View Full Version : Dow Drops 504 points
For some Americans, today has not been a good one due to this drop. It reminds me of the Friday after 9-11, when the Market re-opened.
Can remember holding my breath that day...it was a very long day...:rolleyes: Have just read that todays drop is the worst since that day.
http://www.marketwatch.com/
September 15, 2008 4:44 P.M.ET
BULLETIN
Blue chips drop 500
It's the worst day for the Dow industrials in seven years, and Wall Street is in full tilt after Lehman Brothers fails to find a buyer but Merrill Lynch does. Stocks slump and bonds jump.
Jack Moroney (RIP)
09-16-2008, 05:13
While I am sure that this too will pass with a long and painful recovery, what bothers me most about this is not the dent in my investments as much as the total lack of accountability for those that were instrumental in precipitating the events that led to this day of reckoning. While this is not the end of life as we know it, it certainly is another indication that those in positions of power, as well as those of us that put them and keep them in power, need to pluck their heads out of their collective fourth points of contact and get this right. We are truly at a breaking point the in US's ability to secure its national interests at home and abroad-and for that you can thank our self-serving politicians.
While I am sure that this too will pass with a long and painful recovery, what bothers me most about this is not the dent in my investments as much as the total lack of accountability for those that were instrumental in precipitating the events that led to this day of reckoning. While this is not the end of life as we know it, it certainly is another indication that those in positions of power, as well as those of us that put them and keep them in power, need to pluck their heads out of their collective fourth points of contact and get this right. We are truly at a breaking point the in US's ability to secure its national interests at home and abroad-and for that you can thank our self-serving politicians.
But the Dims say we are on the Highway of Hope, if we get off on the Exit Ramp of prosperity that leads to the side road to change. Whatever that means:D
The underlying problem is the derivatives market. As Lehman is liquidated, its securities must be sold to someone at some price. When that happens, we have a new, recent price for those securities.
However, a number of banks have their capital invested in such things. When the trade occurs, the banks must adjust their capital numbers - perhaps below minimum levels. Thus, there is a cascading effect.
The real excitement now is in AIG. They're looking for $75 billion after a credit downgrade. Will they survive? I certainly wouldn't buy their bonds, much less their stock.
This feeds back into the housing market. We had a robust housing market, partly due to freely available mortgage money. It is unlikely that anyone will touch new "creative" mortgage securities for quite awhile. Hence, perhaps less money for new mortgages - thus putting downward pressure on house prices. Will people keep paying the mortgage on a house that isn't worth nearly what they paid for it? Hmm.
By the way - the credit default swap (CDS) market is around $60 trillion dollars. (Yes, trillion with a "T"). It is unregulated, uncontrolled, and unreported. In essence, someone, somewhere guarantees that a debt instrument will be repaid. The lack of transparency in such a large market is problematic.
nmap, Thanks for the PM. Can you elaborate on the CDS market?
Can you elaborate on the CDS market?
I'm glad to, Chef Penn.
Let's suppose someone wishes to purchase some bonds - say, $10 million dollars worth - but they want a guarantee that the bonds will fulfill their payments. They could pay a premium - usually, a small premium - and someone, somewhere guarantees that the bond will meet its terms. It is also possible to trade the CDS, so the person making the guarantee can sell it to someone else. One problem is that no one knows who is actually obligated.
As an example, someone might have guaranteed that an XYZ bond would not default. They then found someone to trade this with, perhaps making a profit. That person (or company, more likely) did the same. This may have happened many times - say, five times. Now, if XYZ does default, a bond holder would go to the original person making the guarantee. This person would point to the next person down the line, and so forth. This works just fine if the person at the end can perform - but - what if they cannot? They refuse to pay or default. You can see the end result. It all goes to court. And if the failure is large, their may be bankruptcies all around.
Add in another problem. The CDS market was highly leveraged - as I understand it, 20 to 1. A small series of defaults results in a large, bad outcome.
Here's an example of the price action, from todays WSJ:
On Monday, many of AIG's bonds traded at levels more reflective of junk bonds that are on the verge of default. Some of the bonds traded at less than 50 cents on the dollar, having fallen from more than 80 cents last week. In the market for derivatives contracts that provide protection against debt defaults, investors were agreeing to pay $2.5 million upfront plus $500,000 annually to hedge against a default of $10 million in AIG's debt over five years, according to data provider CMA DataVision. The cost is so high because sellers of the protection want to be adequately compensated for taking on the risk.
Key point: If a bank owns an AIG bond, and wants to buy insurance, it will cost $2.5 million dollars, plus $500,000 per year to guarantee $10,000,000 in debt over 5 years.
To put this in perspective, to guarantee U.S. Treasury bonds would cost about $25,000 for $10,000,000. By the way, that's up from $21,500 on Friday. So if you had made the guarantee on Friday, you would lose $3,500 if you liquidated it today. That's volatility. Now - if you had only put up about $1,500, you would have lost all your money plus another $2,000. LINK (http://uk.reuters.com/article/companyNews/idUKN15153420080915) (Saying this another way - in this example, you would promise to pay $10,000,000 to a person buying insurance if the treasury bond defaulted. They would pay you $25,000 for doing this. If you suppose the default wouldn't happen, it's like free money. If the default does happen, there is a problem.)
AIG made a lot of these guarantees - but as overall fear in the credit markets increase, the cost to offset a guarantee goes up. Here is a link to some AIG-specific details: LINK (http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080218/REG/794188688)
This goes to the bailout or not question. Bailouts are a problem. But not bailing them out can create lots of other problems.
Another link might be of interest... LINK (http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+January+2008.htm)
Red Flag 1
09-16-2008, 09:09
nmap.
PM inbound.
RF 1
The Reaper
09-16-2008, 09:21
So why bail out Bear Stearns, but not Lehman Bros.?
Is the decision itself by the government not potentially litigious?
TR
Sweetbriar
09-16-2008, 09:34
Reading this at Patterico (http://patterico.com/2008/09/15/treasurys-decision-to-not-bail-out-lehman-bros-was-a-message-to-the-broader-market-to-get-their-house-in-order/#comments), including some of the comments, and along with the WSJ (http://online.wsj.com/public/article_print/SB122143765625334393.html) article helped me understand a little better.
CoLawman
09-16-2008, 09:38
Nmap,
For those of us with mutual funds, what action does a fund manager take to mitigate losses when the fund has substantial holdings in, say a Lehman? I assume (the alternative is too frightening) they are doing something!
