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Doctor Love
Hold on to your asses

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Donnie Darko
I only lost $76 today, but I don't have any holdings in any of the financial companies. My bio/nano/energy tech holdings actually made $2.26.

Though it will make you cringe, it is worth reading what this winner of the Nobel Prize in Economics and supporter of Barack Obama has to say about this mess:
http://www.cnn.com/2008/POLITICS/09/17/sti…isis/index.html
Doctor Love

I don't see him mention the 800 lb. GSE Gorillas in the room, who were committing some of the most egregious stuff right underneath the nose of Congress (who they aggressively lobbied, of course, in a particularly incestuous form of government corruption).

I haven't looked at any of my investments today, I'm not planning on selling any time soon so why put myself through the potential agony, I figure.

Shabba53
Didn't make me cringe too much. Dramatic change to oversight and due diligence is a necessity.

There were a lot of us in the industry who saw what was going on. We prepared who we could. It's unfortunate that so many people got caught up in the greed of so few. Many of whom will get golden parachutes and sip happily on their margaritas while the rest of the US wallows in bankruptcies and foreclosures.

But as I mentioned to many people today, the wound needed to be cleansed before it can heal. That's what's going on right now. It will be a tumultuous few months to say the least. But, things will come back eventually, just like they did after the S&L Crisis and the Oil Embargo and the Great Depression, etc etc. It's the nature of a capitalist economy.

It's a bad year to retire though…
dakini_painter
The banking regulators decided to relax some rules today.

Banks can now use "goodwill" as part of their capital reserve requirements to cover loans. This is kind of like saying "I promise to pay you".

Banks can now shift money from their banking operations to their investment operations. It was intended to prevent them from moving money from safe parts of the business to ones with greater risk. Holding a bunch of mortgages isn't considered safe anymore, so they can now move it to the stock market.

Some of the changes are meant to allow smaller at-risk banks and other financial businesses to be bought up by bigger (supposedly less at-risk) banks and other financial businesses. Considering that some of the biggest names in the financial sector are the ones in deep trouble doesn't make this a really brilliant move. It just helps create bigger businesses that when they have problems, will be "too big to fail" and therefore they get a bailout.
Their greed at gobbling up the little fish is very risky.
Provenance
QUOTE(dakini_painter @ Sep 17 2008, 05:04 PM) *
Banks can now use "goodwill"

They have none.
Shabba53
QUOTE(dakini_painter @ Sep 17 2008, 09:04 PM) *

It just helps create bigger businesses that when they have problems, will be "too big to fail" and therefore they get a bailout.

Or big enough to leverage themselves so heavily that it brings down a whole industry.

Oh wait, I think that may have happened already. chickawow.gif

Having one firm with enough power to force even the stalwart Reserve Primary Fund to reprice their NAV from $1 to 97 cents is huge. Almost every bank in the country uses the prime fund for some form of clearing or sweep account.

Something that's buggin me is how 'someone' knew to withdraw $40 billion (more than 60% of it's entire amount) from the fund just a few hours before the announcement was made about the repricing. Hmmm. Insider trading anyone????
dakini_painter
Reading the NYT this morning it seems that all the central bankers are at a real loss on what to do. Infuse capital into the system to keep it afloat! While a downward spiral continues on shares, with continued margin calls as the price falls, and no way to borrow more or sell assets fast enough as their value falls as well.

Looks like a Death Spiral to me. Now Morgan Stanley and Goldman Sachs are very much at risk.

So much for unbridled Free Market Capitalism.
Lord Stanley
The invisible hand has them by the balls. And the grip is tightening.
Doctor Love

QUOTE(dakini_painter @ Sep 18 2008, 05:05 AM) *
So much for unbridled Free Market Capitalism.


Except it wasn't unbridled, the federal government played a substantial role in pulling the whole house of cards down.

