Have you guys been following?

[Embar Angylwrath]

Have you guys been following the what the US is planning to do to stop the melt-down in the financial markets? WOW. I don't know what to think of it. One of the things the US is doing is essentially buying all the toxic debt related to the mortgage mess. And they are insuring all money market funds. And the SEC has banned short selling of financial and insurance securities.

Definately a bold and decisive move, but it's going to cost the taxpayers about 1 trillion dollars, holy shit! One trillion dollars! That's going to seriously shackle the next administrations ability to either cut taxes, or to increase spending. This is history you're watching folks.

[Partha]

And here I thought you'd be screaming about the socialization of our financial markets.

[Lurker]

It's going to be nice having someone with intelligence back in the White House.

Obama's statement and press conference.

[Harlowe]

Have you guys been following the what the US is planning to do to stop the melt-down in the financial markets? WOW. I don't know what to think of it. One of the things the US is doing is essentially buying all the toxic debt related to the mortgage mess. And they are insuring all money market funds. And the SEC has banned short selling of financial and insurance securities.

Definately a bold and decisive move, but it's going to cost the taxpayers about 1 trillion dollars, holy shit! One trillion dollars! That's going to seriously shackle the next administrations ability to either cut taxes, or to increase spending. This is history you're watching folks.

I'm still taking it all in and pouring over news releases, I'm with you - I don't know what to think. 1 trillion dollars....holy shit.

[Select]

It couldn't be a better time to grow up! Tax, you ready for this?

[Ddrak]

Jesus - I go to sleep for the night and wake up to THIS? I can't help feeling that the whole thing is being driven by knee jerk reactions that are ignoring the medium to long term effects for a quick short-term fix. I have a few immediate questions though:

• Where is the trillion dollars coming from? That's a third of the budget. Is there going to be a matching plan to source an extra trillion dollars of income or is the government just going to put itself another trillion dollars in debt to China?
• The end result of this is going to have some serious inflationary pressure. I say that from gut feeling, not from any real analysis.
• Banning short selling is cutting your arm off to get rid of a splinter. Expect major shock waves through the derivative markets.
• The Dow is going to be like a ADD kid on crack cocaine for the next few months as the markets alternately feel buoyed by the government backing and retarded by the question of who's really paying for it.
• The McCain campaign is going to take a hit from this. McCain has been saying a bunch of conflicting stuff about the economy (fundamentals are strong, stop all the bailouts, etc.) which makes him just look plain dumb whether you agree with one of his shifting positions or not. Obama comes off looking better with his "lets think this through" approach.
• Palin's lost the media's attention. It was going to happen, but the GOP strategists would have been betting on it not happening until November. Losing it two weeks after the convention is a flat out disaster that could actually see her dumped as VP candidate.

Embar's right. 25 years time this will be a mandatory class in all economics courses. I can't help feeling that the general theme's going to be "how not to back mistakes with more mistakes" though.

Dd

[Embar Angylwrath]

This is what I've gleaned so far.

The US Treasury is going to buy all the "toxic debt" (read: CDOs), and at a later date, sell them. The government's position is that once fear and irrationality are neutralized, the CDOs will have a market value. I tend to agree. Most Americans are still making mortgage payments. A CDO value will fall as homes go into foreclosure. As long as the bulk of the mortgages remain in good standing, the CDO will retain most of its value. If this move by the Federal government halts the slide of foreclosures, the value of the CDOs will be preserved, and there will be a market for them once the dust settles and the financial markets stabilize. This is a crude anaology, but the Federal government just cornered the market on mortgage futures.

In the absolute worst case scenario, the CDOs are worth a blended 50% of face value. The CDOs are secured by real property. Even in the hardest hit areas, that real property hasn't depreciated by more than 50% from the peak in 2006. I think the government made a shrewd move here, and may even make some money off this if they don't fuck it up.