Team Sergeant
09-16-2008, 10:33
I believe we have built an economy based on a financial "house of cards"; that house of cards being promises to pay (credit) and the greed of large financial companies (predatory lending). Because so many promised to pay, those financial companies built a house of cards to the moon and beyond. Now that house of cards is collapsing causing a cascading effect and it ain't over. Those cards at the top are huge and they are falling and they in turn are going to take out every card below.
I do not believe the US Government has the money to plug the holes in this dike. Fannie Mae, Freddie, AIG, Lehman, Merrill Lynch, et al they do not deal in billions but trillions of dollars and we cannot cover them all.
I also believe we have arrived at the financial & economic "event horizon" and are now witnessing a slow motion train wreck that cannot be stopped.
Unless you are one of the Ivy League geniuses that run those failed companies (that make hundreds of millions in salaries), I’d prepare for hard times ahead.
This will not be a national problem; this financial crisis will effect the entire globe.
Just my .02
TS
I’ve sent an email to my economic professor at Penn. He is on the board of the Federal Reserve here in NYC, asking for his advice on modeling my business and current position with regards to the market in the near term. He responded that he just completed two straight weeks (7days) of 18-20 hour days and would get back to me tomorrow.
I have already witnessed the impact on the service industry. We are responding by lying off 1/3 of the staff, changing the menu from a la carte to a Prix Fixe. Right now the model shows $ 27 at break even with the menu change. It will be interesting to see how he evaluates my consideration and if we will survive this downturn.
While I am sure that this too will pass with a long and painful recovery, what bothers me most about this is not the dent in my investments as much as the total lack of accountability for those that were instrumental in precipitating the events that led to this day of reckoning. While this is not the end of life as we know it, it certainly is another indication that those in positions of power, as well as those of us that put them and keep them in power, need to pluck their heads out of their collective fourth points of contact and get this right. We are truly at a breaking point the in US's ability to secure its national interests at home and abroad-and for that you can thank our self-serving politicians.
Col. Sir,
You have very eloquently put so many Americans thoughts into words, indeed.
The only thing I enjoy reading as much as your posts, are posts about guns. Go figure?:o
Holly
Most funds - except a few sector funds that focus on a small area - avoid heavy exposure in a single stock. Even those that do have such big positions will generally liquidate early in the process - it is a rare money manager who hangs on like grim death as a stock declines into oblivion.
However - you asked about mitigation. One easy approach would be the purchase of put options. I don't know how familiar you are with options, so I'll take the liberty of talking about them.
An option is a contract that can be traded in the open market. A put option permits the owner of the put to force the seller of the put to purchase 100 shares (usually) of a stock, any time before a specified expiration date, at a specified price - which is called the "strike price". So, if the stock goes down, the option owner can "put the stock to" the option seller.
Suppose a hypothetical stock is selling for $20 per share, and we were concerned it might go down. We could purchase an April 2009 put with a strike price of 15. We might pay as little as $25 to purchase it. So if our stock went to $10 per share, we could force the other person to pay $15 per share any time before the expiration date in April. Cheap insurance, right?
We could also sell a call. The call permits the buyer to take the stock away from us at a given price. Suppose we sell an April 2009 call at a strike of $20. And suppose we get $150 for it. If the stock sinks to $19 per share, we have a loss on the stock of $100, but a profit on the calls we sold of $50 (the $150 we got for selling it, minus the $100 loss on the stock).
All the numbers are hypothetical, of course, and purely for illustration.
You can see an example of calls on LEH HERE (http://finance.yahoo.com/q/op?s=LEH&m=2009-04). Calls are at the top, puts at the bottom.
Individuals can do this too, but it generally works best for a large portfolio - such as a mutual fund.
Hope that helps...
Nmap,
For those of us with mutual funds, what action does a fund manager take to mitigate losses when the fund has substantial holdings in, say a Lehman? I assume (the alternative is too frightening) they are doing something!
AIG - looks like the Fed is coming to the rescue. LINK (http://money.cnn.com/2008/09/16/news/companies/AIG/index.htm?cnn=yes)
Wise? I think so. The economy is already seeing some decline, and further disruption of the credit markets doesn't help anyone. The action may be inflationary, and may put an additional burden on taxpayers - but the present market volatility could be disruptive.
A bit more obscure:
Lowry's reports that yesterday was a "very decisive 90% down-day", the third one in September and the sixth one since April.
This comes from a subscription newsletter, so I cannot provide a link. Usually, the market goes up for from 2 to 7 days after a hard down day. A 90% down day means that 90% of the New York Exchange's volume came from declining stocks.
For a turn, we need several of these, followed by a 90% up day. The present situation is part of getting to a bottom in the market, so in a way, this is good news.
I'm glad to, Chef Penn.
Let's suppose someone wishes to purchase some bonds - say, $10 million dollars worth - but they want a guarantee that the bonds will fulfill their payments. They could pay a premium - usually, a small premium - and someone, somewhere guarantees that the bond will meet its terms. It is also possible to trade the CDS, so the person making the guarantee can sell it to someone else. One problem is that no one knows who is actually obligated.
As an example, someone might have guaranteed that an XYZ bond would not default. They then found someone to trade this with, perhaps making a profit. That person (or company, more likely) did the same. This may have happened many times - say, five times. Now, if XYZ does default, a bond holder would go to the original person making the guarantee. This person would point to the next person down the line, and so forth. This works just fine if the person at the end can perform - but - what if they cannot? They refuse to pay or default. You can see the end result. It all goes to court. And if the failure is large, their may be bankruptcies all around.
Add in another problem. The CDS market was highly leveraged - as I understand it, 20 to 1. A small series of defaults results in a large, bad outcome.
Here's an example of the price action, from todays WSJ:
On Monday, many of AIG's bonds traded at levels more reflective of junk bonds that are on the verge of default. Some of the bonds traded at less than 50 cents on the dollar, having fallen from more than 80 cents last week. In the market for derivatives contracts that provide protection against debt defaults, investors were agreeing to pay $2.5 million upfront plus $500,000 annually to hedge against a default of $10 million in AIG's debt over five years, according to data provider CMA DataVision. The cost is so high because sellers of the protection want to be adequately compensated for taking on the risk.
Key point: If a bank owns an AIG bond, and wants to buy insurance, it will cost $2.5 million dollars, plus $500,000 per year to guarantee $10,000,000 in debt over 5 years.
