Economic Crisis of 2008/2009

[Circular Logic]

Originally Posted by chikorita157

Recovery is still possible (remember, nothing is impossible), but it's very difficult than the previous recessions than before because now we have problems with banks with bad assets and now all the jobs are off-shored, so it creates a bigger mess. Simply throwing more money like the so-far failed TARP bill to fix the banking problem isn't going to help, nor did it help since it's still difficult to even get any credit even with a high credit rating and caused more problems with bailed-out banks paying big bonuses (like AIG and other banks).

The TARP is supposed to help increase credit by fixing banks' balance sheets. It lowers the risk of buying sub-prime assets, thereby unfreezing the economy.

I find it interesting they didn't go for an asset insurance scheme like in the UK though. The US plan is a rather moderate bailout...

[chikorita157]

Originally Posted by Circular Logic

The TARP is supposed to help increase credit by fixing banks' balance sheets. It lowers the risk of buying sub-prime assets, thereby unfreezing the economy.

I find it interesting they didn't go for an asset insurance scheme like in the UK though. The US plan is a rather moderate bailout...

I know what is the TARP bill supposed to do, but in my opinion, it did little to get credit flowing fast enough, mainly because of the banks unwillingly want to lend at first, the way the Bush Administration handled it and the lack of oversight and accountability, which is why it's viewed as a failure.

[Circular Logic]

Originally Posted by chikorita157

I know what is the TARP bill supposed to do, but in my opinion, it did little to get credit flowing fast enough, mainly because of the banks unwillingly want to lend at first, the way the Bush Administration handled it and the lack of oversight and accountability, which is why it's viewed as a failure.

Well, you have the PPIP to look forward to now. Let's hope that gives the US economy a kick in the backside.

[Rurik]

Originally Posted by chikorita157

Simply throwing more money like the so-far failed TARP bill to fix the banking problem isn't going to help, nor did it help since it's still difficult to even get any credit even with a high credit rating and caused more problems with bailed-out banks paying big bonuses (like AIG and other banks).

What other Bank that was part of the TRAP TARP program payed outrageus bonuses like AIG?

And I gather that the effects of the TARP are not suppossed to take the intended effect imidiatley.

[TrueKnight]

Some of AIG executives returning their bonuses in full.

AIG employees hand over bonuses: NYAG Cuomo

NEW YORK (Reuters) - Fifteen of 20 American International Group leading bonus recipients have agreed to give them back in full, said New York's top legal officer who is probing into $165 million in executive pay at the troubled company bailed out by the U.S. government.

New York Attorney General Andrew Cuomo told reporters on a conference call on Monday that he hopes to recoup $80 million of bonus payments made to Americans, or about half of the $165 million paid by the giant insurer on March 15.

An AIG spokeswoman said late Monday a "handful" of senior executives have resigned from its Financial Products unit, which Cuomo blamed last week for bringing the insurer to the brink of collapse. It was unclear if any of the executives with the top bonuses had resigned.

The spokeswoman declined to specify the number of resignations, noting they were "manageable," and said there were indications that more will follow.

Cuomo, who has pressed AIG and other banks and companies over the hot button issue of bonuses, said that so far he calculated that $50 million had been paid back by employees of the AIG Financial Products unit.

"A number of them (employees) have risen to the occasion and I applaud them," said Cuomo, whose office is looking into whether AIG and others broke securities laws by not fully disclosing information about the award of bonuses to executives for 2008.

Nine of the 10 executives who received top bonuses have agreed to return them, Cuomo said. He said about $80 million was paid to Americans, the rest outside of U.S. jurisdiction.

Cuomo has said he wanted to make public the names and details of bonus recipients, but he was assessing security and privacy of individuals following death threats against some employees.

"Our legal theory is fraudulent conveyance, and we think it is a powerful legal theory," Cuomo told reporters. "But if a person returns the money I don't it is in the public interest to name them."

He added that those people will see their name disappear from his list permanently.

