US Financial Crisis

Tsar

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Posted: 08-Jul-2008 at 11:45

Originally posted by hugoestr

Point: You can do everything correctly, as you have planned to get your house, and if the market conditions are bad enough, it will affect you. Like it or not, the economy is a ship that everyone shares its fate, except for the really wealthy.

I might not have a job in one years time, so i do run the risk of a short term gap of funding. That is my calculated risk. Its all calculated risks, i have no crystal ball. Smile

By timing my purchase at the peak in the interest rate cycle (take advantage of asset price declines), and even better while the economy slows - increase foreclosures, I mitigated interest rate risk. BTW we are at 7.25 cash rate, average home loans are currently anywhere between high 8's to 9.5+%. In Australia we normally don't fix our mortgages like they do in the USA.

The other option was to purchase earlier in a low interest rate, loose lending standards environment, with a jumbo mortgage in hot property market that is above trend in prices. There was simply to much risk jumping in at that time, even with a secure job. Either way in a cyclical downturn I could lose my job anyway. either with a jumbo mortgage on a inflated price (geez..negative capital) or with something less daunting and manageable.

While the odd property industry sponsored 'experts report' insists that supply/demand fundamentals mean that house prices should go up, the only thing that has gone up and is still rising, is rent. Thats my 'lose the job' hedge. Its not enough to cover interest rate + Principal, but enough to to cover my arse.

Over a longer time horizon the supply/demand fundamentals will start to kick into house prices as the credit starts to get cheaper again, and/or wages catchup to the affordability gap we now are experiencing in this city. Hence why i will act soon. For me its the price I pay (more so how small my loan is) that is most important and chance to own a place in a very very expensive city. By not entering i then risk opportunity cost , i cannot afford to miss that for my future family.

Originally posted by hugoestr

Question: What is a Mexican standoff?

In person i normally get my cliches mix up.

Mexican standoff is a strategic deadlock or impasse, in which no party can act in a way that ensures victory.

en.wikipedia.org/wiki/Mexican_standoff

few are selling because they don't like the prices they will get and no one is buying because they cant afford the prices demanded. Except in our poorer suburbs were people were already forced to sell.

Edited by Leonidas - 08-Jul-2008 at 11:53

vulkan02

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Posted: 09-Jul-2008 at 02:37

Originally posted by maqsad

How can someone qualify a $1 trillion reduction in overpriced assets as a "loss"? The so called "value" that has been lost is nothing more than the correction of overhyped pricetags. There has been no loss of life, property or any other tangible asset.

Those who were falsely led to believe their real estate was worth a lot more than it should be have just been informed they owe an extra amount equal to the level of error.

Thats true Maqsad but it nonetheless affects the economy when such writedowns are reported, especially when it results in firing of employees when it doesnt figure that the company has made a profit.

To put into perspective the derivatives "market"(hedge funds etc...) is currently worth about $300 Trillion if i remember correctly, meanwhile the total world economy is between $60-$70 Trillion. Now just try to close your eyes and imagine what abyss the Western(especially US') is headed when this balloon pops.

The beginning of a revolution is in reality the end of a belief - Le Bon
Destroy first and construction will look after itself - Mao

Leonidas

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Posted: 09-Jul-2008 at 04:10

Originally posted by vulkan02

Thats true Maqsad but it nonetheless affects the economy when such writedowns are reported, especially when it results in firing of employees when it doesnt figure that the company has made a profit.

well factor in the 45 trillion+ in CDS's i posted earlier, that figure is looking reasonable. The issues these derivaties* create is that they spread the risk all over the place, they can also levarage it (both ways) so enhancing any effect of market stress, multiple degrees of seperation from the end investor/s from the real asset-risk,and all of this creates a complicated counter-party web that can simply crash under its own weight. Local councils in Australia had to write down "AAA" rated CDO's based on subprime from the US.

*there is nothing worng with them per se, just how they are used

hugoestr

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Posted: 09-Jul-2008 at 12:11

I must say that reading over the thread, that part of being a financial genius is to come up with respectable names for what are really nothing but scams.

A lot of the dangerous investment vehicles can be summarize as followed: lend money to people at an unreasonable interest rate and then sell the loan to someone else who doesn't understand that the lender cannot pay back. Thus the con man gets money from both lender and borrower but assumes none of the risk.

I understand why regular people would get fooled, but what was up with financially savvy institutional investors? Where they made stupid through greed, or were they hoping that they were going to sell the hot potato to someone else when the credit market exploded?

pikeshot1600 View Drop Down

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Posted: 09-Jul-2008 at 15:02

Originally posted by hugoestr

I must say that reading over the thread, that part of being a financial genius is to come up with respectable names for what are really nothing but scams.