To put this in perspective, to guarantee U.S. Treasury bonds would cost about $25,000 for $10,000,000. By the way, that's up from $21,500 on Friday. So if you had made the guarantee on Friday, you would lose $3,500 if you liquidated it today. That's volatility. Now - if you had only put up about $1,500, you would have lost all your money plus another $2,000. LINK (http://uk.reuters.com/article/companyNews/idUKN15153420080915) (Saying this another way - in this example, you would promise to pay $10,000,000 to a person buying insurance if the treasury bond defaulted. They would pay you $25,000 for doing this. If you suppose the default wouldn't happen, it's like free money. If the default does happen, there is a problem.)
AIG made a lot of these guarantees - but as overall fear in the credit markets increase, the cost to offset a guarantee goes up. Here is a link to some AIG-specific details: LINK (http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080218/REG/794188688)
This goes to the bailout or not question. Bailouts are a problem. But not bailing them out can create lots of other problems.
Another link might be of interest... LINK (http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+January+2008.htm)
This is why I only invest in Land, The price of Dirt never go's down.
Looks like the road is a bit more rocky in Russia.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aIRza4.azeC4&refer=worldwide
Second day they closed the markets early.
greenberetTFS
09-17-2008, 10:09
Col. Sir,
You have very eloquently put so many Americans thoughts into words, indeed.
The only thing I enjoy reading as much as your posts, are posts about guns. Go figure?:o
Holly
echoes,
I sincerely agree with you, JM really does an excellent job on this post....:D
GB TFS :munchin
This will not be a national problem; this financial crisis will effect the entire globe.
Just my .02
TS
Words of wisdom, and well worth reflection.
Today, gold was up $90 an ounce to $870 per ounce. Meanwhile, the Dow has broken important support levels.
The next thing to look for is a run on the dollar; one indicator is an extended increase in the price of gold and other commodities. The next one to watch is the price of bonds. If bonds start going lower, and interest rates higher, then we could be in for some challenging times.
One problem is that the U.S. dollar is the world's reserve currency. We have, in essence, had a very large line of credit that never had to be repaid, all at zero interest. If faith in the dollar cracks among foreign nations, then the value as compared with other currencies will decline - probably a lot. We, the U.S., will wind up paying much higher interest rates to finance our deficits.
There are indications that consumer discretionary spending may be in for a move downward too. But this must surely affect the entire world - from China and Mexico, and many other places as well. Our consumers will suffer distress, purchase less - and thus draw other nations into recession as well.
Kgoerz may do very, very well with his land. Perhaps refugees from Wall Street will offer to work for room and board. (That was an attempt at humor, by the way).
Sweetbriar
09-17-2008, 15:48
How will T-bills do? I put my retirement into them years ago and never got around to putting them back in the market. Growth is always slow, but I was waiting for a correction in the economy....
How will T-bills do? I put my retirement into them years ago and never got around to putting them back in the market. Growth is always slow, but I was waiting for a correction in the economy....
T-bills are the short term variety, with a maturity of a year or less. They should be fine - one of the best and safest places to be, in my opinion. Even if interest rates go up, the new issue each year provides an improved yield.
Longer term bonds may be more problematic. Their long term nature makes them go down quite a lot if interest rates go up significantly.
Short, safe, and liquid are good goals - and you have all three with T-bills.
This is why I only invest in Land, The price of Dirt never go's down.
Sir,
That's what my uncle, (and grandpa before him,) would say.;)
Have to admit, am not too happy at my tax dollars being spent to "bail out" yet another financial institution.
Yet, I will really have a problem if the CEO's DO walk with their multi-million dollar retirement pack's, and the rest of the employees are left holding the bag. Am all for big-business, but think that if my tax dollars are bailing out their poor decision making...it just 'aint right.
Just my humble .02
Holly
echoes,
I sincerely agree with you, JM really does an excellent job on this post....:D
GB TFS :munchin
Indeed Sir! The Col. certainly has a way with words!
Team Sergeant
09-17-2008, 16:37
Cascading effect...... I don't see an end in sight, I do hope those at the helm of this crisis have cool heads.
Clobbered: Dow Plummets 449 on Credit Fears
Credit fears swept Wall Street on Wednesday, pushing the blue chips to their second epic selloff of the week and overshadowing the Fed's emergency takeover of insurance giant American International Group.
Today's Market
The Dow Jones Industrial Average slid 449.36 points, or 4.06% to 10609.66, the Standard & Poor’s 500 dropped 57.22 points, or 4.71%, to 1156.38 and the Nasdaq Composite lost 109.05 points, or 4.94%, to 2098.85. The FOX 50 fell 36.83 points, or 4.21%, to 838.16.
The losses pushed the Dow to its lowest level since November 2005 and the broad S&P 500 to a reading unseen since May 2005.
“Just because the government gave an $85 billion life preserver to AIG doesn’t mean everything is fine. If anything, there is more concern. There are significant credit market fears," said Michael James, senior equities trader at Wedbush Morgan Securities.
http://www.foxbusiness.com/story/markets/futures-fall-aig-bailout/
Red Flag 1
09-17-2008, 17:52
nmap,
Thanks!
I feel we are a nation living on credit/debt...over extended, and praying to not be caught too short.
Folks have already been caught short on housing loans; they were "approved". Is there another shoe?
Lord I hope we have this right!
Jim
CoLawman
09-18-2008, 07:42
Nmap,
Thanks for the reply. Troubling times indeed. It is times like this that I am thankful that I have secure employment. I just never knew I would be doing this job while using a walker!
I need to get on meds or seek counselling as I still have this compulsion to "Buy".
Futures and now we have short selling and then you have naked short-selling.
Why do I get the impression that there are a bunch of people playing the money game that don't have any real money or things?
Dow rises 410, S&P up 50, NASDAQ up 100 at close of market today.
nmap, Is it correct to assume that this article on the governments action, forestalls a world wide depression, caused by the bad bets in the mortgage markets? And is it also true, that the sub prime mortgage market that was created is linked to the Feds willingness to lend banks money without oversight on their balance sheets? If they are both true, is it correct to assume that by creating this new agency, the Government is, in essence, buying out the debt via a guarantee on the American economy and taxpayer?
If these assumptions’ are correct; how then are those who made their bets in this market held responsible. Secondly, would not the Government take possession of the assets as well as the debt? And would the debt be sold off, a la Milkins junk bonds, which create a new market? And the hard assets, would they be sold?
