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Thread: Wall Street Financial Crisis

  1. #691
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    I watched the hearings, these people are unbelievable arrogant. When they call themselves "market makers" what they are talking about is the derivatives market. This market didn't even really exist until the 90's. We managed to get along just fine without it.

    It's a market for the banks and no one else. And they managed to burn the house down with their greed and recklessness. $600 Trillion? Who the hell needs all that funky paper floating around?

    I can live with business's need to hedge against risk. But banks should be limited to their own level of exposure to that risk, not just betting the markets. Especially when they are the ones that created that market, and the only ones that understand the risks.

    Goldman saw the crash coming, and bet about 60% of their value shorting real estate derivatives through credit default swaps. They made a killing, well beyond their level of exposure. Of course it didn't hurt having a former Goldman CEO as Treasury Secretary when he paid off those CDS's from the TARP money.

    They were betting that the very derivatives they were pushing to investors were going to fail. In some cases they were designed to fail. They bundled sub-prime and alt-A mortgages into AAA rated paper by leaning on the CRA's, and then had the gall to claim that the investors that bought this paper "wanted" that level of risk.

    If it was up to me, there would be heads on pikes all the way down Wall Street.
    Last edited by highsea; 05 May 10, at 03:53.

  2. #692
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    Quote Originally Posted by highsea View Post
    If it was up to me, there would be heads on pikes all the way down Wall Street.
    Well said. The derivative products those 30+ year olds created were disease ridden instruments created in Excel and not at all understood by their superiors.

  3. #693
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    The economic predictions made by Gary J. Pernice of the Platinum Business Group, LLP back in 2009 seem to have come true. Writing in the New York Times, Gary Pernice said that he expected tough times ahead and that is exactly what we’ve gotten. “I concur with Mr. Hands’ assessment that equity funds are not dead, but they certainly are and will likely remain very anemic for the foreseeable future," Pernice said.

    "We are not seeing much lending going on from banks and traditional funding sources. Rather, we anticipate a very, very slow recovery. The primary concern from our perspective is with the significant government (Congress) overreaching and massive government spending that shall certainly cause heartburn in the trenches for years to come."

    Gary Pernice
    Platinum Business Group, Ltd
    Gary J Pernice

    full article here

  4. #694
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    I have been reading quite a bit about the tarp costs being far lower than expected. If the numbers reported hold true this will be looked at quite differently by history than by us. If we managed to prevent the collapse of our banking system for under 100 billion it will be money well spent.

  5. #695
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    Quote Originally Posted by Roosveltrepub View Post
    I have been reading quite a bit about the tarp costs being far lower than expected. If the numbers reported hold true this will be looked at quite differently by history than by us. If we managed to prevent the collapse of our banking system for under 100 billion it will be money well spent.
    Unless banks continue with risky behavior b/c they know DC will bail them out, in which case subsequent financial crises will have to be added to the tab.
    "So little pains do the vulgar take in the investigation of truth, accepting readily the first story that comes to hand." Thucydides 1.20.3

  6. #696
    Armchair Worrier Senior Contributor bolo121's Avatar
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    Shek, I think in such a case you need to take a leaf out of China's book. Save the bank but execute or imprison (along with seizing all their assets) senior bankers.
    For Gallifrey! For Victory! For the end of time itself!!

  7. #697
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    Quote Originally Posted by Shek View Post
    Unless banks continue with risky behavior b/c they know DC will bail them out, in which case subsequent financial crises will have to be added to the tab.
    I think they will continue to because their compensation isn't at risk. That isn't the case with Goldman and is why they weathered this crisis so much better. We seem to be bouncing from banking crisis to banking crisis. Bonds- SL- IPOs- Subprime. I think till compensation isn't so insulated from risk the question is what will the next crisis be.

  8. #698
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    Quote Originally Posted by Roosveltrepub View Post
    That isn't the case with Goldman and is why they weathered this crisis so much better.
    You don't think Hank Paulson's decision to make good $7 Billion in AIG CDO's to Goldman had anything to do with it?

