Free Market Bailed Out

[quote]MaximusB wrote:
Should this really happen, it will be a huge mistake. Companies will all line up for a bailout, if the first one takes place. I personally dont like my tax dollars being spent on other people’s stupidity and foolishness. You need to be your accountant.[/quote]

Why wouldn’t they? Why should I wake up every morning and put my nose the grindstone when you can go to a company, FUBAR it, and then get bailed out by the government?

Fuck 'em.


OK, thought this was funny. Drudge Report default photo this evening :wink:

Just one point there was the scary run on the money markets. Survival and Darwin is all great on paper but when sister can’t get a credit card or dad can’t get a line of credit for his shop expansion-some one has to step to the plate.

I think many of these assets will be sold for a profit in the long term. The word bail out is a bit of sensationalism fostered by the media. I grew up in Detroit area and was working for the auto industry during the so called Chrysler bail out. Actually it was a loan in which the government turned a profit.

[quote]daudowen wrote:
Just one point there was the scary run on the money markets. Survival and Darwin is all great on paper but when sister can’t get a credit card or dad can’t get a line of credit for his shop expansion-some one has to step to the plate. I think many of these assets will be sold for a profit in the long term. The word bail out is a bit of sensationalism fostered by the media. I grew up in Detroit area and was working for the auto industry during the so called Chrysler bail out. Actually it was a loan in which the government turned a profit.[/quote]

The bail out could be done for less than $100B. ALl they need to do is change the mark to market accounting rules for the loans the fed forced banks to make. That allows the banks to carry the cost of the loan on the books, not the FMV of the loans.

[quote]rainjack wrote:
The bail out could be done for less than $100B. ALl they need to do is change the mark to market accounting rules for the loans the fed forced banks to make. That allows the banks to carry the cost of the loan on the books, not the FMV of the loans.
[/quote]

You’re an accountant right RJ? I think, in this instance, I’m pretty willing to let experience take the cake.

Can you expand on this a little more? I’m interested. What is an FMV? What accounting rules were changed that caused all of this?

I’m not an expert. Not by a long shot. But it is my understanding that banks have to carry their loans at Fair Market Value (FMV).

This is called mark to market because they have to change the book values of the collateral backing the loans to what they are worth on the open market.

With an appreciating market, this is not a problem - they are holding loans that are collateralized for more than the made them for.

But when the market turns - like we have currently with the real estate crash - they have to mark the collateral down. That means the loans are for more than the collateral is worth.

If they would allow the banks to carry these loans at historical cost - meaning the value of the collateral is held constant at what it was worth when they made the loan - there would not be the problem we are having right now with banks trying to shore up their balance sheets.

That is a very basic explanation - as that is all I am smart enough to give on this subject. I am sure there are others here that have a better grasp of finance than I do.

rainjack
What I don’t understand is how all these sub prime mortgages were bundled,sold and used as collateral in more traditional schemes. And where was the bond rating companies when all this was going on. I think it’s going to be a few years before this is sorted out. I have to admit as a small investor I have little confidence in the investment industry.

[quote]daudowen wrote:
rainjack
What I don’t understand is how all these sub prime mortgages were bundled,sold and used as collateral in more traditional schemes. And where was the bond rating companies when all this was going on. I think it’s going to be a few years before this is sorted out. I have to admit as a small investor I have little confidence in the investment industry.[/quote]

I have read that some circles blame the Gramm-Leach-Bliley Act with the subprime collapse. Or at least enabled certain “shady” transactions to go on that otherwise would have been too risky.

I had an interesting article that explained how the mergers of different financial institutions enabled the buying and selling of loans because everything could now be handled by one company instead of going thru several.

crap, wish I knew where I found it, it was really interesting. I’ll keep on looking.

[quote]daudowen wrote:
rainjack
What I don’t understand is how all these sub prime mortgages were bundled,sold and used as collateral in more traditional schemes. And where was the bond rating companies when all this was going on. I think it’s going to be a few years before this is sorted out. I have to admit as a small investor I have little confidence in the investment industry.[/quote]

I haven’t had confidence in it since 2000. Sub-prime is short for garbage. Rather than dealing with it they major investment companies kept playing hot potato with it and selling them to each other. The problem is that eventually time comes to pay up. Margins have called…

Here is what Ron Paul had to say about the bailout. In case anyone cares.

Dear Friends,

Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.

The events of the past week are no exception.
The bailout package that is about to be rammed down Congress’ throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect.

It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder. Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China!

“This is welfare for the rich,” he said. “This is socialism for the rich. It’s bailing out the financiers, the banks, the Wall Streeters.”
That describes the current bailout package to a T. And we’re being told it’s unavoidable.