Shabba53
I think that's what she meant when she talked about all of the government involvement.
Jaded Prole
QUOTE
Except it wasn't unbridled, the federal government played a substantial role in pulling the whole house of cards down.


Yes, they did the unbridling -- undoing the regulations imposed after the last great depression.
Pataphysician
Barney Frank Celebrates Free Market Day

House Financial Services Committee Chairman Barney Frank said that he was going to introduce a resolution declaring Sept. 15 “Free Market Day.”

Sept. 15 was the Monday after the government declined to step in to rescue Lehman Brothers, but it was one day before the government took a much different approach to prevent the collapse of American International Group Inc.

“The national commitment to the free market lasted one day,” Frank said. “It was Monday.”
Doctor Love

Particularly ironic coming from Barney Frank, who has been big supporter of government sponsored enterprises like Fannie & Freddie who have been central in the expansion of loose lending which led to the current crisis. These two organizations have liabilities exceeding $5 trillion, and Barney happily led us down the path we're on of having to bail out these organizations due to years of irresponsible lending in the name of "housing affordability."

Pataphysician
Perhaps so. I just find it additionally funny that Republicans rail against Socialism while nationalizing the U.S. economy.
dakini_painter
To blame Freddie and Fannie for the mortgage crisis is incorrect. Certainly they contributed by backing mortgages with high risk financing. But there's also the real estate developers who did everything to keep the bubble going, the individuals who continued to refinance their home as it's value increased, lots of people in the mortgage industry who promoted these mortgage backed securities and various derivatives based on them, etc.

It's all intertwined and it's unraveling. There's no more faith in the house of cards. That's why it's a crisis.

The deregulation of the banking industry was a big mistake. Mortgages probably need to be regulated into very simple forms. Forms that people understand. It's not a "growth industry". That's a mentality we need to move beyond.
bob_chong
Good thing Bill Clinton vetoed all those deregulation bills…oh, wait…
Donnie Darko
The problem with regulation was also that even when there were regulations, they did not appear to be enforced.

An even bigger problem than the refusal to regulate and the refusal to enforce regulations is the non-evidence based culture driving our current economic theory. Economics is far less of a science than those who do it for a living would have you believe. The collapses of all these financial giants indicates modern economic theory is more faith-based than people realize, specifically the faith is in the theory that insists that markets stay in equilibrium. Combine that with the fact that people like to be told they're going to make money, and investment managers apparently told investors what they wanted to hear, all the while keeping their fingers crossed themselves that house prices won't go down (any moron who reads history knows that they can go down), and you've got an economy that is based on smoke and mirrors more than it is based on evidence backed theory.

More than anything, what makes markets tumble isn't even bad news, but is often times traders' behavior. Physicst Jean-Philippe Bouchard and Capital Fund Management in Paris did a study of over 90,000 news items in an attempt to connect news on stocks to jumps in stock performance (which current economic theory assumes is true) and found there was no connection that could be discerned at all. Rather, investors/investment managers would just follow other investors, and the stampede to follow the herd is what causes the arbitrary valuations of investments far more than what evidence indicates they are worth. The lemmings running off the cliff analogy could not be more appropriate. More illuminating details of the study are here, showing how the current economy emphasizes analysis and groupthink far more than actual evidence… http://arxiv.org/abs/cond-mat/0410079
Donnie Darko
QUOTE(bob_chong @ Sep 18 2008, 12:36 PM) *

Good thing Bill Clinton vetoed all those deregulation bills…oh, wait…


You could save yourself some time if you just made every post "Whatever it is, it's the fault of the Left".
Doctor Love

QUOTE(dakini_painter @ Sep 18 2008, 09:24 AM) *

To blame Freddie and Fannie for the mortgage crisis is incorrect. Certainly they contributed by backing mortgages with high risk financing. But there's also the real estate developers who did everything to keep the bubble going, the individuals who continued to refinance their home as it's value increased, lots of people in the mortgage industry who promoted these mortgage backed securities and various derivatives based on them, etc.