Or, are we, the American people, guaranteeing a bad portfolio with no hard assets and nothing to recover or sell?
http://www.bloomberg.com/apps/news?pid=20601087&sid=aBXk2Zku0B.Y&refer=home
bravo22b
09-19-2008, 07:41
Disclaimer: I am not a finance guy, nor have I ever played one on TV.
My (admittedly limited) understanding of how this might work is that the government would agree to buy assets from these financial institutions that are illiquid because it impossible to put a value on them. If we are talking about the government buying these packages of securitized mortgages, or CDO's (Collateralized Debt Obligation), then the government is indeed buying something that has a hard asset behind it, namely somebody's house. That of course raises a lot of questions about what exactly the government is going to do with all this real estate.
If the government buys these assets, it does a couple of things. One, it gets the assets that are bought off the books of the financial institution. Second, it sets a price for these assets that the financial institutions can then use to assign a value to similar assets that they still hold on their books. This may help them from suffering the type of overnight under-capitalization that seems to be causing all these firms to go belly up.
What seems to be a further, if not well reported, problem is that the paperwork for some of these CDO's is missing. In other words, let's say a given CDO consists of the mortgage debt of 10,000 houses. The person that owns that CDO theoretically should have or have access to the titles for each and every one of those 10,000 houses to prove that they, in fact, own the mortgage. It seems that a lot of this paperwork is lost or did not follow the CDO when it was sold, and maybe even re-sold, several times. So the firms that own these CDO's may not even be able to prove that they actually own the mortgage, preventing them from foreclosing and/or re-selling the property.
It will be interesting to see how this all shakes out. Bill Gross from PIMCO suggested ( I think tongue-in-cheek) that the government buy up millions of houses and then bulldoze them to reduce the over-inventory of houses for sale, thus correcting a large part of the real estate problem in one fell swoop. Maybe he was kidding, but what will happen if the government suddenly finds itself owning millions of homes that may or may not have been foreclosed on, and that they may or may not have title to? Could be interesting.:munchin
ZonieDiver
09-19-2008, 09:37
Biography
An unremarkable civilian with a background in securities brokerage and computer science.
Nmap,
I think you need to consider changing part of the above description. Your analysis is always succinct and enlightening. You simplify very complex problems excellently. There is nothing "unremarkable" about those abilities. If you don't teach about this subject at a university or community college, you may wish to consider it. Thanks for all your time.
An interesting chart.
http://stockcharts.com/charts/historical/djia1900.html
Kinda shows the long term view of things.
nmap, Is it correct to assume that this article on the governments action, forestalls a world wide depression, caused by the bad bets in the mortgage markets? And is it also true, that the sub prime mortgage market that was created is linked to the Feds willingness to lend banks money without oversight on their balance sheets? If they are both true, is it correct to assume that by creating this new agency, the Government is, in essence, buying out the debt via a guarantee on the American economy and taxpayer?
If these assumptions’ are correct; how then are those who made their bets in this market held responsible. Secondly, would not the Government take possession of the assets as well as the debt? And would the debt be sold off, a la Milkins junk bonds, which create a new market? And the hard assets, would they be sold?
Or, are we, the American people, guaranteeing a bad portfolio with no hard assets and nothing to recover or sell?
http://www.bloomberg.com/apps/news?pid=20601087&sid=aBXk2Zku0B.Y&refer=home
1) It may have prevented a depression; keep in mind what Team Sergeant said about a house of cards. That house rests on some key supports, one of which is relatively cheap and available credit. If people and banks hoard cash, because they are afraid they won't get their money back, then credit ceases to be available. Without credit, business activity declines a lot. If money is the blood flowing in our commerce system, the present halt in lending is like a heart attack. It's also worth noting that Bernanke is far more concerned about deflation than inflation. Declining housing prices, the recent decline in commodity prices, and reduced business activity cause some to think that the real threat is deflation - and, from the perspective of fighting deflation, the bailout is probably a good idea. Here is a link to a speech in 2002 by Chairman Bernanke SPEECH (http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm).
The problem is a bit more troubling than just bad bets in the mortgage market - rather, the entire mortgage market was structured so that those originating the mortgages could make a great many loans, including bad loans, with minimum risk to their own capital and with most of the risk transferred to others. After a mortgage broker with no risk exposure made the loans, the loans were sold and packaged as securities few understood. Then, the underwriters (the ones who put the packages together) got bond ratings based on what the creators of those packages told the rating agencies - with NO independent analysis by the rating agencies. Brokers then sold them to investors who trusted the rating agencies. Notice that no one with direct contact with the borrower has any chance to evaluate that borrower. In fact, those who do the transactions make money no matter what the borrower does. The problem is not bad loans, it was (and is) a bad design.
The present system takes the risk away from the banks or other mortgage lenders and transfers part to the borrowers (home buyers) in the form of adjustable rate loans. It also seeks to transfer risk to people who buy packages of loans. Notice that the loan originators have zero risk - and hence, no incentive to be cautious. As long as they can find a borrower (no matter how dubious) and a buyer for the loans, they make money. In essence, the core of the problem is a group of smart people who were either too optimistic, or who bent the truth to their own ends. I suspect it was a little of both.
2) On the second assumption - Fed willingness to lend - it is my understanding that problems with the mortgage loans came first. The rapid escalation in housing prices - far above the level implied by wage rates - was ringing alarm bells some time ago. A fairly obscure paper from 2004 ( HERE (http://www.federalreserve.gov/pubs/feds/2004/200440/200440pap.pdf) ) discusses implementation of a variety of emergency policies, including what we are seeing today. It became (again, according to my understanding) a hot topic in Fed circles along about 2006. The problem is that we had a high-tech stock bubble, which crashed. Greenspan then encouraged a housing bubble to offset the effects of the failed stock bubble. Now we witness the consequences. What pulled the trigger on the housing crises? My (probably biased) suspicion is energy prices. People had trouble with gas prices, then fell behind on their mortgage payments, and the flaws in the system became manifest. That said, I strongly suspect the Fed knew there was a problem long before we did - they just did not want to deflate the bubble because the consequences were likely to be painful.
3) Third assumption - Yes, the U.S. taxpayer is about to make a big guarantee. This will involve a great deal of money; perhaps a big part of a trillion dollars.
4) Those responsible for creating, packaging, and selling these securities will never be held accountable. They have looted the economy - from the borrowers (who share some culpability), to the investment managers of pension funds and other entities that purchased the bonds. The victims include banks and other investors from Japan to Germany to the U.K., as well as in the U.S. Those who did the looting made millions and tens of millions. Were we sharing a cup of coffee, I would probably say some things about the justice they deserve. However - those who bought the securities, especially on behalf of pension funds - share some guilt. The buyer has a responsibility to do their homework. These buyers did not.