The claim that the market caused all this is so staggeringly foolish that only politicians and the media could pretend to believe it. But that has become the conventional wisdom, with the desired result that those responsible for the credit bubble and its predictable consequences - predictable, that is, to those who understand sound, Austrian economics - are being let off the hook.

The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!
�?� The Treasury Secretary is authorized to purchase up to $700 billion in mortgage-related assets at any one time. That means $700 billion is only the very beginning of what will hit us.

�?� Financial institutions are “designated as financial agents of the Government.” This is the New Deal to end all New Deals.

�?� Then there’s this: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

Translation: the Secretary can buy up whatever junk debt he wants to, burden the American people with it, and be subject to no one in the process.
There goes your country.

Even some so-called free-market economists are calling all this “sadly necessary.” Sad, yes. Necessary? Don’t make me laugh.
Our one-party system is complicit in yet another crime against the American people.

The two major party candidates for president themselves initially indicated their strong support for bailouts of this kind - another example of the big choice we’re supposedly presented with this November: yes or yes.

Now, with a backlash brewing, they’re not quite sure what their views are. A sad display, really.

Although the present bailout package is almost certainly not the end of the political atrocities we’ll witness in connection with the crisis, time is short. Congress may vote as soon as tomorrow. With a Rasmussen poll finding support for the bailout at an anemic seven percent, some members of Congress are afraid to vote for it.

Call them! Let them hear from you! Tell them you will never vote for anyone who supports this atrocity.

The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are about to be looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care?

When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media?

Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be.
In liberty,
Ron Paul

[quote]Ren wrote:
daudowen wrote:
rainjack
What I don’t understand is how all these sub prime mortgages were bundled,sold and used as collateral in more traditional schemes. And where was the bond rating companies when all this was going on. I think it’s going to be a few years before this is sorted out. I have to admit as a small investor I have little confidence in the investment industry.

I have read that some circles blame the Gramm-Leach-Bliley Act with the subprime collapse. Or at least enabled certain “shady” transactions to go on that otherwise would have been too risky.

I had an interesting article that explained how the mergers of different financial institutions enabled the buying and selling of loans because everything could now be handled by one company instead of going thru several.

crap, wish I knew where I found it, it was really interesting. I’ll keep on looking.[/quote]

It has little to do with Phil Gramm’s bill. It has to do with the left forcing banks to make risky loans to people who don’t deserve a loan in the first place.

The banks wanted to shore up their balance sheet, and get the high risk receivables off their books, so they got creative with ways to package these loans so that they would be more attractive to the market. IF the banks are guilty of anything, they are guilty of playing hot potato with loans they were forced by the fed to make.

There is an interesting article here on one of the reasons for the market mess we are facing now.
http://www.bloomberg.com/apps/news?pid=20601109&sid=ah839IWTLP9s&refer=home

Thoughts? This chart seems to indicate to me that Frannie and Freddie weren’t as involved as some would like to claim. In fact, it seems like the GSE’s were primarily responsible.
Edit: I made a boo-boo, meant to say ABS’s were primarily responsible, see post below.

[quote]Demiajax wrote:
Thoughts? This chart seems to indicate to me that Frannie and Freddie weren’t as involved as some would like to claim. In fact, it seems like the GSE’s were primarily responsible. [/quote]

What do you think Freddie and Fannie are? They are Government Sponsored Enterprises (GSE). Your graph proves that F&F are indeed very involved in the making of bad loans.

Sorry, I miswrote. What I meant to point out was that the GSEs were primarily responsible for lending in the last two years (as seen in the graph), but in late 2003, when I think many people would say the housing bubble was at its highest, the GSE’s were relatively uninvolved.

Possibly because people who applied after this period were woefully unqualified for such loans (?). This is when, by my understanding, the less regulated ABS lenders began to give loans. And now we’re screwed.

Of course, you could also argue that the last two years of lending are the cause of this crash, and that the period from 2003-2006 was largely irrelevant.

However, I think most people agree that the housing bubble burst in 2007, meaning that the highest period of loans from Freddie and Fannie was after the fact. To say that they caused the burst of the bubble and the proceeding economic downturn doesn’t seem accurate to me.

demijax
From what I understand Fannie and Freddie were not properly funded and the red flags had been raised for some time. Also Fannie and Freddie probably would have been OK if not for the collapse of Bear Stearns etc. Major European and Asian banks wanted reassurance of U.S backing of their investments. But beyond that-if banks are approving dubious loans with outrageous balloon payments- who is really the blame? I know when I was younger with limited resources, I could have been lured into the same situation-house hunting can be intoxicating. The home owner did sign on the dotted line, but who twisted the banks arm?