Private Equity, Thomas Lee and Simmons Mattress

http://www.nytimes.com/2009/10/05/business/economy/05simmons.html?hp=&pagewanted=all

Morgenson: How Lehman Brothers Got its Real Estate Fix

(c) 2009 F. Bruce Abel

It's long and I have read only the first page, but it's clear and fascinating.

http://www.nytimes.com/2009/05/03/business/03real.html?hp

OK, I've read the whole thing and it's valuable because it shows the progression of things while also showing the banality of evil: Walsh was not an evil person, just "smarter" than everybody else. His boss did not understand what he was doing, but it produced huge profits, etc.

Which leads to the now "age-old" dilemma: How to prevent this from happening.

What is also interesting is that these schemes lie hidden to the Main Street world until long after the damage is done. And they always will remain so. And I'm not even sure my use of the word "schemes" isn't too over-the-top.

And another example of how one man, one man, can bring down an institution and an industry, perhaps.

The Wall Street "Talent" Merely Reforms Into Smaller Units

Does that mean all of TARP is for naught, as the problem is in the minds of individuals and not corporations? A core issue:

http://www.nytimes.com/2009/04/12/business/12wall.html?hp

and somewhat related, showing the inverse (obverse? reverse?) issue, What Our College Brightest Are Flocking to These Days, now that investment banking has been disgraced:

http://www.nytimes.com/2009/04/12/weekinreview/12lohr.html?hp

Here's How the System Collapse Occurs

(c) 2009 F. Bruce Abel


OK, here's how it happens.

Your investment advisor has lost you 40%, say.

OK, it's time to take responsibility. I used to be a trader over ten years ago, while practicing law. Although I lost money, I am wiser now and should have learned something from that distant trading experience.

OK, Schwab says if you make at least 30 trades a quarter (something like that) your commission per trade cannot go above $8.95.

OK, I open an account at Schwab in January with $5,000.

Oh! To trade on margin you need $10,000. OK, I bump this up to $10,000 in order to trade on margin.

Oh,Oh! Notice pops up on the account: Additional margin needed: $15,000. !??? Research and inquiry: "Pattern-Day-Trader Rule."

Oh, you're bad now. OK, there's this rule something like: that if you have three or more day-trades for three out of four days, you must put up enough money so that you have $25,000 in the account. If you do not do this you cannot trade in this account other than to liquidate positions.

A good rule!

They also refer you to Gamblers' Anonymous. No kidding!

I'm down $400 on the $10,000 account, the bulk of this by one "slippage" situation where Schwab had me in 200 MS when I thought I had 100 before I went off to see a client (setting a protective stop loss on the 100, but not the 200, if it was 200, we're still negotiating).

OK, the additional $15,000 (my $10,000 is about even, with 200 SPY's bringing me up) makes me have to cool off until I scrape up the money.

And did I say They also refer you to Gamblers' Anonymous. No kidding!

OK, you've got a back-up line of credit attached to your bank account at US Bank. That's exactly the amount you need to scrape up the $25,000.

Now you've got a Schwab account worth $25,000 and change. But your margin ability is $50,000 with Reg T's current requirement. And, day-trading, your limit is $39,000 for today, going up (I think) to $75,000 after today.

So you "think" of your account now as an account of $25,000, or even $50,000, or even $75,000.

Essentially it's 10 o'clock PM at the Argosy -- no I haven't been there for years -- and, whereas the Pattern Day-Trader Rule is good, it conflicts with the low commission rate for making at least 30 trades a quarter. And the Rule is good only until the trader figures out that he only needs to put the $25,000 up for one day. [ed note 3/27/2009: Schwab says this is not the case] But then when he does so his psychology gets all screwed up again: the "blackjack table" (in my mind) is no longer a $5 table; it's $10, or maybe $25, (and the big-time dealer has just moved in).

So no good rule goes unpunished. Any rule can be "gamed." And human nature will always have the potential to ruin the individual. And with so much money in hedge funds, as we are seeing, it has the potential to ruin the system.

And it looks like Asia and Europe were strong, and Geithner is about to hit a home run before Congress today -- my feeling -- by announcing return of the uptick rule and the SEC is easing the "mark-to-market" rule, and therefore the Dow should be up 3000 points, or at least up some, etc.

Oh God, what have I done?

Three Worthy Financial Articles This Morning

Morgenson has two excellent pieces today, one fresh in the New York Times, on exactly what the elephant in the room is and ideas on how to nurse it to health. The first gleam of hope I think. But it will take some time.

http://www.nytimes.com/2009/01/25/business/25gret.html

The other Morgenson article "fresh" in the Cincinnati Enquirer from the syndicated file of a few days ago (missed it somehow in my daily reading of the NYT):

http://www.nytimes.com/2009/01/18/business/18gret.html?scp=3&sq=morgenson%20banking&st=cse

And then a tour-de-force on Bernie Madoff. This one also points out the great, great falacy of deregulation.

"The Talented Mr. Madoff"

http://www.nytimes.com/2009/01/25/business/25bernie.html?_r=1&8dpc

Michael Lewis's New Book "Panic" Favorably Reviewed

Readers of this blog will note that I refer to "Liar's Poker" more often than almost any other topic. That is because he called it the first and continues to call it.

What is "it?" Wall Street complex derivatives and their devastating effect on the economy.

