| RotoGuru Politics Forum View the Forum Registry XML Get RSS Feed for this thread | Self-edit this thread |
|
| 0 |
Subject: Our Financial Bailout Culture Posted by: Boxman - [337352111] Fri, Apr 11, 2008, 13:33 I thought this article from the WSJ deserved its own thread. It's broader than just a stock discussion or any other thread I could justify putting this in. Our Financial Bailout Culture By ETHAN PENNER April 11, 2008 Last week's congressional hearings on the Bear Stearns "non-bailout" were fascinating, and frightening. Our leading financial regulators said the Federal Reserve's unprecedented action was necessary to ensure the stability of financial markets, which would have melted down had nature taken its course. When asked by the committee if opening the Fed borrowing window for investment banks (which was done later) could have saved Bear, New York Fed President Timothy Geithner responded that "We only allow sound institutions to borrow against collateral," thus implying that Bear was not sound. That raises the question of when Bear became unsound, especially in light of the public statements about the company's strength by their CEO only days earlier. If Bear was undercapitalized and overleveraged, shouldn't red flags have gone up long before? Sen. Jim Bunning (R., Ky.) asked the regulators how the solvency of a single financial institution could threaten to bring the entire market to its knees. The regulators' reply was to hang their heads and pledge more and better oversight. In a bear market – with losses looming for investors, homeowners, financial services executives, homebuilders and the average stretched consumer – the hue and cry for the government to save everyone is reaching a fevered pitch. Even avowed capitalists who enjoyed the benefits of bull markets are now advocating government intervention. Government officials need little prodding to respond, and so the process of increased regulation has clearly begun. Every day comes news of the increasing creep of the public sector. State governments, frustrated by the impact of the housing crisis on tax rolls, are implementing laws to stall or impede foreclosures. The Federal Housing Administration, granted (along with Fannie Mae and Freddie Mac) a huge increase in its loan limit, is now close to making the increase permanent. The unstated premise is that, with better government oversight, we would not be suffering today's bear market and financial chaos. Of course, during the previous outsized boom, no one was calling up his congressman to complain that home values were appreciating too quickly. Meanwhile, they drained that appreciation regularly through refinancings to pay for vacations, new cars and other pleasantries, all of which created the prosperity for which politicians were pleased to take credit. Leverage – and the rapid creation of dollars – fueled the boom we all seemed to love. But leverage cuts both ways, accentuating the benefits of a bull market and the pain of a bear market. The lesson we all must take away now is that leverage is not a one-way path to wealth with no risk of loss. There is little doubt that if Bear were to have ended up in bankruptcy, the ripple would have been felt wide and far. Perhaps the most extreme and best example are the defaults that would have occurred on Bear's overnight borrowings, whereby they pledged collateral, much of it mortgage-backed securities (MBS), as security. Many of these loans were held by (short-term) money market funds, funded ultimately by people like you and me, who are legally prohibited from owning MBS with their long 30-year final maturities. Had Bear gone bankrupt, these funds would have been compelled to seize and immediately liquidate the collateral into an already highly distressed market, ensuring that its investors (you and me again) would have likely lost much of their stake. Painful? Surely. Eye-opening? Definitely. Instead of losses spreading through the system, however, the government stepped in. As J.P. Morgan CEO James Dimon said in the hearings, "This would have been far more, in my opinion, expensive to taxpayers had Bear Stearns gone bankrupt and added to the financial crisis we have today. It wouldn't have even been close." This is clearly true on this deal and in the short run. But as Mr. Bunning implied, isn't it the regulators' job to ensure that we don't end up here ever again? That is the dilemma of "moral hazard." Consequences not suffered from bad decisions lead to lessons not learned, which leads to bigger failings down the road. And so we have the insidious modern trend to shirk responsibility and blame others for our missteps. This trend, this "victim mentality," is a path toward personal disaster. Perhaps if the Fed had raised short-term rates more aggressively, the excesses of the bubble could have been avoided. Maybe regulators could have noticed that the criteria for achieving an AAA rating had weakened markedly and inserted themselves early on. Yes, we can hope that the government takes the appropriate steps to ensure that the regulatory system improves as a result of this crisis. However, we citizens also need to accept our share of the responsibility. Homeowners