patrick.net

thenuttyneutron Says:
I am still in moderation after 8 hours?

Sorry, been a busy day and I did not get to read till just now. I checked just now, and there are no posts in moderation.

Yea - by backstopping all new debt - I cnnot even get my head around the possible fraud here. Start a business. Get a loan. Pay youselves $1billion. Banks doesn't care that you business plan is to sell 1 tamale for $1t - hey the debt is backstopped. You declare bankruptcy, but walk away with $1b. The banks says, "Gosh, that didn;t work out." The US backs the debt. And you and I, the taxpayers pay.
This market intervention will prop up markets for a while. And, for me, I will sell into strength. Becasue this is just sillly.

Someone obviously hasn't tried to get a business loan from a bank.

Duke,

I was concerned about that, too. For example, three banks arrange to give each other big loans, and then use the loans to pay off some other bad debts. Then they default on the loans and let the public pay. Nice arrangement. Gives a while new meaning to the term "credit default swap"

On the other hand, I can not believe that the government has not built safeguards into the program. Think of it this way: If you default on an interbank loan then you are in effect asking for the FDIC to take you over and sell you off. All the management will be dismissed. Mist banks would not want this to happen.

If the terms of the insurance make any sense at all, this is how it will work. But where are the details published.

Again, this is why we need to socialize the credit market.

All new debt needs to be secured against something tangible, such as existing hard assets or pre-existing income.

No, how about moving more to privatizing and letting bad decisions hurt the ones who make them.

The more control is put on actual lending, the more the potential for corruption. If I ask you to lend me $10 you will make a decision based on whether you think I will pay it back. If you are in charge of a government run lender, you will be more susceptible to a bribe or favor to approve a loan.

justme Says:
October 13th, 2008 at 10:27 pm
"Local minimum or not? I think all eyes will be on the Intel Q3 report tomorrow after market close."

I'll be glued to the TV waiting.....not! One corporate report is what you're going to base your financial security by?

Malcolm, I wasn't planning on it, exactly. Should be an interesting data point nevertheless, since some people appear to think that the bank capital injection will "save the market".

What bothers me is that even those in the MSM who say that the real problem is housing prices do not seem to "get it". The pundits are all saying that we should do our damndest to prop up housing prices, rather than letting the prices revert to the historical trend.

Of course, nobody around this blog ought to be surprised about this development.

I was just curious what you were going to get out of it. Are you looking at it as a sign of consumer power? (can they still buy laptops?) Or as an economic sign of are they buying laptops? Or maybe how is Intel doing with market share, or is the international market buying more chips? Or are you local and curious if you are going to have a job?

I guess it is an interesting single data point for a few different things, it made me wonder why that one report out of all of the news is important to you.

The bigger problem is this.
There is supposed to be a cost of capital. It reflects risk. In an economic down-turn it should be hard to get money. You had better have a stellar idea to start a business during a recession as the initial debt will be expensive.
Now.
Now.
Well, the governement says, "Loan to anyone and we will back you." So we fund ideas like Joe's tamale stand. Who cares that it is a bad business plan? Who cares that it cannot possibly make money? There is upside to the bank if it works and ALL DOWNSIDE is shifted to the backer of the loan - the taxpayer. Once again, we are disconnecting an interest in seeing the interprse succedd from the cost of failure. Just like the HUGE FRAUD we saw in MBS we are going to see this wind up wih scam businesses. I mean, why not? Bankers will say, "The governemtn told me to lend or esle. They forced me to take $25b and said, "Go lend!"
I do understand that the intent of this bailout was only to slow the contraction - to possibly prvent the over-correction. And we may even achieve it. But the cost will be enormous. Trust is shattered.
Who here will not find a way to sell on strength and wait to invest once all the intervention is done. Once transparancy is in place?
And who here does not fear the loss of value in our currency as we print more and more to patch up our broken financial system?

No, how about moving more to privatizing and letting bad decisions hurt the ones who make them.

