icarusancalion

Well, I've got degrees in economics and I spent 20 years on Wall Street, with a specific specialty in mortgages and other structured products. In my experience, economists don't know dick about the markets - for every economist you add to the debate, you get at least two more conflicting theories.

That doesn't mean I think this plan is a good idea, but the stupidity (both well-meaning and malicious) underlying the problem is so widespread - from original borrowers, to government intervention, to inadequate and ignorant supervision, corporate greed, too many investors chasing too few assets, foreign banks looking to circumvent their investment guidelines, investors violating all their risk guidlines, political grandstanding which blurs the fact that "Wall Street Fat Cats" are actually all the little guys who've got a pension plan, not to mention an economy which has been encouraged to rely more and more on the housing industry - it's not just about recapitalizing the banks and, at this point, doing something is better than doing nothing.

And the thing is we don't really know how "toxic" these assets are. We know that there isn't a market for them right now, but that doesn't mean that every loan is in default. The rate differential between where the government would issue debt and what it would receive on the loans could be pretty profitable...if anybody knew exactly what was going on - which they don't, really.

This year, and for the first time in my life, I had thought I might actually vote for a major party candidate, but now I'm feeling pretty much "a pox on both your houses." And I'm astounded at how Warren Buffett can be a major "consultant" in all this mess and still be scooping up billions in distressed assets...and by "astounded" I mean not very much surprised at all.

From:

In my experience, economists don't know dick about the markets - for every economist you add to the debate, you get at least two more conflicting theories.

That doesn't surprise me. :)

I'm glad you're here, because I have some questions.

...it's not just about recapitalizing the banks and, at this point, doing something is better than doing nothing.

Do you mean that at least doing something is better than nothing, in order to stall the market freefall? If that puts us on the hook for $700 billion dollar debt, won't that hurt us more in the long run, even if we have a temporary Dow Jones recovery? Or do you think doing something will give us time to fix the whole mess?

Even if every economist has a different idea how to fix the problems, it seems like we need to know first what the problems are. Second, we have a palette of different options on how to solve it. The IMF (not my favorite group, but they're good for studies) did a study on different banking bailouts (http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf) and how effective they were.

Why are we going for buying the debt? What are the advantages? What are the disadvantages? I'm hearing no discussion about the substance of the deal, and that makes me leery, since that's how we got saddled with NAFTA.

I read a WSJ article by the former FDIC chairman (http://online.wsj.com/article/SB122178603685354943.html) where he explained that the S&L scandal of the 1980s was actually worse than the current situation, but banks weathered it because -- and here's where I'm paraphrasing -- at the time banks weren't required to report the fair market value of their assets.

Now I'm a distrustful person and therefore a big fan of regulations -- deregulation usually means "the crooks get off scott-free" to my lizard brain. ;) But market value can be inflated just from perception ("you collect barbie dolls? What a worthless pile of junk!" can change to "wow, you collect vintage barbie dolls? Your collection's worth a mint!"). Tying asset values to market values... I can see how that would be a problem.

What do you think about his points?

And the thing is we don't really know how "toxic" these assets are. We know that there isn't a market for them right now, but that doesn't mean that every loan is in default.

And just because the market is bad now, there is intrinsic value to property. You can count on it recovering eventually, though you don't know how much, or what will affect it later. Barbie dolls on the other hand, if the fad passes, it passes.

The rate differential between where the government would issue debt and what it would receive on the loans could be pretty profitable...if anybody knew exactly what was going on - which they don't, really.

See, now that's the big problem. I thought there was more transparency as to just how bad these debts are. Or do you mean that we just don't have a crystal ball to predict how well home owners will do in paying their mortgages? Because with the rising unemployment rate, the increase in the price of gas and cascading increase in food prices, etc., the falling dollar due to our high deficit, it doesn't look good to me.

Last question, this one about deregulation, what do think the impact of deregulating commodities has had? Should we -- and can we? -- bring those regulations back?

From:

Oh dear, don't get me started on FASB. They're famous for creating accounting rules with no clear implementation.

What the ex-FDIC chairman was saying is that assets shouldn't be marked down beyond economic levels. In the case of the Third world debt of the 1980's, the fundamentals of the debt (the country's ability/willingness to pay, political changes, issues of currency convertibility, etc.) meant that it was economically appropriate to consider that stuff practically worthless. But when a market is stalled and investors are unwilling to play in it, that doesn't mean the assets within that market have no value.

On the other hand, if there's been a bubble in the market and prices have corrected, it's appropriate to recognize that. An example of this is when the Japanese real estate bubble burst and the Japanese banks/government were unwilling to write down their portfolios. The real estate stayed locked at unrealistic levels with no way to re-enter the market and become a viable asset again - Japan was left with over 10 years of recession.