AIG said in a statement that it was reviewing responses of other employees in the Financial Products division.

"We are deeply gratified that a vast majority of FP's senior leadership have expressed a willingness to forsake their recent retention payments," the statement said.

Source: http://www.reuters.com/article/newsO...44988120090324

Maybe other AIG execs subsequently will follow?

[LynnieS]

Originally Posted by Circular Logic

Well, you have the PPIP to look forward to now. Let's hope that gives the US economy a kick in the backside.

Wonderful. I've been reading about this for a couple of days now, and just hope that the "kick in the backside" isn't to loose the U.S.'s grip and force it into something worse.

If their balance sheets were cleared, would banks still lend if the economy is still bad, people are still losing their jobs, and etc?

What's to stop the private investors from walking away from a genuinely bad asset that they picked up at auction? Having them walk away means very little loss of their capital (since the U.S. is paying most of the bill) and sticking the U.S. with the asset, yes? Why would the U.S. taxpayers want trash assets then?

The private investors collect a lot of the upside (if any), so what's to stop the average U.S. citizen from demanding - in the same way that bonus payments got clawed back - a change after the Obama administration is gone? Would the investors want to take on the political risk?

How do you reconcile the bid/ask spread of an auctioned-off asset if it's too big? If you don't, then the seller might not want to sell and the buyer might not want to buy.

The FDIC is supposed to issue US$820 billion (and that's a lot of cash...) in debt, but the FDIC is funded by its member banks and was supposed to be running somewhat low in cash already. Will servicing that debt mean more money needs to be raised from these member banks? Would the healthy banks want to pay, esp. since some of them had already refused the TARP money?

[Nosauz]

Originally Posted by LynnieS

Spoiler for shits too long did it for the space:

Wonderful. I've been reading about this for a couple of days now, and just hope that the "kick in the backside" isn't to loose the U.S.'s grip and force it into something worse.

If their balance sheets were cleared, would banks still lend if the economy is still bad, people are still losing their jobs, and etc?

What's to stop the private investors from walking away from a genuinely bad asset that they picked up at auction? Having them walk away means very little loss of their capital (since the U.S. is paying most of the bill) and sticking the U.S. with the asset, yes? Why would the U.S. taxpayers want trash assets then?

The private investors collect a lot of the upside (if any), so what's to stop the average U.S. citizen from demanding - in the same way that bonus payments got clawed back - a change after the Obama administration is gone? Would the investors want to take on the political risk?

How do you reconcile the bid/ask spread of an auctioned-off asset if it's too big? If you don't, then the seller might not want to sell and the buyer might not want to buy.

The FDIC is supposed to issue US$820 billion (and that's a lot of cash...) in debt, but the FDIC is funded by its member banks and was supposed to be running somewhat low in cash already. Will servicing that debt mean more money needs to be raised from these member banks? Would the healthy banks want to pay, esp. since some of them had already refused the TARP money?

This "toxic" assets aren't valueless, they have value but in the weak economy that value deprecieates quickly. Since most of these assests are linked to subprime mortgages a quite a few of these are duds due to over agressive foreclosure on these properties but with the presidents intiative to cut down on forclosure and over all rescue the housing market, it secures most of these toxic assests from actually reaching real values of zero.

[LynnieS]

Originally Posted by Nosauz

This "toxic" assets aren't valueless, they have value but in the weak economy that value deprecieates quickly. Since most of these assests are linked to subprime mortgages a quite a few of these are duds due to over agressive foreclosure on these properties but with the presidents intiative to cut down on forclosure and over all rescue the housing market, it secures most of these toxic assests from actually reaching real values of zero.

IMHO, you have no way of determining what asset is really garbage and what asset is perceived to [presently] be garbage outside of time passing and (possibly) models, which run into model risk. Banks aren't going to say out loud which of their assets is garbage since that would mean exposing their hands; people will then bid on the pearls only.

