The Fed Rescue Has Failed

[J]

What do you call a bailout?

A bailout is what happened to Northern Rock in the UK. Actually that was a bit more than a bailout, it was a bailout followed by nationalization, I believe it cost the taxpayers something like 90 billion pounds. For a single bank.

But what about the responsible people? Letting institutions go under with no bailout at all... do you draw the line at savings and chequing accounts, retirement plans, or what?

That's what the FDIC is for, and why they're hiring right now. The people's savings are covered up to $100k, though it may take a while to get the paperwork sorted out to actually claim the money.

Homes cost 350k+ now, and you're saying the historical average is 150k (or less)? And this is caused by what, too much credit floating around?

The historical average for a home which one can afford is around 3 times the income of the person buying the home. Thus a family with a combined income of $100k will be able to afford a roughly $300k home, and have the means to pay off the mortgage even if they run into a few difficulties now & then. The figure can be pushed up to maybe 3.5 to 4 times income, but then everything has to go just right or else the home's getting foreclosed.

As for the cause of the housing price bubble, that's easy credit, cheap cheap loans, and really questionable mortgage products at work. When a homeless unemployed person can get a $500k mortgage from the bank, something is very wrong.

You realize there is a 50 year mortgage now and what you're suggesting is at the least a painful readjustment.

Yup, but it sure beats the alternative, which is the banks continuing to play hide the piles of toxic poo until they all go down and die. The longer they play games the greater their losses will become, and that is also true of th health of all financial markets and the economy. The banks are hoping for a miracle turnaround, one which will not happen.

[Darth Wong]

Want to know what's really sick and perverse? Banks which did not jump feet-first into the subprime market were actually viewed as hurting their shareholders as recently as last year.

The reason is simple: banks are given large amounts of money to invest (ie- your savings accounts). They promise to pay it back to you with interest, which means that in order to make money, they have to invest it in something that will pay them more interest than whatever they are paying you (which is admittedly not much). The gap between their investment return and the return they pay is their profit.

Now here's the fun part: shareholders want maximum profit, which means they want the bank to achieve a very high rate of return on its investments. And sub-prime mortgages paid a high rate of return, so banks which refused to buy into the sub-prime market were not achieving the profits of the banks that were doing so with glee, and CEOs who tried to stand their ground were at risk of being ousted by angry shareholders. That's why almost all of the major banks ended up with heavy exposure to the sub-prime market.

It's the free market at work, baby.

[J]

Even more fun is how many banks have taken up absurd leverage ratios in recent years which rival those of high risk hedge funds. Typically, a bank will run a leverage ratio of around 10:1, that is they're investing $10 for every dollar which they actually own. Which means in theory a 10% drop in the value of their investments could wipe out all their capital.

Right now there are quite a few US banks running leverage ratios of over 50:1, and I believe WaMu is sitting around 73:1. A 1-2% drop in the value of their investments and they go belly up, which is why they're borrowing like mad from the TAF and whoring themselves out to sovereign wealth funds to raise capital for covering their margin calls. Of course the reason they're so highly leveraged is that it makes them a warehouse full of money on the upside of the economic cycle, when the cycle starts down, well...

[Adrian Laguna]

That's the flaw in free market economics right there. There is an assumption that lies behind the idea of the "Invisible Hand" that eventually Rights All and Makes Everyone Prosperous. This assumption is that consumers and investors will all act in their own best interest. This if a false assumption, a demonstrably false assumption as Wong has shown. The reality of the matter is that people will act in a manner that they perceive is in their best interest, and that perception is often not in line with their actual best interests. Put simply, a pure free market would only work in a world where people are capable of accurately taking the long view. We do not live in such a world, but rather in one where people are commonly short sighted and stupid.

[Einhander Sn0m4n]

That's the flaw in free market economics right there. There is an assumption that lies behind the idea of the "Invisible Hand" that eventually Rights All and Makes Everyone Prosperous. This assumption is that consumers and investors will all act in their own best interest. This if a false assumption, a demonstrably false assumption as Wong has shown. The reality of the matter is that people will act in a manner that they perceive is in their best interest, and that perception is often not in line with their actual best interests. Put simply, a pure free market would only work in a world where people are capable of accurately taking the long view. We do not live in such a world, but rather in one where people are commonly short sighted and stupid.

And easily manipulated. Don't forget the power of propaganda like those bank commercials with the fuzzy furniture and hopeful-sounding music to lead people to do things in their own worst interest completely unknowingly. In fact, commercials put the lie to ALL implementations of a completely free market by cloaking all the facts in massive adamantine layers of diamond-impregnated Bullshit.