I didn't say they were the only ones to blame, certainly there is plenty of that to go around. But they most certainly ARE central to the mortgage crisis. Barney Frank and others encouraged Fannie & Freddie to expand their MSB portfolio and loosen guidelines, and then rewarded the top executives handsomely for doing so. They did this on such a massive scale that these other investment banks and lenders followed suit to keep up. All the while we were promised Fannie & Freddie would never go under. And yet here we are. One thing I don't think people realize is the scale of Fannie & Freddie and their impact on the marketplace. These two entities hold or back HALF of all mortgages in the United States! All the other companies we're talking about have slivers of the remaining half.

Doctor Love

QUOTE(Donnie Darko @ Sep 18 2008, 10:00 AM) *
The lemmings running off the cliff analogy could not be more appropriate.


Yep, the degree to which our markets are at the mercy of knee-jerk psychology is quite astounding, really.
bob_chong
QUOTE(Donnie Darko @ Sep 18 2008, 01:01 PM) *

"Whatever it is, it's the fault of the Left".


Now you're talking! abs-cheers.gif

In all seriousness, the Left is not solely responsible. But like many, many bills that have come due this decade, they should be placed where they belong: on Clinton. Without Clinton, there would have been no 9/11, no Iraq war, no subprime meltdown, etc.
Provenance
Without Bill Clinton there wouldn't be breast milk on the menu.
Donnie Darko
QUOTE(bob_chong @ Sep 18 2008, 01:16 PM) *

Without Clinton, there would have been no 9/11, no Iraq war, no subprime meltdown, etc.


Without Reagan there would have been no Osama Bin Laden thus no 9/11, no Iraq war because we wouldn't have endorsed Saddam Hussein's regime, no savings and loan meltdown, etc. Why does your regress back to the origin of things stop whenever a right-winger is in office? The least you could do as a sincere conservative is appreciate the fact that Clinton left us with a surplus, but I bet you're so begrudgingly partisan that you'll attribute 100% of the good things that happened during Clinton's administration to the Republican congress and 100% of the bad things that happened to Clinton.

Also note that Clinton did not choose to invade Iraq, Bush did, so who actually caused the Iraq war? I hope you don't say "the terrorists who attacked us on 9/11", or "weapons of mass destruction" or "sudden concern and compassion for the people of Iraq"….
Shabba53
QUOTE(Donnie Darko @ Sep 18 2008, 01:00 PM) *

Rather, investors/investment managers would just follow other investors, and the stampede to follow the herd is what causes the arbitrary valuations of investments far more than what evidence indicates they are worth. The lemmings running off the cliff analogy could not be more appropriate.

What's even more interesting is that institutional money managers typically tend to do exactly opposite of what the individual investor does. Many use the data from what individual investors are doing to invest in the totally opposite direction. That's because when the 'common man' invests, it tends to be based on emotion, and emotion tends to give bad results to investments.

Even though the media will make people believe they can do it all themselves, it's a load of crap. Give every person the same access to research and data as we have, and it won't make a bit of good. Because it's extremely hard, almost impossible to maintain a level head when your investing your own money. You can find the best investment ever, but if you get in or out at the wrong time (which emotions help to do) you'll lose money.

Even advisors have their own advisor. It's more about emotional management than financial management. That ties back into the whole groupthink mentality.
Shabba53
QUOTE(Donnie Darko @ Sep 18 2008, 02:30 PM) *

Why does your regress back to the origin of things stop whenever a right-winger is in office?

Because that makes him look like he's right.
Jaded Prole
Mmmm, breast milk!
dakini_painter
I think it might be your time to look for an M&A job.
Donnie Darko
QUOTE(Shabba53 @ Sep 18 2008, 02:33 PM) *

QUOTE(Donnie Darko @ Sep 18 2008, 01:00 PM) *

The lemmings running off the cliff analogy could not be more appropriate.