    No conflict of interest there- Treasury Secretary former CEO of Goldman is sitting on $200 Million in Goldman stock, and they are made whole at the taxpayer's expense.

    You think TARP won't end up costing much, but you're not counting on the interest on those treasuries. Fed prints a trillion dollars, gives it to the banks at zero interest, banks give it to the treasury to fund government spending, treasury pays 3% interest to the banks, who then return the principal to the Fed. All done on computer, of course. The money never left the Federal Reserve Banks. It's sitting there on pallets to this day.

    Taxpayer foots the bill in interest on the debt, gov't proclaims TARP huge success. If you or I did that Rosie, they'd call it kiting and put us in jail.
    "We will go through our federal budget – page by page, line by line – eliminating those programs we don’t need, and insisting that those we do operate in a sensible cost-effective way." -President Barack Obama 11/25/2008

  9. #699
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    October 14, 2010, 7:30 pm
    How Wall Street Hid Its Mortgage Mess
    By WILLIAM D. COHAN

    William D. Cohan on Wall Street and Main Street.

    Tags:
    financial crisis, Financial Crisis Inquiry Commission, mortgages, Wall Street


    The conventional wisdom has it that the Financial Crisis Inquiry Commission — the bipartisan group of wise men and women charged with uncovering what caused our recent economic meltdown and telling us what should be done to prevent a recurrence — is woefully out-of-touch and out-of-date. A Times article last month suggested that “an exodus of senior employees” from the commission and “internal disagreements” among those remaining could hamper efforts to produce a meaningful and useful report, which is due to be published in December.

    But the conventional wisdom is often wrong, and this time will be no exception. I predict that not only will the commission’s report — and accompanying documents — reveal numerous causes of the crisis that others have overlooked, but also that it will have a significant impact on the regulations that still must be written by the Securities and Exchange Commission and the Treasury as part of the implementation on the Dodd-Frank financial reform law. In fact, the inquiry commission may have already played an essential role in beginning to bring fraudsters to justice.

    A much-derided federal panel has produced clear evidence that investment banks kept secret from their clients the shaky nature of many mortgage-backed securities.
    Consider what was revealed at one of the commission’s regional hearings, held in Sacramento on Sept. 23. Part of the hearing focused on the role that Clayton Holdings, a firm that reviews loan files on behalf of investment banks, played in the mortgage securitization process by which one home mortgage after another got packaged up into mortgage-backed securities by Wall Street and sold to investors all over the world. The banks hired Clayton to do some forensics — to examine the mortgages that went into the securities and determine if they complied with some basic level of credit underwriting guidelines and “client risk tolerances,” as well as with state and local laws. If a loan met the underwriting “guidelines,” Clayton would rate the loan “Event 1”; other ratings meant that the loan did not meet the guidelines, with varying degrees of flaws.

    According to Vicki Beal, a senior vice president at Clayton who testified at the Sacramento hearing, one of the main services Wall Street paid Clayton for was a detailed examination of the loans that deviate “from seller underwriting guidelines and client tolerances.”

    This is where things got interesting. Clayton provided the inquiry commission with documents that summarized its findings for the six quarters between January 2006 and June 2007, when mortgage-underwriting standards were arguably at their worst and the housing bubble was inflating rapidly. Of the 911,039 mortgages Clayton examined for its Wall Street clients — a sample of about 10 percent of the total mortgages that the banks intended to package into securities — only 54 percent were found to meet the underwriting guidelines. Standards deteriorated over time, with only 47 percent of the mortgages Clayton examined meeting the guidelines by the second quarter of 2007.

    So, did Wall Street throw all those mortgages back into the pond as being too risky for securities they were going to sell to clients? Of course not — many were packaged right into their product. There were degrees of nefariousness: Some Wall Street firms were better about including higher-quality mortgages in their mortgage-backed securities than others. For instance, at Goldman Sachs, 77 percent of the nearly 112,000 mortgages reviewed met the guidelines, while at Citigroup only 58 percent did. At Lehman Brothers, which later filed for bankruptcy, 74 percent of the mortgages sampled and then packaged up as securities met underwriting guidelines.