Buying undervalued assets is what the private funds want also, esp. with good leverage given. The U.S. gets a cap of 17% of the upside and, I think(?), most of the downside. Not that great a deal if I was an investor - and being a U.S. taxpayer, I am one indirectly. Of course, the government should care most about the economy getting back onto its feet, but if I - or my kids when I have them - run the risk of having to pay for someone else's mess, I kind of want to be better protected as well.

[Nosauz]

The problem right now is if there is no liquidity those "toxic" assets, then they are zeros, even if they have a value. With out liquidity in the markets there is no way the economy will be able to bounce back. Of course the taxpayer gets the shaft, but its to get market moving. Personally as a taxpayer i'm not excited about this plan because you know what I feel that most of the private market is what got us into this mess and yet here we are the taxpayer shilling out for the booboo. Its asinine and theres no accountability when it comes to the people who allowed for so much deregulation on home loans but hey what do I know, making a 35% return a year for doing nothing just makes perfect sense to me, there could not possibly be a problem with what we were doing. The difference with this bubble is that after its burst unlike bluechips burst in the late 90s, you don't have highly trained people to actually go and make or produce new technologies or new products instead you have these brokers who still want their cut in the action, and these mortgage companies who still claim it was sound business lending 500,000 to some with a 30,000 salary. Go figure.

[Jinto]

Originally Posted by Nosauz

The problem right now is if there is no liquidity

I think you start with a wrong precondition. There has never been as much liquidity as now (if you do not count stock shares as liquidity).
The problem is, that all this liquidity is in the hands of people and institutions that do not want to spend money at the moment. Because they fear the bad times that might come.

Originally Posted by Nosauz

those "toxic" assets, then they are zeros, even if they have a value.

In a market the value is defined by demand. And there is no demand at the moment. There is demand for crisis proof assets however (unfortunately "toxic" assets do not belong to that category for a reason).
If I know that I lend money to someone else who is going to build an asset that is presumably only worth half the price once it is build, then I would demand that the other person has half of the money beforehand and I lend just half the money.
But if I am driven by the greedy idea to increase the number of possible customers by lowering these hurdles, then I just need to wait a long enough time, until the majority of my assets are "toxic" assets.
Exactly this idea of lending no matter what the situation, lead to the current situation. Its just everybody got so used to it, that the current situation of causious lending seems so alienating.

Originally Posted by Nosauz

With out liquidity in the markets there is no way the economy will be able to bounce back.

Since there is enough liquidity, I would claim: Without consume there is no way the economy will be able to bounce back. This however requires people/institutions with liquidity that feel save/good to spend their money to either buy products or some sort of service value. The current situation isn't anything like that. And that actually makes things worse.
Well, another thing allowed this situation to rise. The few rich people become ever more rich. Rich and horting most of a nations liquidity. Thats a problem. But a selfmade one. If payment was distributed more equal, everyone could consume more. The rich people usually can't spent all their money for consume... the pile of cash/assets just keeps growing and growing (with the occasional exception of someone rich spending a lot of money for something... but never enough to level the amount of liquidity that piles up considering all rich people).

Originally Posted by Nosauz

Of course the taxpayer gets the shaft, but its to get market moving. Personally as a taxpayer i'm not excited about this plan because you know what I feel that most of the private market is what got us into this mess and yet here we are the taxpayer shilling out for the booboo.

The principle of privatizing wins and socialize losses. Astonishing that most people remain calm. For the top 5 or 10% there is actually a reason to stay calm, because they do not loose much in this scenario. But for most people its just a loss through depreciation.

Originally Posted by Nosauz

Its asinine and theres no accountability when it comes to the people who allowed for so much deregulation on home loans but hey what do I know, making a 35% return a year for doing nothing just makes perfect sense to me, there could not possibly be a problem with what we were doing. The difference with this bubble is that after its burst unlike bluechips burst in the late 90s, you don't have highly trained people to actually go and make or produce new technologies or new products instead you have these brokers who still want their cut in the action, and these mortgage companies who still claim it was sound business lending 500,000 to some with a 30,000 salary. Go figure.

