

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

The SEC said it would repeal the short-selling ban three days after the bailout was approved or by 17th Oct at the latest. Is this a good idea if it increases volatility? I know short-selling provides liquidity and hedging options, but in this environment, it must be a large reason why so many companies are going under. Imagine the profit to be had by selling Lehman Bros' stock just before it dived, then scooping up the remains like JP Morgan Chase did, and does with others. Then imagine the ease at which you can do this if you have prior knowledge of the Fed's decisions and access to the discount window.

Perhaps it's better for the economy in the mid-to-long term that you guys have this mergerfest, as at least some firms will be able to get back on their feet relatively quickly. I'm pessimistic about the cronyism - the Bank-Bernanke-Paulson triumvirates - being addressed at all even when this is over, the rhetoric that will come out of the WH and Congress will be all about economy, employment, health, and all the other issues that will take a hit or already have. By not addressing the anti-meritocratic principles in your leaders you will continue to have ineptitude, cronyism, and downward pressure on anyone trying to better themselves.

It just boggles my mind that YOU have to pay interest on a loan that YOU issue to the banks. :(
 
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...

That's fairly clear, which is why I don't understand what Wachovia is doing here. If I'm working at Wachovia and get a call from the people at WF inquiring about a deal, wouldn't I have to dismiss it immediately as a breach of contract? Why would Wells-Fargo even get into this in the first place when Citi has a pretty clear legal claim? Where is the FDIC in all of this? I think there's more to this story than we're seeing right now.
 
Ah, I see what you mean, m. No one knows for sure, but I have my doubts that everyone, including the FDIC, will be playing by the same rules over the next little while as back when times were better. This is turning into one big blame game right now and financial institutions are scrambling to either absorb or be absorbed and chances are good that the governments and the FDIC's are not going to raise a fuss, in the interests of saving whatever bits they can of the rapidly collapsing system. In this case, Citi might raise a bit of a fuss and flail its feathers, but I wouldn't be surprised if it's all brushed aside with a "settle down now, can't you see what's happening out there?". The rules are being rewritten day by day now, so in effect there are no rules. The name of the game is survival by any means. Everyone knows it. If a bank finds a way to save itself and its depositors' assets, few will question twice how it managed to do so.
 
Sticky Green said:
Can you find me a link to support this, plz.

*shamefaced* - no. I remember reading it on Metafilter, but I can't find the post where I think I read it.

However, let's think about it. They're not going to just print money (because the resulting inflation would dilute the value of the money anyway). They're not going to raise taxes, and wait until they've collected the money, that would take months (more?). Issuing bonds is how the government funds itself, so it seems fairly non-controversial that it will do so again.

But that's speculation, so I should probably withdraw my claim.Thanks for calling me on it :)
 
^ Not so fast there Jester, you did hear right.

"On Wednesday, the Treasury Department, for the first time in its history, said it would begin selling bonds for the Fed in an effort to help the central bank deal with its unprecedented borrowing needs."

source
 
Citi succeeds in getting injunction

Judge tells Wachovia to negotiate only with Citi
Sat Oct 4, 2008 11:35pm EDT

NEW YORK (Reuters) - Citigroup Inc said on Saturday that a judge ordered Wachovia Corp to refrain from negotiating with other parties, a day after Wachovia backed out of a plan to sell its banking operations to Citigroup and instead said it was selling all its assets to Wells Fargo & Co.

Citigroup said a New York state judge granted emergency injunctive relief to extend its exclusivity agreement with Wachovia. The exclusivity agreement bars Wachovia from negotiating with other parties.

Citigroup said on Monday it had preliminarily agreed to buy Wachovia's banking assets for $2.2 billion in a government-backed deal. On Friday, Wells Fargo said it had signed an agreement to buy the whole of Wachovia, including its asset management unit and retail brokerage, for about $15 billion.

Reuters

They're killing each other essentially over an empty agreement...