Except that doesn't happen. They just get bailed out, again and again. We already have socialism for the wealthy and irresponsible, how about opening up the benefits to the rest of the population?

Socialize debt and make defaulting a criminal, not a civil issue.

From marketwatch.com:

Banks have until Nov. 14 to request capital from the Treasury. The minimum amount for banks is 1% of their risk capital, while the maximum is $25 billion.

The government will receive senior non-voting preferred shares and warrants to purchase common shares in return for the capital. The shares will pay a 5% dividend for the first five years and 9% after that, creating an incentive for the banks to buy back the shares from the government as soon as possible.

Biggest drawbacks: No voting rights. Pricing to be determined later (of course). Some say conversion rights would be better than warrants.

Malcolm, because INTC and JNJ and maybe CSX are the only really big and well-known companies on the earnings calendar TODAY. That's why.

No other big earnings news until tomorrow, when there be a larger amount of "leading" companies (abt, ebay, JPM, ko, WFC and others).

... and yeah, getting a feel for consumer sentiment is always useful.

Duke,

My assumption is government backing inter bank lending. I didn't think they were going to back stop banks. Banks still need to make prudent loans for them to be in business. I do know some people can misuse inter bank lending trust, I don't see it any different from managements using people's money to make fraudlent loans to benefit themselves.

Not sure I understand it completely.

The hope is that this will bring banks to lend again but the elephant in the room is average american that’s too loaded with debt to borrow any more.

Next up at the bailout feeding trough– the consumer.

Good point, but which consumers? A guy in "need" for assistance since he lost his job? He won't be borrowing again anyway. How about the short sighted man with the "loan reset?" We can "forgive" half the balance to make his payment affordable, but he also will not be in the market to further borrow. Do we pay down the balance of the guy who can pay his loan, just to free up his credit limit so he can borrow again?

The consumer variable is interesting and IMO how we got here. Good earnings today may translate to defaults tomorrow. Now, I'm reading about the credit card crisis, like we've never heard that one before. Crisis after crisis just like in Atlas Shrugged. Some may laugh but the solutions are starting to resemble the storyline solutions.

'Each consumer shall pay the same price for a house as they did last year....'

More and more behavior that doesn't benefit the ruling class (hidden behind the notion of the social costs) gets criminalized.

Yes, I'm for debtors prison in cases of fraud but now some of you are saying put someone in jail for defaulting? Come on!

And sorry Justme, I don't mean to knock your logic, but how is a quarterly report going to show the effectiveness or failure of something that is two weeks old?

USSA does have a point, that restoring banks ability to loan at the consumer level is useless if the consumers are unable/unwilling to borrow. Maybe we will see tax code efforts to make borrowing cheaper while penilizing thrift. Such as:

Renter's Tax
Tax on FDIC insured savings balances
Tax credit in lieu of mere deduction for mortagage interest/local taxes
Tax on home equity (difference between assessed value and mortagage balance)

And more generalized, I would have to say that anyone who tries to decipher whether this plan is going to succeed or fail based on the emotional swings of the market should probably hang onto their money.

I was just thinking that Headset. On Youtube I got into it with someone because I said, "Well, no one has stopped offering credit to me.." I think Justme is correct, the consumers are the real key, that's why I believe in getting this country back on track by a bottom up approach. If we strengthen personal finance, and that means letting home prices fall, and actually get a manufacturing base again, a lot of these problems go away by themselves. I'd rather see a trillion dollars invested in real performing assets of infrastructure (and yes small business loans with partial guarantees) than this clusterfuck of a bailout.

CDS is more than 56 trillion dollars, more than the whole world's GDP. Dumping $700 billion into the market is like dumping a piece of mud into a pond. Dow probably will hit 6000.

If we strengthen personal finance, and that means letting home prices fall, and actually get a manufacturing base again, a lot of these problems go away by themselves.

Yes! Besides, home prices will fall despite the bailout boys best efforts. For those people put out of work by the collapse of the debt industry, I agree that the gov should create jobs for them by funding infrastructure rebuilding rather that flushing away the money in Wall Street bailouts.