Exactly, and nobody questioned it. But now, when a change could be brought... most people want the old system back. A strange place this planet.

[LynnieS]

Originally Posted by Nosauz

The problem right now is if there is no liquidity those "toxic" assets, then they are zeros, even if they have a value. With out liquidity in the markets there is no way the economy will be able to bounce back. Of course the taxpayer gets the shaft, but its to get market moving. Personally as a taxpayer i'm not excited about this plan because you know what I feel that most of the private market is what got us into this mess and yet here we are the taxpayer shilling out for the booboo. Its asinine and theres no accountability when it comes to the people who allowed for so much deregulation on home loans but hey what do I know, making a 35% return a year for doing nothing just makes perfect sense to me, there could not possibly be a problem with what we were doing. The difference with this bubble is that after its burst unlike bluechips burst in the late 90s, you don't have highly trained people to actually go and make or produce new technologies or new products instead you have these brokers who still want their cut in the action, and these mortgage companies who still claim it was sound business lending 500,000 to some with a 30,000 salary. Go figure.

One problem that I see with the banks not ridding themselves of these "toxic" assets is that in order to do so, they must abide by the market's preceived value of each asset. Either that, or convince the market that its bid price is too low and the banks' ask price is the right one (or compromise). If you have each of these assets on your books at a certain price and then sell it at a lower price, that's not a good thing. If a bank then marks down their assets, if I'm not mistaken, that would impact the bank's regulatory capital requirements - not to mention running the risk of the bank being declared insolvent. If assets' worth is less than its obligations, that is a problem unless you can raise funds somehow, and in the current climate, that's pretty much gone.

Spoiler for Click me for more...:

Mortgage pools' values are based on models driven by interest rate(s), prepayment, default rate, and so on as well. Old models aren't really correct now, esp. with the default rate, IMHO, so valuing these is harder.

I see the preceived solution is to get rid of the "toxic" assets from the banks' books at prices that would not hurt the seller banks. With the extra capital, they would then be free to lend more. The auctions would then set the value of the asset.

The problem is do people really feel banks would lend strongly to people if the economy does not improve, the borrower might run the risk of losing his job, a company/store/etc might declare bankruptcy for lack of customers and so on? Not without additional guarantees, I don't see that happening.

On the banks' side, would they agree to the auctions' selling prices as well? They can set a reserve price on each asset, for example, and not go through with the deal if it isn't met. Nothing in the PPIP says it can't be done.

On the private investors' side, the money loaned by the government is non-recourse, so they can walk away if they find the asset bought is really a dud. Who gets the asset then? For now, the government does.

On the government's side, it's giving out money from the Treasury and lending via FDIC (through, I hear, the Treasury, but I haven't heard of this from 2+ sources so no idea if true). FDIC has less than US$820 billion right now, so how will it repay the debt? Not by getting money from its member banks, IMHO, since that might cause them to become insolvent. The Treasury might have to write off the debt then...

BTW, the blue chips burst in the late 90's? I seem to remember LTCM (a hedge fund) declaring then that it run the risk of defaulting on loans, which would cause lenders to write down everything. Something else happened?

[Demongod86]

LTCM blew up FYI. They made the assumption that the future would behave identically to the past. And of course, in order to do anything data driven, you need *data*, which is of course, information gathered in the past, meaning that when the paradigm shifts, you're going to feel pain.

This usually isn't fatal, however, and if you're clever enough with your algorithms, you might make out even better than you were to begin with!

But LTCM thought their models could never ever be wrong, and so they leveraged themselves 40 to 1, thinking nothing could ever go wrong.

Well, guess what?

With that kind of leverage, in the long run, you're right. In the short run, you're screwed.

Yesterday, I learned about a model to create CMOs (collateralized mortgage obligations). Guess what? It makes these two assumptions:

1) All mortgage pools are independent.
2) There's enough liquidity to trade out of any position.

