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Old 09-30-2008, 07:09 PM   #21
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So, while most people are unaffected directly by LIBOR increases, indirectly they could be as it drives up the cost of doing business.
My extended family's small business is also affected, highly indirectly. My point was that we are in elevated pain mode, not catastrophe mode.
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Old 09-30-2008, 07:12 PM   #22
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Here's another proposal:

Tony and Richard Ressler: A Better Alternative

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A bailout proposal that will work needs to unambiguously address the issue that Secretary Paulson and Chairman Bernanke have identified as the principal threat to our nation's economic well being. That threat has been identified as the unwillingness of banks to lend to each other or to non-bank borrowers. The purported reasons for this unwillingness to lend is that mark to market markdowns of "toxic securities" on bank balance sheets will shrink their equity base, reducing their ability to lend to bank and non-bank borrowers. In addition, markdowns on the balance sheets of their fellow banks who they might lend to will undermine the creditworthiness of those banks leaving the lender bank with a bad loan to a borrower bank.

The solution proposed by Treasury is to create a $700 billion buyer of these "complicated" securities that will cause the market to value these "toxic securities" at a price closer to their "yield to maturity value" rather than the "fire sale" prices that are currently being offered. Becoming the buyer of the last resort for the $14.8 trillion U.S. residential and commercial mortgage market seems to be an extremely indirect way of bolstering the capital accounts of U.S. banks.

A better alternative to the current plan is a simpler and far easier to implement plan that directly addresses the ability of U.S. banks to increase their capital accounts and their willingness to lend to bank and non-bank borrowers.

The proposal is simple. Any "FDIC insured" financial institution in need of capital can raise 10% preferred stock plus warrants (struck at 90% of the prevailing market price/value of their common equity) from the U.S. Government's bailout fund. Generally the same structure and yield offered to Goldman Sachs by Berkshire Hathaway in its recent $5 billion preferred stock issuance. The fund would need only $350 billion to achieve its goal of restarting lending as all FDIC insured institutions had a total of $1.4 trillion of equity capital and only $300 billion of "toxic" mortgage securities on their books as of June 30.
If we Americans had a responsible Congress, proposals like this would be carefully studied alongside the Paulson and other proposals before any decision was made on how to best utilize our [future] tax dollars.
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Old 09-30-2008, 07:41 PM   #23
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The latest from the NY Times:

http://www.nytimes.com/2008/10/01/bu...nted=1&_r=1&hp

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As they studied the vote tally from the surprising defeat of the bill in the House on Monday, strategists said they were identifying lawmakers who they thought could be persuaded to back a revised plan.

One idea, an increase in federal bank deposit insurance, gained momentum after it was endorsed early Tuesday by both Senators John McCain and Barack Obama, the presidential candidates. Another idea under discussion was to extend jobless benefits for people who had been out of work for months.

As President Bush, Mr. McCain and Mr. Obama called for Congress to act, all sides indicated that any revisions would be modest to a plan to spend up to $700 billion to buy distressed securities.
The two ideas are just more window dressing, and change nothing. The core of Bailout Bill #2 will the same as Bailout Bill #1: using taxpayer money to cover the gambling losses of Wall Street speculators.
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Old 09-30-2008, 07:43 PM   #24
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actually the FDIC part is the big one and i think the bailout part is dead. there is also talk of amending the tax code so that corporations can bring back dollars from overseas
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Old 09-30-2008, 07:48 PM   #25
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Do those LIBOR rates seem catastrophic to you? Not to me - I lived through the hyper-inflation of the late 70's where the fix was for the Fed to send short rates to 15%.
Well if I don't really understand how the banking system works, then no.

Central banks around the world injected hundreds of billions of dollars of new liquidity into the market yesterday to try to bring interest rates DOWN. Notwithstanding that, the overnight LIBOR rate increased the most on record (431bp). Yields on CP climbed 171bp. Rates on CP backed by assets (like credit card receivables) increased 229bp.

What you don't seem to understand is that the short-term lending market is shutting down. This isn't the same thing as the 1980's when credit was readily available at a price. We're running dangerously close to a situation where credit isn't available at all, at any price.

According to Bloomberg News:
Quote:
``The money markets have completely broken down, with no trading taking place at all,'' said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. ``There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''
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Old 09-30-2008, 08:15 PM   #26
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Excellent Article below by David Paul. Is anyone in power listening?