    In fact, the banks probably weren’t disappointed at all by the shaky status of many of these loans: in part because they could use the information that some of the mortgages were rotten to get a discount from the mortgage originators on the price paid for the entire portfolio. The people who should have been concerned were the investors who bought the securities from the Wall Street firms. But the amazing revelation of the Sacramento hearing was that the investment banks did not pass this very valuable information on to their customers.

    “Investors were not given sufficient information to make the decisions that they needed to make to see if they were going to buy these securities,” testified Kurt Eggert, a professor at Chapman University School of Law in Orange, Calif. “They should have been given loan-level detail for every pool for which securities were issued. Current loan-level detail, not what was true weeks ago or a month ago. Instead, they got vague, boilerplate language about ‘underwriting,’ and that there were ‘substantial exceptions,’ whatever that means. They should have gotten the due diligence reports that we just heard described. Those reports existed. The exceptions were described and defined. Why weren’t investors given that information which was in the hands of the people that were selling the securities? Why weren’t they given the underwriting reports by the originators who knew what exceptions were given and why?”

    These are very good questions. And while we await the Financial Crisis Inquiry Commission’s answers, the good news is that the news media have begun to pick up on the outrageous behavior its hearing revealed. The Times’ Gretchen Morgenson reported on that Clayton Holdings had in fact offered to make its data available to the three ratings agencies that rated mortgage-backed securities, but that each rejected Clayton’s offer. It seems they feared that if they revealed the flaws in the underwriting of the mortgages, they would lose other business from the investment banks that put the mortgage-backed securities together.

    On Monday, Eliot Spitzer, the former New York governor turned talk-show host, called the inquiry commission’s revelations “fraud, plain and simple,” and said there is “a basis without any question for the most rigorous examination” of why Wall Street failed to disclose this valuable information to investors. His guest on CNN’s “Parker Spitzer”show that night was Joshua Rosner, a managing director at Graham Fisher & Co., an independent research firm. Mr. Rosner agreed with Spitzer’s assessment and said, “This is what happens when the children are in charge.” On Wednesday, Felix Salmon, a business columnist at Reuters, wrote that “if I was one of the investors in one of these pools, I’d be inclined to sue for my money back. Prosecutors, too, are reportedly looking at these deals, and I can’t imagine they’ll like what they find.”

    So far, not a soul on Wall Street has been found to be criminally liable for the practices that led to the financial crisis. But thanks, in part, to the Financial Crisis Inquiry Commission, we are getting closer than ever to the day when the culprits will pay for what they did.

    ——————
    UPDATE, Oct. 15, 4:00 p.m.: In a surprising turn of events, Paul Bossidy, Clayton’s chief executive, wrote this letter to the F.C.I.C. on September 30, a week after the hearing, disavowing Beal’s sworn testimony.
    So, the rating agencies wanted to be ignorant and the Banks knew the risks but used legalese to both deny and aknowledge them and systenatically lied

  10. #700
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    [B]Dr Yellen Takes Charge[/B]

    My piece on the new Fed Chair


    What did we know, and when did we know it has become the cliché of forensic policy analysis. In the late summer of 2008, as the US financial markets lurched into their worst crisis in 75 years, Federal Reserve Board Governors struggled to make sense of the seemingly benign economic indicators available to them at the time.

    The IMF warned in April 2008 that the US was heading into recession, an unusually accurate albeit grossly understated prediction. By September, the Fed’s attention was focused on the pending and then actual collapse of major financial institutions and rapidly freezing of credit flows. Yet, the economy looked good, perhaps a bit soft but nothing to worry about. Unemployment had bumped up from 4.5% to 6.1% between the second quarter of 2007 and the latest available data (August 2008). Inflation was the main concern, reaching 5.5% in July.

    Opening the Fed’s lending gates, what they thought at the time was an appropriate response to investor panic, might have given them pause. The graph shows borrowings by financial institutions from the Federal Reserve.

    The first bar shows the average $580 million borrowed each month in the 87 years to the end of 2006. The second is the highest previous record, $8 billion in August 1984. Then, the Ides of March arrived.