In the current case, the mark to market issue is more complex. There's a lot more borrowing going on than just the guy who takes out the mortgage or the bank which borrows to issue more mortgages. There are also the investment banks which borrow money to buy the mortgages (in securitized form) and then use those same mortgages as collateral to borrow even more money. There are the guys who buy and sell complex hedging transactions (which sit off the books) that are based on the mortgages (or other securities) and which require cash collateral (also borrowed) when the markets move a specific amount. There's the insurance written and purchased to convert less credit-worthy securities into AAA securities that will fit bank guidelines, and which needs to be adjusted when the underlying asset value changes. This kind of marking to market is more about the credit-worthiness of the counterparties than it is about the price of real estate in southern Nebraska. There aren't a lot of accountants with the advanced calculus you need to figure this stuff out.

So, it kind of looks like the banks/investors which have been violating their risk guidelines should be left to pound sand and we should worry about the homeowners only - except that everything is so intertwined. A lot of lending (including subprime) is based on the London Interbank rate, which is the rate at which banks are willing to lend to each other. The Fed can lower rates all it wants, but if LIBOR goes up people can't make their mortgage payments.

You're right about there being an intrinsic value to property. I think the idea was to have an orderly disposition of the real estate assets and to collect interest and principle payments in the meantime. Just because a mortgage was written badly doesn't mean it is bad (like Jessica Rabbit). If the feds borrow money at under 1% and collect interest at over 6%, a lot of those loans can go into default and it still isn't a bad deal. Of course, default is a bad thing and adds more complexity. And to tell the truth, I haven't a clue what all is in those portfolios they're talking about acquiring.

From:

I know, blah, blah, I've been talking too much, but to answer a couple more questions. I don't think there's a lot of transparency as to the details of the situation. I don't see how there could be, things have moved too fast - but I think there's a general idea of the kinds of assets they'll encounter. There doesn't need to be a crystal ball to predict homeowner behavior - there are a lot of complex equations which already do that and those equations are what feed into the market price of a mortgage.

Having said all this, I think it's extremely important that some confidence be restored to the markets. People may have money tied up in their homes, but they've also got an enormous amount of money tied up in pension funds, which are pretty much all in the stock market. As much as we like to talk about free markets, people need to be fed and housed and we'll all have to pay for it one way or another. I do feel there needs to be more thought behind any bailout plan and that the public needs more information before they buy into it, but there's no way to get it "right" - we need to agree on certain fundamentals and I'm afraid the details will be left to bite us in the ass some other time.

From:

Thank you. You're not talking too much at all. This was all very enlightening. :)

From:

reedfem.livejournal.com

When you have an economic problem, you talk to an economist. Don't you?

Not when you have "maverick" congressmen interfering in the process, you don't...

From:

I have to disagree with you here. I'm not saying that your wrong about there being a better way to do this. I'm sure there is. I sure there are real problems worth the bill. But I'm also sure that the longer we do nothing the worse this will get.

Wamu, as you know, has already fail. Wachovia failed this morning. Both my roommates and my brother used that bank. My roommate's paster just figured out their church's $600,000 worth of CDs are not FDIC insured. If that finance group goes down, they'll be wiped out. My mom works for a bank. My friends SO worked for Merrill lynch. She doesn't know if they can make rent if he doesn't have a job. The Dow is down over 250 and it's barely lunch time. It's spreading. A European bank has already failed.

So yes, this bailout stinks. But I don't think anything better can make it down to the floor in time to do any good.

From:

I agree we have to do something. But if that something doesn't work, then not only do we have the current crisis, we have the current crisis plus a $700 billion dollar debt.

I'm suspicious about the WaMu bank failure. I understand that WaMu was doomed either way, but there are roughly 317 banks in trouble right now, and yet WaMu was the only name leaked (usually, the names of banks in trouble aren't released because it could cause a run on that bank).

What companies knew about WaMu being in trouble? JPMorgan and Wells Fargo. But JPMorgan sat on their hands waiting for a better deal. (I don't know what happened with Wells Fargo's bid.)

After the "leak," the CEO of WaMu still didn't want to sell. The feds waited till he was on a plane and then seized the bank -- and sold it to JPMorgan.

Now I see a JPMorgan-sized loophole in that most recent deal. From AP:

...there is an exception made for assets acquired in a merger or buyout, or from companies that have filed for bankruptcy.

This detail could allow JPMorgan Chase & Co. to sell toxic mortgages and other assets it gained control of last week when it purchased Washington Mutual Inc. for a higher price than the failed thrift paid for them.

