[AlanY]

Quote:

Originally Posted by Hopstretch /img/forum/go_quote.gif Yeah, it's a classic case of good old moral hazard.

That's really the crux of it. All of these firms have been hiring fantastic risk modellers from places like MIT, but none of their models seem to have included any margin for this kind of systemic breakdown in structured securities and derivatives. I just can't believe none of the quantitative guys spoke up, especially given that we saw the same error before with LTCM.

A decision must have been made at the executive level to ignore modelling the possibility of a systemic breakdown in order to justify ever more leverage, either out of plain greed or the knowledge that the government would have to step in to bail them out, so they didn't need to worry. The problem is that now things may be too large for the government or the Fed to save everyone.

 

[loveheadphones]

Bernanke has been studying the great depression for his entire career. This looks eerily similar to the way that started, so this is a chance for him to show the Fed can do something about it this time. His thesis was that the banks weren't propped up. Ideally, the federal government would do it, but they have not acted because of a fear of the backlash from the public during an election year (basically, like you all are saying: why not just let the banks die, they deserve it). As a result Bernanke is stepping in and decreasing confidence in the Fed, but he sees it as necessary.
At the start of the great depression the government did very little, just as some of you are suggesting to do now. I realize there's moral hazard here, but guess what - businesses need bankers to survive and grow (despite how profitable a business may be, it still may not be able to self-finance growth). The government needs businesses to grow to increase tax revenues. Everything is connected, and if you let the banks go down things are going to look really, really bad for a long time.

 

[slwiser]

Quote:

Originally Posted by loveheadphones /img/forum/go_quote.gif Bernanke has been studying the great depression for his entire career. This looks eerily similar to the way that started, so this is a chance for him to show the Fed can do something about it this time. His thesis was that the banks weren't propped up. Ideally, the federal government would do it, but they have not acted because of a fear of the backlash from the public during an election year (basically, like you all are saying: why not just let the banks die, they deserve it). As a result Bernanke is stepping in and decreasing confidence in the Fed, but he sees it as necessary. At the start of the great depression the government did very little, just as some of you are suggesting to do now. I realize there's moral hazard here, but guess what - businesses need bankers to survive and grow (despite how profitable a business may be, it still may not be able to self-finance growth). The government needs businesses to grow to increase tax revenues. Everything is connected, and if you let the banks go down things are going to look really, really bad for a long time.

Another one I have to agree with. There really are no good solutions to this situation but Bernanke better pull one out of his hat.

 

[saint.panda]

Quote:

Originally Posted by loveheadphones /img/forum/go_quote.gif At the start of the great depression the government did very little, just as some of you are suggesting to do now. I realize there's moral hazard here, but guess what - businesses need bankers to survive and grow (despite how profitable a business may be, it still may not be able to self-finance growth). The government needs businesses to grow to increase tax revenues. Everything is connected, and if you let the banks go down things are going to look really, really bad for a long time.

I'm not familiar with the Great Depression, but wouldn't bailing out the banks make the next crisis even bigger?

 

[Arainach]

Quote:

Originally Posted by saint.panda /img/forum/go_quote.gif I'm not familiar with the Great Depression, but wouldn't bailing out the banks make the next crisis even bigger?

Yes.

After the Great Depression we added all sorts of rules and regulations so that it could never happen again. Then as time went on, and especially under Reagan, the financial industry (including all the aforementioned companies), ignoring all historical precedent, pushed to eliminate those regulations, and low and behold they did. Now the cards are in place for an even bigger crash. To those who say "the worst is over" - have fun. I just hope the US Economy crash doesn't take the rest of the world with it, because Japan and Europe'll still have a good demand for tech jobs.

 

[Wodgy]

Quote:

Originally Posted by loveheadphones /img/forum/go_quote.gif I realize there's moral hazard here, but guess what - businesses need bankers to survive and grow (despite how profitable a business may be, it still may not be able to self-finance growth). The government needs businesses to grow to increase tax revenues. Everything is connected, and if you let the banks go down things are going to look really, really bad for a long time.

You're absolutely right... we're way beyond moral hazard at this point. The Fed isn't stepping in to save Bear Stearns -- they're gone -- it's stepping in to try to keep them alive for enough days to at least try to unwind all the derivatives in an orderly manner. If that doesn't happen, then losses start to approach the notional values of those derivatives and at that point no one has enough money to salvage the situation. We'd be looking like Russia in the early 1990s.