The agreement with Wachovia that Citigroup has cited and that contains the ban on negotiating with any other potential bidders was not a final merger contract, but a letter agreement to “continue to proceed to negotiate definitive agreements.”

The letter agreement does not state that a deal must be completed. It also specifically rules out the collection of money damages if the agreement to negotiate were breached.

Lawyers not involved in the battle said that Wachovia could defend the Wells Fargo deal by arguing that it is better for its shareholders. Wachovia is likely to claim that its fiduciary obligations — its responsibility to protect the interests of its investors — required it to consider the Wells Fargo bid and, given its higher price, to accept that bid.

The litigation could put regulators in a difficult spot. The Wells Fargo deal may be better for taxpayers, but if it succeeds, in the future other financial institutions may not be willing to help the government, as Citigroup did, because of the risk that they might not reap the anticipated benefit.

NY Times

Monday looks to be not so pretty.
 
How much has the incurred devaluation of money caused by leveraging caused this situation? It seems to me that a system where banks can lend money that they don't have, with interest, will grow for a while, until it breaks under its own weight. This is a simplistic view, I know, but I'm wondering if any of you more knowledgeable people might chime in.

Also, how have the wars and peak oil have helped cause the crisis? I'm sure the war was good for some of our economy, but making money off of destruction is also a system bound to fail.
 
Ping... pong...


Court tilts Wachovia fight toward Wells Fargo

Sunday October 5, 10:22 pm ET
By Sara Lepro, AP Business Writer

Wells Fargo gets favorable federal court ruling as it battles Citigroup to take over Wachovia

NEW YORK (AP) -- The battle for control of troubled bank Wachovia tilted toward Wells Fargo Sunday as a state appeals court blocked a lower court ruling that had favored rival bidder Citigroup.

At stake is the $339 billion in Wachovia deposits and its network of more than 3,300 branches throughout the country that would solidify the winner as being in the top tier of U.S. retail banking.

In the Sunday night ruling, the Appellate Division of State Supreme Court threw out an order by Justice Charles Ramos issued late Saturday at the request of Citigroup; the order would have extended the time under which Wachovia and Citigroup had to complete their deal.

full story... (AP/yahoo)
 
Mehm: leverage itself is alright - we wouldn't have a banking system if banks couldn't lend money they don't have. We'd all basically have to save up and pay cash for housing etc. However, I suspect that you're right that banks have lent too much money, compared to their assets. (This is actually something that regulations have already addressed; in Europe, the relevant legislation is the Capital Requirements Directive, and it's being amended and tightened).

The war? Well it cost the govt a lot of money, which wasn't made up by cutting expenditure or raising taxes. So the govt accounts are in deficit, meaning the govt has less money to spend on this issue (and also raising a scary prospect of the US govt losing its AAA credit rating, which would increase the cost of US govt borrowing).

Oil: obvious answer is gas/petrol costs more, so if you are already struggling, you've got real problems. Not sure about the macro-economic effect.
 

Germany takes hot seat as Europe falls into the abyss

We face extreme danger. Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days. Nobody will be spared, unless they own gold bars.

Investors will learn today whether the Paulson bail-out - fattened to $850bn (£480bn) by Congress - can begin to halt the death spiral in the credit system. So far, the response looks terrible.

Germany is now in the hot seat. The collapse of a rescue deal for Hypo Real Estate on Saturday threatens a €400bn (£311bn) bankruptcy that nearly matches the Lehman Brothers debacle for sheer scale.

Chancellor Angela Merkel has been forced to pull her head out of the sand, guaranteeing all German savings, a day after she rebuked Ireland for doing much the same thing. Reality intrudes.

During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis. Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement.

The US commercial paper market is closed. It shrank $95bn last week, and has lost $208bn in three weeks. The interbank lending market has seized up. There are almost no bids. It is a ghost market. Healthy companies cannot roll over debt. Some will have to sack staff today to stave off default.

As the unflappable Warren Buffett puts it, the credit freeze is “sucking blood” out of the economy. “In my adult lifetime, I don’t think I’ve ever seen people as fearful,” he said.

