Tuesday Morning Rant

Actually Grandma did buy it.


These Sharks sold Mortgage Meltdown Product A to Hedge Fund Manager B. Hedge Fund Manager B raised money from Fund of Fund Manager C. Fund of Fund Manager C raised money from Fidelity High Yield Fund D. Fidelity High Yield Fund D raised money from Grandma or Grandma 401K.


But these same Sharks also sold Mortgage Anti-Meltdown Product E to Hedge Fund Manager F. Hedge Fund Manager F raised money from Fund of Fund Manager G. Fund of Fund Manager G raised money from Fidelity Specialized Fund H. Fidelity Specialized Fund H raised money from Grandma or Grandma 401K because it has a low correlation to Fidelity High Yield Fund D which makes for a diversified portfolio.


These Sharks collected fees for selling and administering Mortgage Meltdown Product A and for selling and administering Mortgage Anti-Meltdown Product E. These same Sharks may have even taken a position in some of these products based upon information and belief.


And we are going to try and design a regulatory environment that keeps the Sharks from eating the Chum (Grandmas)?...but still keep the Chum in the pool? All the Sharks…from the product designer, to the hedge fund manager, to the fund of fund manager, all the way down to the Fidelity fund manager…are circling the water because the Chum is in the water. You can’t really put the Sharks and the Chum in the same pool and not expect the Chum to be eaten.


Hell, a few years back, we were even trying to let the Chum of the world try to take part of their Social Security deposits and place it themselves in a higher yield position. And admittedly, I was in favor of that. But that would have just given the Sharks more access to Chum money.


If we are going to keep the masses from being prey, we have to find a way to keep them from swimming in the pool with the Sharks. Let the Sharks feed on one another. Let the Chum grow slowly into something larger. Every attempt we have made over the last 50-60 years (from deregulation of interest rates on bank deposits, to allowing investment banks to take deposits from regular folks, to access to mutual funds and such, to unique mortgage structures on home buying) that brings access on behalf of the masses to the riches of the Sharks has served to transfer wealth from the masses to the Sharks. They cannot eat what is not in front of them. Originally Posted by Rudyard K

Isn’t that sort of like saying we shouldn’t let people have light bulbs because nuclear power plants are complex, and hard to understand and we really don’t want to have to bother figuring out how to regulate them?
Or are you saying there shouldn’t be regulations around products either?

Isn’t that sort of like saying we shouldn’t let people have light bulbs because nuclear power plants are complex, and hard to understand and we really don’t want to have to bother figuring out how to regulate them?
Or are you saying there shouldn’t be regulations around products either? Originally Posted by terbul

No.

If I understand what you are saying, RK, the only way to protect the chums is to go back to set interest rate on deposit accounts, a return to Glass-Seagall act strictly enforced, a world where Investment Banks mostly issue new shares and bonds for corporate clients and execute orders then trade on their own accounts. Originally Posted by discreetgent

I don't know that we need to go back all the way...and frankly I'm not sure I know all the provisions.

But I do think there needs to be more separation from the masses. They don't understand the risk they are taking. During periods of growth, they have no understanding that their appreciation is because they are winning due to a higher risk profile. When the worm turns, they are shocked, and attribute failure to nefarious activity.

I know there are vultures out there who are taking advantage of the situation. But it is my opinion that most of the brokers or investment bankers think they know what they are doing...and the last 10-15 years has had an economy that bailed them out...you know, rising water floats all boats. But when the weather gets stormy...they don't know what they are doing and how to get out of it. And they never planned for anything but calm seas.

Use as a "for example" buying a house. That is probably the largest transaction most will ever venture into. They are "advised" (and I use that term loosely) by a residential real estate broker. They are "advised" by a mortgage broker. They are "advised" by an insurance agent. The purchaser understand very little of what he is doing, so the real estate agent, or the mortgage broker, or the insurance agent can really "wow" them. But if you have ever questioned any of those "advisors" in any depth, they haven't a clue as to laws and options. They only know what they have been told.

Here is a little exercise for you. Ask any non-lawyer real estate friend of yours the difference between a "special warranty" and a "general warranty". My bet is, that 8 out of 10 will not be able to answer. Move that down to a residential real estate broker and it is probably 10 out of 10. This is really not some unusual concept that no one should know...I think most should know it...but they don't.

You buy a $30,000 new car and you get a 20 minute sit down with the salesman showing you how to use the features. You buy a $300,000 new house and they hand you the keys and pat you on the butt.

You know I am against the government trying to be a nanny to me...and I am all for everyone else standing up for themselves. But most of the normal's guys financial trials and tribulations are rooted in his lack of knowledge and training, and his efforts to control his own destiny from that uninformed base. If society wants to keep the normal Joe from getting himself in a pickle...it must restrict his access to things that will allow him to get into trouble. If it wants to allow him to participate in the Fat Cat world?...society needs to expect that most will get burned.

I don't think you will ever get enough regulation that will keep the knowledgeable man from taking money from the unknowledgable man. As they saying goes...When a man with experience meets a man with money. The man with the experience ends up with the money. And the man with the money ends up with the experience.