Next - The government is guaranteeing money market funds for one year. Purely a symbolic gesture with little downside. Money market funds are extrodinarily safe, and this move is geared towards the psychology of Main Street. The government is saying... don't make a run on the banks and stuff your money under the mattress. I agree with this move as well.

Finally - The SEC has temporarily halted the short selling of financial and insurance stocks. I have mixed feelings about this. The biggest investment banks were the biggest abusers of short selling. But now that we only have two large investment banks, I grudgingly agree with this limitation. However, expect to see a refocus in the banking industry, and a melding of investment/commercial banking again, as is allowed now since the modification/partial repeal of the Glass-Steagall Act (which prohibited investment banking and commercial banking in the same bank).

Oddly enough, I was listening to NPR today, and the reporter was saying that banks were better off before the Glass-Steagall Act because they had more diversification. The banks that were investment/commercial mixes actually offered better investment opportunities, and the fear of those types of banks offering shady investments to depositors was unfounded. He cited numerous studies by a plethora of economists. The Glass Act split banks into two categories (it did other things as well, like establish the FDIC). The categories were commericial banks, and investment banks. Investment banks helped companies issue stock, and helped find buyers for the stock. (Read: IPOs) Commercial banks are the banks most of us deal with. Checking, savings, CDs, etc. It used to be that banks could do both activities, but after the Glass Act, those activities were separated into two different types of banks.

But here's the strange part... once the Graham-Beach-Lilley Act was passed which essentially negated most of the Glass-Steagall Act... all of the investment banks declined to incorporate commercial bank activities (read: checking and savings accounts for Joe and Joesephina Sixpack). The investment banks were making a lot of money, and didnt see the need to deal with Joe Sixpack.

My how times are a'changing.

Anyway, expect to see a merging of investment/commercial activity in banks over the next decade or so. If I were a betting man (and I am), I'd put my stock money in bank stocks that have a large regional influence. Wait a couple weeks though

[Kulaf]

Well this is sort of a damned if you do......damned if you don't scenario. How many of us has had the Great Depression shoved down our thoats in various classes and the endless debates about how the "do nothing" Hoover administration sat there and let it all happen.

The key is not to make matters worse.....which I honestly don't see this doing. The worst thing that could happen would obviously be for a bunch of banks to fail and then have a run scenario where people are worried about their deposits and start mass withdrawals. Let's hope we do not see that occur. Personally I am watching the Washington Mututal woes with facination since that is a local large bank in my area.

[Ddrak]

There won't be a run on commercial banks anyway - the FDIC guarantees them.

Dd

[Kulaf]

Ok so your bank fails tomorrow......when do you get your money? The next day......next week.......next month? That is what no one is sure about and what could fuel a run.

Could any of us go a month.....right now.....wihtout being able to write a check?

[Harlowe]

It's nothing like a month. I was listening to a program on NPR and it sounds like it's really only a few business days.

Here is a link to the FDIC site with answers.

http://www.fdic.gov/bank/individual/fai ... and_a.html

[Kulaf]

Normally that is correct. We are no longer in a "normal" situation. Here is the answer and I will bold the important section:

5. How long does the FDIC take to pay insurance on deposits after an insured bank fails?

Federal law requires the FDIC to make payment as soon as possible. Historically, the FDIC pays insurance within a few days after a bank closing either by establishing an account at another insured bank or by providing a check. Deposits purchased through a broker may take longer to be paid because the FDIC may need to obtain the broker’s records to determine insurance coverage.

So basically they pay you as soon as they can. I will also assume this is in reference to Savings accounts. Checking accounts could take longer because I assume they will want all checks to clear.

[Ddrak]

If the government has a trillion dollars to toss around on wall street, then have a few million to bail out a savings bank. I wouldn't stress about the FDIC in the least.