Sounds to me like JPMorgan has some powerful friends.

Wachovia was sold to Citibank, which was one of the banks involved in Enron.

A former FDIC chairman says that part of the problem is that the rules require that... and wow, I am paraphrasing like mad and make no pretense I'm an economist... that asset values be stapled to "fair" market value. That's a misnomer (there's no such thing as a "fair" market value) and a terrible way to calculate asset values because market values balloon unrealistically and fall like a ton of bricks on a pulsar. He said that the Savings & Loan crisis in the 1980s was much worse than the current crisis, but the impacts now are much worse.

So to quote Obama from the debates (when he was asked how the bailout would affect his own plans) we need a scalpel, not a hammer.

From:

Well, the bill has failed and the market has crashed by almost 800 points

What really bothers me is that it didn't fail because of fundamental objects to the bill (granted, some votes were cast for that reason), but because of moral cowardness on the part some congressmen in tight election. Just look at 538 for that breakdown.

But I was watching the debate and the votes. Most of the speeches, from both sides, were incredibly moving. Then a vote was called. At first it was verbal, shout out of Yea and Nay. It was obvious listening the Yeas had it. Then, before it could be declaired passed, someone called for the vote to be recorded. Once it was on record, the nays had it. So a lot of people changed their votes when they had to go on record. To quote SNL, I call on them to grow a pair.

From:

Yes, I saw that.

http://www.fivethirtyeight.com/2008/09/swing-district-congressmen-doomed.html

They're scheduled to come back to it Thursday, and this time they'd better fix some of the problems.

First, they need to not have just a "voice" regarding the golden parachutes for execs of failed companies. A "voice" -- that's ridiculous.

Next, they need to remove that giant JPMorgan loophole that allows JPM to not only scoop up WaMu, but also rip off the taxpayers in the process by selling the debt to the government at a profit.

Finally, they need to address the fact that a lot of this toxic debt is the result of fraud, where homeowners -- especially the lower income, African Americans, and the elderly -- were swindled. These firms are currently under investigation by the FBI for fraud.

I've seen video of a doddering old lady who was talked into refinancing her house, and she was told of a fixed interest rate. When they brought her the paperwork, they changed it to a balloon payment and told her it would be fine. She lost her house. Frankly, I don't think this woman was capable of even understanding the terms she was being offered.

The current form of the bailout has no help for these people whatsoever.

If there had been some sort of help for the little guy, you bet your sweet ass these swing state politicians would have voted for it.

Not including that help in the first place was a tactical error.

From:

Yep, "moral coward" and "congressman" are like peanut butter and chocolate. I can't imagine Pelosi couldn't strong-arm 12 more Democrats to get the thing passed. But really, nobody much liked this bill - including the zillions of folks who flooded the House with e-mails. As you say, there's no excuse for including financial institutions which not only *aren't* in trouble but have the resources to acquire other institutions. That's breath-takingly "in your face."

From:

At this point I'm thinking: f@#k the republicans. A big part of the reason the bill didn't contain a lot of the stuff you mentioned was because the conservatives didn't want to vote for something they considered socialism. Well, if repubs are going to make the dems carry all the weight anyway, I think they should shove in every bit populist policy they want.

From:

Senator from Washington just yelled about the JP Morgan issue on the senate floor in the debates. She's ticked. Just thought you'd like to know.

From:

Bravo, Cantwell!

She also torpedoed drilling in the Alaska National Wildlife Refuge. She's got my vote for life.

From:

zafra.livejournal.com

Well, at this point it's moot since it wasn't passed in the House.
Throw everyone out on their arse. And throw all the would-be-groomers out, too. Or at least change the rules so it doesn't go back to the same-old, same-old once the Yale and Harvard set being groomed to take over another twenty years from now get there. *is bitter and likes it that way*

From:

I am stunned it didn't pass in the House. On the other hand, I despise the JPMorgan loophole and would like to see that removed, ASAP.

From:

webbapettigrew.livejournal.com

Honestly? I think it would've been better had everyone been given a million-dollar stimulus check. Seriously. It can't be worse than what the government is going to do. At least with a million dollars I could pay off my house and do some investing in retirement and pay for my kids' college and take a trip. Wouldn't those things help the economy?

Of course, inflation would run rampant and it would take a million bucks to buy bread in six months, but geezum, I hate my government.

From:

sarcastic-irony.livejournal.com

Oh, I don't know. According to Sarah Palin, a clip YOU posted, this WILL work. I mean, call it whatever you will (or, in her case, don't call it anything), we all know Reaganomics works wonders.

From: