Lehman Brothers

[rach 1]

I'm going to ask a perhaps very naive questions here. It's all a bit beyond me.

 

If the economy is in such a disaterous mess right now, how come this has all seemed to happen all of a sudden? Why wasn't something done earlier? Should 'normal' people be really angry at someone, and who?

[Tubby Beaver 209]

I dunno Rach, I'm in the same boat in that I know nada about how economies work and how the money market affects us regular people, but these orgs take huge risks and most of the time its ok but every now and then they seem to take a huge fall....as long as its not my money, its their loss. I guess if you entrusted them with your money then you'd want answers

[JA2340 16]

The worrying thing for me is that these people (Lehmann et al) have been happy to take all they can get from the punters in the good times, and when the times get a bit tough, call for government assistance.

 

Sorry, they got gazillions of dollars from average consumers as they gouged the rates to their own benefit, then want government asistance to bail them out when they can no longer make the multi millions they are used to.

[Rag-Doll 0]

Aaagh!

 

Guys, seriously. It’s as if the banks just siphoned money out of the economy and somehow they went broke. You know the US700b in bad assets that the Fed is going to buy? Do you know what they are? Mostly they are real estate assets - meaning that somewhere, some average Joe was able to buy a house rather than pay rent and the loan he took out was sold by the lender to a firm that turned the loans into investment securities which were then sold to people all over the world. The money from these sales went back into the system so more average Joes could buy a house. Oh how greedy!

 

Yes there were problems with what was going on:

 

1.The very common limited recourse loan (meaning the only collateral the lender can use to secure the loan is the house which allows borrowers to walk away from the loan/house with no further obligations and no danger of becoming bankrupt - a situation almost unheard of in other countries).

 

2. Being able to on sell the loans meant the lender had no real interest in the borrower's ability to repay the loan which in turn lead to loans that were very cheap up front but which the borrower was very unlikely to be able to afford when the honeymoon period ended– no problem for the borrower if the loan was limited recourse.

 

3. Far too many loans being made to people who could not demonstrate an ability to repay them (the low doc, no doc, sub-prime type of loan).

 

4. Very cheap money (very low interest rates) stemming from the Fed's need to stimulate the economy and avoid a recession.

 

5. An unprecedented decline in the US housing market which means that the collateral securing the loans is worth less than the loans meaning that even responsible lenders are under secured - see above about the problems with the limited recourse loans.

 

6. Everybody and I mean EVERYBODY bought the CDOs - pension funds, local councils, hedge funds, investment funds, banks, companies, private investors etc. these were seen as good investments and they were, until the housing market went nuts. When the Fed bails out the banks, it is supporting the wealth enormous numbers of regular people.

 

 

 

People did see this coming. People were betting for a while that this was going to happen, but the Fed had to keep reducing interest rates and what politician is going to get in the way of Joe average buying a house for his family? Once the price of houses started going down, the entire structure started to collapse because all of a sudden all of those CDOs (secured ultimately by the real estate) were not as well secured as they should have been. AAA investments stopped being AAA investments and on it went.

 

Predatory short selling has also played a big part in the demise of firms like Bear Stearns and Lehman Bros.

 

It makes good copy for the media to beat up the banks but the banks do more than just deal in real estate assets. When they go out of business lots of other types of business and services they provide go with them- asset management, private banking, share trading, corporate finance etc. People will be cheering from the sidelines until next year when they want to buy a house or a business or a car and all of a suddent they don't have a lot of choice as to which bank they use and the interest rates will be higher because the govenments have imposed additional capital and other restrictions, the cost of which is passed on to the consumer, or the bank requires so much paper work and proof of income that it is almost impossible for a student or someone self employed to meet the documentation requirements etc.