If the first becomes violated, you're going to feel pain.
But if the SECOND is violated, the first will get violated in short order.
And then, at 30 to 1 leverage, you're dead.

And guess what? When huge institutions start failing, credit dries up. Know how Wall Street runs? On extremely liquid short-term low-interest rate loans (see: yield curve) to purchase extremely illiquid assets with much higher long-term returns.

What's the catch? These institutions are, at all times, a stone's throw away from a financial crisis. If they can't roll over their short-term loans, they can collapse overnight. That's *EXACTLY* what happened to Bear Stearns.

In short, these financial institutions have a MASSIVE exposure to the imbalance between the duration of their short-term loans and their long-term assets. And that, my friends, is the hidden monster of leverage. 99% of the time, you make money.

And then when you roll that unlucky number, you get murdered on the spot.

[Nosauz]

this wasn't rolling an un lucky number this was unsound economics don't confuse the two...

[LynnieS]

Originally Posted by Demongod86

LTCM blew up FYI. They made the assumption that the future would behave identically to the past. And of course, in order to do anything data driven, you need *data*, which is of course, information gathered in the past, meaning that when the paradigm shifts, you're going to feel pain.

This usually isn't fatal, however, and if you're clever enough with your algorithms, you might make out even better than you were to begin with!

Yes, I know about LTCM. Friends and I, back then, were wondering if we would lose our jobs because of the losses that would have happened had the rescue not taken place. What I didn't know was this "blue chips collapsing" that got mentioned. Some clarification would be nice.

Model risk might be recoverable from, but IMHO, it's better to just cut your losses and move on. The creator of the model might not be willing to do that, though, and decide to go down with the ship.

There can be any number of reasons why a model goes bad - going from not looking far back enough to cherry-picking your dataset. I don't know if you can call the sub-prime mortgage event a paradigm shift... We have had collapses of bubbles in the past, and a part of me wonders what would have happened if these pools were (1) rated as "speculative" and (2) disposed of to other investors instead of being held by the banks. It's pretty steady income, IMHO, till they blew up.

Originally Posted by Nosauz

this wasn't rolling an un lucky number this was unsound economics don't confuse the two...

In a way, it is unlucky. Their models should have included such an event in the underlying assumptions, but if so, they probably discounted it. It wasn't 100% sound, but the cost of hedging that risk was likely too great for the probability of it happening. Pretty standard, IMHO.

[Nosauz]

Ummmmm loaning way too much money to people who could barely make ends meet is unlucky... thats just stupid just like the subprime mortgages. What would happen if their cost of living were to skyrocket? Say gas prices spike? Oh wait that did happen.. it was inevitable considering the volitility in middle east compounded by the agricultural push to support ethanol... in other words one way or another... these loans were going to get defaulted and of course business is all about the short term in the U.S.

[yezhanquan]

As Alucard would say,"They've definitely kicked the iron board this time."

[Shadow Kira01]

US and Europe Reject Chinese Bid for New Global Currency

Luckily, Europe also agrees with rejecting an unreasonable bid for a new global currency amidst the global ailing economy.

[yezhanquan]

A currency created out of thin air isn't going to work. China would have to work very hard to turn its renminbi into a global currency. For now, they just have to continue using the dollar and to some extent, the euro.

[Xellos-_^]

the financial illiteracy of the avg American continue to astound me. I am reading some of the post on washpost and sfchron regarding Wellsfargo 3billion profit. There were people compliant about how wells only produce a 3billion profit after been give 25bil in bailout money.

No wonder the country is having so much trouble when the majority country can't remember news form 6 months ago and can't understand the fact that the 25bil were loans on the asset sheet and is seperate form the 3billion in profit, how hard is that to understand?

[Nosauz]

well just think, most of these people have substantial credit card debt on top of that hefty mortgage. Having a mortgage is one thing but then to have personal debt that has intreset rates of 14.5-21% and keeping your credit cards maxed out just shows you the fiscal awareness most americans possess.