What's even more interesting is that institutional money managers typically tend to do exactly opposite of what the individual investor does.


In terms of what they are buying and selling and when they are buying and selling, sure. But does each institutional money manager come up with their own stringent standards of evidence for what makes something a solid investment strategy, or do they follow what other institutional money managers are doing? From the way this subprime mess has taken down 6 or more large and supposedly rock-solid companies, including the largest insurance company in the history of planet earth, it is evident that almost everyone followed everyone else's bad idea, thus it's still lemmings going off a cliff, whether it is their own money they're investing or somebody else's.

Emotional decisions don't just stop with the personal investor, or with an advisor's advisor. Showing a big gain is a huge ego boost, and nobody is immune from it. Everybody wants to be the smart guy that found a clever way to show consistent and supposedly risk-averse growth, and so we had advisor after advisor and manager after manager all buying into the same faith-based decision that home values always go up and that lending people more money=more home building=infinitely sustainable growth, meanwhile there isn't any evidence to support such a notion. I figured this shit out 3 years ago when my friend got a mortgage and told me how damn easy it was, how he borrowed part of the down payment from one company and part of the down payment from another company, didn't need to demonstrate consistent income (he's freelance, same as I am), and poof, he got a mortgage. I said no way, I'm not doing that, and there's no way any bank can keep giving out mortgages like that. I didn't even realize at the time that it wasn't just fantasy mortgages that the banks were doing, but to complicate the problem investors were actually pouring money into the idea of fantasy mortgages thinking it was a surefire money maker. Yes, apparently CEOs with PhDs in finance thought it was a great idea to give credit to people with no money and an even better idea to trade that credit as if it were worth something. I apply more foresight when I play a game of Monopoly.

This isn't a case of hindsight being 20/20. It's a case of an inability to have foresight, because individual investors all the way up to the tip-top fund managers weren't basing their decisions on evidence, they were basing their decisions on hope.

Of course there is little consequence to those who were in charge and who let this go on and even encouraged it. The only way to discourage such behavior is to make the people at the top accountable by taking a huge bite out of the only thing they give a shit about: their money. As long as there are bonuses for short term growth, this problem will happen again and again and again and again.
Shabba53
QUOTE(Donnie Darko @ Sep 18 2008, 05:35 PM) *

In terms of what they are buying and selling and when they are buying and selling, sure. But does each institutional money manager come up with their own stringent standards of evidence for what makes something a solid investment strategy, or do they follow what other institutional money managers are doing?
Institutional money managers wouldn't make the money they do if they all followed the same strategy. Each has their own set of criteria and quantitative analysis. Each looks at different things.

And let's not forget that not everyone is losing money here. There are plenty of institutional money managers who are making money hand over fist right now. But all we see in the media is the mayhem, because that's what grabs the headlines.

No one could've ever believed that Lehman was so hevaily leveraged that they would implode in 24 hours, thus making even the highest quality commercial paper a risky investment.


QUOTE
From the way this subprime mess has taken down 6 or more large and supposedly rock-solid companies, including the largest insurance company in the history of planet earth, it is evident that almost everyone followed everyone else's bad idea
Not really. AIG was forced to reinsure mortgage debt. That was one of their main businesses. It wasn't part of their investment portfolio. But with so many mortgages defaulting at the same time, they had too many claims to pay out. It's the same thing that happens to a lot of insurance companies that got massacred during particularly bad hurricane seasons, forcing the industry to rethink whether they will offer certain types of coverage on the affected coasts. This is just a lot bigger.

QUOTE
Everybody wants to be the smart guy that found a clever way to show consistent and supposedly risk-averse growth, and so we had advisor after advisor and manager after manager all buying into the same faith-based decision that home values always go up and that lending people more money=more home building=infinitely sustainable growth, meanwhile there isn't any evidence to support such a notion.
Again, we has SOME advisors and SOME managers. There are plenty that didn't fall for it. In fact, most haven't. But the reason why the big firms like Lehman and Merril got hit so hard was because they were the major players. They underwrote a lot of these securities. They invented most of them. Thus, they got hit hardest.