David Paul: Deleveraging Society

Some highlights:

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Over the past quarter century--dating to the dawn of the Reagan Revolution in fact--America has become awash in debt, and sub-prime home mortgages are just the tip of the iceberg. Home mortgages. Credit cards. Auto loans. Business loans. Federal debt. As shown below, since 1980, our public debt has grown ten-fold, from $4.4 trillion to over $45 trillion.
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As we are getting in deeper and deeper debt, and as our national savings rate has declined to near-zero, we rely almost exclusively on foreigners to provide us with capital to fund our excessive public, private and corporate spending habits.
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In addition ... our growing debt is also increasingly owned by countries--China and Russia most notably--who are often our adversaries in international affairs. This fact was evident in the Fannie and Freddie bailout a few weeks ago, when Treasury Secretary Henry Paulson took pains to avoid any action that would diminish the value of the Fannie Mae bonds held by the Chinese, even as he wiped out the value of the preferred stock held by domestic banks.
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If any of these holders of our bonds should decide to dump our paper or even move to diversify their central bank reserves out of US government securities, the dollar will fall further and our long-term interest rates will rise.
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The problem that we face is our growing addiction to debt as the driver of national income growth.
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We are no longer a nation that is paying our own way and in control of our financial destiny, but rather have become addicted to increasing uses of debt to financing our way of life. These are not the characteristics of a great nation or a great people.
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Historically, the traditional fix to excessive debt is inflation. As inflation grows, the borrowed dollars are paid back in a devalued currency. And that strategy appears to be in play already.
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The risk, of course, is how long our international creditors will play this game with us, and when they will look to protect their own financial interests and be a bit less lenient in funding ours.
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Old 09-30-2008, 08:27 PM   #27
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What you don't seem to understand is that the short-term lending market is shutting down.
I wasn't making a political statement regarding whether or not we actually have a crisis. I was just expressing surprise that LIBOR is currently so low as compared to short rates during other financial crises I've lived through. Admittedly, the Fed's discount rate and LIBOR aren't the same thing.
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Old 09-30-2008, 08:59 PM   #28
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If they raise the FDIC insurance limit they will have to recapitalize the FDIC big time, right? the balance is only $45 billion as of Sept 25.
http://www.bloomberg.com/apps/news?p...ISU&refer=home

"Only once in the FDIC's history have we had to borrow from the Treasury - in the early 1990s - and that money was paid back with interest in less than two years."
Andrew Gray
Director
Office of Public Affairs
Federal Deposit Insurance Corporation

With the hundreds of banks at risk, I doubt they'd be paying it all back in two years.


Also, on a different topic, I question whether it's a good strategy to buy up MBS with the hopes of trying to "stabilize" house prices. First, those prices were artificially inflated due to crazy mortgage terms. Those 4% option ARMs or interest only loans have gone away , big time. If prices are stabilized artificially, the market will WAY slow down because no one can afford those big prices anymore without stupid mortgage financing, esp in Calif or other high priced areas.

There's really no good solution or choices to be made here. The only reasonable analysis I've read is on REG monitor by Noubini
RGE - The US and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever

He proposes triage and then nationalizing some of the banks. But his reasoning is impeccable, at least to me.
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Old 09-30-2008, 09:11 PM   #29
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How about a plan which does two things

1) allows anyone upsidedown on a mortgage to refinance using fair market value for the 1st mortgage and guarantee a fixed rate loan of 6% for a good or excellent credit score and higher rates for lower scores.

2) the difference between purchase price and fair market value (above) is put on a second mortgage which is in deferrment (no interest paid by borrower) with the interest paid by the federal government and a lien on the house held by the IRS.

If person sells the house, the IRS collects on the lien and pays back the treasury
If the person gets foreclosed on, the IRS knows and write some fines into legislation to make this a BAD situation for the borrower.
If the house appreciates enough, the homeowner should have a way to refinance the IRS lien off the house if they pay the principal amount back to the treasury.

Give a 30 year timeframe for this and do not allow the deed to be transferred without IRS lien being dealt with (so parents do not die and have kids inherit house lien free).

Would this work?
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Old 09-30-2008, 09:21 PM   #30
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What you don't seem to understand is that the short-term lending market is shutting down. This isn't the same thing as the 1980's when credit was readily available at a price. We're running dangerously close to a situation where credit isn't available at all, at any price.
You are arguing against the solution that will absolutely work (higher interest rates) and in favor of a very expensive, stop-gap solution that might work (government giveaways of tax dollars to buy up bad debt). Higher interest rates will absolutely bring out more money to be loaned to businesses. Why is it that you believe, in this one instance, that the laws of supply and demand do not apply, and that money will not be available at any price? I want that solution, thank you, the market-based one. Yes, there will be pain. But it has the virtue of not adding to our tax burden, of laying the real estate mess at the feet of those those who brought the mess to us (buyers and lenders both-or those who bought the paper without knowing what was inside in hopes of a great interest rate). That's the fix I want--the one that goes to root causes.