We are fast approaching the point of no return. The only way out of this calamitous descent is “shock and awe” on a global scale, and even that may not be enough.

Drastic rate cuts would be a good start. Central bankers still paralysed by a misplaced fear of inflation – whether in Europe, Britain, or the US – have become a public menace and should be held to severe account by our democracies. The imminent and massive danger is now self-feeding debt deflation.

The lesson of the 1930s is that any country trying to reflate in isolation will be punished. The crisis will ricochet from one economy to another until every one is crippled. We are seeing it play again in this drama as our leaders fail to rise above their narrow, parochial agendas.

The European Central Bank – which raised rates into the teeth of the crisis in July – has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington.

It could have offered “cover” to the US Federal Reserve this spring when Ben Bernanke was forced by events to slash rates to 2pc. It could at least have signalled an end to monetary tightening. That is how an ally ought to behave.

Instead, it stuck maniacally to its Gothic script, with equally unhappy consequences for both sides of the Atlantic, as well as for China, Japan, and India. The euro rocketed yet further, which it turn set off an oil shock as crude metamorphosed into an anti-dollar with leverage.

The ECB policy was self-defeating, even on its own terms. It merely drove headline inflation even higher, while deeper forces of underlying debt deflation pulled the real economies of Germany, Italy, France, and Spain into a recessionary vortex.

Far from offering reassurance, the weekend mini-summit of EU leaders served only to highlight that nobody is in charge of this runaway train. There is still no lender of last resort in euroland. The £12bn stimulus package is risible.

Angela Merkel has revealed her deep limitations. It was she who vetoed French efforts to launch a pan-EU rescue package, suspecting that any lifeboat fund would prove to be Trojan Horse – a way of co-opting German taxpayers into colossal transfers of wealth to Latin Europe.

In that she is right, but it is too late now for dysfunctional EU political games. By demanding that those who caused the damage should pay for it, she crossed the line into caricature, or worse.

Her comments echo word for word the “we’re alright Jack” attitudes of Euro-pols during the first US banking crises in 1930-1931, until the storm hit Europe and the entire cast was swept away by furious electorates, or simply shot. Thankfully, this EU stupidity is at last drawing serious criticism.

“We have to make sure Europe takes its responsibilities, like the US: action must be taken quickly and in a concerted manner,” said IMF chief Dominique Strauss-Kahn.

As for the US itself, it has not yet exhausted its policy arsenal. It can escalate further up the nuclear ladder. The Fed can cut interest rates from 2pc to zero. If that fails, it can let rip with the mass purchase of US debt.

“The US government has a technology, called a printing press,” said Fed chief Ben Bernanke in November 2002. (His helicopter speech).

In extremis, the Treasury/Fed can swoop into any market to shore up asset prices. They can buy Florida property. They can even buy SUV guzzlers from the car lots in Detroit, and mangle them in scrap yards. As Bernanke put it, the Fed can “expand the menu of assets that it buys.”

There is a devilish catch to this ploy, of course. It assumes that foreign creditors will tolerate such action.

Japan entered its Lost Decade as the world’s top creditor, with a vast pool of household savings to cushion the slump. America starts its purge with net external liabilities of $3 trillion, and a savings rate near zero. Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds.

But the risk of a dollar collapse is one for the distant future. Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets “delevers” with a vengeance.

This is a “short squeeze” on those who have used the dollar for a vast global carry trade. International banks are facing margin calls on their dollar leverage. It is why the Fed is having to provide $1.25 trillion in dollar liquidity for the entire global system, according to estimates by Brad Setser from the Center for Geoeconomic Studies.

The crisis engulfing Europe, Asia and emerging markets, makes life easier for Washington. The United States is becoming a safe-haven again.

The Fed can now hope to pursue monetary stimulus “a l’outrance” without being slapped down by the currency, debt, and commodity markets. Take comfort where you can.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3141428/Germany-takes-hot-seat-as-Europe-falls-into-the-abyss.html
 
How low will she go?