His new book "Panic" is worth a read. Although I gave a copy to my son-in-law I have not yet read it.


http://www.nytimes.com/2008/12/28/books/review/Gross-t.html

Why India's Banks Got it Right -- Nocera

http://www.nytimes.com/2008/12/20/business/20nocera.html?_r=1&8dpc

Tour de Force on Madoff in NYT Today

Well-written, but does it add much? Not sure.

http://www.nytimes.com/2008/12/20/business/20madoff.html?hp

And Krugman Writes it Best -- Madoff

This puts Madoff into the broader context of Wall Street and our Civil Society, i.e. the magnet of Wall Street and the utter waste of brains and money over the years:

http://www.nytimes.com/2008/12/19/opinion/19krugman.html?hp

The Madoff Economy
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new_york_times:http://www.nytimes.com/2008/12/19/opinion/19krugman.html
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By PAUL KRUGMAN
Published: December 19, 2008
The revelation that Bernard Madoff — brilliant investor (or so almost everyone thought), philanthropist, pillar of the community — was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend.
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Times Topics: Bernard L. Madoff
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Yet surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?
The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s not just a matter of money: the vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole.
Let’s start with those paychecks. Last year, the average salary of employees in “securities, commodity contracts, and investments” was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.
But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.
Consider the hypothetical example of a money manager who leverages up his clients’ money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.
O.K., maybe my example wasn’t hypothetical after all.
So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.
We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.
But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.
At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. From Bush administration officials like Christopher Cox, chairman of the Securities and Exchange Commission, who looked the other way as evidence of financial fraud mounted, to Democrats who still haven’t closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms (hello, Senator Schumer), politicians have walked when money talked.
Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?
Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.
Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.
After all, that’s why so many people trusted Mr. Madoff.
Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we’re looking at now are the consequences of a world gone Madoff.
More Articles in Opinion » A version of this article appeared in print on December 19, 2008, on page A45 of the New York edition.

The Clawbacks From Hell -- Madoff

In today's New York Times:

http://www.nytimes.com/2008/12/19/business/19ponzi.html?em

and Spitzer's family too was swindled by Madoff:

http://www.nytimes.com/2008/12/19/business/19spitzer.html?_r=1&partner=rss&emc=rss

Morgenson Today -- GE

GE-fact or fiction?

http://www.nytimes.com/2008/12/07/business/07gret.html?scp=2&sq=general%20electric&st=cse

A Chapter of Erie

http://books.google.com/books?id=cS_qoBAtsssC&dq=charles+francis+adams+erie&printsec=frontcover&source=bl&ots=jYAgdiujvl&sig=DKmKnnnoaj4NcXyaj2EnnGg3AQc&hl=en&sa=X&oi=book_result&resnum=2&ct=result#PPA7,M1

And This Must Be Read

http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

Brooks Said it Back Last Spring

We all love to borrow...or speculate.


Op-Ed Columnist
The Great Seduction
new_york_times:http://www.nytimes.com/2008/06/10/opinion/10brooks.html

By DAVID BROOKS
Published: June 10, 2008
The people who created this country built a moral structure around money. The Puritan legacy inhibited luxury and self-indulgence. Benjamin Franklin spread a practical gospel that emphasized hard work, temperance and frugality. Millions of parents, preachers, newspaper editors and teachers expounded the message. The result was quite remarkable.

Times columnists David Brooks and Gail Collins discuss the 2008 presidential race.All Conversations »

The United States has been an affluent nation since its founding. But the country was, by and large, not corrupted by wealth. For centuries, it remained industrious, ambitious and frugal.
Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. The country’s moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money.
Sixty-two scholars have signed on to a report by the Institute for American Values and other think tanks called, “For a New Thrift: Confronting the Debt Culture,” examining the results of all this. This may be damning with faint praise, but it’s one of the most important think-tank reports you’ll read this year.
The deterioration of financial mores has meant two things. First, it’s meant an explosion of debt that inhibits social mobility and ruins lives. Between 1989 and 2001, credit-card debt nearly tripled, soaring from $238 billion to $692 billion. By last year, it was up to $937 billion, the report said.
Second, the transformation has led to a stark financial polarization. On the one hand, there is what the report calls the investor class. It has tax-deferred savings plans, as well as an army of financial advisers. On the other hand, there is the lottery class, people with little access to 401(k)’s or financial planning but plenty of access to payday lenders, credit cards and lottery agents.
The loosening of financial inhibition has meant more options for the well-educated but more temptation and chaos for the most vulnerable. Social norms, the invisible threads that guide behavior, have deteriorated. Over the past years, Americans have been more socially conscious about protecting the environment and inhaling tobacco. They have become less socially conscious about money and debt.
The agents of destruction are many. State governments have played a role. They aggressively hawk their lottery products, which some people call a tax on stupidity. Twenty percent of Americans are frequent players, spending about $60 billion a year. The spending is starkly regressive. A household with income under $13,000 spends, on average, $645 a year on lottery tickets, about 9 percent of all income. Aside from the financial toll, the moral toll is comprehensive. Here is the government, the guardian of order, telling people that they don’t have to work to build for the future. They can strike it rich for nothing.
Payday lenders have also played a role. They seductively offer fast cash — at absurd interest rates — to 15 million people every month.
Credit card companies have played a role. Instead of targeting the financially astute, who pay off their debts, they’ve found that they can make money off the young and vulnerable. Fifty-six percent of students in their final year of college carry four or more credit cards.
Congress and the White House have played a role. The nation’s leaders have always had an incentive to shove costs for current promises onto the backs of future generations. It’s only now become respectable to do so.
Wall Street has played a role. Bill Gates built a socially useful product to make his fortune. But what message do the compensation packages that hedge fund managers get send across the country?
The list could go on. But the report, which is nicely summarized by Barbara Dafoe Whitehead in The American Interest (available free online), also has some recommendations. First, raise public consciousness about debt the way the anti-smoking activists did with their campaign. Second, create institutions that encourage thrift.
Foundations and churches could issue short-term loans to cut into the payday lenders’ business. Public and private programs could give the poor and middle class access to financial planners. Usury laws could be enforced and strengthened. Colleges could reduce credit card advertising on campus. KidSave accounts would encourage savings from a young age. The tax code should tax consumption, not income, and in the meantime, it should do more to encourage savings up and down the income ladder.
There are dozens of things that could be done. But the most important is to shift values. Franklin made it prestigious to embrace certain bourgeois virtues. Now it’s socially acceptable to undermine those virtues. It’s considered normal to play the debt game and imagine that decisions made today will have no consequences for the future.