    In the week of March 17-21, 2008, borrowing soared to more than $19 billion, 185 times the previous week’s level. Something broke, but we didn’t know what or exactly how bad it would become. Demand for the Fed’s money would eventually reach a monthly record $437.5 billion seven months later, and remain above the $1 billion a month level until December 2013.

    Recently released notes from Fed meetings held at the time show then-Chairman Ben Bernanke warning of the dangers of a recession. Inflation hawks, alarmed at the rapid rise in prices, prevented any quick interest rate cut. San Francisco Federal Reserve Board President Janet Yellen, now holding Dr Bernanke’s seat, argued for much stronger action to shore up the economy and the financial system.

    The lady takes charge
    Dr Yellen brings to the job the kind of background one could only dream of in a world class central banker. Educated at Brown and Yale; teaching at Harvard, Berkeley and LSE. Wife of 2001 Nobel economics laureate George Akerlof and mother of another economics professor. She is the first woman to head the Fed, and the first Democrat since Paul Volcker (1979-87). She and Dr Volcker are also the shortest and tallest to hold the position, respectively.

    Her work at the Fed began in 1971, then after 19 years in academia, Bill Clinton tapped her to chair his Council of Economic Advisers. She was named a Fed Governor in 1994, president of the San Francisco “branch” in 2004, a member of the powerful Federal Open Market Committee in 2009 and Vice Chair in 2010. In short, she has more experience than either Bernanke or Alan Greenspan.

    As early as 2005, Dr Yellen began warning about the dangers of a housing bubble, although in those early days she suspected the economy could ride out “a good sized bump in the road.” Analysis by the The Wall Street Journal rated her as the best economic forecaster of the 14 Fed members between 2009 and 2012.

    She has spoken out against inflation targeting as lacking credibility, as any such policy would undoubtedly be reversed if more pressing macroeconomic conditions demanded a change in focus. However, she appears to be willing to consider targeting nominal economic growth. Her preference is for setting tough financial sector capital requirements and closely monitoring – and if necessary, intervening to dampen – risk-taking.

  11. #701
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    Dor:

    Nicely written and informative. What's your take away on her? Her forecasting ability has been challenged, particularly as to the aftermath of the housing bubble.

    January 22, 2007 at a speech to the Joint Rotary Clubs of Reno and the East Bay (SF Bay Area)
    Reno, Nevada, Yellen said:

    While the decline in housing activity has been significant and will probably continue for a while longer, I think the concerns we used to hear about the possibility of a devastating collapse—one that might be big enough to cause a recession in the U.S. economy—have been largely allayed
    Of course, no one can be 100% when it comes to economic forecasting. Too many balls are in play to ever be certain what's going to happen.
    To be Truly ignorant, Man requires an Education - Plato

  12. #702
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    "Analysis by the The Wall Street Journal rated her as the best economic forecaster of the 14 Fed members between 2009 and 2012."

    I haven't done that analysis, so can't really add anything.

  13. #703
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    Past Financial Crises, and Lessons Learned

    The Economist has a 6-page essay on past financial crises and responses. Among the interesting bits is this response to a past crisis:

    “[He] attacked on many fronts: he used public money to buy federal bonds and pep up their prices, helping protect the bank and speculators who had bought at inflated prices. He funnelled cash to troubled lenders. And he ensured that banks with collateral could borrow as much as they wanted, at a penalty rate of 7% (then the usury ceiling).”

    Who would have dared to fly in the face of today’s right-wing denouncement of the Bernanke-Yellen policy approach?


    The future of finance: Leviathan of last resort | The Economist


    .



    The year was 1792, and the policy was that of Alexander Hamilton, the first US Secretary of the Treasury.

  14. #704

    Wall Street Financial Crisis

    Hello....Wall Street deals in markets in everything from pork bellies to your grandmother’s retirement fund. They make as much high science out of investor behavior as can be had. But the investor, seeks return on capital in a ruthless way. When the value is not there, investors flee to safer investments.
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