Wall Street Financial Crisis

[Guest]

Goldman Sachs. Earnings fall more than 70% but beat analyst projections. Stock falls 8% in pre-market trading

Goldman's earnings plunge - Sep. 16, 2008

[antimony]

Oh? Do tell.

sent you a pm

[Ray]

Switch to any channel domestic or international, it is this news that is hogging the show.

The world seems to have gone crazy!

Everything is downsliding it appears!

I believe a whole lot of people are being laid off including in the US!

Heaven help us!

I believe the US govt will salvage AIG lest it creates a huge flap!

[rj1]

Switch to any channel domestic or international, it is this news that is hogging the show.

The world seems to have gone crazy!

Everything is downsliding it appears!

I believe a whole lot of people are being laid off including in the US!

Heaven help us!

I believe the US govt will salvage AIG lest it creates a huge flap!

Relax. This is debt deflation, otherwise known as money disappearing. The sun will rise tomorrow even if AIG implodes. And if it does, enjoy the fireworks. (It appears currently that the government is putting together an aid package, I'm skeptical on it being just a loan but whatever.)

I'll lose some money because of my investments short-term but long-term I am okay. You and your country will be fine in my opinion, and they can take advantage of this situation as Gordon Gekko (a fictional character from a late 1980s movie, "Wall Street") puts it:

Bud Fox: How much is enough?

Gordon Gekko: It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.

Which goes back to my "transfer of wealth" statement. Keep yourself out of debt and you'll be fine.

At no time in history has the biggest money in the world been as misallocated and invested as it is today. Generally run by misinformed, poorly prepared ignoramuses who are at the top of the world investment and banking industries. They have not studied history or know economics and are repeating it as is always the case. This is the biggest opportunity in history. The greatest transfer of wealth from those that store their wealth in paper to those that don’t is unfolding. All markets will have to price in reality, and the reality is that the G7 in general and the financial and banking industries in particular (there are exceptions to this) are insolvent. Rather than default through the normal process they will default through the printing press as legendary economist Adam Smith and Ludvig Von Mises have illustrated and predicted in their bodies of work. Volatility is opportunity and it is set to expand.

There is also very clear organized support out there for the U.S. and its finances via the Arab oil states of Saudi Arabia, Qatar, Kuwait, and Dubai. They have been buying treasuries, selling euros, producing as much oil as they can produce (especially the Saudis), and selling their commodities investment out of their sovereign wealth funds en masse. If you think about why they are doing this, you can figure it out.

[antimony]

Bottom line here folks.......greed. I watched a program on one of the numerous business sites where a middle aged man and his"not quite well" financial state of affairs were voluntarily exposed and shocking does not adequately cover the results.. The man worked as a security guard at a common factory making 10 bucks an hour,and incredibly, was given a mortgage on a $500,000 dollar house!

Even assuming that this gentleman had a stellar credit score, it is posible that with that income level, he would have had a low amount to put down. A 15% downpayment would result in a loan amount $425,000. Now any amount over $417,000 ($729,750 after the economic stimulus package) is usually classed as a jumbo loan, which Freddie/ Fannie will not cover fully and on which the borrower may have to pay a hefty mortgage insurance (PMI). This would push the borrower nearer to a default

[antimony]

Relax. This is debt deflation, otherwise known as money disappearing. The sun will rise tomorrow even if AIG implodes. And if it does, enjoy the fireworks. (It appears currently that the government is putting together an aid package, I'm skeptical on it being just a loan but whatever.)

I'll lose some money because of my investments short-term but long-term I am okay. You and your country will be fine in my opinion, and they can take advantage of this situation as Gordon Gekko (a fictional character from a late 1980s movie, "Wall Street") puts it:

It is still not good for those of us in the US. We are going through a time which is shaking the banking and financial sector to it very core. Any time that happens, it affects other industries as well. Also, there does not seem to be a quick recovery in sight.

[rj1]

It is still not good for those of us in the US.