Risk Models Fail

By STEVE LOHR
Published: November 4, 2008
Today’s economic turmoil, it seems, is an implicit indictment of the arcane field of financial engineering — a blend of mathematics, statistics and computing. Its practitioners devised not only the exotic, mortgage-backed securities that proved so troublesome, but also the mathematical models of risk that suggested these securities were safe.
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Eight Weeks of Financial Turmoil
Rick Friedman for The New York Times
Prof. Andrew M. Lo of M.I.T. in 2005. A paper he helped write that was presented in 2004 warned of risk in financial markets.
What happened?
The models, according to finance experts and economists, did fail to keep pace with the explosive growth in complex securities, the resulting intricate web of risk and the dimensions of the danger.
But the larger failure, they say, was human — in how the risk models were applied, understood and managed. Some respected quantitative finance analysts, or quants, as financial engineers are known, had begun pointing to warning signs years ago. But while markets were booming, the incentives on Wall Street were to keep chasing profits by trading more and more sophisticated securities, piling on more debt and making larger and larger bets.
“Innovation can be a dangerous game,” said Andrew W. Lo, an economist and professor of finance at the Sloan School of Management of the Massachusetts Institute of Technology. “The technology got ahead of our ability to use it in responsible ways.”
That out-of-control innovation is reflected in the growth of securities intended to spread risk widely through the use of financial instruments called derivatives. Credit-default swaps, for example, were originally created to insure blue-chip bond investors against the risk of default. In recent years, these swap contracts have been used to insure all manner of instruments, including pools of subprime mortgage securities.
These swaps are contracts between two investors — typically banks, hedge funds and other institutions — and they are not traded on exchanges. The face value of the credit-default market has soared to an estimated $55 trillion.
Credit-default swaps, though intended to spread risk, have magnified the financial crisis because the market is unregulated, obscure and brimming with counterparty risk (that is, the risk that one embattled bank or firm will not be able to meet its payment obligations, and that trading with it will seize up).
The market for credit-default swaps has been at the center of the recent Wall Street banking failures and rescues, and these instruments embody the kinds of risks not easily captured in math formulas.
“Complexity, transparency, liquidity and leverage have all played a huge role in this crisis,” said Leslie Rahl, president of Capital Market Risk Advisors, a risk-management consulting firm. “And these are things that are not generally modeled as a quantifiable risk.”
Math, statistics and computer modeling, it seems, also fell short in calibrating the lending risk on individual mortgage loans. In recent years, the securitization of the mortgage market, with loans sold off and mixed into large pools of mortgage securities, has prompted lenders to move increasingly to automated underwriting systems, relying mainly on computerized credit-scoring models instead of human judgment.
So lenders had scant incentive to spend much time scrutinizing the creditworthiness of individual borrowers. “If the incentives and the systems change, the hard data can mean less than it did or something else than it did,” said Raghuram G. Rajan, a professor at the University of Chicago. “The danger is that the modeling becomes too mechanical.”
Mr. Rajan, a former chief economist at the International Monetary Fund, points to a new paper co-authored by a University of Chicago colleague, Amit Seru, “The Failure of Models That Predict Failure,” which looked at securitized subprime loans issued from 1997-2006. Their research concluded that the quantitative methods underestimated defaults for subprime borrowers in what the paper called “a systematic failure of default models.”
A recent paper by four Federal Reserve economists, “Making Sense of the Subprime Crisis,” found another cause. They surveyed the published research reports by Wall Street analysts and economists, and asked why the Wall Street experts failed to foresee the surge in subprime foreclosures in 2007 and 2008. The Fed economists concluded that the risk models used by Wall Street analysts correctly predicted that a drop in real estate prices of 10 or 20 percent would imperil the market for subprime mortgage-backed securities. But the analysts themselves assigned a very low probability to that happening.
The miss by Wall Street analysts shows how models can be precise out to several decimal places, and yet be totally off base. The analysts, according to the Fed paper, doggedly clung to the optimists’ mantra that nominal housing prices in the United States had not declined in decades — even though house prices did fall nationally, adjusted for inflation, in the 1970s, and there are many sizable regional declines over the years.
Besides, the formation of a housing bubble was well under way. Until 2003, prices moved in line with employment, incomes and migration patterns, but then they departed from the economic fundamentals.
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Whose to Blame -- Norris