Opening bell for Oct 6th is about to ring in 5 minutes... watch as she drops like a lead weight in water.
Our government has and the federal reserve are ran by the biggest fiscal idiots this planet has ever seen.
Asina market closed down 465 points (5%)
European dropped 121 points (6%)
Our lovely federal reserve announced today that they will pump $300B more out today, and probably $900B by the end of the year.....
For you not keeping score.... we have now seen this "bailout" jump from $700 Billion to $2 TRILLION.... yippee for the idiots

Im quite certain, that as the market falls, consumer confidence falls and fears will increase at record paces (kinda like which came first chicken or egg)....
wouldn't surprise me one bit to see this down below 4500 by Wednesday, maybe sooner and a complete collapse within a week
 
leverage itself is alright - we wouldn't have a banking system if banks couldn't lend money they don't have. We'd all basically have to save up and pay cash for housing etc.

It seems like a third option exists where as banks hold deposits, and they are allowed to lend out only those deposits. So if you have two rich people with 250,000 in your bank collecting 2% interest, you can turn around and lend that 500,000 at 5%, thus making a profit. In the current system, banks are literally allowed to create money they don't have and collect interest. While this is accepted as "how things work", it obviously isn't working very well. I think its time for us all to seriously consider alternative economic models that aren't based on uninhibited growth. The planet simply can not support it.

The war? Well it cost the govt a lot of money, which wasn't made up by cutting expenditure or raising taxes. So the govt accounts are in deficit, meaning the govt has less money to spend on this issue (and also raising a scary prospect of the US govt losing its AAA credit rating, which would increase the cost of US govt borrowing).

Oil: obvious answer is gas/petrol costs more, so if you are already struggling, you've got real problems. Not sure about the macro-economic effect.

My conspiracy theory is that the markets were deregulated with the specific goal of generating income and loans..which were used to go out and secure the last of the remaining oil reserves. Why not? Forget about this illusion of credit, America DOES NOT RUN without foreign oil.
 
Mehm said:
My conspiracy theory is that the markets were deregulated with the specific goal of generating income and loans..which were used to go out and secure the last of the remaining oil reserves. Why not? Forget about this illusion of credit, America DOES NOT RUN without foreign oil.

Here's an instance where our domestic oil was taken, and the sellers were stiffed:

http://marketplace.publicradio.org/display/web/2008/09/30/semgroup/

A case in point comes to us from the oil business and a now-bankrupt trading company called SemGroup. The firm was caught short when a swing in the markets left it without enough money to cover its bets. Crude margins have only gotten tighter since then. And thousands of oilmen jilted in the bankruptcy are themselves close to ruin. From Tulsa, Oklahoma, Laurie Burkitt reports.

There's also an ongoing lawsuit here involving Oral Roberts University, it was recently published, that the regents were refusing to reveal their books, basically saying that the record is based on word of mouth, and there's not any written records to hand over.
 
What sickens me is how profits have always been privatised and how losses are now a public affair. casino capitalism, and we all have to pay for it now. to think that you can just get rich without doing any work for it- and the top managers even of those finance houses who mismanaged everything and went bust have their pockets full of cash now....
 
Ximot said:
What sickens me is how profits have always been privatised and how losses are now a public affair. casino capitalism, and we all have to pay for it now. to think that you can just get rich without doing any work for it- and the top managers even of those finance houses who mismanaged everything and went bust have their pockets full of cash now....
+infinity
 
American capitalism unravelling
Dr David KL Quek | Sep 29, 08 1:19pm
I have always wondered how financial markets work.
http://www.malaysiakini.com/opinions/90538

ed4a4ee57ff779b8bbaaf85a5222818c.gif


How is it that when one 'invests' big or bigger, one creates bigger volumes of trade? Frequently these so-called 'hedged' speculations are supposedly to help stabilise wilder fluctuations in volatile markets, well... what now?

Hedge funds and derivatives trading (and other so-called structured financial options) have now shown their true colours - and they are now in the deep red!