Depends on who you are. This crisis has been a godsend for Bank of America so far because they're in a good financial position and using it to buy distressed properties at cut-rate prices.

It's also been good for repo men. :))

YouTube - Repo Man titantron
YouTube - Colbert: Repo Man Success Story

Edit: Government is getting 80% stake in the AIG in exchange for $85 billion.

[Herodotus]

What it means is that a lot of people that either had or thought they had a lot of money...no longer do. Also, it works on a country basis. Countries that think they have a lot of money find out they actually do not. So what do they do? They either spend less or pass on the costs to taxpayers. In the case of Fannie Mae and Freddie Mac, to prop up the enterprises which we have to do if we wish to keep foreign governments buying our debt, the costs get passed onto taxpayers like me and you and we pay for any failures. Also, failing companies in an effort to stay in business will have to sell assets. On a sovereignty level, some of these assets are being sold to sovereign wealth funds. Lehman is being forced into liquidation and will be forced to sell off its assets to the highest bidder to try and get creditors some of their money back. (Saw on CNBC today that there's a ton of golf balls and shirts and various other "Lehman Brothers"-branded items that were put on eBay.)

My response was mostly factitious as you did not provide any evidence for your assertion. "largest transfer of wealth" is just an empty euphemism. What happened was a lot of people got greedy, misread the markets, and now want the government to bail them out. Even now Lehman Brothers, or parts therein, has been acquired, just as Merril Lynch was/is being acquired by my bank. If you think people are going to riot in the streets because Lehman Bros. went under I got news for you.

The world in the early 1900s very much operated on a British-brokered finance system just as the global financial system today is very much American-brokered. Today, the U.S. does not have complete control of the global system (see note below*), but it's very much the main one and the other central banks around the world definitely listen to the Fed and Treasury. The British then were the center of power near the same way.

Montagu Norman was the Chair of the Bank of England in the post-World War I period. After World War I, another "war" took place between the U.S. and Britain for who would be the top power in the global financial system. Norman orchestrated a series of manuevers with exchange rates that partially instigated the Stock Market Crash of 1929 to make pound sterling back to #1 in comparison to the U.S. dollar. Norman won, sort of, but it was pretty expensive for the British economy by and large.

The world operated on the gold standard prior to WWI, how much monetary control the British banks had is debatable as exchange rates were stable.

[rj1]

My response was mostly factitious as you did not provide any evidence for your assertion. "largest transfer of wealth" is just an empty euphemism. What happened was a lot of people got greedy, misread the markets, and now want the government to bail them out. Even now Lehman Brothers, or parts therein, has been acquired, just as Merril Lynch was/is being acquired by my bank. If you think people are going to riot in the streets because Lehman Bros. went under I got news for you.

People aren't going to riot because the typical American is ignorant on these matters. Most of our population are not paying attention enough to understand what's going on. It's not like we teach people basic economics anymore. If we did, why are lotteries so profitable?

The world operated on the gold standard prior to WWI, how much monetary control the British banks had is debatable as exchange rates were stable.

Different currencies had different values relative to gold. What Norman did was he increased pound's rate to gold so high (to the pre-World War I rate, which was overvalued) to the point that people could get higher payments for holding gold in London compared to New York, thereby causing an eventual large capital flight from New York back over the Atlantic to London.

[Shek]

I don't agree with the underlined part. I would expect as a taxpayer and depositor that the Financial Regulatory Authorities would set up prudent lending norms and hold the lenders to those norms. I would say that this time around, some regulators were sleeping on their job

The requirement to make risky loans was a peverse incentive to "help" out those with poor credit ratings. Regulation was part of the problem.

[Shek]

Bottom line here folks.......greed. I watched a program on one of the numerous business sites where a middle aged man and his"not quite well" financial state of affairs were voluntarily exposed and shocking does not adequately cover the results.. The man worked as a security guard at a common factory making 10 bucks an hour,and incredibly, was given a mortgage on a $500,000 dollar house!

So the security guard was greedy? Trying to buy more house than he could afford? I agree.

[S2]

Greed?