Floyd Norris

October 8, 2008, 8:04 am — Updated: 8:29 am -->
Who’s to Blame?
In the debate last night, John McCain blamed the mortgage finance giants Fannie Mae and Freddie Mac for the financial crisis.
“They’re the ones that, with the encouragement of Sen. Obama and his cronies and his friends in Washington, that went out and made all these risky loans, gave them to people that could never afford to pay back. And you know, there were some of us that stood up two years ago and said we’ve got to enact legislation to fix this. We’ve got to stop this greed and excess.”
He added:
“Fannie and Freddie were the catalysts, the match that started this forest fire.”
For his part, Barack Obama blamed deregulation, which he in turned blamed on Senator McCain and President Bush.
To hear some Republicans tell it, all this was caused by the Democrats who wanted to get poor and minority people into homes.
I am grateful to Barry Ritholz for bringing to my attention this transcript of remarks in Phoenix in 2004 by President Bush. Senator McCain was present, and if any part of it bothered him, he does not seem to have mentioned it.
The parenthetical remarks (applause) are from the White House transcript. I have added the italics for emphasis.
I’m going to tell you another statistic, which is an amazing statistic given what we’ve been through. Housing starts in 2003 were the highest in a quarter of a century. Homeownership sales were the highest ever. Sixty-eight percent of homeownership — the homeownership rate is the highest ever. And that’s fantastic news for America. We want more people owning their own home. There’s nothing like saying, this home is my home. (Applause.)
There’s nothing better than somebody over there saying, welcome to my home. And we’re about to talk to some first time homeowners. And I want to share their stories with you — they’re going to share their stories with me, and you’re going to get to hear it.
I do want to talk about a challenge for our country, and there is a minority homeownership gap in America. Not enough minorities own their own homes. And it seems like to me it makes sense to encourage all to own homes. And so we’ve done some interesting things. Again, I want to thank the Congress. But we passed down payment assistance programs that will help low-income folks buy their own home. A lot of times, if you’re trying to buy your own home, you never bought one, the down payment seems like a little much. Some of you know what I’m talking about. It seems to make sense if one of the things we’re trying to do is to get — to close the minority home ownership gap and to get 5.5 new — million new minority homeowners into homes over the next five years, that we ought to help with down payments — and we have.
The state of Arizona is going to have $2.6 million to help people with down payments. (Applause.) I proposed that mortgages that have FHA-backed insurance pay no down payment. That will help 150,000 new homeowners. (Applause.)
. . .
One other thing I’ve done, is I’ve called on private sector mortgage banks and banks to be more aggressive about lending money to first-time home buyers. And the response has been really good. There’s a lot of people in this — our communities around the country that deeply care about the issue of homeownership, and they’ve been responsive.
Mr. Bush then told how he had converted programs aimed at helping poor people to pay their rent into programs to help them buy homes. He introduced several people who had been able to buy homes with federal assistance, and they described how grateful they were for down payment assistance and counseling. The president added:
You know, I bet somebody is listening out there and wonders whether or not he or she can buy a home. I bet there’s somebody saying, gosh, I don’t think a homeownership is — even though I want a home, I’m not so sure I’m able to do so. I hope you hear the story of Monica and Emily. These are people that had a dream and found help, and are now realizing their dreams. It’s the greatness of America, you know that? Jorge is sitting here. He’s got a family to raise, gets a little extra help, making more money, got him a second home, upgrading, family is better off.
What we want is we want this dream to be extended to every neighborhood in America. We want people owning their own home; we want people getting the skills necessary to make a living. (Applause.)
There is plenty of blame to go around. The bankers let their lending standards vanish, and not just for loans to the poor. The rating agencies and the banks and the regulators believed in computerized risk models that turn out to have been absurd. Reporters, including me, did not ask enough questions. People took out mortgages they could not afford. Fannie and Freddie bought some of those mortgages, but they did not buy the worst of the lot. Those went into securitizations that were sold to supposedly sophisticated investors.
Now the financial system is crumbling. Fannie and Freddie messed up, but the private sector messed up even more. There was not nearly enough regulation, but the regulators — all the way up to the president — thought that what was happening was a good thing.

Thomas Wolfe Quote

Shed no tears for the Masters of the Universe, however, not that your correspondent actually thought you might. Most of the young Masters already have their own personal nut free and clear. “Nut” is the term for the amount of money you need salted away in weather-proof investments in order to generate enough interest to live comfortably in Greenwich on Round Hill Road, Pecksland Road or Field Point Road in a house built before the First World War in an enchanting European style, preferably made of stone featuring the odd turret, with a minimum of five acres around it and big enough to be called a manor. Every Master of the Universe knows the number.Tom Wolfe, the author of “The Bonfire of the Vanities,” is at work on a novel about immigration in Miami.