must learn that there are risks to using a home as an ATM. Investors who borrowed to flip condos must learn the downside of such risk. Individuals who steered money from insured bank deposits into uninsured money market accounts to pick up 1% more yield – like the institutional investors who purchased complex securities with little due diligence – need to know that in an efficient market, extra yield means extra risk. Those who played the derivatives market, focusing more on computer-driven pricing models and less on managing counterparty risk, must pay for that oversight. And, much as it is impolitic to say, people who took money from lenders and signed without considering how they'd repay those loans must also be held accountable. In one of this year's primary debates, Ron Paul said it is not the president's job to run the economy. I'd add that it is not the government's job either. It is each and every citizen's job to manage our own affairs, make our own decisions, bear the fruits or painful consequences and learn our lessons. The free market is the essence of our society's strength and is rooted in the Lincolnian precepts of accountability and responsibility. When decisions are made and actions taken (or not taken), there are consequences. These consequences are models for us to learn from and serve to stimulate social growth and advancement. Mr. Penner helped pioneer the application of securitization technology to real-estate finance as CEO of Nomura Capital. | |||||||
| 1 | Perm Dude ID: 14352118 Fri, Apr 11, 2008, 14:22 |
I think that the government has been in the business of bailing out big companies for a long, long time. In 1980 we bailed out Chrysler by backing their loans (which wasn't a direct bailout, but put the government at risk if the loans weren't paid). In 1982 we paid off more than a billion dollars when Continental Bank was about to pay. The difference between banks who knowingly take on risks and homeowners who are often misled by those same banks appear to have been missed by the writer, however. While there certainly cases of people with 2 & 3 houses who got burned (and burn them), the author makes no distinction at all about people who were lied to and people who didn't. Like many conservatives, the assumption of perfect knowledge blinds him to a good analysis. | ||||||
| 2 | Perm Dude ID: 321041921 Wed, Nov 19, 2008, 23:16 |
Auto CEOs take private jets to Washington to ask for bailout money "There is a delicious irony in seeing private luxury jets flying into Washington, D.C., and people coming off of them with tin cups in their hand, saying that they're going to be trimming down and streamlining their businesses," Rep. Gary Ackerman, D-New York, told the chief executive officers of Ford, Chrysler and General Motors at a hearing of the House Financial Services Committee. Heh. Let them fail, if that's what it takes. | ||||||
| 3 | Baldwin ID: 1110431822 Thu, Nov 20, 2008, 02:29 | The funny thing is that when all is said and done and the posturing is over Dems want the bailout because it avoids [if it works] rewriting the union contracts thru bankruptcy getting them off that hook. | ||||||
| 4 | Baldwin ID: 1110431822 Thu, Nov 20, 2008, 02:46 |
Model for republican defeat:"Congressman, there's a line of people behind them who are going to make a similar argument. I hope you're ready for it."When offered the choice between a socialist in republican clothing and a socialist they will pick the real democrat and defeat the phony republican most of the time. | ||||||
| 5 | Slizz ID: 551055922 Thu, Nov 20, 2008, 07:36 |
Great Op-Ed piece in the NY Times yesterday: Your thoughts? | ||||||
| 6 | Frick ID: 3410551012 Thu, Nov 20, 2008, 08:31 |
Did the current management sign the union contracts that created the massive retirement packages that exist today? Or are they trying to run a business with them as deadweight? I don't know the details and I'm guessing that very, very few people actually do. Plus the contracts might not have seen quite so bad in the past without the foresight to know that medical costs were going to grow exponentially. The author states that current executives have done a fabulous job competing with the extra costs that are implicitly in their cars. The next paragraph says they should all be removed. I think most people would agree that the benefits and medical costs are one of the largest issues facing the domestic manufacturers. (But it is far from the only one. Stale designs and a bad product management also contribute.) Obama has said that he wants to give more power back to the NLRB and unions by preventing companies from hiring replacement workers. This seems to contradict what needs to happen with the auto makers, it will be interesting to see how it plays out. What scares me, is how much is it going to cost myself and my children. | ||||||
| 7 | Slizz ID: 4710371415 Thu, Nov 20, 2008, 09:06 | I think he was referring to the design of the frame and engineering behind it...but its no contest when you look at a console of an American car vs. its counterpart...which is where the $2,000 he speaks of is going too. | ||||||
| 8 | biliruben Leader ID: 589301110 Thu, Nov 20, 2008, 09:28 |