"So the security guard was greedy? Trying to buy more house than he could afford? I agree."

That's bothersome. Let's talk about underwriting criteria. Here's how it's skewed-

1. Credit Eval- Only mortgage, installment, and revolving debt are evaluated as part of a tri-bureau report.

2. Income- Your risk is assessed based upon gross income.

So lets look at your ability to repay your debt-

A classic conforming fixed 30 yr. mortgage traditionally adhered to a FANNIE MAE/FREDDIE MAC standard of 28/36. That is your front end ratio defined the portion of your gross income that could be borne as mortgage debt, i.e., Principle, Interest, Taxes, and Insurance - PITI

The back-end ratio defined the maximum total mortgage, install, and revolving debt that could be borne under the loan. Fair enough.

Well, consider this- Most American live off NET income- not gross. Most Americans carry considerably more monthly obligations than mortgage, install, and revolving debt, i.e- phone bills, heat, gasoline, clothes, food, cable, etc.

All that impacts the ability to repay monthly. None of that was evaluated in the good ol' days.

THEN IT GOT WORSE- Front end ratios went out the window. Back end ratios went to 60% of gross monthly income.

Trust me that neither the borrower knew enough to ask nor did the loan officer know enough to explain...and NOBODY cared.

Sure, dummy working stiff suddenly is "approved". Well, the greed didn't begin and end with that poor doofus. When underwriters were given a semi-permanant "bank holiday", the jig was up.

Greed's a funny thing in the lending business.

[Shek]

Well, the greed didn't begin and end with that poor doofus. When underwriters were given a semi-permanant "bank holiday", the jig was up.

Greed's a funny thing in the lending business.

S-2,

I don't disagree. Just pointing out that we need to also pin responsibility on folks who try to live beyond their means instead of bestowing victim status upon them.

[antimony]

The requirement to make risky loans was a peverse incentive to "help" out those with poor credit ratings. Regulation was part of the problem.

Sorry Major, I did not get that. Regulations such as prudential lending norms and KYC norms are designed to prevent exactky this.

If you are refering to fair lending norms and non-discrminatory lending regulations (like HMDA/FHA/ EOC) I will admit that sometimes they might seem to be at odds with prudential lending norms, but can you point out to me the piece of regulation/ legislation that forces lenders to work with people with sub par scores?

I would like to read that up

Also, this theory does not explain why 61% of the borrowers who were affected by the sub-prime crisis would actually have been eligible for normal loan programs and yet chose to go with the far more pricey option.

S-2,
I don't disagree. Just pointing out that we need to also pin responsibility on folks who try to live beyond their means instead of bestowing victim status upon them.

Would the folks trying to live beyond their means really know enough that they are doing so. From my time in the US, I have not seen a lot of financial knowledge among folks.

I will admit that people in the US tend to buy a lot of stuff though.
The American way, I guess

[Oscar]

S-2,

I don't disagree. Just pointing out that we need to also pin responsibility on folks who try to live beyond their means instead of bestowing victim status upon them.

In an ideal world they would be responsible but here it's a case of blaming the poor for the rich's sins.

BTW AIG has been nationalized.

US to take control of AIG


By Francesco Guerrera in London, Aline van Duyn in New York and Krishna Guha in Washington

Published: September 16 2008 14:47 | Last updated: September 17 2008 08:52

The US Federal Reserve announced that it will lend AIG up to $85bn in emergency funds in return for a government stake of 79.9 per cent and effective control of the company – an extraordinary step meant to stave off a collapse of the giant insurer that plays a crucial role in the global financial system.

Under the plan, the latest dramatic intervention by the US government to combat the global credit crisis, the existing management of the company will be replaced and new executives - as yet unnamed - will be appointed. Reports on Wednesday suggested Edward Liddy, the former Allstate chief executive, will replace Robert Willumstad, the chairman bought in to replace ousted chief executive Martin Sullivan last year.