Good article in the NYT on the risks:
http://www.nytimes.com/2008/09/20/busin ... ref=slogin

Specifically, Embar's assumption that CDOs have face value is somewhat dodgy. They are supposed to have value, but they are derivative options, not actual mortgages so they aren't really tied to property directly. To claim the value, you have to follow the legal chain to the end, and then agree with all other creditors on what's actually happening. That's going to take years to sort out, if it even can be.

Dd

[Embar Angylwrath]

Dd -

I see where you're coming from, and I agree. Many (most) of the CDOs have partial shares in any given mortgage. And you' re right, that makes them hard to value individually. My point is that bundled CDOs have a face value based on the aggregate share of the secured worth of the total property embraced by the CDO.

It's going to be a moot point though, since the Treasury is going to set up a reverse auction for these instruments. And I like that idea. Banks will have to decide where their pain threshhold is for the sale of CDOs. Ten cents on the dollar? Twenty cents on the dollar? Ninety cents?

Its a shrewd move on the part of the Treasury. It will flush out most of the bad debt almost immediately, as banks compete for the purchase price of CDOs. Any bank that doesn't want to sell the CDOs faces the risks associated with keeping non-marketable debt.

For all you history junkies out there, this is probably the most exciting time in US history, absent the colonial and civil wars. And it is certainly the most exciting time since the advent of modern capitalism. The entire premise of the US capitialism rests in the next few weeks. If capitalism fails, there will be a world-wide shift in econo-politico structure.

I can't overstate this enough... you are watching history right now. The events in the next few weeks will shape lives for a century or better.

[Ddrak]

How is the reverse auction going to work? I see it mentioned but can't find details.

The international component is going to be interesting. A lot of foreign banks hold CDOs as well, so avoiding an international finance war is going to be at the front of the Fed's mind as well. I suspect the end result of a lot of this is a significant movement away from the US as the financial center of the world - not entirely sure where to though as both China and Europe could make some interesting power plays.

The whole mess is going to cost US taxpayers an order of magnitude more than Iraq though, and it should scare people that the Administration is asking for unfettered and unchecked power to act as they see fit with a trillion dollars of money.

Dd

[Fallakin Kuvari]

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

We can all thank that act.

[Kulaf]

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

We can all thank that act.

Which makes you wonder what the hell Bank of America is thinking in its aquisition of Merril Lynch. They have to see the writing on the wall and are likely going to have to divest themselves of this in the near future.

[Embar Angylwrath]

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

We can all thank that act.

That's a perspective based on ignorance.

Even though the Act allowed for consolidation of investment banks and commercial banks, no large investment banks choose to do so.

[Embar Angylwrath]

How is the reverse auction going to work? I see it mentioned but can't find details.

The international component is going to be interesting. A lot of foreign banks hold CDOs as well, so avoiding an international finance war is going to be at the front of the Fed's mind as well. I suspect the end result of a lot of this is a significant movement away from the US as the financial center of the world - not entirely sure where to though as both China and Europe could make some interesting power plays.

The whole mess is going to cost US taxpayers an order of magnitude more than Iraq though, and it should scare people that the Administration is asking for unfettered and unchecked power to act as they see fit with a trillion dollars of money.

Dd

There's been a change in policy now. Apparently foreign banks with substantial operations in the US now qualify for help. The theory is this is about fixing the problem, not a bailout per se.

Also, I think I read a reverse auction would work something like this... the government says they'll by CDOs at 10% of face value, and they see what they get. Then they say they'll but them at 11%, and see what they get, then 13%, then 14%.. you get the picture. It's a way of removing the most dangerous debt first, I think, and also gives the Treasury a chance to make some money off them later when they sell them.

Banks are still going to take a bath, but at least the assets will now have a floor price and the uncertainty will leave the market. Which, by the way, is what I suggested the Feds do. No, Paulson hasn't called me yet though.

[Lurker]

Even though the Act allowed for consolidation of investment banks and commercial banks, no large investment banks choose to do so.

You've completely misread what the Act allowed and what the banks did. Amazing how you can watch history unfold before your eyes while learning nothing from it.