[Vision2020] Why are we bailing out all these large
Tom Hansen
thansen at moscow.com
Sun Sep 21 18:32:58 PDT 2008
Thanks, Andreas, for squaring me away on my wrongful understanding of the
roots to this problem.
Your explanation put it somewhat into terms I, with my lowly BS degree in
Information Systems, can understand. I am going to have to research this
a bit more before I make any further allegations.
My apologies for my misunderstanding and, once again . . .
My thanks,
Tom Hansen
Moscow, Idaho
> Tom --
>
> I'm going to have to (probably) agree with Jeff on this one. FDIC only
> insures consumer banks, and SIPC provides a very limited amount of
> protection -- it only insures investors against assets endangered by
> the failure of a brokerage, rather than against the assets themselves
> dropping in value. Neither has a lot to do with the utter market
> collapse that's going on around us right now. Some of it could've been
> prevented by re-regulating the financial markets; other elements have
> always been poorly regulated.
>
> The first problem was the explosion in subprime and exotic mortgages.
> Here, part of the problem was the incentive structure for mortgage
> brokers: individually, they received a commission on the mortgage;
> however, since the mortgage frequently no longer belonged to the
> original broker when the borrower defaulted, they didn't care. So long
> as the housing boom was moving fast enough to get the mortgage off the
> balance sheet by the time it came due, no one cared*.
>
> The second problem was the explosion in the sale of mortgage-backed
> securities. This, essentially, was a trillion-dollar attempt to spin
> straw into gold. Large banks packaged high-risk mortgages together in
> such a way as to -- supposedly -- balance the various risks against
> each other in such a way as to make the investments safe. They then
> leaned on the ratings agencies to rate these securities either AA or
> AAA (essentially, as safe debt to purchase), which they did. One
> would think that the financial geniuses that run Wall Street would
> know that there's no honest way to make 2 + 2 = 5. But there you have
> it.
>
> Third, leverage. The debt to asset ratio being carried by Wall Street
> was ludicrous. The SEC had granted exemptions for the big five
> investment banks, allowing them to take out loans at anywhere from
> 30:1 to 40:1. Of the five companies granted that exemption, only one
> -- Goldman Sachs -- is still in anything resembling a decent state.
> The higher your leverage, the more you depend on outsmarting the
> market to outrun your debts. Worse, *your* debts are in someone else's
> accounts receivable column. If you drop into bankruptcy,
> congratulations: your creditors can all take the number in their
> accounts receivable and divide it by the amount to which you're
> leveraged. This causes ripple effects across the entire financial
> sector.
>
> I've got no problem with the government spending taxpayer money to
> bail out Wall Street. The CDOs (mortgage-backed securities) that the
> government is thinking of purchasing probably do have some underlying
> value. But if we're going to be buying a ton of bad debt, we should be
> canny consumers: we don't take on $700 billion worth of debt without
> getting something in return. An equity stake in every company from
> whom we buy CDOs should be fine. The US taxpayer having a seat on the
> board of directors of every major Wall Street firm would also provide
> an elegant solution to the regulation problem: each firm is regulated
> (by a federal trustee) to the extent it couldn't keep its own house in
> order*.
>
> -- ACS
>
> * Incidentally, despite what John McCain's commercials might be
> telling you, Fannie Mae and Freddie Mac had very little to do with
> this business. The definition of a 'subprime mortgage' is a mortgage
> which neither Fannie nor Freddie would take. Fannie and Freddie's
> problems were largely caused by (a) investor panic, (b) their
> attempts, while wearing their 'private corporation' hats, to compete
> at a level of risk higher than they ought to've, and (c) a massive
> liquidity crisis caused by everyone wanting to sell mortgages and no
> one willing to buy.
>
> ** Also incidentally, as a US taxpayer, you might be happy to know
> that since the AIG bailout, you now own a one-three-hundred-millionth
> stake in Manchester United, which I am told is a soccer team. They
> used to be a property of AIG: now they're yours. They're quite good.\
>
> On Sun, Sep 21, 2008 at 5:35 PM, Tom Hansen <idahotom at hotmail.com> wrote:
> > Paul -
> >
> > It is my impression that this economic crapshoot was instigated by
> > deregulation of the industry under both Reagan and Bush Sr..
> >
> > It used to be that it was difficult (stringent requirements and
constant
> > federal monitoring) for banks, S&Ls, and other financial institutions
to
> > qualify for FDIC/FSLIC "protection". Once Reagan removed these
requirements
> > and Bush Sr. drastically limited (if not eliminated) federal
> > monitoring, banks approved loans to people/businesses that possessed no
> > viable capability of ever repaying the loans and investment firms made
> > investments that would make third-world countries cringe. These
financial
> > institutions were not concerned about going "out of business", not as
long
> > as they had that FDIC/FSLIC sticker on their doors.
> >
> > So, as Bush Jr. tries to pass himself and potentially McCain (who
> > coincidentally has been in the Senate since Nixon left the White
House) as
> > heroes to the American people, remember who made this all possible.
Hint:
> > It wasn't Obama.
> >
> > Tom Hansen
> > Moscow, Idaho
> >
> >
> >
> >
> > ________________________________
> >> Date: Sun, 21 Sep 2008 16:59:05 -0700
> >> From: godshatter at yahoo.com
> >> To: vision2020 at moscow.com
> >> Subject: [Vision2020] Why are we bailing out all these large
corporations?
> >>
> >> If a large corporation is about to go bankrupt because they loaned
money
> >> without proper collateral behind it and without a determination that
the
> >> person taking out the loan could reasonably pay it back, shouldn't we
> >> let it crash and burn? Isn't that what is so casually referred to as a
> >> "market correction"?
> >>
> >> I've heard it stated that there is something different about this
> >> situation - it's more dire and it could have a snowball effect on the
> >> rest of the economy or even the globe. Does anyone here know enough
> >> about this to explain that?
> >>
> >> What is so important about this situation that would result in the
> >> necessity for an Iraq War-sized expenditure?
> >>
> >> Or is it a case of the rich looking out for the rich, which I'm
> >> half-tempted to believe is the case.
> >>
> >> Paul
> >>
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> >
> >
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> >
>
> =======================================================
> List services made available by First Step Internet,
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> http://www.fsr.net
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>
"Jesus was a community organizer and Poncius Pilate was a governor."
- Marilyn Trail, sister of Representative Tom trail (September 8, 2008)
----
"We're a town of about 23,000 with 10,000 college students. The college
students are not very active in local elections (thank goodness!)."
- Dale Courtney (March 28, 2007)
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