It began with the sub-prime loans debacle where unqualified and risky borrowers were given uncharacteristically preferential mortgage interest rates well below market levels.
Many therefore were borrowing more than they can afford to remortgage or pay back, but were holding on to such 'cheap' holdings as investments in lieu of hard cash and other more volatile stocks and shares.

Then, the soaring crude oil and commodities price hike triggered and unravelled the tenuous hold on liquidity. Savings and loans banking entities as well as insurers were all caught in a vicious web of interlocking downward spiral of near worthless returns. Then, Bear Sterns went under, the Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) collapse, the Lehman Brothers chapter 11 protection, Merrill Lynch, Washington Mutual shock and worst of all the huge AIG collapse.

Now, the hapless President George W Bush, is trying to cobble together the biggest bail-out the world has ever seen—USD 700 billion. This, purportedly to forestall the collapse of the world's largest economy and potentially triggering a global economic meltdown.

Some ten years ago during the Asian financial crisis, respected economists - Americans included - were pushing battered economies to accept the collapse and rapid-fire restructuring with the IMF and World Bank calling the shots. Terrible social upheavals and shocks ensued.

8e988ade22c330fc3b0eb71b46305d6d.jpg


Many home-spun corporations were quickly sold to foreign fund managers and multinationals. Huge numbers of the local population were bankrupted and impoverished, with some of the most traumatised resorting to rioting with ethnic overtones - all accepted as a change phase for the better.

Thus, it is so ironic now for Americans to change their tune and ask for a blatant domestic bail-outs. By protecting these huge corporations, it may be earnestly helping to prevent a severe meltdown. However the flip side remains - protecting those who wallowed in profligate and wanton greed.

Large disagreement

More than 90 percent of Americans don’t agree to bailing them out, however they do want to protect their mortgage, savings and pension. And conservative Republicans oppose government oversight of the free-market system.

Betrayed Asian economists see this as a “Do as I say but not as I do”

89c44e1fa6be8f2c13bb2f05af5df818.jpg


Perhaps, it is time for the US to eat humble pie and acknowledge that it alone cannot provide all the answers and solutions to our immensely complex and chaotic world. Perhaps, the US can help to finally strengthen its own flawed institutions by reinforcing more institutional oversight guidelines and regulations (not less). In so doing, America might then recover its vaunted capacity to export good ideas and ideals.

Perhaps the free trade agreements so aggressively pushed with many countries, should be revisited or even revised to acknowledge each and every country's inflexible interests - since countries agreed to just so they can access the US market.

Gross excesses during the past few decades were often apologetically rationalised away by the weight of US-trained and US-indoctrinated economists worldwide, such that alternative models have been left by the wayside. Socially-conscientious or directed mechanisms, safety net issues are almost taboo in the modern paradigm of this now shaky economic model. Continental European economic models with stronger social protections appear to have withstood better the current financial storm.

7fe7548e2c6ed8fc1ca2debbcf6ed77c.gif


Thus, perhaps older Europe can play a bigger role in today's world in helping to reshape and restructure the world's economy. Perhaps, the Asian model of guided and government-regulated free-market models can find a more respectable place where control and regulations still exact a modicum of fear and responsibility from the crass extremes of unbridled greed and speculation.

Not being trained as an economist, helps to picture in my simple mind that there really is no free lunch. That one plus one may be 2, 3 or even 5, may be plausible. But 100 or 10,000, this seems just too far-fetched.

Rise in the middle class

The past two decades or so have seen a mentality of voracious greed to reap enormous profits and pay-outs. This belief has spurred that exponential urge to spend, speculate, guesstimate or gamble beyond one's monetary worth or capacity...

Following the 1987 global recession, we seemed to have embarked on a roller coaster ride of mainly positive growth of exponential proportions, with a spectacular rise in a middle class population worldwide.