 

 

[BagOfCrisps 24]

Just got this from Michael Moore:

 

Friends,

Let me cut to the chase. The biggest robbery in the history of this country is taking place as you read this. Though no guns are being used, 300 million hostages are being taken. Make no mistake about it: After stealing a half trillion dollars to line the pockets of their war-profiteering backers for the past five years, after lining the pockets of their fellow oilmen to the tune of over a hundred billion dollars in just the last two years, Bush and his cronies -- who must soon vacate the White House -- are looting the U.S. Treasury of every dollar they can grab. They are swiping as much of the silverware as they can on their way out the door.

 

No matter what they say, no matter how many scare words they use, they are up to their old tricks of creating fear and confusion in order to make and keep themselves and the upper one percent filthy rich. Just read the first four paragraphs of the lead story in last Monday's New York Times and you can see what the real deal is:

"Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.

 

"Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

 

"At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.

 

"Nobody wants to be left out of Treasury's proposal to buy up bad assets of financial institutions."

 

Unbelievable. Wall Street and its backers created this mess and now they are going to clean up like bandits. Even Rudy Giuliani is lobbying for his firm to be hired (and paid) to "consult" in the bailout.

 

The problem is, nobody truly knows what this "collapse" is all about. Even Treasury Secretary Paulson admitted he doesn't know the exact amount that is needed (he just picked the $700 billion number out of his head!). The head of the congressional budget office said he can't figure it out nor can he explain it to anyone.

 

And yet, they are screeching about how the end is near! Panic! Recession! The Great Depression! Y2K! Bird flu! Killer bees! We must pass the bailout bill today!! The sky is falling! The sky is falling!

Falling for whom? NOTHING in this "bailout" package will lower the price of the gas you have to put in your car to get to work. NOTHING in this bill will protect you from losing your home. NOTHING in this bill will give you health insurance.

 

Health insurance? Mike, why are you bringing this up? What's this got to do with the Wall Street collapse?

 

It has everything to do with it. This so-called "collapse" was triggered by the massive defaulting and foreclosures going on with people's home mortgages. Do you know why so many Americans are losing their homes? To hear the Republicans describe it, it's because too many working class idiots were given mortgages that they really couldn't afford. Here's the truth: The number one cause of people declaring bankruptcy is because of medical bills. Let me state this simply: If we had had universal health coverage, this mortgage "crisis" may never have happened.

 

This bailout's mission is to protect the obscene amount of wealth that has been accumulated in the last eight years. It's to protect the top shareholders who own and control corporate America. It's to make sure their yachts and mansions and "way of life" go uninterrupted while the rest of America suffers and struggles to pay the bills. Let the rich suffer for once. Let them pay for the bailout. We are spending 400 million dollars a day on the war in Iraq. Let them end the war immediately and save us all another half-trillion dollars!

 

I have to stop writing this and you have to stop reading it. They are staging a financial coup this morning in our country. They are hoping Congress will act fast before they stop to think, before we have a chance to stop them ourselves. So stop reading this and do something -- NOW! Here's what you can do immediately:

 

1. Call or e-mail Senator Obama. Tell him he does not need to be sitting there trying to help prop up Bush and Cheney and the mess they've made. Tell him we know he has the smarts to slow this thing down and figure out what's the best route to take. Tell him the rich have to pay for whatever help is offered. Use the leverage we have now to insist on a moratorium on home foreclosures, to insist on a move to universal health coverage, and tell him that we the people need to be in charge of the economic decisions that affect our lives, not the barons of Wall Street.

2. Take to the streets. Participate in one of the hundreds of quickly-called demonstrations that are taking place all over the country (especially those near Wall Street and DC).

3. Call your Representative in Congress and your Senators. (click here to find their phone numbers). Tell them what you told Senator Obama.

 

When you screw up in life, there is hell to pay. Each and every one of you reading this knows that basic lesson and has paid the consequences of your actions at some point. In this great democracy, we cannot let there be one set of rules for the vast majority of hard-working citizens, and another set of rules for the elite, who, when they screw up, are handed one more gift on a silver platter. No more! Not again!

 

Yours,

Michael Moore

[Rag-Doll 0]

What a tosser - MM, Bags, not you!