5) The debt is an asset. Those mortgages have some value. Perhaps it is only 22 cents on the dollar - as when Merrill Lynch liquidated some of the mortgage securities it held. Given time, the mortgages may have greater value. What if the government has to foreclose on a property? Then the government owns a property, such as a house. This all happened before, back in the late 1980's with the Resolution Trust Corporation. A certain very exclusive neighborhood and country club were owned and managed by the RTC for a time - as were a great many more modest properties.
6) The government could sell the debt, but probably will not. A mass sell-off would drive prices down to low levels, resulting in a greater loss to taxpayers. It would be wiser to hold the debt and, perhaps, repackage it or sell it off gradually. The hard assets, such as houses, will be sold over time.
We, the taxpayers, may come out of this with only (Only! I can't believe I wrote that) a hundred billion lost, and maybe less. We'll probably see some inflation. But our real problem is deeper and more insidious. The market imposes discipline through risk and loss. If an investor makes a poor decision, they lose money - and they avoid doing it again. However, if they make a poor decision and get a bailout, they learn that the risk is small, and the chance for profit is large. Therefore, they do it again. So - wait 15 to 20 years and you will see a repeat performance of the present situation. It will be more expensive and painful. At some point, it becomes too big to bailout, and then a true monetary failure occurs.
Thanks for all your time.
And thank you, Sir, for the kind words.
I did teach computer science to undergraduates at a university in San Antonio for 12 years - perhaps I should change the description from "unremarkable" to "scruffy". :D
nmap, again, thank you so much for taking the time to help me understand this situation a bit more; it's difficult to grasp all the zero's involved, let alone the impact it is having on my small business. Our client base has always been the wall street crowd, we were less than 10% occupied M-Th this past week.
Hopefully, the bailout will stimulate the dinning scene...
ZonieDiver
09-19-2008, 16:30
This is purely anedcotal, but as I drove out of my neighborhood this morning at about 11 - a few hours after the President spoke - there were Realtors at TWO of the several bank-owned properties in my neighborhood. There has been NO activity at these houses for months!
1) It may have prevented a depression; keep in mind what Team Sergeant said about a house of cards. That house rests on some key supports, one of which is relatively cheap and available credit. If people and banks hoard cash, because they are afraid they won't get their money back, then credit ceases to be available. Without credit, business activity declines a lot. If money is the blood flowing in our commerce system, the present halt in lending is like a heart attack. It's also worth noting that Bernanke is far more concerned about deflation than inflation. Declining housing prices, the recent decline in commodity prices, and reduced business activity cause some to think that the real threat is deflation - and, from the perspective of fighting deflation, the bailout is probably a good idea. Here is a link to a speech in 2002 by Chairman Bernanke SPEECH (http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm).
The problem is a bit more troubling than just bad bets in the mortgage market - rather, the entire mortgage market was structured so that those originating the mortgages could make a great many loans, including bad loans, with minimum risk to their own capital and with most of the risk transferred to others. After a mortgage broker with no risk exposure made the loans, the loans were sold and packaged as securities few understood. Then, the underwriters (the ones who put the packages together) got bond ratings based on what the creators of those packages told the rating agencies - with NO independent analysis by the rating agencies. Brokers then sold them to investors who trusted the rating agencies. Notice that no one with direct contact with the borrower has any chance to evaluate that borrower. In fact, those who do the transactions make money no matter what the borrower does. The problem is not bad loans, it was (and is) a bad design.
The present system takes the risk away from the banks or other mortgage lenders and transfers part to the borrowers (home buyers) in the form of adjustable rate loans. It also seeks to transfer risk to people who buy packages of loans. Notice that the loan originators have zero risk - and hence, no incentive to be cautious. As long as they can find a borrower (no matter how dubious) and a buyer for the loans, they make money. In essence, the core of the problem is a group of smart people who were either too optimistic, or who bent the truth to their own ends. I suspect it was a little of both.
2) On the second assumption - Fed willingness to lend - it is my understanding that problems with the mortgage loans came first. The rapid escalation in housing prices - far above the level implied by wage rates - was ringing alarm bells some time ago. A fairly obscure paper from 2004 ( HERE (http://www.federalreserve.gov/pubs/feds/2004/200440/200440pap.pdf) ) discusses implementation of a variety of emergency policies, including what we are seeing today. It became (again, according to my understanding) a hot topic in Fed circles along about 2006. The problem is that we had a high-tech stock bubble, which crashed. Greenspan then encouraged a housing bubble to offset the effects of the failed stock bubble. Now we witness the consequences. What pulled the trigger on the housing crises? My (probably biased) suspicion is energy prices. People had trouble with gas prices, then fell behind on their mortgage payments, and the flaws in the system became manifest. That said, I strongly suspect the Fed knew there was a problem long before we did - they just did not want to deflate the bubble because the consequences were likely to be painful.
3) Third assumption - Yes, the U.S. taxpayer is about to make a big guarantee. This will involve a great deal of money; perhaps a big part of a trillion dollars.
4) Those responsible for creating, packaging, and selling these securities will never be held accountable. They have looted the economy - from the borrowers (who share some culpability), to the investment managers of pension funds and other entities that purchased the bonds. The victims include banks and other investors from Japan to Germany to the U.K., as well as in the U.S. Those who did the looting made millions and tens of millions. Were we sharing a cup of coffee, I would probably say some things about the justice they deserve. However - those who bought the securities, especially on behalf of pension funds - share some guilt. The buyer has a responsibility to do their homework. These buyers did not.
5) The debt is an asset. Those mortgages have some value. Perhaps it is only 22 cents on the dollar - as when Merrill Lynch liquidated some of the mortgage securities it held. Given time, the mortgages may have greater value. What if the government has to foreclose on a property? Then the government owns a property, such as a house. This all happened before, back in the late 1980's with the Resolution Trust Corporation. A certain very exclusive neighborhood and country club were owned and managed by the RTC for a time - as were a great many more modest properties.
6) The government could sell the debt, but probably will not. A mass sell-off would drive prices down to low levels, resulting in a greater loss to taxpayers. It would be wiser to hold the debt and, perhaps, repackage it or sell it off gradually. The hard assets, such as houses, will be sold over time.
We, the taxpayers, may come out of this with only (Only! I can't believe I wrote that) a hundred billion lost, and maybe less. We'll probably see some inflation. But our real problem is deeper and more insidious. The market imposes discipline through risk and loss. If an investor makes a poor decision, they lose money - and they avoid doing it again. However, if they make a poor decision and get a bailout, they learn that the risk is small, and the chance for profit is large. Therefore, they do it again. So - wait 15 to 20 years and you will see a repeat performance of the present situation. It will be more expensive and painful. At some point, it becomes too big to bailout, and then a true monetary failure occurs.
So, basically if I'm greedy or an idiot. Ill be OK. If I'm responsible and don't over extend myself. I pay for people who do. What a sorry state we are in.
nmap what do you make of some republicans, to include McCain and Palin that think the bailout is the wrong way to go? I heard on the Neil Cavuto show today that there are quite a few republicans that are going to try and block the passage of this bailout plan.
I for one think the private companies should be held accountable, but with my limited knowledge of the intricacies of this type of thing, what happens if the bailout is blocked? What does that mean for the rest of us.
Another note, Pelosi is trying to get the POTUS to sign another $50B stimulus package. I don't know about you all, but I don't need another stimulus check at the cost of hurting the economy even more than it is right now.
Jack Moroney (RIP)
09-20-2008, 05:07
I for one think the private companies should be held accountable.
I agree, this is not something that should be about regulation as much as it should be about accountability. This is a major step towards becoming a social society and folks need to understand that capitalizism has its ups and downs. This is a down side whose sole answer is not more regulation but more accountability. Let's see how creative some of the MBAs can be making license plates, breaking rocks, and rebuilding the country's infrastructure. Do you know what the term GAAP means? It is the field manual that financial management wizards go by and it stands for Generally Accepted Accounting Principles. Now that alone should make you wonder that if they operate by Generally Accepted Principles and not by something a little more concrete that there is an awful lot of leeway for creative financing-just a thought. I also get a chuckle out of the term "goodwill" in annual financial statements that pops up in many big companies reports. Essentially this is means that because they are thought to be just a bunch of folks who have a solid reputation that the value of their balance sheet is allowed be higher than the actual dollar value of their assets. Now I do not know about you but the last time I obtained a mortgage no one told me because I was tall, good looking, neat, articulate, and had a full head of hair that reflected goodwill I should be able to handle a loan greater than my ability to repay. I am with you, we need to see a whole lot of jail time and before someone redistributes what little "wealth" I have those who go to jail over this need to have the wealth that they amassed at the expense of those that followed the rules siezed and put back in the treasury to pay down the debt we have just increased by not holding folks accountable.
I agree, this is not something that should be about regulation as much as it should be about accountability. This is a major step towards becoming a social society and folks need to understand that capitalizism has its ups and downs. This is a down side whose sole answer is not more regulation but more accountability. Let's see how creative some of the MBAs can be making license plates, breaking rocks, and rebuilding the country's infrastructure. Do you know what the term GAAP means? It is the field manual that financial management wizards go by and it stands for Generally Accepted Accounting Principles. Now that alone should make you wonder that if they operate by Generally Accepted Principles and not by something a little more concrete that there is an awful lot of leeway for creative financing-just a thought. I also get a chuckle out of the term "goodwill" in annual financial statements that pops up in many big companies reports. Essentially this is means that because they are thought to be just a bunch of folks who have a solid reputation that the value of their balance sheet is allowed be higher than the actual dollar value of their assets. Now I do not know about you but the last time I obtained a mortgage no one told me because I was tall, good looking, neat, articulate, and had a full head of hair that reflected goodwill I should be able to handle a loan greater than my ability to repay. I am with you, we need to see a whole lot of jail time and before someone redistributes what little "wealth" I have those who go to jail over this need to have the wealth that they amassed at the expense of those that followed the rules siezed and put back in the treasury to pay down the debt we have just increased by not holding folks accountable.
Sir, you hit the nail on the head. What really has my blood boiling is some of these azzhats are walking away with millions of dollars. I heard the guy from AIG is getting $68M, and the guy who worked at either freddie or fannie is walking away with $7M and he was only there for about three months. If the government would prevent these guys from obtaining their "golden parachutes" then would we need $1T to bail out the industry. I don't know about you but I think the $75M mentioned would go along way towards this problem, not to mention what all the other "leaders of industry" have walked away with.
I am truly glad McCain believes these guys should be held accountable and not be bailed out. And what is Obama's plan??? Oh I forgot, he doesn't have one and once again has essentially voted "present" instead of taking a tough stand that might anger some people, notably his rich friends, who are willing to pay $28K a plate for the luxury of having dinner with him. That is more than my son makes and he has spent the last 2 years of his life getting his butt shot at in Iraq. Makes me sick.
greenberetTFS
09-20-2008, 10:55
I agree, this is not something that should be about regulation as much as it should be about accountability. This is a major step towards becoming a social society and folks need to understand that capitalizism has its ups and downs. This is a down side whose sole answer is not more regulation but more accountability. Let's see how creative some of the MBAs can be making license plates, breaking rocks, and rebuilding the country's infrastructure. Do you know what the term GAAP means? It is the field manual that financial management wizards go by and it stands for Generally Accepted Accounting Principles. Now that alone should make you wonder that if they operate by Generally Accepted Principles and not by something a little more concrete that there is an awful lot of leeway for creative financing-just a thought. I also get a chuckle out of the term "goodwill" in annual financial statements that pops up in many big companies reports. Essentially this is means that because they are thought to be just a bunch of folks who have a solid reputation that the value of their balance sheet is allowed be higher than the actual dollar value of their assets. Now I do not know about you but the last time I obtained a mortgage no one told me because I was tall, good looking, neat, articulate, and had a full head of hair that reflected goodwill I should be able to handle a loan greater than my ability to repay. I am with you, we need to see a whole lot of jail time and before someone redistributes what little "wealth" I have those who go to jail over this need to have the wealth that they amassed at the expense of those that followed the rules siezed and put back in the treasury to pay down the debt we have just increased by not holding folks accountable.
JM,
As usual your right on target.....:D
GB TFS :munchin
nmap what do you make of some republicans, to include McCain and Palin that think the bailout is the wrong way to go? I heard on the Neil Cavuto show today that there are quite a few republicans that are going to try and block the passage of this bailout plan.
I for one think the private companies should be held accountable, but with my limited knowledge of the intricacies of this type of thing, what happens if the bailout is blocked? What does that mean for the rest of us.