Our peculiar system of building retirement benes and health care into our cars instead of into the general tax-base, as Detroit's competitors mainly do, has made it very difficult for us to compete. We had been able to still compete for a long time, when pushing those costs into the far future, but now that future is now upon us. This is compounded by Detroit making a largely inferior product, and one not addressing present and future consumer demand. Probably bankruptcy (while at the same time patching and expanding our social safety nets so that the costs are not born by auto buyers) is the only way for these things to change substantively, but this is an awfully bad time for it to happen. | ||||||
| 9 | Baldwin ID: 1110431822 Thu, Nov 20, 2008, 09:38 |
I don't know where all this talk about bad product is coming from. The competition is fierce and the products of both foreign and domestic are fabulous as a result. How they manage to design around wacky government committee design requirements is amazing. How they are supposed to supply the right proportion of SUV's vs minicoopers to fit whatever the price of a barrel of oil will be a year later is a job I am glad I don't have. | ||||||
| 10 | Tree ID: 51011420 Thu, Nov 20, 2008, 09:43 |
I don't know where all this talk about bad product is coming from. The competition is fierce and the products of both foreign and domestic are fabulous as a result. they've had more than thirty years to develop efficient smaller cars and cars that run on alternative fuel sources. they've discussed doing both, but other than some half ass attempts, haven't really gone all in. instead of doing so, they built bigger and bigger and bigger, and when the bottom dropped out so quickly, they were left holding the bag. it's not even an issue of foresight. they've had THREE DECADES to get it right, and because bigger meant more money, they went that route. it's foolish short term thinking, instead of smarter long term planning, that led to the inferior product. | ||||||
| 11 | boikin ID: 532592112 Thu, Nov 20, 2008, 09:44 |
How they are supposed to supply the right proportion of SUV's vs minicoopers to fit whatever the price of a barrel of oil will be a year later is a job I am glad I don't have. The foreign companies have seemed to not have much problem dealing with what and when to make which products. | ||||||
| 12 | Slizz ID: 4710371415 Thu, Nov 20, 2008, 09:59 |
I disagree that both offer "fabulous" products. The Japanese clearly have a superior product and I believe that $2,000 that is referred to in the Op-Ed piece is a big reason why. Detroit has to slash costs, mainly on accessories which account for the chinsy interiors in almost all American cars. For example, compare the two consoles of the Cadillac STS (American Flagship Line) vs Acura RL (Solid Japanese car) interiors: Its ridiculous that these incompetent CEO's want billions of taxpayers dollars to serve as a temporary band-aid for a failing industry. There will be jobs elsewhere due to the increased demand at other manufacturing plants for places like Nissan, Honda, Toyota, BMW, etc. Someone is going to have to make up for the 40+% piece of the pie that the "Detroit 3" make up in American Auto Sales. | ||||||
| 13 | Frick ID: 3410551012 Thu, Nov 20, 2008, 11:21 |
Aren't the US automakers still considered the best manufacturers of trucks and SUVs? GM owns Opel which makes decent small cars for Europe, but those cars don't make it to American shores. The reason why they don't I question. Until the very recent past, small cars were not in demand by the general public. Coupled with the fact that the US automakers made very little, if not lost money, on small cars it is understandable from a business viewpoint why they didn't. GM makes small diesel cars that do well in Europe, they just don't bring them here. Re:12 Maybe on the displaced work force finding jobs at other manufacturers. There is extra capacity world wide from what I've read. Plus those jobs might not go to US plant. Bailing out the US airlines seems sillier than bailing out the automakers, but that's just me. | ||||||
| 14 | Baldwin ID: 1110431822 Thu, Nov 20, 2008, 11:33 |
In the category I buy, I've looked at all the foreign competition and Dodge won hands down. I've got three of the exact same model. Yeah, I like it. As to why they aren't first out the gate with a hybrid costing an extra 10K premium and performing like an athlete with a half ton battery tied to his ankle...Americans don't particularly want them. | ||||||
| 15 | Perm Dude ID: 91017209 Thu, Nov 20, 2008, 11:39 | I think they make cery good products. The problem with the US manufacturers is that they are saddled by a lot more costs than newer overseas auto companies. | ||||||
| 16 | Perm Dude ID: 91017209 Thu, Nov 20, 2008, 11:40 | er, that's "very good..." | ||||||
| 17 | Baldwin ID: 1110431822 Thu, Nov 20, 2008, 11:57 |
Yeah, like about $73/hr actual labor costs compared to @$45 for foreign owned manufacturers. Off the top of my head from radio... Then there are insane retirement packages. As far as this cryin about why they haven't given you energy sippin vehicles, get yer butt down to the Segway dealer and quit yer whinin'. | ||||||