 

If this was all cuased by the lack of health insurance, how then is it the fault of the banks?

 

 

 

Unbelievable. Wall Street and its backers created this mess and now they are going to clean up like bandits.

 

This so-called "collapse" was triggered by the massive defaulting and foreclosures going on with people's home mortgages. Do you know why so many Americans are losing their homes? To hear the Republicans describe it, it's because too many working class idiots were given mortgages that they really couldn't afford. Here's the truth: The number one cause of people declaring bankruptcy is because of medical bills. Let me state this simply: If we had had universal health coverage, this mortgage "crisis" may never have happened.

 

This bailout's mission is to protect the obscene amount of wealth that has been accumulated in the last eight years. Hasn't nearly eveyone enjoyed an increase in wealth over the past 10 years?

 

It's to protect the top shareholders who own and control corporate America. No. All shareholders benefit, that includes pension funds and superannuation funds and mums and dads and everyone else who used their increasing wealth to invest in the booming stock market.

 

There is an interesting article in the Aust news about how the lack of money means a lack of building approvals because the builders can't get loans/ovedrafts etc. To let the banks fail would be to turn off the money entirely. The world's economy really wuld grind to a halt. Forget credit cards, forget education loans, home loans, forget business start up loans or affordable insurance, forget business overdrafts etc.

[BagOfCrisps 24]

(just want to point out that Michael Moore was emailing me - I presume - because I signed up to view his new movie for free. can't remember when that was supposed to be actually..... but not looks like I'm his mate!)

 

[soubriquet 0]

Perhaps if the 700 billion dollars was spent paying off the sub-prime mortgages of the poor, and returning homes to the dispossessed we might see any of the following. In no particular order.

 

A lift in the wealth of the nation.

People having a stake in their homes and local communities.

A significant slice of society being given a leg up from being welfare dependent to being property-owning middle class.

 

But that wouldn't be the capitalist way, would it?

[Rag-Doll 0]

That's fair Soubs - the Fed could just ask, who has recently bought a house they can't afford?

 

Anyone who puts their hand up gets a cut of the cash. Reminds me of The Life of Brian....I'm Brian, no I'm Brian. I'm Brian and so is my wife!

[soubriquet 0]

All the Fed has to do is to ask the lenders for details of their bad loans. I'm sure the lenders will have the relevant documents when they front up for their handouts....

 

As an aside (this comes from the memsahib) post-WWII MacArthur effectively confiscated the property of the Japanese landowners and gave it to the tenant farmers. This was a measure to enhance social stability. MacArthur was a military man, more interested in results than politics and ideology.

[NoFakie 45]

Soubs is on the right track. There is only one way you make an ownership society. You have to make homes affordable. The best way is to invest in industry and education and create good well-paying jobs. Its hard work and its long term and no-one will get a quick buck or big bonus, but it has a proven track record of working. Limiting speculation on homes also helps because high multiples of earnings let fewer and fewer people in. Creating lax credit just gives you a housing bubble and lots of people in debt like we have now. Everyone would be better off renting like those Frenchies, Dutchies and Germans with their high personal savings, short working weeks, etc., etc.

 

Since 2000, home ownership has fallen in the USA. You measure it by owned equity versus market value. Its now 45%. Before Reagan it was 70%. The current figure includes 38 million homes owned outright. So it means a very large number of people with mortgages have very little equity indeed and are heavily in debt. Not homeowners, just in debt. During a housing boom, owned equity should actually increase as existing owners see their value increase while their outstanding mortgage gets paid off. Unfortunately, along with ninja loans for anyone with a pulse, the financial sector has been giving anyone with a house already all the heloc money they could ever want to piss away on suvs and countertops, some of it on the same option and teaser conditions as subprime that are way beyond the understanding of the average person. Or at least the average person in a bubble with free money under their nose. No one gets taught how to manage finances in school after all. Anyway, the net result of that also is less ownership. More debt. Again, if the idea is ownership, why issue interest only and negative amortization loans? Option arms where the principal can increase? There is no way that this can be described as benevolent George Bailey type social engineering.