We need the infrastructiure, people need the jobs, the Wall Street folks do not need more compensation.

HeadSet Says:
October 14th, 2008 at 9:19 am
"USSA does have a point, that restoring banks ability to loan at the consumer level is useless if the consumers are unable/unwilling to borrow. Maybe we will see tax code efforts to make borrowing cheaper while penilizing thrift. Such as:"

Yesterday, I read Obama suggests letting people tap their retirement early, tax free. That's more palitable to me with the same outcome but an equally bad idea.

I read Obama suggests letting people tap their retirement early, tax free.

So what does this genius thing people will live on when they retire? Dependence on gov or charity?

It would be far better to cut back current consumption and leave retirement funds alone. Apparently, he is targeting people who do not really need to tap the retirement funds, since they have the option to leave them as is because of the tax penalty.

For fun take a step back and think about this....

We seem to generally agree (yes Randy, group think) that this country has a problem with debt. But then it is considered a crisis that defaults discourage lending. So the solution is to free up more credit.

I think I am living in a nightmare. I'm waiting for the thought control agents to show up in the white van in their white coats to take me away. I don't know if it's just me or if I and a relatively small group are the only ones who are sane.

Definitely not one of his better ideas, but I guess the goal is it will get some unencumbered spending going on. Even I would agree that someone spending real saved money would be refreshing as opposed to another 5 easy payments of......

"Apparently, he is targeting people who do not really need to tap the retirement funds, since they have the option to leave them as is because of the tax penalty."

The government resembles those moochers everyone knows. It is just running around going "He's got some money wow, maybe he can spend it. He's got a little wealth, let's ask him for some...." It's quite pathetic.

Even I would agree that someone spending real saved money would be refreshing as opposed to another 5 easy payments of……

Yes, but this is one of the last bastions of unspent savings in the US. I'm not a conspiracy nutter (well... not much anyway) but how many times do we have to see this and not think "They" have something against savings.

Meanwhile, let's go ahead and tax the RE equity of those few who are left with any, and what the hell, while we're there, go ahead and tax any paid-off autos that are sitting around not generating interest. And, yeah, now let's let the boomers hit their 401ks and IRAs early and often, and then get them indigent before they go to the old-folks warehouses to be turned into Soylent Green.

I am guessing O'bama's thinking is this:
If you lose your job and need something to live on, doesn't it stink to have to pay a penalty AND tax on a pension distribution?

Of course, this locks in the massive losses experienced by most pensioers.

The real trick would be to employ people so that raiding their retirement account isn't their only options.

Strangely, McCain makes Much more sence here. He knows that at 70 you are FORCED to withdraw money from your IRAs. Taking out money while its value is depressed froces you to realize the loss.

The pretext to all of this is that we can somehow magically get the DOW back to 14,000. Who believes this economy, or the global economy, can support DOW 14,000? Given what we know about the leverage at banks, the massive loss of weath, the quality of assetts, the job-market.

MST, you're right of course. The worst thing I keep coming across in my life is related to that mindset of trying to tap the wealth of someone who has it too easy. It is very easy for the government to see that thinking as a solution as they obviously are. I'm not a conspiracy nut either, I'm just shocked more and more every day about how creative these boomers are at taping into every segment of this country's resources for their own gluttony. It is like some sci fi energy monster that you cut off a limb and two more sprout out to tap into the energy supply. They just don't stop.

McCain the other day on TV, was talking about how the government needs to level with the next generation that there won't be social security for them. The boomers got more than any other generation and they are still whining that isn't enough.

Malcolm:

Exactly. Demography is Destiny. With the population pyramid turned upside down, the Ponzi scheme days of Real Estate, Social Security, Medicare, Perscription Drug Bennies, Automaker Pension Funds, and soaring National Debt WILL end. It is as inevitable as the sun setting tonight.