The Fed bears enormous responsibility of course for creating this mess, along with everyone else involved. Things had to explode, everyone knew the counterparty game was trading in fictions and moral hazard, it was just a question of when. But they're also the only party that can help reduce the pain on the unwind.

I would prefer if they did as little as possible to salvage the situation, rather than a huge inflationary intervention. But they do need to intervene in one form or another.

BTW, for anyone who's having trouble understanding the mechanics of what's going on and how leveraged, poorly rated risk can explode, the Washington Post had a great cartoon today that explains it:
How Debt Bites Back - washingtonpost.com

 

[saint.panda]

That's a fantastic cartoon to explain the current mess.

 

[Wodgy]

Quote:

Originally Posted by saint.panda /img/forum/go_quote.gif That's a fantastic cartoon to explain the current mess.

Yeah, the only thing it doesn't quite explain is how the packaged mortgage securities got rated AAA, but that would require another cartoon to explain the monoline bond insurers, CDOs, etc.

This cartoon presentation fills in some of the details, but be warned, a bit of foul language. Very funny though:
Subprime Explained - Google Docs

 

[SuperNothing]

Quote:

Originally Posted by loveheadphones /img/forum/go_quote.gif Ideally, the federal government would do it, but they have not acted because of a fear of the backlash from the public during an election year (basically, like you all are saying: why not just let the banks die, they deserve it). As a result Bernanke is stepping in and decreasing confidence in the Fed, but he sees it as necessary.

I am definitely not anti-bank. I just see this whole situation becoming even worse if the government keeps stalling the economic crisis by propping up banks instead of letting it run its course. I don't even think it is an issue of causing banks to believe they will be backed up for any risky moves in the future but rather treating the symptoms of the disease rather than the route cause.

On a separate note did anyone see this article in Businessweek.

College Towns: Still a Smart Investment

 

[Lazarus Short]

While you are wringing your collective hands over the well-deserved fate of the banks, do note that the Dollar itself is going to go bye-bye in a hyperinflationary blowoff. It is sure to happen due to our inability to face the pain of readjustment. The dregs will be drunk to the last drop.

BTW, was anyone else aware that the inflation rate in Zimbabwe is currently 100,000%? A large portion of the population has had to flee the country just to survive.

Laz

 

[RYCeT]

Chase bought Bears for $2/ a share. What's going on here guys? Is it good or bad?
JPMorgan to buy Bear for $2 a share - Yahoo! News

 

[Wodgy]

Quote:

Originally Posted by RYCeT /img/forum/go_quote.gif Chase bought Bears for $2/ a share. What's going on here guys? Is it good or bad? JPMorgan to buy Bear for $2 a share - Yahoo! News

Bear is insolvent, so technically it's worth nothing. It's actually worth less than nothing, since JPMorgan will be assuming their liabilities (though the Fed is providing $30 billion in supplementary funding to cover this!!), but I suppose their goodwill is worth something. The guys who've been short selling Bear are going to make out like bandits assuming they didn't cash in their positions on Friday.

 

[slwiser]

Quote:

Originally Posted by RYCeT /img/forum/go_quote.gif Chase bought Bears for $2/ a share. What's going on here guys? Is it good or bad? JPMorgan to buy Bear for $2 a share - Yahoo! News

FED steps in and tells JPMorgan to purchase it with money they are providing I would bet. JPMorgan is doing nothing but attempting to close a wound which is what the FED is attempting to do. The Plunge Prevention Team (PPT) will be out in force tomorrow. Who is the PPT you may ask. A group of investment banks that are organized by the FED to pump liquidity into the market at the right times when a plunge is occurring. Will tomorrow be "black Monday?"

 

[Hopstretch]

Quote:

Originally Posted by RYCeT /img/forum/go_quote.gif Chase bought Bears for $2/ a share. What's going on here guys? Is it good or bad?

It's definitely a minus if you owned Bear stock, which opened at around $57 a share on Friday morning!

Given their float of 118 million shares, that's $6.4 billion up in smoke in one weekend. For those who like their schadenfreude served cold, by my back of the envelope calculation Bear's chairman personally lost $440 million over the last two weeks. Easy come, easy go.

 

[Wodgy]

Quote:

Originally Posted by Hopstretch /img/forum/go_quote.gif For those who like their schadenfreude served cold, by my back of the envelope calculation Bear's chairman personally lost $440 million over the last two weeks. Easy come, easy go.

Doesn't seem like he cares... he was playing card games as the company burned:
Bear Stearns chairman played cards amid crisis - Wall Street Journal
I love the jokers who end up at the top.