Comments on Yesterday's Failure

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1.
September 30, 2008 6:54 am
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It was blind ideological deregulation that allowed investment and insurance executives to take as personal bonuses money that should have been held in reserve against changes in the market.The people that run Wall St companies acknowledge they are greedy. They described the derivates they sold as “pure profit” to their boards of directors. Calling them “pure profit” meant far bigger personal bonuses. Why did the counterparties to these derivatives spend money on them if there was no risk.Paulson was largely responsible for implementing the Republican ideology that caused this mess.The banks and finance companies that bought the derivatives did so to mitigate risk.The executives of the bank and finance companies that were counter-parties to these derivatives told their boards of directors and investors that there was no risk. There for all the interest and premiums were pure profit.All the interest supposedly being “pure profits” meant extravagant bonuses.If the interest and premiums had been held as reserve against the changing market conditions, instead of being paid out as bonuses, no bail out would have been required.You have to restrain the arsonist and put out the fire before you rebuild the kitchen.If we bailout before we do a first aid fix on the causes of the problem we are just wasting $700 billion.We’d still have the problem, but we would no longer have $700 billion to fix it with.We have to do a quick fix on the causes of the problem before we can do the bailout.Unbelievably, the bailout would reward Paulson’s failure in management and oversight, by giving him increased power, giving him the ability to bailout his friends, and not bailout others, as he chooses.The "bailout" left restrictions on executive pay and golden parachutes to the discretion of Paulson to impose for each company.The agreement gave Paulson discretion to pick and choose who he bailed out.
— Keith T, Winnipeg Canada
Recommend Recommended by 13 Readers
2.
September 30, 2008 6:54 am
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This is very simple. we shouldn't let the arsonists (Bush, Paulson) put out their own fires with their only tools: gasoline.The sky did not fall, as bush predicted. His dire proclamations sound fishily similar to the ones he came up with leading up to the 2002 mid term elections, when he said that if we didn’t immediately invade Iraq, the whole world would end on that day too, and there would only be mushroom clouds to prove he was right.The more time we have to calmly step back and think about this latest bush debacle, this huge attempted robbery, this prime example of the bush shock doctrine, the more time we have to calmly entertain ideas that hopefully come from as far from the bush administration as possible. We can think about ideas that will actually benefit the country instead of strangling it.Author Thom Hartmann had some thoughtful ideas that I think would actually take this bush created mess and fix it.The money is out there. It is just a matter of tweaking some of the rules that have fallen away under the last few, deregulatory administrations.In his article, "How Wall Street Can Bail Itself Out Without Destroying The Dollar," which you can find here http://www.commondreams.org/view/2008/09/26 Thom Hartmann lays out whose policies brought us to this moment--Grover "drown the government in a bathtub" Norquist, for one.Mr. Hartmann suggests that we do some of the things FDR did in the 1930's--the last time republicans brought us to this point financially.Instead of giving all sorts of money with no strings attached to the very culprits that started this, he suggests we create an agency to fund the bailout, loan that agency the money from the treasury, then have that agency tax wall street to pay us (the treasury) back.That is much more palatable than just borrowing and throwing more good money after bad, because all that will happen is they will run out of that too, and at some point there won't be anybody left in the world to borrow it from and then we'll be in for a serious collapse.
— davekliman, Glen Cove, NY
Recommend Recommended by 6 Readers
3.
September 30, 2008 6:54 am
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This year the self-deprecating motto of our presidential candidates ought to be: "It's not the economy stupid; it's the stupid people in charge of the economy."
— MJM, Denver, CO
Recommend Recommended by 10 Readers
4.
September 30, 2008 6:54 am
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How about they dig up the idea that you don't get something for nothing. Interesting reading some of the world media's take on the U.S. bailout plan that just sunk in comparison with the idea of fully nationalizing failing banks, as is just happened in the UK. Here's a direct quote:"But many banking analysts argue that the nationalization of the bank could be a boon to taxpayers one day, unlike the U.S. bailout plan, in which the government is simply buying up bad debts."Well now there's an idea. Instead of privatizing gains and socializing losses, let's have it be all one or the other. We'll even let the bankers choose which they prefer. Now that's got to be fair.
— Dutton, CA
Recommend Recommended by 5 Readers
5.
September 30, 2008 6:54 am
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Here's the rescue plan: The banks start lending money to each other and to credit-worthy borrowers. The banks write dowwn their bad debt and stop crying about their losses. American investors lost big time during the collapse of the dot-com bubble and the world did not end. Allowing some banks to fail and others to take their losses will not be the end of civilization.Once banks demonstate that they trust one another, the public will again trust the banks.Let our leaders lead the way and stop whining about having the taxpayer buy their bad debt for greater than it's worth. The American saver/investor is no longer that stupid.
— jojo1232, San Francisco, CA
Recommend Recommended by 9 Readers
6.
September 30, 2008 6:57 am
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One question. Paulsen claims that there isn't sufficient liquidity for investors to buy up these mortgage backed securities even at the current depressed prices.But today, investors sold billions worth of stock in the DOW. That means they have cash on hand now. What is preventing them from buying up these securities, now that they have sold off a lot of stock in other companies?Just fear? How about providing some incentives to buy off these distressed assets, like a tax break, or something.Here's another idea. Lets raffle off Air Force One. Everyone who buys $1,000,000 in mortgage backed securities gets one ticket. What jet-setting hedge-fund manager wouldn't like that?
— Theresa, Arizona
Recommend Recommended by 4 Readers
7.
September 30, 2008 6:57 am