71e6b824d01e0ccbb32b4f0f7302e89f.jpg
Free market capitalism and mass consumerism swept the world in an unprecedented success story which saw the demise of the communist-socialist model beginning with the 1989 dismantling of the Soviet Union.

Excesses and poor judgements by many aspirant developing countries on fast track growth led to the Asian Tom Yam crisis of 1997-98—this disaster crippled and decimated many third world nations and led to enforced hugely unpopular infusions of IMF and World Bank measures and funds.

Governmental bail-outs were frowned upon, and this 'shock and awe' model was proposed as the necessary bitter medicine which will eventually salve all economic hurts and wounds, notwithstanding the social upheavals which were unleashed in nations such as Indonesia, Thailand, South Korea and even in Malaysia.

In the long run, this approach was supposed to enhance economic strength and stability of the individual countries involved, where freer markets with foreign funds and investments, inflows or outflows, would be unhampered.

Yet most nations found that they could not accept the unvarnished practicality in toto. Pitiable safety nets had to be set up, often placed at the bottom rung of economic need or even consciousness.

Danger to global harmony

This growing destitute class seethes with anger and envy - ingredients for urban anarchists, religious fanatics, jihadists and others opposed to the 'western' model of the world.

Extreme wealth disparity which breeds social dystopia—where an increasing populace feels miserable, dispossessed, disempowered and oppressed—is a real danger to a peaceful, progressive harmonious world.

Notwithstanding the ascendancy of economics and finance in the world today, the recent financial meltdown is a timely reminder that economics is never a hard science if ever, and whichever economic model cannot be the one and only foolproof unchanging model for the world.
 
UK puts £50bn to save banks.

There were rumours over the past couple of days that this would happen, which caused bank shares to drop even further. At least they announced it and avoided total confusion.

Interesting to see the difference in systems; the UK Chancellor can just do this, he doesn't need to go to Parliament.

Also, I think the Brits are being a bit smarter; they're getting preference shares in the banks in exchange for the capital injection. (Preference shares mean you don't get to vote, but in the event of a bankruptcy, you get paid before the other shareholders).

And they're also putting up £200bn in temporary liquidity. Let's hope this all works. The US govt is also putting money into the commercial paper market to increase liquidity (if that market dries up, we are truly fucked).

Edit: doesn't seem like the markets approve: FTSE is down another 5%. That's a good 15% this week. Ouch :(
 
We're fucked too! I guess now is a good time to buy old skool shares like McDonalds or Coca Cola.


Malaysian shares hammered down 2.6%
Wong Choon Mei | Oct 8, 08 3:51pm

Malaysian shares tumbled today in tandem with other regional bourses amid a growing realisaton the financial turmoil in the US and Europe was spreading closer and a contagion-like effect last seen a decade ago during Asia’s own crisis was inevitable.
MCPX

At 3.50 pm, the benchmark Kuala Lumpur Composite Index lost 2.57 percent to 971.63 points, trawling a two-year low.

This compares less severely against the Nikkei, which plunged 6.3 percent, the Hang Seng which dropped 5.55 percent, and the Singapore Straits Times Index which lost 4.81 percent.

In Indonesia, investors gave the stock market such a pounding that trading was halted after the Jakarta Composite Index plummeted more than10 percent.
 
Infinite Jest said:
UK puts £50bn to save banks.

There were rumours over the past couple of days that this would happen, which caused bank shares to drop even further. At least they announced it and avoided total confusion.

Interesting to see the difference in systems; the UK Chancellor can just do this, he doesn't need to go to Parliament.

Also, I think the Brits are being a bit smarter; they're getting preference shares in the banks in exchange for the capital injection. (Preference shares mean you don't get to vote, but in the event of a bankruptcy, you get paid before the other shareholders).

And they're also putting up £200bn in temporary liquidity. Let's hope this all works. The US govt is also putting money into the commercial paper market to increase liquidity (if that market dries up, we are truly fucked).

Edit: doesn't seem like the markets approve: FTSE is down another 5%. That's a good 15% this week. Ouch :(

Think that should read GBP 500bn.
 
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