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Old 03-25-2008, 09:05 PM   #41
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The problem is still the same, why can't we let them fail the old-fashioned way? My understanding of "prudent management" is that you spread your risks. If a few players didn't, they fail. Their creditors should be diversified. No single creditor should be so exposed to BSC or these REITS that the creditor goes down just because they have to wait for the bankruptcy process to play out before they get their money.
Did the Fed step in the help Carlyle Capital? they blew up, lost $650M for their investors and when it's all over possibly in the billions for their lenders.

There is a lot of pain out there right now, especially in the closed end fund and floating rate funds.
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Old 03-26-2008, 08:52 AM   #42
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I think you're saying that at least some of BSC's creditors are so leveraged that even if BSC represents only a normally prudent percent of their book, the leverage magnifies that percent into a solvency issue. Instead of the system dissipating the impact by spreading it across a lot of players, there's enough leverage out there that it gets re-concentrated over and over. Is that right?
You got it. Add that to the fact that just about EVERYONE in the capital markets has/had exposure to Bear and you can see why the Fed felt compelled to step in.

My example with the agency REITs was to illustrate that in a stressed market even the safest and most liquid paper on the planet began to drop in value because the maret was not functioning as it should (i.e. orderly buying and selling). Every bank in the US has some of this paper on its books (in part because of its liquidity), so you can imagine what a collapse in the value of it due to market illiquidity would mean.
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Old 03-26-2008, 10:02 AM   #43
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You got it. Add that to the fact that just about EVERYONE in the capital markets has/had exposure to Bear and you can see why the Fed felt compelled to step in.

My example with the agency REITs was to illustrate that in a stressed market even the safest and most liquid paper on the planet began to drop in value because the maret was not functioning as it should (i.e. orderly buying and selling). Every bank in the US has some of this paper on its books (in part because of its liquidity), so you can imagine what a collapse in the value of it due to market illiquidity would mean.
I'm trying to differentiate between EVERYONE and the subset who could actually fail due to the fact that they happen to be BSC's creditors.

I figure that the "Every bank" is mostly regulated commercial banks. The Fed is already set up to give them liquidity bridges. Presumably the regulators also keep them from going very far out on the limb. I'm assuming that my local bank isn't getting leveraged or concentrated to the point that this is could put them under. If they have a short term problem finding a bidder for fundamentally valuable assets, the Fed can deal with that at very little risk to the taxpayers.

So if a BSC bankruptcy was going to lead to a complete financial meltdown, the problem is somewhere else. It sounds like it's in highly leveraged investment banks, securities dealers, and ... ?

Is this as simple as putting a cap on leverage ratios for a wider range of institutions? I can see where that will hurt profits in the good years (fewer mega-million bonuses), but it seems that it would stifle the chain reaction that you are describing.
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Old 03-26-2008, 10:09 AM   #44
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Did the Fed step in the help Carlyle Capital? they blew up, lost $650M for their investors and when it's all over possibly in the billions for their lenders.

There is a lot of pain out there right now, especially in the closed end fund and floating rate funds.
I picked up this quote from Forbes:
"Carlyle Capital, which had borrowed 32 times its capital to fund its investments, like other heavily leveraged funds been particularly vulnerable. "

I certainly wouldn't want the Fed to help them out. My concern is that the Fed would feel they have to back up somebody because peple like this have made the whole system too fragile.
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Old 03-26-2008, 10:15 AM   #45
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So if a BSC bankruptcy was going to lead to a complete financial meltdown, the problem is somewhere else. It sounds like it's in highly leveraged investment banks, securities dealers, and ... ?

Is this as simple as putting a cap on leverage ratios for a wider range of institutions? I can see where that will hurt profits in the good years (fewer mega-million bonuses), but it seems that it would stifle the chain reaction that you are describing.
Hedge funds and other unregulated investment vehicles are the other major additions to your list of who gets hurt. I would put the major money center banks in there, too, and maybe some of the dumber/weaker regionals.