I think there are some real issues about the free market, risk, and fundamental principles. There is a question about how much risk actually exists.
If the bailout is blocked, it seems likely that some banks will fail, and that the flow of credit to businesses and individuals will slow substantially. In addition, regulated companies, such as insurance companies, that include the troubled securities in their portfolios could fail. This implies less economic activity, both in the U.S. and globally. That can lead to business failures, increased levels of unemployment, and, perhaps, increased rates of default on mortgages and other debt instruments. In the process, more homes will be foreclosed on and more people evicted. This could result in further declines in the value of debt securities, stocks, houses, and so forth. Thus, we might see a cascading effect that could expose a great many people to a lot of discomfort. From a political perspective, this might not be a viable solution.
Could the situation be less serious than I've outlined? Of course. However, given the statements and actions by Secretary Paulson, Chairman Bernanke, and others, it seems that matters may be fairly serious.
McCain and Palin may think the consequences are overstated. Perhaps they think some financial distress now lets the market correct excesses without burdening the taxpayer. Or, they may think this bailout is merely the first step in a series of bailouts that will load the taxpayer excessively. There is also the issue of incremental socialism versus free markets. Inherent in the free market is "creative destruction". Existing allocations of resources, such as money and labor, are changed to better (more profitable) uses. By keeping inefficient organizations alive, we prevent the movement of resources to better, more productive organizations. Thus, the pain today leads to gain tomorrow. This vision of tomorrow contrasts with people losing their jobs, homes, and businesses today.
So - as a policy maker, what is best? At what point should there be interventions and bailouts? Add to this that no one really knows how matters will develop, so decisions are made based on ambiguous data. I do not see this as an easy decision for any leader.
Then we have the companies and accountability. Colonel Moroney makes the point that individual accountability needs to exist - not just corporate accountability. In the case of Fannie Mae, shareholders have been devastated. The same is true of Lehman, AIG, and others. Those responsible may lose their jobs, but little else. Without a doubt, some individuals should learn the finer points of license plate production.
Deep down, though, I think the real problem is implicit assumptions - the assumptions we make without thinking. We've all heard the idea that house prices always go up, and that they never go down. Now, consider - if that is true, then creating a mortgage with nothing down, and that the buyer cannot support, is NOT risky. The property may be foreclosed on and resold, the original mortgage will be paid off with the proceeds, and the securities based on the mortgage will remain viable. It gets worse. For awhile, houses were increasing in value rapidly. An unqualified borrower could borrow the entire sum, make a few payments, then get an additional loan on the appreciated value. The borrower had a bigger loan, but had the house, cash in their pocket, new cars, luxury vacations, and so forth. This is a classic case of expecting something for nothing. But notice - no one disputed the assumption that houses always go up. Greenspan did not. No politician or businessman stepped forward. No one argued against the accepted viewpoint. Thus, we come to grief. Can we blame unsophisticated borrowers for believing what so many repeated? Perhaps not. The more intelligent and better educated investment bankers should, perhaps, have known – but going against commonly held beliefs is never easy.
One might be tempted to ask what other implicit assumptions we depend on, and where they might be leading us. But that is something for another time.
The provisions of the bailout have been reported, and are available at: LINK (http://www.foxnews.com/story/0,2933,425672,00.html)
Of particular interest:
Sec. 6. Maximum Amount of Authorized Purchases.
The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time
This seems to imply no absolute limit. Thus, the entire $5 trillion dollar portfolio of Fannie Mae and Freddie Mac might be acquired in $700 Billion pieces.
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
This seems to give a great deal of power to the Secretary.
Will this result in a decline in the dollar? Quite possibly. Will it increase the national debt? Sure.
However, in time, the Treasury might sell the securities at a profit.
(The Politico) How much will the Mother-Of-All-Bailouts cost U.S. taxpayers?
Here's a very quick sketch gleaned from the info available:
It could be $500 billion to $1 trillion, says Ala. Sen. Richard Shelby, among the most skeptical of the Congressional Republicans briefed last night by Fed chief Ben Bernanke and Treasury Secretary Hank Paulson.
That's roughly the price range of the Iraq War, which has cost taxpayers about $500 billion so far - plus $600 million in interest payments -- and another $280 million to replenish military equipment, according to estimates by economists earlier this year.
So much for President Bush's dream of eradicating the nearly $500 billion budget deficit by 2012.
But there's a possible platinum lining. The mortgage-backed securities likely to be bought by Treasury (which is likely to be the initial purchaser, according to reports) are not without value. They are just impossible to value by a panicky, pessimistic market. When (or if) the market stabilizes, prices might actually rise and the government could actually profit from the most innately valuable of the securities that are bought.
Of course, that could take years -- and the massive borrowing required to backstop the markets could spike inflation in the near or medium term, economists say.
Stay tuned.
LINK (http://www.cbsnews.com/stories/2008/09/19/politics/politico/thecrypt/main4459802.shtml)
Interesting times.
It seems that banks in the Middle East hold some of our bad paper, and will gain from the bailout.
LINK (http://www.bloomberg.com/apps/news?pid=20601087&sid=aD6Zyk4vHgM8&refer=home)
Emaar Properties PJSC, the Middle East's biggest publicly traded real-estate company, had its biggest gain since listing in March 2000, data compiled by Bloomberg show. National Bank of Abu Dhabi PJSC rose the most in almost eight months and Zain gained after raising $4.49 billion through a capital increase.
``The Fed's bailout will write off bad debt which is great news and gives banks the opportunity to recover,'' said Haissam Arabi, a Dubai-based managing director of asset management at Shuaa Capital PSC who oversees $1.8 billion.
Sir, you hit the nail on the head. What really has my blood boiling is some of these azzhats are walking away with millions of dollars. I heard the guy from AIG is getting $68M, and the guy who worked at either freddie or fannie is walking away with $7M and he was only there for about three months. If the government would prevent these guys from obtaining their "golden parachutes" then would we need $1T to bail out the industry. I don't know about you but I think the $75M mentioned would go along way towards this problem, not to mention what all the other "leaders of industry" have walked away with.I'm pretty sure the execs from Freddie, Fannie and AIG will NOT be leaving with their "Golden Parachutes" (severance packages)...
On February 6, 1996, the Federal Deposit Insurance Corporation (FDIC) issued a final rule that restricted troubled banks, thrifts, and holding companies from making golden parachute payments. Exceptions to the rule are allowed for individuals who have qualified for pension and retirement plans. Other exceptions permit the FDIC to enforce the spirit of the law by allowing legitimate payments but stopping payments that might be considered abusive or improper. The rule also prevents FDIC-insured institutions from paying the legal expenses of employees who are the subject of related enforcement proceedings. The rule went into effect on April 1, 1996.