[Sarevok]

That's the flaw in free market economics right there. There is an assumption that lies behind the idea of the "Invisible Hand" that eventually Rights All and Makes Everyone Prosperous. This assumption is that consumers and investors will all act in their own best interest. This if a false assumption, a demonstrably false assumption as Wong has shown. The reality of the matter is that people will act in a manner that they perceive is in their best interest, and that perception is often not in line with their actual best interests. Put simply, a pure free market would only work in a world where people are capable of accurately taking the long view. We do not live in such a world, but rather in one where people are commonly short sighted and stupid.

Is not a free market everyone acts in their best interest a bad idea even it worked ? There is only one first place in everything. And the gap between those who have made it and those who lost the race would be huge.

[Darth Wong]

Is not a free market everyone acts in their best interest a bad idea even it worked ? There is only one first place in everything. And the gap between those who have made it and those who lost the race would be huge.

Oligopolies and monopolies are the inevitable outcome of a truly free market. Successful organizations would be foolish not to pool their resources in order to crush competitors and remove consumer choice.

[Darth Wong]

Hilarious excerpt from a Thompson Financial report from Harry Koza:

You’ve got to love Alt-A. It’s as if some banker had an epiphany one day: “Hey, we’re already making stupid mortgage loans to people with no jobs, no money and bad credit so that they can buy big houses they can’t afford. Why not make equally stupid loans to people with good credit so that they can buy second and third houses that they won’t be able to carry either? After all, we’ll offload all the risk to the credulous anyway, er, securitize the loans and sell them to savvy global investors.” Thus was born the Alt-A mortgage.

...

Across the pond, meanwhile, Peloton Partners LP, a London-based hedge fund, is liquidating its two funds and shutting down. It had over $3-billion in assets, and earned an 87 per cent return last year from shorting sub-prime. This year, March blew in, and Peloton blew up. Now, they aren’t even sure what proceeds, if any, their investors will recover from the liquidation.

Big deal, you say, another hedgie bites the dust, so what? They bred like flies, and now they’re dropping like flies: that’s hardly news. Last month Citigroup’s CSO Partners, a formerly $500-million hedge fund, invoked the Hotel California Clause (you put your money in but you can never get it out) and suspended investor redemptions, and this week Drake Management (running $10-billion in fixed income assets) also suspended investor redemptions at its apparently ironically named Drake Low Volatility Fund.

Gotta love that Invisible Hand.

[Big Orange]

And easily manipulated. Don't forget the power of propaganda like those bank commercials with the fuzzy furniture and hopeful-sounding music to lead people to do things in their own worst interest completely unknowingly. In fact, commercials put the lie to ALL implementations of a completely free market by cloaking all the facts in massive adamantine layers of diamond-impregnated Bullshit.

Speaking of commercials encouraging thoughtless and abusive business practices - Wormwood-Bane ("WE DON'T GIVE A SHIT!").

[Crazy_Vasey]

A bailout is what happened to Northern Rock in the UK. Actually that was a bit more than a bailout, it was a bailout followed by nationalization, I believe it cost the taxpayers something like 90 billion pounds. For a single bank.

No. That was the maximum possible liability if every single asset in Northern Rock's hands lost all value (well, right ballpark anyway; it was somewhere in the 90 to 100 billion range as I recall) and the government had to shell out to pay off everything. This is, barring the sort of total economic collapse that would make it all rather academic anyway, unlikely. House prices in Britain are high, at least in part, because there aren't enough of them in the places where people actually want to live because of actually relevant things like employment opportunities.

It still wasn't a cheap episode, though, and I rather doubt it will end as well as the Rolls Royce nationalisation did.

[J]

Hallelujah we're saved, stocks rally, all is good. Buy! buy! buy!

Dow soars 417 on Fed move
Stocks surge in the Dow's best day in 5-1/2 years as investors cheer central bank's move to pump an additional $200 billion into the banking system.

By Alexandra Twin, CNNMoney.com senior writer
Last Updated: March 11, 2008: 6:06 PM EDT

NEW YORK (CNNMoney.com) -- Stocks rallied Tuesday on news that the Federal Reserve, in coordination with central banks worldwide, will lend up to $200 billion to banks in an effort to loosen up tight credit markets.

The Dow Jones industrial average (INDU) jumped almost 417 points, its fourth-biggest one-day point gain ever and the biggest one-day point gain since July 2002. In percentage terms, the gain of 3.55% was the best since March 2003.

The blue-chip index had ended the previous session at a 17-month low.

The broader Standard & Poor's 500 (SPX) index climbed 3.7% after ending the previous session at a 19-month low. It was the biggest one-day percentage gain since May 2002.

The Nasdaq composite (COMP) jumped almost 4% after ending the previous session at its lowest level in 18 months. It was the biggest one-day percentage gain since March 2003.

The advance had lost a little steam in the late morning before recharging in the afternoon.