There are already leverage limits on regulated financial institutions, and they generally are appropriate (as evnced that very few have fallen out of the sky even in this troubled market). Putting a furter squeeze on these institutions right now would be the exact wrong response, as it would further reduce credit availability. I am pretty sure that is what regulators will do anyway, as they are really good at shutting the barn door after the horse has bolted (and the barn has burned down).
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Old 03-26-2008, 10:42 AM   #46
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Fleckenstein take on it: Catering to the bailout nation - MSN Money

"After all, this country's median income of roughly $49,000 can hardly be expected to service the debt of the median home price of $234,000, up from approximately $160,000 in 2000.

[snip]

Housing prices, thanks to the bubble and inflation, have risen well past the point where the median (or typical middle-class) family can afford them. Either income must rise -- which seems unlikely on an inflated-adjusted basis -- or home prices must come down."
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Old 03-26-2008, 11:42 AM   #47
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decided to pick up The House of Morgan

Amazon.com: The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance: Ron Chernow: Books

about how JP Morgan got started in the early 1800's and it's history through the 20th century. turns out there have been bailouts in the 1800's as well when a big financial firm got in trouble and we are still here and think we are living in a free market

lesson is don't listen to 95% of what reporters write since most of them are idiots and don't know the history of what they are writing. these people took journalism classes and think they know the subject they are writing about
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Old 03-26-2008, 11:52 AM   #48
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lesson is don't listen to 95% of what reporters write since most of them are idiots and don't know the history of what they are writing. these people took journalism classes and think they know the subject they are writing about
A safe bet in any case, regardless of the subject.
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Old 03-26-2008, 01:12 PM   #49
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Hedge funds and other unregulated investment vehicles are the other major additions to your list of who gets hurt. I would put the major money center banks in there, too, and maybe some of the dumber/weaker regionals.

There are already leverage limits on regulated financial institutions, and they generally are appropriate (as evnced that very few have fallen out of the sky even in this troubled market). Putting a furter squeeze on these institutions right now would be the exact wrong response, as it would further reduce credit availability. I am pretty sure that is what regulators will do anyway, as they are really good at shutting the barn door after the horse has bolted (and the barn has burned down).
I intended to differentiate between banks that are already regulated (who don't seem to be magnifying the problem) and firms that aren't, or at least aren't regulated with an intent of limiting the damage they can do to the broader system. So I said "wider range".

You don't want to tighten standards on the people who don't seem to be causing the problem, that's reasonable. How about the people who are?

Of course it's always easier to (a) prevent a repeat of the last crisis than it is to (b) prevent a crisis that comes from a truly new direction. It seems that, if we have a pretty good idea of how to do "a", we should at least do that much, even though we know that "b" is still out there.

But in this case, I'm not sure that we know how to do "a". Hence my question, Is this as simple as putting leverage limits on firms that currently don't have any, or is it much more difficult than that?
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Old 03-26-2008, 01:22 PM   #50
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But in this case, I'm not sure that we know how to do "a". Hence my question, Is this as simple as putting leverage limits on firms that currently don't have any, or is it much more difficult than that?
What has happened is unprecedented on any scale. Simple as that. The set of regulations that might have prevented this might well put a serious damper on US economic growth.

As for regulations, I expect we will see securities firms like Bear get regulated by the Fed in the future. Kind of goes with giving them access to the discount window, IMO. But beyond that, exactly how do you propose to regulate private companies? What jurisdiction does the Fed and the SEC currently have over private partnerships domiciled offshore (i.e. hedge funds)? Unless Congress passes some very different laws than we curently have, I don't see it. If they do pass such laws, the US is likely to lose a lot of financial services jobs and GDP (and I might well end up working in London, Bermuda, etc.). In any case, regulations are always made to be arbitraged/gotten around, so its only a matter of time before creative people find new ways to blow themselves and others up in size.
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Old 03-26-2008, 01:32 PM   #51
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Also, profits from the sale? you must be kidding

Don't confuse value with liquidity.

Do a little checking into what happened to the assets purchased after the LTCM meltdown.
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Old 03-26-2008, 01:35 PM   #52
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Don't confuse value with liquidity.