| 18 | Tree ID: 51011420 Thu, Nov 20, 2008, 12:20 |
As far as this cryin about why they haven't given you energy sippin vehicles, get yer butt down to the Segway dealer and quit yer whinin'. a very realistic option for those who have one hour plus commutes in states that have cold winters... | ||||||
| 19 | Perm Dude ID: 91017209 Thu, Nov 20, 2008, 12:33 |
Current per-hour worker costs are not adding that much to the vehicles (and, to some degree, are offset by very real overseas shipping costs which domestic companies don't have to pay). The real sunk costs for GM, Ford, etc are pensions and retiree health care costs. Of course, we've heard this "we're reforming!" argument from Big Auto before. | ||||||
| 20 | boikin ID: 532592112 Thu, Nov 20, 2008, 12:54 | GM owns Opel which makes decent small cars for Europe, but those cars don't make it to American shores. had one in high school still my favorite car. | ||||||
| 21 | Frick ID: 3410551012 Thu, Nov 20, 2008, 13:05 | I don't get the article. The Big 3 are being killed by their overhead costs. Between pensions, health benefits and job banks they have a much higher overhead rate. They can build a car with close to the same efficiency. Comparing the market cap as the company hangs on the edge of bankruptcy makes sense, because that is a great snapshot of the stocks worth. Ignoring dividends when comparing 5 year averages against an index that is extremely varied and diversified also doesn't make sense. How do the the automakers do when you compare them to other manufacturers in total returns? Isn't that a more relevent question? | ||||||
| 22 | Boldwin ID: 541042014 Thu, Nov 20, 2008, 15:12 |
Rush was very detailed about Barney Frank's demands and plans. Their going to demand 80% stake in the companies somewhere down the line and if they fail to show a fleet of minicoopers [in an impossible timeframe] the Dems are gonna demand the most recent bailout money back. Ludicrous demands. For the sake of the workers I hope I am wrong but Frank is moving to kill all those jobs forever because he can't bear the thot of setting a precedent rolling back union contracts in major industries thru bankruptcy. | ||||||
| 23 | Perm Dude ID: 91017209 Thu, Nov 20, 2008, 15:44 | Crazy demands for sure. But are they true? Sounds like a classic strawman to me. | ||||||
| 24 | boikin ID: 532592112 Thu, Nov 20, 2008, 16:43 |
Here is my question the car makers are asking 25billion to make to spring. What is going to happen in the spring that is going make them all of sudden be able to break even? in other car news looks like YUGO is going out of business. I was surprised to hear they were still in business. | ||||||
| 25 | walk ID: 181472714 Thu, Nov 20, 2008, 16:59 | I am also in the camp that the Asian autos are superior to the American autos. The cars are more reliable, run smoother and have more features. They are also more expensive. Americans make more and better trucks. The American auto manufactures are not nimble. The plants take forever to restructure to respond to changing market conditions. There should have been many more excellent gas efficient compact cars when gas increased to $3 and $4 per gallon, but instead, you see commercials for SUVs that get like 18 mpg. Wrong emphasis. Unions are also not helping the auto industry. A dinosaur. | ||||||
| 26 | Boldwin ID: 331138143 Fri, Dec 14, 2012, 11:48 |
Treasury now owns zero shares of AIG common stock – down from 92% of outstanding shares (1.655 billion shares) 19 months ago. It doesn't say whether AIG is up to their eyeballs again in derivatives they won't be able to cover. I'm guessing yes. | ||||||
| 27 | Boldwin ID: 1611461416 Fri, Dec 14, 2012, 17:46 |
| ||||||
| 28 | Perm Dude ID: 201027169 Thu, Jan 10, 2013, 20:58 |
AIG Board declines to join lawsuit of their former CEO against the government. A lawsuit which alleges that the conditions attached to the bailout hurt AIG stockholders (!) | ||||||
| 29 | Frick ID: 2193319 Fri, Jan 11, 2013, 08:51 |
I heard about the lawsuit earlier this week and it was interesting to see how the AIG Board would react. By declining to join the suit, they have potentially opened themselves to lawsuits that claim they are not operating in the stockholders best interest. They were backed into a corner with two bad choices. The lawsuit was brought by AIG's largest stockholder, who also happens to be the exCEO that drove AIG into the position that it was in. I would not be surprised if behind the scenes threats and promises were made to not join the lawsuit. I hope that the judge who is assigned this case rules that the case is frivolous and punishes the filing party with court costs and the costs of the defendents. And I agree PD, if the government had not stepped in, the stock would have been worthless as the company was going to into bankruptcy. So say that the exCEO doesn't see the irony or the loathing that everyone has for him is an understatement. | ||||||
| If you believe a recent post violates the policy on Civility and Respect, you may report the abuse via email to moderators@rotoguru1.com | ||||||||
| ||||||||
Post a reply to this message: Our Financial Bailout Culture | ||||||||