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Cheers to our United States Representatives! They served their constituents well today. They listened to the people and it wasn't too difficult to understand that the people are angry and will not be fleeced. What was difficult was taking a stand against tremendous pressure applied to them by Wall Street con men and their government cronies who just want to maintain their status quo. But our Representatives withstood the pressure and did the right thing. Now they must hold their stand while the markets fall, as market forces do what is their nature, and then, as investors see bargains, they rise again. Good job U.S. Representatives! Stand strong!
— Acorn1, Phoenix, AZ
Recommend Recommended by 11 Readers
8.
September 30, 2008 6:57 am
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One question. Paulsen claims that there isn't sufficient liquidity for investors to buy up these mortgage backed securities even at the current depressed prices.But today, investors sold billions worth of stock in the DOW. That means they have cash on hand now. What is preventing them from buying up these securities, now that they have sold off a lot of stock in other companies?Just fear? How about providing some incentives to buy off these distressed assets, like a tax break, or something.Here's another idea. Lets raffle off Air Force One. Everyone who buys $1,000,000 in mortgage backed securities gets one ticket. What jet-setting hedge-fund manager wouldn't like that?
— Theresa, Arizona
Recommend Recommended by 4 Readers
9.
September 30, 2008 6:57 am
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That last paragraph says it all. For that reason alone, some sort of bailout plan needs to be approved, as distasteful as it may be to some of us. Now, it's not just the U.S. economy that waits for Congress - it's the rest of the world.
— Jaime Herrera, El Paso
Recommend Recommended by 2 Readers
10.
September 30, 2008 6:57 am
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Here's another idea.Require everyone who buys treasury bills to also buy 5%-10% of the value worth of mortgage-backed securities. That way the same people who are flying into a panic about them end up being the owners of them. Poetic justice.
— Theresa, Arizona
Recommend Recommended by 3 Readers
11.
September 30, 2008 6:57 am
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Enough is enough. We are bankrupt. We are borrowing from China to pay for a plan that many economists are convinced will not work. These guys took the money, do you understand? They TOOK IT. It's in their off-shore accounts. Now, middle class people are being asked to clean up the mess. THAT JUST WON'T STAND. Prohibit the OTC derivatives market that got us into this mess to start with. Raise taxes on the wealthy to 75% to pay for any bailout and I'll consider it. Raise taxes on hedge fund management fees to 50% while you're at it. Impose a tax on trades. Give judges the right to cram down mortgages. Start with that, and then ask me to support throwing good public money after bad private bets. It's time to let the gamblers fail and to learn our lessons.
— joe (new york), New York
Recommend Recommended by 16 Readers
12.
September 30, 2008 6:57 am
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I would like an explanation of the timing of this generalized "meltdown". All the necessary conditions for this meltdown were present twelve months ago.Why now? Why five weeks before an election?
— David Healy, Montpelier VT
Recommend Recommended by 11 Readers
13.
September 30, 2008 6:57 am
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What gets lost in the New York Time coverage is that the COUNTRY doesn't support the bailout and is it pushed down our throat. BRAVO to the US Congress who voted NO with their constituency. Bravo to all the Representatives who had guts to withstand the pressure. Taxpayers are already burdened with paying trillions for a war they didn't want that benefited only a few. We are sick to do the same with this bailout. It's time for WS to taste the challenges of real life with no huge bonuses for trading air and creating no lasting value.
— Alex G., New York, New York
Recommend Recommended by 19 Readers
14.
September 30, 2008 6:57 am
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"WE have nothing to fear but fear itself!" Relax America, the worthless paper shuffler economy is dying. We will be fine without Credit Default Swaps and SIV's, you will see. Our Parents did pretty well without them.
— Cynical Yes, Midwest
Recommend Recommended by 8 Readers
15.
September 30, 2008 6:57 am
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Your reporters assume that the bailout is needed. American economists presume we're ignorant if we're against it. But it's our economists, trained under Federal Reserve sponsorship, who are ignorant. The bailout won't help: we got where we are because the Federal Reserve system and the fiat dollar allow our politicians to keep spending more than they have, and allow the financial system to create more credit than the economy needs, thus distorting the free market while making believe they're giving us a free lunch. Things will get better faster if goverment stops meddling and keeps within its budget. Americans have to choose between deluding themselves with a free lunch and living without the Federal Reserve system and the fiat dollar, neither of which will last beyond the collapse they've been destined to bring about.
— hugues da mousse, chapel hill
Recommend Recommended by 4 Readers
16.
September 30, 2008 6:57 am
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Now, imagine a similar crisis next year (not hard to imagine), at a point when McCain is disabled (or gone) and Palin is president.Talk about faltering leadership?If that prospect doesn't disturb you, go ahead, vote for McCain/Palin.
— RWeber, Geneva
Recommend Recommended by 7 Readers
17.
September 30, 2008 6:57 am
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1) In a credit squeeze, it would be politically convenient to point out that the Fed's discount window is available as a lender of last resort. This calamity is not due to the lack of money at the banks, it is due to a chaotic financial miasma that has arisen due to an archaic accounting system. Banks can not close the books for the fiscal year since they do not know what the valuation of their MBS and derivatives are.2) It is important to increase the limits of FDIC coverage for deposit accounts to reflect the current reality. Most people do not have deposits over the limit, but those who do would be encouraged to move their money from "papers" with no legs to real monetary deposits, at whatever interest rate. If the banks have deposits on their books, they can presumably resume their normal lending.3) Reducing the reserve requirement for banks may provide an immediate boost to the credit market. In theory, this may pose a danger, since this measure is meant to provide solvency to counter a "run" on the banks, but is it really necessary, given the FDIC backup, and the new flexibility in bank mergers? As a measure of last resort, we could limit cash withdrawals to $100.- a day per account, both at the ATM's and at the teller windows.4) We can flat line both the real and the virtual mortgages at their origination date, by rewinding the computer tapes as it were and rebuilding the balance sheets based on an accounting concordat that is legally binding. Banks can close out with a valid result, because both the MBS underlying nominals and the real mortgages are symmetrical. See the article at vantari.com/economic. Insurance could be issued to cover mortgage payments at this valuation level until the MBS expires, because the actuarial formula can be computed using the fixed property valuation that has been agreed to, by law.The "balloon" resulting from a drop in assessed valuation is a homeowner liability that is due when he sells the property, not before, giving us time to work them off when valuations once again increase, or to roll them over as legally registered liens, for the new owners to dispose of. This speculative "balloon" becomes a deferred payment that can be passed along to the MBS trunches for each mortgage that is in trouble since the total indebtedness does change at that level. The assessed valuation of the underlying real estate in the MBS trunches and of the real estate mortgagees themselves would remain as it was at loan origination, for those loans which were underwritten during the period of speculation.Dean H Steelehttp://www.vantari.com/