Do a little checking into what happened to the assets purchased after the LTCM meltdown.
Yup. And I would not be the slightest bit surprised if AAA rated tranches from the vast majority of Alt A securitizations eventually pay out full par plus all coupons. These are the same bonds you would be thrilled to get 85 cents on the dollar for today, if you could find a buyer.
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Old 03-26-2008, 02:14 PM   #53
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What has happened is unprecedented on any scale. Simple as that. The set of regulations that might have prevented this might well put a serious damper on US economic growth.

As for regulations, I expect we will see securities firms like Bear get regulated by the Fed in the future. Kind of goes with giving them access to the discount window, IMO. But beyond that, exactly how do you propose to regulate private companies? What jurisdiction does the Fed and the SEC currently have over private partnerships domiciled offshore (i.e. hedge funds)? Unless Congress passes some very different laws than we curently have, I don't see it. If they do pass such laws, the US is likely to lose a lot of financial services jobs and GDP (and I might well end up working in London, Bermuda, etc.). In any case, regulations are always made to be arbitraged/gotten around, so its only a matter of time before creative people find new ways to blow themselves and others up in size.
i don't buy it

NYC real estate market is 75% co-op apartments where you need 20% down and a background check in order to buy property. yet prices quadrupled in the last 10 years.

i bet if we had common sense regulations like anyone getting an ARM mortgage has to qualify at the highest indexed rate or a requirement to verify income by at least looking at bank accounts we wouldn't be in this mess. we might have had less growth in some years, but it would have been made up by a smoothing of the growth and less risk of downside
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Old 03-26-2008, 02:18 PM   #54
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I guess I would argue that NYC RE is "special." Kind of like HI and SF in that regard. So I would be wary of extrapolating anything based on the NYC market.

I think forcing qualification at the highest possible indexed rate is overly restrictive, personally. But I would have liked to see stated income loans restricted to the self-employed only, and I think a return to 20% down or the use of mortgage insurance will prove to be healthy in the long term.

Actually, I think that the full weight of all the shite tat is flowing down hill is likely to land right on top of the rating agencies. That will be fun to watch.
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Old 03-26-2008, 02:34 PM   #55
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What has happened is unprecedented on any scale. Simple as that. The set of regulations that might have prevented this might well put a serious damper on US economic growth.

As for regulations, I expect we will see securities firms like Bear get regulated by the Fed in the future. Kind of goes with giving them access to the discount window, IMO. But beyond that, exactly how do you propose to regulate private companies? What jurisdiction does the Fed and the SEC currently have over private partnerships domiciled offshore (i.e. hedge funds)? Unless Congress passes some very different laws than we curently have, I don't see it. If they do pass such laws, the US is likely to lose a lot of financial services jobs and GDP (and I might well end up working in London, Bermuda, etc.). In any case, regulations are always made to be arbitraged/gotten around, so its only a matter of time before creative people find new ways to blow themselves and others up in size.
Are you talking "economic growth" in terms of "sustainable improvements in the number of widgets produced per hour of labor"?
or do you mean the boom portion of periodic boom/bust cycles? I like the first but not the second.

I'm sure that the gov't currently regulates every private company in the US that hires workers, so I don't think that regulation is impossible.
The question is whether it does more harm than good.

If an electric utility is putting up a power plant in my neighborhood that could blow up and kill us all, I think it would be okay for the gov't to force them to change their design.
If that means more expensive power, that's a trade-off we'd probably make. (I would want to see a cost/benefit using reasonable probabilities of the explosion first.)

So the questions here are
"What's the exact mechanism that can turn an ordinary bankruptcy of a middling sized firm (14,000 employees) into a complete meltdown of the US economy?"
"Where is the most efficient spot to change the system to prevent that from happening?"
"How much real, sustainable economic growth are we giving up if we mandate that change? and how much does that reduce the chance of a meltdown?"

I really don't care if a few jobs go overseas (sorry, but remember you'll still have internet access) if the value of what we gain is more than what we lose.
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Old 03-26-2008, 02:40 PM   #56
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Indy, I gather you are not a fan of Schumpeterian economics? If you restrict the growth of credit, you restrict economic growth.