Our firm, for example, is sitting on over a billion in cash right now. Our board doesn't believe in the heavy leveraging like Lehman and Merril. There are a lot of other firms that follow the same path. Not surprisingly, most are independant B/Ds. Independant B/Ds don't have the same types of conflicts of interest that got people into trouble.


QUOTE
Yes, apparently CEOs with PhDs in finance thought it was a great idea to give credit to people with no money and an even better idea to trade that credit as if it were worth something.
They sure did. And guess what? Those same people made hundreds of millions of dollars doing it. So their plan worked wonderfully for them. That's what people need to realize. At those big firms, they are out to only make money for a select few. They don't care about 95% of their clientele. And guess what? They don't have to. The regulations in their part of the industry allow them to put their own interests above the interest of their client, as long as they can show 'suitability'. That's basically the difference between criminal and civil court.

QUOTE
It's a case of an inability to have foresight, because individual investors all the way up to the tip-top fund managers weren't basing their decisions on evidence, they were basing their decisions on hope.
Untrue. There were LOTS of people who saw this coming. We've been talking about it for years. Most mutual funds haven't been caught up in the problem. They are just riding the wave as the markets go down because of broad based selling. And they'll go right back up when the investment atmosphere is more comfortable.

QUOTE
only way to discourage such behavior is to make the people at the top accountable by taking a huge bite out of the only thing they give a shit about: their money. As long as there are bonuses for short term growth, this problem will happen again and again and again and again.
BINGO. abs-cheers.gif
Donnie Darko
Thanks for the illumination. Just goes to show you one cannot base analysis merely on what is reported. I guess it's because it's the highest profile firms that are tanking that it appears the problem was systemic rather than isolated to just a few large players.
bob_chong
QUOTE
apparently CEOs with PhDs in finance thought it was a great idea to give credit to people with no money


QUOTE
There were LOTS of people who saw this coming. We've been talking about it for years.


Saw this piece linked today, from 2000. While it explains only a bit of the problem, it is very instructive.
Kirk
QUOTE
blacks with incomes of $65,000 to $75,000 a year have on average worse credit records than whites making under $25,000.

Real instructive.
Donnie Darko
QUOTE(bob_chong @ Sep 18 2008, 09:04 PM) *


Saw this piece linked today, from 2000. While it explains only a bit of the problem, it is very instructive.


No, it's utter rubbish. It blames Clinton, so of course it's true in your eyes, but it's not supported by the evidence. Less than half of sub-prime mortgages were subject to CRA, and not even the banks that imploded are blaming CRA for what happened.
http://www.prospect.org/cs/articles?articl…subprime_crisis
Donnie Darko
QUOTE(Kirk @ Sep 18 2008, 10:21 PM) *

QUOTE
blacks with incomes of $65,000 to $75,000 a year have on average worse credit records than whites making under $25,000.

Real instructive.


What, you didn't know that the only people who get CRA loans are black people? That statistic is of utmost importance as to why CRA is such a problem.
Kirk
I'll tell you what the problem is, and it ain't the black people.
sixela
QUOTE(Donnie Darko @ Sep 18 2008, 06:01 PM) *

"Whatever it is, it's the fault of the Left".


Not in the US. You have no Left in the US, just different shades of Right.
sixela
QUOTE(bob_chong @ Sep 18 2008, 06:16 PM) *

Without Clinton, there would have been no 9/11,

chickawow.gif

Of course. Without Clinton, we'd all live in a utopian world in which the lions and the sheep would live together and not devour each other. Actually, people were living in peace and harmony (thanks to the Good Works of Saint Ronald and His Faithful Followers) before that bastard came along and ruined things for people.
sixela
QUOTE(Shabba53 @ Sep 18 2008, 07:33 PM) *
when your [sic] investing your own money.