— Dean Vantari, Atlanta, GA
Recommend Recommended by 0 Readers
18.
September 30, 2008 6:57 am
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All of these things including the mother of all bailouts seem like colorful kiddie bandaids put on some mangled body hit by a roadside bomb.It seems that the US economy has to rebuild itself from the ground up. That's only going to happen with genuine leadership and a comprehensive, intelligent and fully modern master plan for our economic, cultural and political future.
— Don, Madrid
Recommend Recommended by 8 Readers
19.
September 30, 2008 6:57 am
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So starts the New Great Depression. The Republicans didn’t learn from the 1920s and all of us, apparently, are destined to repeat that mistake. We’ve had trickle down, deregulation, tax breaks for the very wealthy, endless war and now the bill is due. There are plenty of names to name, but what it amounts to is the ghost of Herbert Hoover. Let’s not forget all of those little people preaching from rightwing think tanks and lobbying on K Street. Oh, yeah! The geniuses on Wall Street, too. Oh, yeah, again! The voters who go to the polls wearing their designer blinders.So thanks a lot, fellows. See you in the soup line. Except that, because you’ve had your hands in the till for the past twenty something years, we won’t.
— Spence, Bellingham, WA
Recommend Recommended by 4 Readers
20.
September 30, 2008 6:57 am
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Europe is bailing out it's banks.Why is the congress not in usa ?Democrats control congress.They must be responsible.
— P.A.Pointon, USA
Recommend Recommended by 0 Readers
21.
September 30, 2008 6:57 am
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The vote failed because it has been presented to the people as a "bailout of Wall Street" The Man on the Street" who have been calling their representatives does not understand that this affects him as well as us all. Needs a better PR person that can tell it like it is! Not George Bush--he's not trusted!
— Anna L, Pinehurst, NC
Recommend Recommended by 5 Readers
22.
September 30, 2008 6:57 am
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Treasury secretary Henry Paulson and Federal Reserve chief Ben Bernanke, having led us into this mess, should be fired immediately -- and should in no case be trusted to solve the enormous mess they allowed to happen on their watch.
— polymath, British Columbia
Recommend Recommended by 3 Readers
23.
September 30, 2008 6:57 am
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Putting this whole battle in terms of “Wall Street versus Main Street” ignores the fact that “Wall Street IS Main Street”. I hope everyone who was concerned about having their taxes raised $2400 a year realizes they probably lost that much from their 401K in one day with yesterday’s drop on the Dow. And to hear Fox News and other voices of the right blaming Democrats for not rallying every one of their House members to support what is essentially a Bush plan is particularly galling. The populist voices on both the right and the left seem so intent on sticking it to the Wall Street whiz kids that they’re willing to sacrifice their families’ economic security to do it. And I envy executives’ compensation packages as much as the next person, but that money is a small drop in the bucket compared to the hundreds of billions the recovery package includes. The bottom-line lesson I hope everyone learns from this is that 25+ years of Republican opposition to regulation, oversight and government intervention has come home to roost in the form of this crisis. I’d like as much as anyone to rub their noses in their mess, but not at the expense of my family, my job and any hopes I have for living off of my diminishing retirement savings.Fiftysomethingman.blogspot.com
— Davis Whiteman, SC
Recommend Recommended by 12 Readers
24.
September 30, 2008 6:57 am
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Great! (sarcasm) So now the Treasury is printing more money? You know what this means, don't you? They are out of "fixes" for this financial meltdown, and are using the only weapon left in their arsenal. This action is only going to lead to more world-wide inflation of prices. It isn't going to change the fact that nobody knows the worth of their paper assets anymore, and bankers aren't loaning money to other bankers. Simply putting more money into circulation isn't going to help much with these issues, if at all.Everybody needs to take a few deep breaths, have a few stiff drinks and ride this thing out. Things will be rough for awhile. But it is going to take a minimum of a year to know where the financial dead bodies are buried, then to figure out what the remaining paper assets are worth, if they are worth anything at all.So, good: we get back to tangible basics: houses, buildings, infrastructure, machinery, gold, metals, commmodities, etc. We have needed to do this for the past 10 years, or more. Now is the time to take stock in the things we can see, eat and build capacity with.Stop with the phony, short-term, hysterical financial bail-out "fixes", which are only going to put the U.S. taxpayer on the hook for something that is going to happen anyway: a world-wide recession/correction. Perhaps a good recession will force a return to instituting intelligent financial regulations, and to stopping shoddy, predatory lending practices. One can only hope.BUT NO MORE BAIL-OUTS OF FINANCIAL CORPORATIONS BY U.S. TAXPAYERS! STOP WITH THIS GARBAGE NOW!
— Rob L, N Myrtle Beach, SC
Recommend Recommended by 7 Readers
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September 30, 2008 6:57 am
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Paulson and others are running about shouting "The sky is falling, the sky is falling..." without explaining clearly what that means. What, exactly, are the consequences of doing nothing? They say that the $700bn bailout will save the day (year?). How, exactly, will it do that? No mumbo jumbo, please! Just the facts and the possible scenarios!
— Stephen White, San Clemente, CA
Recommend Recommended by 7 Readers
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Makes Sense to Me