Did businesses always depend on short-term loans to get by? A profitable business might consider, perhaps, retaining enough from sales to meet their own short-term expenses. Just like families do (or should. Would any responsible person say--"dang, we distributed all our money again, and that darn rent payment is due. Lets get a loan like we did last month!"). Self sufficiency has some benefits, and depending on short-term financing to buy raw material or even to make payroll has definite risks. Well, the word "risk" is the root of the word "risky" for a reason.
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Old 09-30-2008, 09:29 PM   #31
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Agreed! Especially with this part:

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.... Higher interest rates will absolutely bring out more money to be loaned to businesses. Why is it that you believe, in this one instance, that the laws of supply and demand do not apply, and that money will not be available at any price? ....
I know I've got quite a bit of "liquidity" just in my little ole portfolio sitting on the sidelines earning very little right now that I'd love to be loaned out to responsible borrowers at the right interest rate return to me.
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Old 09-30-2008, 09:41 PM   #32
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Well if I don't really understand how the banking system works, then no.

Central banks around the world injected hundreds of billions of dollars of new liquidity into the market yesterday to try to bring interest rates DOWN. Notwithstanding that, the overnight LIBOR rate increased the most on record (431bp). Yields on CP climbed 171bp. Rates on CP backed by assets (like credit card receivables) increased 229bp.

What you don't seem to understand is that the short-term lending market is shutting down. This isn't the same thing as the 1980's when credit was readily available at a price. We're running dangerously close to a situation where credit isn't available at all, at any price.

According to Bloomberg News:

The idea that this 700 billion will restore liquidity is bullcrap!!! Total and complete, financial markets are using their malfeasance to change the rules and foist their losses on the public. Banks were totally overleveraged and all are moving at the same time to deleverage with any incoming liquidity, the assets are not worth what they thought because the credit default swaps are only good if noone goes under. If they get the loans sold they wouldn't relend the 700 billion they would go and rebuild back their balance sheet loaning at much lower levels more profitably because of reduced competition. .


Talk of how the government would make money on their buyout is ridiculous, they know they are losers and if they were going to be winning portfolios the financial companies would be pulling for loans on the portfolios for their "value" not a purchase by the government. Now that they have the SEC to relax the mark to market they can say whatever they think the dubious securites are worth and take the writedowns when they want and keep investors totally in the dark as they did on the crdit default swaps.

Look at the credit default swaps, so how could you keep dubious debt without worrying about default - by a credit swap to insure and voila! No more risk. A loss that should have occurred no longer exists because it is insured, except in a downturn the insurance is no good, it was never any good unless they didn't need it -- just favorable for accounting at the time and an easy way to look profitable. In 2001 there was less than 1 trillion credit default swaps, by 2007 there was 62 trillion. So far in 2008 that number has receded to 55 trillion as liquidity is going into reducing these positions. These credit default swaps allowed holders to insure against defaults preventing the necessity of selling distressed bonds in an orderly and timely fashion when they should have been sold. So bad inventory all built up in the system and losses were not recognized. Now as they are all going bad together because they all piled in to this trade and noone wants the paper the US government is going to bail them all out with 700 billion!? By the end of this the big 4 banks will be stronger than ever and the US government is going to be staring at a black hole of cash flow as the interest and social security obligations overwhelm it's tax raising capabilities. Won't help the economy any, liquidity will still be hard to come by because there is just too much bad paper but the banks will be ok.


Good luck on that.......
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Just when you thought it couldn't get any worse...
Old 09-30-2008, 11:12 PM   #33
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Just when you thought it couldn't get any worse...

Senate to vote on rescue plan with added tax cut

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WASHINGTON In a bold bid to revive President Bush's multibillion-dollar financial rescue plan, Senate leaders scheduled a vote for Wednesday night on a version of the bill that adds substantial tax cuts meant to appeal to Republicans when it reaches the House.

The goal is to net at least 12 more House votes than the rescue proposal received Monday, when lawmakers rocked the political and financial worlds by rejecting it.
I am stunned, absolutely stunned. Is this really my country? What has happened to America? Are Republicans iittle doggies you can pacify with a tax-cut bone?