Stay safe.
It seems that the bailout is going to be modified. It will now be larger, and cover additional classes of debt.
The U.S. Treasury submitted revised guidance to Congress on its plan a day after first submitting it, as lawmakers and lobbyists push their own ideas. Officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.
The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset. That may force an eventual increase in the size of the package as Democrats and Republicans in Congress negotiate the final legislation with the Bush administration, analysts said.
``The costs of the bailout will be significantly higher than originally considered or acknowledged,'' said Josh Rosner, an analyst with independent research firm Graham Fisher & Co. in New York. ``How, given these changes, can the administration and Federal Reserve believe they are being forthright in their unrevised expectation of future losses?''
LINK (http://www.bloomberg.com/apps/news?pid=20601087&sid=aYXtwpG9mw9g&refer=home)
Car debt? Student loans? Credit card debt?
I begin to wonder whether this is a joke, or some strange insanity that has gripped the nation's capital.
I'm pretty sure the execs from Freddie, Fannie and AIG will NOT be leaving with their "Golden Parachutes" (severance packages)...
On February 6, 1996, the Federal Deposit Insurance Corporation (FDIC) issued a final rule that restricted troubled banks, thrifts, and holding companies from making golden parachute payments. Exceptions to the rule are allowed for individuals who have qualified for pension and retirement plans. Other exceptions permit the FDIC to enforce the spirit of the law by allowing legitimate payments but stopping payments that might be considered abusive or improper. The rule also prevents FDIC-insured institutions from paying the legal expenses of employees who are the subject of related enforcement proceedings. The rule went into effect on April 1, 1996.
Stay safe.
I see your point, but since that is indeed the law, how have all these companies been able to give the CEOs that run their companies into the ground all this money at their departure? Do they classify it something other than the golden parachute so that they can get away with breaking the law?
I’m not sure who said this: “All great wealth is based on/in larceny.”
Some things never change, as illustrated by this:
----------------------------------------------
"The commercial world is very frequently put into confusion by the bankruptcy of merchants, that assumed the splendour of wealth only to obtain the privilege of trading with the stock of other men, and of contracting debts which nothing but lucky casualties could enable them to pay; till after having supported their appearance a while by tumultuary magnificence of boundless traffic, they sink at once, and drag down into poverty those whom their equipages had induced to trust them."
Samuel Johnson, English author, "Rambler #189," January 7, 1752.
------------------------------------
Sound familiar?
The Reaper
10-01-2008, 17:05
First, I blame Congress, principally the Dims, for pushing for easy credit and NINJA loans.
Second, I say bring back Debtor's prison for the CEOs who allow criminal activities on their watch.
TR
Team Sergeant
10-06-2008, 12:58
Here's more of the cascading effect I was talking about, its going to get worse..... Remember this happened "after" the $700 billion bailout...
Monday Mayhem: Dow Plunges 700 Points
The Dow plummeted more than 700 points and the Nasdaq Composite lost more than 8% of its value Monday afternoon as U.S. markets reached session lows.
Triggered by global credit fears and worries of a U.S. recession, the sea of red left the Dow below the psychologically-important 10,000 level for the first time in nearly four years.
Today's Market
As of 2:30 p.m. EDT, the Dow Jones Industrial Average slid 715.95 points, or 6.92%, to 9612.93. The broader S&P 500 Index lost 83.71 points, or 7.62%, to 1015.52 while the Nasdaq Composite fell 156.22 points, or 7.93%. to 1792.96. The consumer-friendly FOX 50 dropped 54.97 points, or 6.68%, to 767.70.
"It's very serious. This has all the makings of a good Black Monday," said Frank Davis, director of sales and trading at LEK Securities.
The selloff was well shy of the 22% the index lost on Black Monday in October 1987. However, on a point basis the blue chips were on pace for their largest lead since last Monday's record 778-point plunge.
Still, Monday marked the second time in a week the blue-chip index has suffered a loss of 700 points or greater.
http://www.foxbusiness.com/story/markets/european-turmoil-hits-stock-futures/
/* **** Attempt at humor: ON *** */
Well, I hope everyone who opposed the bailout is happy now. See what you've done? If we had acted earlier, none of this would have happened.
/* **** Attempt at humor: OFF *** */
Seriously, we have violated all manner of technical support. Dow Theory indicates a full-blown bear market. We have penetrated the 50% level of the move from the 7300 level years ago. The trend is down on all the averages.
Perhaps more problematic, the bond market is also projecting more problems - and it tends to be more sensitive than the stock market. More accurate, too.
We have a commodity sell-off, with almost everything but gold headed down. It is my understanding that this represents large-scale liquidation in order to acquire dollars and settle debts - especially debts on credit default swaps. The Baltic Dry Index provides some insight into trends in world trade - and it, too, is headed into the basement.
It appears we will get one of those generational buying opportunities. In the meantime, we may get to observe panic. The cascade effect mentioned by Team Sergeant (which I agree with completely, by the way) is likely to have an adverse effect on the global and domestic economy, employment, and finance. People often have limited funds available to cover their expenses during periods of unemployment, which may create a policy challenge for government at all levels.
It will be interesting to observe the behavior of our politicians. In California, there is discussion of using the pension fund as a source of funds for an existing cash-crunch. But if the present credit lock-up continues, California and other governments will remain unable to sell short-term paper; the consequences to retirees might be unpleasant.
Interesting times.
:munchin
/Perhaps more problematic, the bond market is also projecting more problems - and it tends to be more sensitive than the stock market. More accurate, too.
We have a commodity sell-off, with almost everything but gold headed down. It is my understanding that this represents large-scale liquidation in order to acquire dollars and settle debts - especially debts on credit default swaps. The Baltic Dry Index provides some insight into trends in world trade - and it, too, is headed into the basement.:munchin
nmap,
You are so very wise in your assesments...Thank You for sharing them!:)
Some of the bond and commodity folks I used to work with at MS would agree with your above projections, I am sure.
Can remember sitting out on a bench across the street from my office in La Jolla, staring at the sea, on days like today.
At least the Dow tried to rally, and only lost 360+/- for the day.
Well, am seeing cuts in certain States funding for projects to help the disabled comming. Sooner, rather than later.
Interesting times indeed nmap.:munchin
Holly