There must be a balance...but IMHO, that balance has swung way to far to allowing the unknowlegeable man to participate in things he has no business participating.

@RK -- I read what you write and I ask myself, "How? & How can we fairly protect the 'masses'?"

Sure we can regulate disclosure or have investment minimums (in the case of some funds). But beyond that isn't Joe Plumber's green as good as yours?

Your protect the masses rhetoric sounds pretty darn paternalistic. If I didn't know better I'd think you were an elitist asshole

My God, Rudyard K advocating for the common man!! What's next, dogs miscegenating with cats??!!!! Careful, there, RK. You'll start sounding like a Democrat.

If I understand what you are saying, RK, the only way to protect the chums is to go back to set interest rate on deposit accounts, a return to Glass-Seagall act strictly enforced, a world where Investment Banks mostly issue new shares and bonds for corporate clients and execute orders then trade on their own accounts. Originally Posted by discreetgent

And the buffoons we saw on television yesterday (i.e., the Senators) running things. No thanks, I'll take the sharks.

Careful, there, RK. You'll start sounding like a Democrat. Originally Posted by TexTushHog

Not like the current crop of Dems.

Actually Grandma did buy it. Originally Posted by Rudyard K

But Grandma didn't get hurt by it. Any losses on that transaction were compensated for by the higher interest she earned and were diversified so any single transaction was largely irrelevant to her unless Fidelity did no due diligence whatsoever -- in which case TTH will sue them.

. If society wants to keep the normal Joe from getting himself in a pickle...it must restrict his access to things that will allow him to get into trouble. If it wants to allow him to participate in the Fat Cat world?...society needs to expect that most will get burned.

. Originally Posted by Rudyard K

I agree with this RK.

But we must limit to big to fail.

The fat cats or sharks should have imploded. I understand why we bailed out the big boys. It was actually our position in the world we bailed out....our form of government. But if we have to bail out our form of government then we need to rethink it.

If the only way to grow our economy is thru a housing bubble then we are not doing something right. Our banking sector is the tail wagging the dog. PJ will argue that it is the engine that creates wealth but does it? How can anyone with a straight face say that a taxpayer bailout is the light at the end of a bubble tunnel.....a good thing.

It is like living on a credit card and then bitching about having to pay the bill while talking about how good the good ole days were.

Maybe double digit growth is not the end all be all that the sharks tell us it is.

How can anyone with a straight face say that a taxpayer bailout is the light at the end of a bubble tunnel.....a good thing. Originally Posted by WTF

Can we start by defining what a "bailout" is? As a starting point, lets consider the one at Wikipedia: "A bailout is an act of giving capital to an entity (a company, a country, or an individual) in danger of failing in an attempt to save it from bankruptcy, insolvency, or total liquidation and ruin; or to allow a failing entity to fail gracefully without spreading contagion."

Now the most recent "bailout" (there have actually been many during our history) involved a number of situation, each of which was different and to which I would answer differently as to whether is was a good thing.

a) The large money center banks. These were in fact injections of capital, but the the problem the government was trying to solve was not inadequate capital, but liquidity. Financial markets were spooked and fleeing to safety (read that t-bills, which at one point actually had negative interest rates). This was draining deposits out of the banks so they needed to sell securities (read exotic derivatives and such) to meet their cash flow needs. But since everyone wanted safety, no one was buying and prices crashed, which under accounting rules required the banks to write down the value of their portfolios, putting further pressure on their cash needs. In short a classic run on the banks. The only way to stop it (assuming Jimmy Stewart is not available) is for the government, as a lender of last resort to step in. Two things are important to remember here. One, these banks were profitable as hell and will be again. They had adequate capital to eat any losses in their portfolios, they just couldn't liquidate the whole mess over night. Second, the government is going to make a ton of money on this deal. They were lending at 5% when their short term costs were near zero and they got equity kickers that will make even more -- it is good to be the lender of last resort. Switzerland did something similar for their banks and quickly (within 6 months) booked a $10 Billion profit to the government without all the noise and angst. This aspect of the "bailout" was on balance a good thing and certainly better than a meltdown. Too big to fail or not. We made money on the deal.

b) The smaller/community banks. These were more a question of capital than liquidity. We were heading in to a recession and these banks, though adequately capitalized for normal times, were heavily invested in local real estate --as most banks normally are. They needed time to work through these problem loans and most banks that got TARP money will in fact survive/be acquired/come back. The banks that were too weak to qualify for TARP may fail. But, so far from what I read, the numbers aren't much worse than a normal recession. And bank failures are paid for by the FDIC which charges a premium for that insurance to their client organization. Here again the country will make money and stave off a bigger problem.

c) AIG. Okay, this one is a fucking disaster. It was poorly structured and should have been sent into bankruptcy. The problem was that they were too intertwined with other financial institutions through derivatives and CDO's. This is an area they should be fixing in a financial reform bill --financial derivatives are conceptually no different that commodity futures and these work quite well through a regulated market where collateral is centrally posted. The big banks don't like the idea of standardizing and centralizing these things because it cuts into their margins. But my opinion is Fuck em- do it. So here, IMO the bailout was bad.