What do tax cuts have to do with whether the basic Paulson proposal is a sound strategy? What happened to the concept of Congress as a deliberative body? I can understand playing stupid political games with minor legislation, but a $700B bill? This has degenerated into a farce.
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Old 10-01-2008, 12:19 AM   #34
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I found this great site that publishes the legislations under deliberation:

PublicMarkup.org

It allows navigation and comments section-by-section, which is really nice considering how massive these bills can get.
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Old 10-01-2008, 12:41 AM   #35
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Senate to vote on rescue plan with added tax cut



I am stunned, absolutely stunned. Is this really my country? What has happened to America? Are Republicans iittle doggies you can pacify with a tax-cut bone?

What do tax cuts have to do with whether the basic Paulson proposal is a sound strategy? What happened to the concept of Congress as a deliberative body? I can understand playing stupid political games with minor legislation, but a $700B bill? This has degenerated into a farce.
Well they're only trying to get 12 more house members, they aren't going to make the bill not a disaster when it's so much easier to add a little something for the other guy. It's the old fat cats scratching each others backs strategy.
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Old 10-01-2008, 06:55 AM   #36
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We're matching a 19th century decision making process grappling with 21st century problems. Not pretty.

One advantage of this latest development is that it makes me lose interest in the topic, the process, and the result. I invested a fair amount of time in this topic over the last week because I believed it was important to the future of the country. This was a poor investment. All I can do is protect myself from the consequences, which is all anyone can do, I guess.
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Old 10-01-2008, 07:45 AM   #37
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after Grey Monday a lot of congresspeople got calls calling for a bailout because they were scared my the market. pretty sure this thing will die out and will never see the light of day again
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Old 10-01-2008, 08:23 AM   #38
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after Grey Monday a lot of congresspeople got calls calling for a bailout because they were scared my the market. pretty sure this thing will die out and will never see the light of day again
Except the Senate is voting on it tonight...
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Old 10-01-2008, 08:27 AM   #39
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and the House wants a different version now and they will probably fight over it until everyone forgets it. half of europe is now backing all their bank deposits, 3 month t-bill yields are creeping back up and overnight LIBOR yield is down

and it wouldn't surprise me if central banks started cutting rates
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Old 10-01-2008, 08:50 AM   #40
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The idea that this 700 billion will restore liquidity is bullcrap!!! Total and complete, financial markets are using their malfeasance to change the rules and foist their losses on the public. Banks were totally overleveraged and all are moving at the same time to deleverage with any incoming liquidity, the assets are not worth what they thought because the credit default swaps are only good if noone goes under. If they get the loans sold they wouldn't relend the 700 billion they would go and rebuild back their balance sheet loaning at much lower levels more profitably because of reduced competition. .


Talk of how the government would make money on their buyout is ridiculous, they know they are losers and if they were going to be winning portfolios the financial companies would be pulling for loans on the portfolios for their "value" not a purchase by the government. Now that they have the SEC to relax the mark to market they can say whatever they think the dubious securites are worth and take the writedowns when they want and keep investors totally in the dark as they did on the crdit default swaps.

Look at the credit default swaps, so how could you keep dubious debt without worrying about default - by a credit swap to insure and voila! No more risk.

Good luck on that.......
First how do you know that government can't make money buying severely beaten down securities? Unless you know the prices of the securities, the interest rate, the percentage of non-performing loans, credit score and other factors you really have no clue. Most importantly these mortgage securities aren't just toxic waste as they have erronously been described.

The are mortgage on homes in very desirable locations in the county like California and Florida. If the value of the securities is less than the value of the homes the taxpayers can (and I think we will make money.) Many understanding is that many of the MBS are trading below 50 on the dollar, and since housing price have not dropped 50% there is significant collateral available. Right now Uncle Sam is borrowing money at below 4% the YTM on most of the securities is the 10%+. Considering that best run banks in the country like Wells Fargo make money with a net interest margin in the 2.5%. The difference between 10% and 4% looks pretty good to me. Now obviously many of these mortgages won't be paid back, and we the taxpayers will end up owning a lot of properties and/or restructuring many mortgages. I think a lot of banks would like to keep these securities rather than be forced to sell them during a fire sale, but the are huge drags on their balance sheet and it prevents the bank from loaning money.
With out money to lend it is hard for individuals to buy house and we are caught in a vicious downward spiral.

As long as the government doesn't do anything too stupid like dump all the properties on the market at once, it should be too hard to wait until housing prices stablize before selling the properties.

You realize that during the depression that government bought and refinanced millions of mortgages an when the operation was finally shut down during WWII far from costing the government billions as critics claim, we taxpayers actually made a profit. Far more importantly it kept millions of people in their homes.

Who cares about CDS? Paulson proposal was to authorize the treasury purchase mortgage back securities, CDS are a different problem. A problem which will certainly get worse if banks start failing left and right.

I find this ignorant fear monger almost as scary as Congress.
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