The Fed will make up to $200 billion available to a group of 20 big investment firms for a term of 28 days. The funds are available in exchange for debt, including AAA-rated mortgage securities, which many investors have avoided lately on worries that defaults in the underlying assets will diminish the value. (Full story)

"The Fed is repeatedly demonstrating to the markets that they are ready to help by providing systematic, well-thought out liquidity," said said Ram Kolluri, president at Global Investment Management.

While this provided a big boost psychologically, Kolluri said the announcement also occurred when the market was at a point where it was looking to rally, after several down sessions.

"This was a very oversold market, and today we're just seeing a short-covering relief rally," Kolluri said. "We're not off to the races now."

He said that the market is in 'full-blown panic mode' in the financial sector and has been down sharply of late, and the Fed news Tuesday gave investors a reason to cover some short positions.

The actual impact on the banking system will be minimal, said Robert Loest, portfolio manager at Integrity Funds, saying the government's need to borrow money could absorb half of the $200 billion in 30 days. But the announcement has a psychological impact, and that's why stocks are responding today, he said.

"It's not that there isn't enough money out there, it's not a liquidity issue," Loest said. "It's a confidence issue."

"I think the market is in a process of a psychological bottoming," he said.

Investors, cheered by the injection of liquidity into the system, looked beyond oil and gas prices at record highs. Oil prices surged to a new record trading high of $109.72 a barrel before retreating, while gas prices hit $3.2272 a gallon at the pump, just above the all-time record from last May.

Stock gains were broad based Tuesday, with 29 of 30 Dow stocks rising. Financial components JP Morgan (JPM, Fortune 500), Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500), American Express (AXP, Fortune 500) and AIG (AIG, Fortune 500) led the advance.

Stocks tumbled Monday for a third straight session on worries that the financial sector will see more writedowns related to the housing and credit crises. Those concerns remained Tuesday, but were countered by the Fed's plan to keep liquidity flowing in financial markets.

Economic news. The trade gap widened in January, the government reported, but the spread between the nation's imports and exports was smaller than what Wall Street economists had forecast.

The economy will see slower growth this year, as the fallout from the housing market continues to hit consumer spending and job growth, but a recession is avoidable, according to the quarterly forecast from the University of California at Los Angeles.

Company news. Bond insurers such as Ambac Financial (ABK) and MBIA (MBI) rallied on the Fed news.

Lenders Countrywide Financial (CFC, Fortune 500), Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) all jumped too.

Washington Mutual (WM, Fortune 500) gained on the Fed news and also on rumors that the mortgage lender could receive a cash infusion from Goldman Sachs or Warren Buffett, Reuters reported.

One big financial stock missing the rally was Bear Stearns (BSC, Fortune 500), which slipped after brokerage Punk Ziegel said the bank might have to cut staff or take other measures to sustain its business.

Record oil prices continued to boost oil services stocks, with Exxon Mobil (XOM, Fortune 500), Chevron (CVX, Fortune 500), Schlumberger (SLB), Halliburton (HAL, Fortune 500) and BP (BP) all gaining.

Google (GOOG, Fortune 500)'s $3.1 billion bid for online ad tracker DoubleClick got the OK from European Union regulators, who said that the deal won't hurt competition for online ads. Google shares jumped over 6%.

Texas Instruments (TXN, Fortune 500) warned late Monday that first-quarter sales and earnings won't meet forecasts. Shares lost 3%.

WellPoint (WLP, Fortune 500) warned late Monday that 2008 earnings won't meet forecasts, due to higher medical costs and a lower-than-expected subscribers. Shares tumbled over 28%.

Boeing (BA, Fortune 500) was the Dow's only loser. The aerospace company slipped after it said late Monday that it will formally protest the $35 billion refueling tanker deal awarded to rivals EADS and Northrop Grumman.

Market breadth was positive. On the New York Stock Exchange, winners topped losers more than 4 to 1 as 1.95 billion shares changed hands. On the Nasdaq, advancers topped decliners nearly 3 to 1 on volume of 2.51 billion shares.

Other markets. U.S. light crude oil for April delivery rose 85 cents to settle at $108.75 a barrel on the New York Mercantile Exchange. The front-month contract ended the previous session at a record closing high of $107.90.

COMEX gold for April delivery soared $4.20 to settle at $976 an ounce.

In currency trading, the dollar rose versus the euro after touching a fresh record low against the European currency earlier. The greenback rallied versus the yen.

Treasury prices slumped, raising the yield on the benchmark 10-year note to 3.59% from 3.45% late Monday as investors took profits. Bond prices and yields move in opposite directions.

Comments on the bolded sections, in order;

• No duh
• There have never been two negative job reports in a row outside of a recession. We've had two in a row. I wonder what that means...
• And mortgage rates will follow, putting even more pain on the housing market