d) Government Motors. Here the the Obama administration (this was not part of the original TARP legislation signed by Bush) decided to cut a sweet deal for the UAW and prop up a company that had a shitty business model (i.e., they were losing money). The problem in the auto industry was legacy costs -- they had driven labor costs out of site with gold-plated retirement and health benefits that could be earned in as little as 20 years work. You buy a Chevy and you are paying more for benefits than you are for steel. So here, they used the government's power to screw all the debt holders (who in some case had mortgages on factories) and gave them about 10% of the company and about 50 cents on the dollar they were owed. Equity holders got zip as they should. The UAW took 50 some percent of the equity to fund their legacy costs (not much of a haircut on that liability at all) and the balance of the equity went to the government for for its 50 billion investment. There was a small tranche of government debt (about $6B) that was recently "paid off" to much publicity -- in fact, they just used some other bailout money to do it. The big bucks however are the $50 billion in equity, that in all likelihood will never be worth that. Unless GM stops making boring and shitty cars. The jury is still out on this piece. I would have preferred a more balanced sharing of pain or even bankruptcy here (which is much easier to do in a business with physical assets that can be sold). But we will see -- lets give it a ? for now until we get the $50 bill & other bailouts back.

... I do not want some law where some government worker can demand my papers. I'd show him some lead and tell him to move on. I'm an anchrist. Problem is we half ass things. Originally Posted by WTF

What's wrong with asking for a drivers license? When you...

• Check into a hotel
• Apply for a passport
• Get a rental car
• Renew your Vehicle Registration
• Use a credit card
• Enter a secured building
• Get a traffic violation
• Get a new job
• etc.

...you are asked for ID and in some cases more than one form of ID, SS card, birth certificate, passport, et.al. Some of those ID requests are actually govt mandated. We've been getting asked by our govt or govt laws for our "papers" for a while now. IMO, forcing, or mandating Card Check and/or a National ID will be more of a violation than any of the requests above.

Second, the government is going to make a ton of money on this deal.



c) AIG. Okay, this one is a fucking disaster. It was poorly structured and should have been sent into bankruptcy. The problem was that they were too intertwined with other financial institutions through derivatives and CDO's. This is an area they should be fixing in a financial reform bill --financial derivatives are conceptually no different that commodity futures and these work quite well through a regulated market where collateral is centrally posted. The big banks don't like the idea of standardizing and centralizing these things because it cuts into their margins. But my opinion is Fuck em- do it. So here, IMO the bailout was bad.

. Originally Posted by pjorourke

Wow , how can you say we are going to make money on these bank bailouts with a straight face? Does it really matter if the banks paid us back with the money we lent AIG? What kind of balance sheet do you consider balanced? Hold the banks to the same standard that you hold GM.


---Financial companies that received multibillion-dollar payments owed by A.I.G. include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).
Big foreign banks also received large sums from the rescue, including Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and UBS of Switzerland ($5 billion).----





Damn PJ bragging about the 99 deals that made money and dismissing the one bad deal is kinda suspect when that one bad deal was a whopper and a total slight of hand.

WE are scared to get our house in order because we are scared of a depression.....a depression is just what you need every now in then in a free market. Of course the masses hate those things....the fat cats kinda hate it too. Not because they are hurting in a depression but because the masses want regulations on the fat cats. Can't have that. So here we are , a bunch of so called free market guys asking for a bail out. It was a bail out any way you spin it. Tighten up on the ratio to debt that the banks can loan. If that hurts some abality to buy a house then fuc'em. Some people do not deserve a home if they can not SAVE for it.

IMO, forcing, or mandating Card Check and/or a National ID will be more of a violation than any of the requests above. Originally Posted by DFW5Traveler

I agree.

...you are asked for ID and in some cases more than one form of ID, SS card, birth certificate, passport, et.al. Some of those ID requests are actually govt mandated. We've been getting asked by our govt or govt laws for our "papers" for a while now. IMO, forcing, or mandating Card Check and/or a National ID will be more of a violation than any of the requests above. Originally Posted by DFW5Traveler

See but the difference with the Arizona law is the the official requesting your papers is required to do so using a very cheesy imitation German accent.

Wow , how can you say we are going to make money on these bank bailouts with a straight face? Does it really matter if the banks paid us back with the money we lent AIG? What kind of balance sheet do you consider balanced? Hold the banks to the same standard that you hold GM.

---Financial companies that received multibillion-dollar payments owed by A.I.G. include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).
Big foreign banks also received large sums from the rescue, including Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and UBS of Switzerland ($5 billion).---- Originally Posted by WTF

a) those banks were all secured to some extent or another.

b) we haven't lost a nickel on the AIG deal yet either and given time we probably won't. Structurally, this deal is as flawed as Government Motors -- except the underlying assets are worth more. And they are being liquidated in an orderly manner.