The flood of illegals (no, I'm not trying to start anything!) is obviously meant to prop up the system for another few minutes until TPTB get out with their asses intact so they don't share the fall when the walls come a tumblin' down.

The walls will fall. The last month was just a down payment.

*Prescription*

Damned fingers!

# Malcolm Says:
October 14th, 2008 at 9:14 am

And sorry Justme, I don’t mean to knock your logic, but how is a quarterly report going to show the effectiveness or failure of something that is two weeks old?

-----

Malcolm, what I'm saying should be taken in the context of my first post on this thread. (way on the top). I'm simply concerned that the stock market initially over-reacted positively to the bailout plan. I think reality may set in once some of the earnings reports are out. The ongoing slide in the markets this afternoon is a case in point.

I really haven't made any claim of the effectiveness (or lack thereof) of the bailout plan. Time will tell,

Semicomer says : CDS is more than 56 trillion dollars, more than the whole world’s GDP. Dumping $700 billion into the market is like dumping a piece of mud into a pond

CDS (Credit Default swap) is like an insurance against default.
The numbers going around the web regarding the loss in wealth is Exaggerated. The actual loss cannot exceed the underlying credit which is insured. In our case, thats the loss in mortgage loans when people walk away from home and bank has to sell it at a lower price.

For example ( analogy)
Lets say ,we can have a big hurricane in florida and ALL the homes in florida are lost.The loss of the home value is either to the home insurance company or to the people.It cannot be to simultaneously to both, for the same house. We cannot keep double counting things.The problem is that if this kind of event causes insurances industry to disrupt or default.Nobody will build new homes in the absense of insurance. Thats what the Govt is trying to address.

I am not saying that every thing is fine and dandy, but we have to look at things as they are.
The total loss to us as a nation cannot exceed the amount of money we have loaned in excess to what it should have been according to case shiller index (around 12 T) thats it..period. Every things else is financial disruption, lost trust in the financial industry, consumer/investor sentiment.

MST sez: Demography is Destiny

Amen to that.

justme Says:
October 14th, 2008 at 10:41 am
"I think reality may set in once some of the earnings reports are out."

Sorry justme, the radical notion of stock prices being determined by actual earnings and performance of companies is just not going to fly in today's world :)

TOB, I noticed that too just between my gen x group and my gen y friends. I catch myself saying, "growing up we only had the networks and limited cable" so we all watched the same stuff. There is a huge difference now, which is why I think gen y is so open minded on things because they had the benefit of multiple sources of information. They are very enlightened and good at filtering out biases.

Oh Ho snmr, how terribly wrong you are.

Since CDS are UNREGULATED, ANYONE can take a CDS against ANYTHING.
For example, Ford issues bonds which are bought by, say, a pension fund. The pension fund buys a CDS from AIG to make them whole in case Ford defaults on the bonds. The transfer of risk was from the pension firm to AIG.
However, in the CDS world. Goldman Sachs, who holds no bonds, can bet with UBS about the likelhood of Ford defaulting. Goldman pays a 'premium' on the default insurance to UBS. If Forddefaults, then UBS pays Goldman.
How insnae is that?
Becasue now Goldman gets all of its Hedgie customers, with their trilllions of dollars, to naked short Ford into default.
That is what you get with no regulation.
That is why CDS can be much larger than the undelying problem. That is why you can get totally unregulated segments affected.
As a further example, given that the knowldeg about credit worthiness was TOTALLY Asymetrical (becasue Fitch, Moodys and Standard and Poor stink) Goldman Sachs can approach University Bike Shop and say, " Moody's says Ford is AAA, so the default risk is 1 in a 1,000. How about we pay you $2k, which is twice the default risk of Ford, if you will pay us $100k if Ford defaults." The bike store is stoked as this is easy money (and pretty near their monthly income anyway). Now when Ford pops, University Bike Store liquidates and cannot pay the $100k. But Goldman Sachs does not care since it had another CDS arangment about Univeristy Bikes goingunder.
The whole thing is sick.