 

It should be noted that the strongest criticism of this bailout is coming from the right from Ron Paul and the small government/libertarian crowd, all the free marketers, and all the contrarians. They're all going mad and screaming "socialism" and "USSA" (as an aside, its more like old fashioned corporatism to me). For the "jealous of high flyers(?)" argument, some noted critics of the financial sector are extremely wealthy investors. Jim Rogers etc. Michael Moore is a w""ker but he's right to bring up health care, bridges in Minnesota that don't collapse, levies that protect people, rebuilding for folk hit by Katrina or Ike, health care for Iraq War vets, or anything else he thinks is worthwhile because all government spending has an opportunity cost. Money spent on this is not going elsewhere.

[SKI 15]

Quote:

People did see this coming. People were betting for a while that this was going to happen

Which people were they? The ones in the industry?
I'm pretty sure that the majority Mr & Mrs Average see it from a rather different perspective.

[soubriquet 0]

Those who have been through previous bubbles knew this one would burst, just like all the others.

[gerard 6]

How about that bailout package, eh?

[Rag-Doll 0]

Originally Posted By: soubriquet

As an aside (this comes from the memsahib) post-WWII MacArthur effectively confiscated the property of the Japanese landowners and gave it to the tenant farmers. This was a measure to enhance social stability. MacArthur was a military man, more interested in results than politics and ideology.

...And the Japanese farming sector has struggled with the resulting loss of productivity ever since! I don't know that MacArthur was being alteristic when he did that, wasn't it more a part of the process to break up the big Zaibatsus that were seen as being complicit in Japan's military agression?

[Rag-Doll 0]

Nice one Wiggs.

 

 

The next few days will be interesting, actually, probably the next 12 mths!

[soubriquet 0]

Quote:

...And the Japanese farming sector has struggled with the resulting loss of productivity ever since! I don't know that MacArthur was being alteristic when he did that, wasn't it more a part of the process to break up the big Zaibatsus that were seen as being complicit in Japan's military agression?

Second point first. I don't know enough about the big picture to have an opinion about the industrial conglomerates, other than to know they were broken up in order to hobble their power. I don't think that an argument that landlords of Oishida were a threat to the Allied Powers is sustainable. On the local level, it was definitely an exercise in social engineering. Basically completing the transition from a feudal to a modern society by turning serfs into the property owning middle-class they are now.

Loss of productivity? I think not. Productivity can be measured, and there's no argument. Japan averages 5 tonnes rice/hectare with a single harvest. Thailand: 2.3 tonnes/hectare with two harvests p.a.

Source: http://www.irri.org/science/cnyinfo/japan.asp

I come from a farming background, and can assure you that (this part of) Japan has the most productive agriculture I've ever seen.

If by "loss of productivity" you mean "inefficiency", then that is an economists argument, not a scientists.

Subsidies paid direct to farmers (rather than subsidies paid direct to bankers) have a number of flow on effects which don't show up on the balance sheets.

First is maintenance of the rural infrastructure and ecology. Paddies support herons eat frogs eat mosquito larvae. Rivers are clean and full of fish. Paddies store water during the wet season, slowing runoff, preventing erosion and flooding. Go to broad acre (an ecological disaster in the US/Aus/UK), and there is immediately a cost. It is simply being transferred from the agriculture to some other budget.

Second. Farmers generally don't drive Porsches or drink Bollinger. Rural subsidies flow into the local economy, and support the myriad local businesses. Cutting subsides will bankrupt the rural economies, forcing people off the land to seek work in the cities. Nice one for an economist, forcing wages down and profits up, but not very clever eh?

[Rag-Doll 0]

I guess I did mean efficency, but I take your points and largely agree.

[soubriquet 0]

Goody I don't use the term "capitalism" as a pejorative, and it has its place in a mixed economy. The emphasis needs to be on "mixed" though.

[grungy-gonads 54]