The authorities, which will retain veto power over major decisions at the company, will receive equity giving them a 79.9 per cent stake in AIG. In return, the insurer would receive a bridge loan of $85bn to keep it afloat until it could dispose of billions of dollars in assets. The Fed said the loan was expected to be repaid by the proceeds of selling AIG operating companies. A senior Fed staffer said the most likely outcome was an orderly liquidation of AIG, though it was possible that the firm could survive as an ongoing business.

The loan is at a punitive interest rate of three-month Libor plus 850 basis points, giving AIG a strong incentive to repay it as soon as possible. It will be secured on all AIG’s assets, including those of its subsidiary companies.

The Fed said in a statement it was acting to prevent “a disorderly failure of AIG” which would “add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance”.

Spiralling subsidiaries
AIG is a huge multinational insurer, but it is much more than that. A glance at the group’s structure shows why. Should it follow Lehman into administration, it would create shockwaves across global financial markets. View our diagram of AIG’s structure
The issuance of the equity participation note to the government is designed to prevent existing shareholders from profiting from a rescue of the company, which has been hobbled by the losses on complex securities backed by mortgages and other assets.

President George W. Bush said the rescue was “to promote stability in the financial markets”.

The emergency moves came after earlier plans for a private sector bail-out were dashed by a further 21 per cent slump in AIG’s shares, reducing the market capitalisation of one of the biggest insurance companies in the world to just over $7.5bn (£4.2bn).

The AIG crisis fuelled another day of turmoil on global markets on Tuesday sparked by the weekend failure of Lehman Brothers and the rushed takeover of Merrill Lynch by Bank of America. Despite the turbulence, marked by brutal conditions in European money markets, the Federal Reserve kept interest rates unchanged at 2 per cent on Tuesday night.

“We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimise the disruption to our economy,” said Hank Paulson, Treasury secretary. “I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers.”

But even as the plan was being being mapped out, there were already signs of political opposition. “I hope they don’t go down the road of a bailout, because where do you stop?’’ Richard Shelby, top Republican on the Senate Banking Committee, told Bloomberg Television.

Charles Schumer, the New York Democrat who chairs the congressional Joint Economic Committee, said: “The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times.

”You have to stop to catch your breath. But upon reflection, the alternatives are much worse.’’

During a day of emergency meetings at the New York Fed, the Treasury and Fed reversed initial reluctance to bail out another financial institution.

In March, the Fed helped JPMorgan Chase buy Bear Stearns by providing a $29bn credit line. Earlier This month, the Treasury seized control of troubled US mortgage giants Fannie Mae and Freddie Mac.

But at the weekend the authorities refused to back Lehman Brothers and encouraged Merrill Lynch to sell itself to a rival. Lehman filed for bankruptcy early Monday morning, rocking the financial system, while Merrill announced a $50bn takeover by Bank of America the same day.

AIG’s plans for a private sector capital infusion were dashed by a further slump in its shares on Tuesday after sharp cuts in the insurer’s credit ratings on Monday threatened to fuel a liquidity crisis and push it into bankruptcy.

Tim Geithner, president of the New York Fed, skipped the Fed’s interest-setting meeting to focus on AIG – a sign of the regulators’ heightened state of alert over the insurer’s plight.

Amid increasingly desperate lobbying for government help, David Paterson, New York governor, had said the beleaguered insurer which lost billions of dollars on derivatives and mortgage-backed securities, had “a day” to solve its problems.

AIG’s fight for survival came as Hank Greenberg, AIG’s former chief executive and the company’s biggest shareholder, announced he was considering a bid to take over all or part of the company.

Mr Greenberg has sent a letter to AIG’s board and its chief executive, Robert Willumstad, complaining about its refusal to take up his repeated offers to help the company group he ran for decades.

In a letter published in Wednesday’s Financial Times, Mr Greenberg urged the US government to step in to provide a loan if private lenders could not be found. He said AIG needed a temporary bridge loan in order to prevent further ratings cuts “which would likely prove fatal” and “pose systemic risk to the US and international financial systems”.

Copyright The Financial Times Limited 2008