So I think heavy-handed regulation would reduce both economic growth and also push one of the most globally competitive US industries (finance) to start moving elsewhere. Why do you think there are more IPOs in London than NYC these days? Hint: Sarb-Ox.

If the regulatory authorities wanted to try to ensure no more blow-ups, there are lots of things they could do, all of which would come with a cost. And I don't think they could prevent problems anyway. So I'd like to see some common sense regulations handed down, but I think that we are likely to overdo it and suffer as a result.
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Old 03-26-2008, 05:21 PM   #57
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Of course credit helps produce growth.

So do:
a healthy, well educated workforce;
political stability;
free trade;
economic stability (the confidence that if you save/invest today the economy will be healthy enough in the future that you can harvest returns);
property rights.
And the first property right is the belief that you will get the benefit of what you produce - rewards go to productive workers, not to people who happen to be politically connected, (as has been true in most nations at most times in human history)

I got wordier on 4 and 5 because those are the things we can lose when people are told that the gov't has to take extraordinary action, even doing things that have an appearance of "bailing out" the wealthy, because the system we've got is so fragile that the alternative is a complete economic meltdown.

Everybody wants "common sense" gov't, and nobody wants the gov't to kill the goose that laid the golden egg.

All industries that generate negative externalities argue that they would be more efficient if the gov't didn't try to reduce those externalities. Some even feel they'll have to find a friendlier gov't somewhere else if the gov't tries.

If we're rationale (unfortunately, I don't have a lot of faith in that), we'll ask the three questions I asked above and come up with an approach that balances costs and benefits. If the industry position is "All possible changes will hurt our profits or efficiency, therefore we shouldn't change anything", then I think the rest of us should acknowledge the premise is probably a true statement but the conclusion isn't, and continue to look for the best trade-offs.
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Old 03-26-2008, 05:57 PM   #58
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Don't confuse value with liquidity.

Do a little checking into what happened to the assets purchased after the LTCM meltdown.
So you think the FED can make a profit by backing Bear's assets? I cannot see any possibility of a profit. Only a possibility of not having a large loss. The FED is not buying the assets at a discount and getting a profit if the discount diasppears. Am I wrong? They are taking the assets on at full face value and the best they can do is if the assets retain their value and pay the coupon. That is not likely, IMO, I'm sure the FED is standing behind the lowest quality assets on Bear's book, not the higher quality. The FED has to take the first $29B of loss, the lowest quality will fail first.
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Old 03-26-2008, 11:28 PM   #59
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Rockon...

under the new deal... Chase takes the first billion hit... but I am sure they have planned to lose the whole amount... so the FED did buy 30 billion of assets for 29 bill... will they lose money... IMO, yes... will they lose 29.. nope...

And I am one that thinks the deal was pushed through and it should not have been... they could have done a packaged bankruptcy and gotten some relief in some of their problems.... the firm would have come out in the end a much smaller company, but it would have 'fixed' some of the leverage that is not good in the system.... because the true risk of investing would now be shown.... people would demand a higher return on their money with the risks.... people ignored the risk and bid down the yields... sorry, you lose... and I am sure I do also as I am in the market... but it would have been good in the long run... I do not know if this will really change people in the long run...
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Old 03-27-2008, 07:55 AM   #60
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Rockon...

under the new deal... Chase takes the first billion hit... but I am sure they have planned to lose the whole amount... so the FED did buy 30 billion of assets for 29 bill... will they lose money... IMO, yes... will they lose 29.. nope...

And I am one that thinks the deal was pushed through and it should not have been... they could have done a packaged bankruptcy and gotten some relief in some of their problems.... the firm would have come out in the end a much smaller company, but it would have 'fixed' some of the leverage that is not good in the system.... because the true risk of investing would now be shown.... people would demand a higher return on their money with the risks.... people ignored the risk and bid down the yields... sorry, you lose... and I am sure I do also as I am in the market... but it would have been good in the long run... I do not know if this will really change people in the long run...

it wasn't the liabilities that anyone cared about on the balance sheet, but the derivative book. a bear stearns BK would have hit every large bank worldwide
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