'
sixela
QUOTE(Shabba53 @ Sep 18 2008, 07:35 PM) *

Because that makes him look like he's right.

At least to himself. But hey, self-delusion is very effective as a means to resolve cognitive dissonance, so who needs anything else?
sixela
QUOTE(Kirk @ Sep 19 2008, 05:33 AM) *

I'll tell you what the problem is, and it ain't the black people.

Sure it is. If you got rid of them, people would be richer, the prisons would have room for other guests (so all the white people still on the streets would be Good Citizens), and the GOP would win elections by a landslide (which, of course, would ensure eternal bliss for all on earth except those with evil dissenting opinions).

bob_chong
Nice cherry picking, folks. Congrats! Never mind the other 4,950 words in that piece. Fact is, a trillion dollars worth of loans, many bad ones, were squeezed out via CRA, and many people saw it as a problem even eight years ago. Just keep pretending that 1992-2000 were a faultless utopia. It's much easier that way.
Shabba53
As opposed to pretending it was armageddon.
Jaded Prole
Much of the deregulation that has led to where we are happened from Reagan on including the Clinton administration. It escalated under Bush combined with the utter incompetence of the present administration which has led to a record national deficit and to us being beholden to China -- our primary lender. Our national reliance on military Keynesianism as well as on shaky credit and bad mortgages to maintain the illusion of a wealthy, functional economy has now reached its inevitable conclusion. Neither head of the One Corporate Party is fully to blame and both have fed at corruption's trough but the Repug head's ideological extremism gives it the lions share of responsibility and makes it the least likely to come up with rational solutions to the crisis.

It seems the unfettered invisible hand of the free market is giving us a crotch punch.
Doctor Love

I don't know that I'd call it the unfettered hand of the free market if it's the government that keeps f***ing up.

BTW, now we're going to be another trillion dollars in debt thanks to the newest "solution" from the feds. Yes I said trillion!

Between Fannie & Freddie and this new buyout plan, the federal government will back the majority of all mortgage loans in the country. How's that for free market.
bob_chong
Privatized profits, socialized losses!
Doctor Love

It's ri-goddamn-diculous.

Congress has brightly shown its utter lack of backbone on both sides of the aisle. These clueless chatterheads are like whimpering puppies ready to do whatever unelected appointed officials at the Fed and the Treasury tell them to do, instead of exercising their power and responsibility under the Constitution to control the money.

Unbelievable.

Donnie Darko
QUOTE(bob_chong @ Sep 19 2008, 11:00 AM) *

Privatized profits, socialized losses!


Would you prefer the Libertarian alternative of allowing ING [typo, AIG] and all other subjects of federal help to just instantaneously collapse instead, and to allow short-selling of all other bank shares? If a company decides to go to Vegas and put everything on Black and then loses not just their farm but everyone else's farm who gave them money, should the state just sit back and watch as millions of people are royally fucked by the irresponsible behavior and extremely poor judgment of a few private companies?

The public would bear the cost of these colossal private errors whether the government steps in or not, the only reason to step in is an attempt to limit the degree of public suffering.
Doctor Love

You mean AIG? ING is a Dutch investment bank.

The answer is not to obligate the American taxpayer to buy all the bad investments these places made.

Donnie Darko
Right, AIG, my mistake.

If the answer is not to obligate the American taxpayer to buy all the bad investments these places made, then the results are that the companies just collapse and that's that. What sort of effect do you think that would have on the average American taxpayer?

Also keep in mind that when you say the taxpayer is buying the bad investments, it's not like we're actually buying the bad investments. If that were the case, our taxes would go up by, oh, about a few hundred billion dollars. The taxpayer would only actually bear the cost of this bailout if the government really followed pay-as-you-go, which they do not. They actually just keep borrowing way more money than they take in, which I think both fiscal conservatives and liberals can agree is a bad idea.
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