Editorial
What About the Rest of Us?
comments
new_york_times:http://www.nytimes.com/2008/09/26/opinion/26fri1.html
Published: September 25, 2008

Lawmakers were still wrangling Thursday night about the Bush administration’s $700 billion bailout of the financial system. Political theater was mainly responsible for the delay, but it will be worth the wait if lawmakers take the time to make sure that the plan includes real relief for homeowners and not only for Wall Street.
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The problems in the financial system have their roots in the housing bust, as do the problems of America’s homeowners. Millions face foreclosure, and millions more are watching their equity being wiped out as foreclosures provoke price declines.
The problems became even more evident Thursday night with the federal seizure and sale of Washington Mutual to JPMorgan Chase.
It’s unacceptable that lawmakers have yet to come out squarely in favor of bold homeowner relief in the bailout bill. Treasury Secretary Henry Paulson, the biggest advocate of bailing out Wall Street, is also a big roadblock to helping hard-pressed borrowers. He wants to keep relying on the mortgage industry to voluntarily rework troubled loans, even though that approach has failed to stem the foreclosure tide — and does a disservice to the taxpayers whose money he would put at risk in the bailout.
Many of the assets that Mr. Paulson wants to buy with the $700 billion have gone sour because they are tied to mortgages that have defaulted or are at risk of default. Unless homeowners get some help — and its a pittance compared to what Mr. Paulson wants to give to bankers — the downward spiral of defaults, foreclosures and tumbling home prices will continue, which could push down the value of those assets even further.
We could make a strong moral argument that the government has a greater responsibility to help homeowners than it does to bail out Wall Street. But we don’t have to. Basic economics argues for a robust plan to stanch foreclosures and thereby protect the taxpayers’ $700 billion investment.
Mr. Paulson has long opposed what is probably the best way to help Americans stay in their homes: allowing a bankruptcy court to reduce the size of bankrupt borrowers’ mortgages. Unfortunately, but predictably, drafts of the bailout plan circulated late Thursday do not mention that relief.
It is simply outrageous that every type of secured debt — except the mortgage on a primary home — can be reworked in bankruptcy court. The law was designed to protect lenders, who have obviously and disastrously abused that protection. There would be no favors dispensed in bankruptcy proceedings. Lenders would have to accept less of a payback and borrowers would have to submit to the oversight of the bankruptcy court for years.
But the bankruptcy process would mean many fewer foreclosures. And that would halt the downward slide in home prices, reduce the number of vacant homes — and the blight that comes with them — and help preserve equity for all homeowners. It would cost the taxpayer nothing.
Arguments against bankruptcy relief for mortgages have all been raised and refuted in Congressional hearings and debates over the past year.
There should be no more balking. Any bailout bill must allow struggling homeowners to modify their mortgages in bankruptcy court. Mr. Paulson should drop his opposition now. If he won’t, Congress should insist on the bailout for homeowners. Americans’ $700 billion investment needs to be protected.

Charles Duhigg's Article That Blew the Whole FNM and FRE Thing Out of the Water

new_york_times:http://www.nytimes.com/2008/08/05/business/05freddie.html

By CHARLES DUHIGG
Published: August 5, 2008
The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others.
That chief executive, Richard F. Syron, in 2004 received a memo from Freddie Mac’s chief risk officer warning him that the firm was financing questionable loans that threatened its financial health.
Today, Freddie Mac and the nation’s other major mortgage finance company, Fannie Mae, are in such perilous condition that the federal government has readied a taxpayer-financed bailout that could cost billions. Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie Mac insiders say Mr. Syron heightened those perils by ignoring repeated recommendations.
In an interview, Freddie Mac’s former chief risk officer, David A. Andrukonis, recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that “would likely pose an enormous financial and reputational risk to the company and the country.”
Mr. Syron received a memo stating that the firm’s underwriting standards were becoming shoddier and that the company was becoming exposed to losses, according to Mr. Andrukonis and two others familiar with the document.
But as they sat in a conference room, Mr. Syron refused to consider possibilities for reducing Freddie Mac’s risks, said Mr. Andrukonis, who left in 2005 to become a teacher.
“He said we couldn’t afford to say no to anyone,” Mr. Andrukonis said. Over the next three years, Freddie Mac continued buying riskier loans.
Mr. Syron contends his options were limited.
“If I had better foresight, maybe I could have improved things a little bit,” he said. “But frankly, if I had perfect foresight, I would never have taken this job in the first place.”
Mr. Andrukonis was not the only cautionary voice at Freddie Mac at the time. According to many executives, Mr. Syron was also warned that the firm needed to expand its capital cushion, but instead that safety net shrank. Mr. Syron was told to slow the firm’s mortgage purchases. Instead, they accelerated.
Those and other choices initially paid off for Mr. Syron, who has collected more than $38 million in compensation since 2003.
But when housing prices began declining in 2006, choices at Freddie Mac and Fannie Mae proved disastrous. Stock prices at both companies have fallen by more than 60 percent since February, destroying more than $80 billion of shareholder value.
More than two dozen current and former high-ranking executives at Freddie Mac, analysts, shareholders and regulators said in interviews that Mr. Syron had ignored recommendations that could have helped avoid the current crisis.
Many of those interviewed were given anonymity for fear of damaging their careers by speaking publicly.
Now, some outsiders are saying that Mr. Syron and the top executive at Fannie Mae — some of the highest-profile figures in the business world — should be replaced.
“The top people should be booted out, and replaced by executives who have the confidence of the markets,” said Janet Tavakoli, a finance industry consultant and observer of both firms. Large Freddie Mac shareholders, speaking on the condition of anonymity, echoed those sentiments.
Mr. Syron and the Fannie Mae chief executive, Daniel H. Mudd, defended their choices, saying in interviews that they did not anticipate that the housing market would decline so quickly and that they were buffeted by conflicting pressures.
“This company has to answer to shareholders, to our regulator and to Congress, and those groups often demand completely contradictory things,” Mr. Syron said in an interview.
Indeed, executives of both companies maintain that one of the reasons the firms hold so many bad loans is that Congress has leaned on them for years to buy mortgages from low-income borrowers to encourage affordable housing. In 2004, Freddie Mac warned regulators that affordable housing goals could force the company to buy riskier loans.
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