A lot of the dangerous investment vehicles can be summarize as followed: lend money to people at an unreasonable interest rate and then sell the loan to someone else who doesn't understand that the lender cannot pay back. Thus the con man gets money from both lender and borrower but assumes none of the risk.

I understand why regular people would get fooled, but what was up with financially savvy institutional investors? Where they made stupid through greed, or were they hoping that they were going to sell the hot potato to someone else when the credit market exploded?

All this is reflective of the "profit above all" mentality that investors and investment professionals, of necessity, have. A few quarters of "underperforming," raises questions about their abilities. A couple of years of it, and they are gone from their jobs, with reputation affected. New, or poorly understood, investment vehicles that look like they pump up the profits sometimes find their way into portfolios so these guys can keep their seven figure salaries and their often eight or nine figure bonuses.

I once had an young (most of them are) insurance company wholesaler call on me to promote a new "Universal, Variable, Reverse Split-Dollar Second-to-Die" annuity product.....basically a smoke and mirrors life insurance contract that was so hard to understand that I would never have been comfortable explaining it to a client. I listened to this spiel of BS, thanked him for his time, and never got in touch......after he gave me a couple dozen golf balls.

The point is that investment and insurance people are good at designing products that almost no one can understand. The actuaries can relate to the theory; the regulatory people can understand the intent, but no one else can. They go for them anyway. The push for profit is that strong.

It took 60 or 70 years before average investors became comfortable with mutual funds, and some still are not.

None of this is new. It has been going on forever. And you, hugo, are correct. The way it goes is to make the money up front and then to pass along the risks to someone else. If something collapses, there is always the inevitable taxpayer bail out.

Edited by pikeshot1600 - 09-Jul-2008 at 15:10

Leonidas

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Posted: 09-Jul-2008 at 15:41

Originally posted by hugoestr

I understand why regular people would get fooled, but what was up with financially savvy institutional investors? Where they made stupid through greed, or were they hoping that they were going to sell the hot potato to someone else when the credit market exploded?

Greed and the bonus structures they had in place. Most of those derivates are quite useful and when used for their original purpose and in a way that they were originally design for; a great risk controls. what happened was that they were traded for completly different reasons.

The CDS's are a good way to hedge out and control risk in your bonds or any other counter-party risk, but people were buying these to make money. I dont complety understand the mathematics, but they buy these CDS's on a company they also buy shares in and some how make a profitable trade within a gap - arbitrage trading of sorts. They make it in small percentages so they do it in a big way. The seller of these things collects a nice little interest rate and is only exposed to a default which was not a bad idea if its a bank in a normal market.

This is why i raised these things as the next big hazard. If a bank falls, not only are the share holders, creditors, clients and employees exposed, there would also be contracts out there in the friggin aether, worth even more than the company itself. That exposes the sellers into to paying out the face value of all those contracts and potentially fall down themselves. Something big just got bigger, a risk control just become risk on steroids

CDO's in themselves or ok, there is nothing new about wall street slicing and dicing credit and re-package it, as long as it ok credit. What went wrong there is that these things grew in scale and leverage and morphed into CDO2's which was like a CDO of a CDO... i kid you not. But these were only accesable through a contracts that bought you exposure but not the assets. OK we are now delving into synthetic fixed interest! The mathematics in these things are soo complex im hearing that almost no one but the acturial wizards that built these understood how these things really worked. When i first heard of these, um around four years ago, it did my head in and still does. I wasn't too ashamed as my dear collegue at the time who is a mathmetic wizard himself couldnt fully grasp it himself. BTW their models we wrong as we later learnt and it was some very silly mistakes, despite the brains behind it.

Now the Investment banks didnt care that they didnt understand these things fully apart from the professors and nerds that built them, conceptually these things were kinda sound (apart from the double counting and shit debt underneath it all) and they earned a lucrative fee. Even better you can turn seemingly bad debt into something marketable. What they could not sell, and this is the biggest fraud of it all, they offloaded into shell structures based in places like the Caymans, spin off the risk from their balance sheets but ultimately earning them very high interest. The balance sheets were inflated and very profitable, big bonuses - happy days.

All along the food chain there was greed. Sub prime spriukers, commercial banks, investment banks, hedge funds (and other investors), rating agencies and monoline insures. take you pick

Edited by Leonidas - 09-Jul-2008 at 15:52

eaglecap

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Posted: 09-Jul-2008 at 22:48

Originally posted by pikeshot1600

Originally posted by eaglecap

The whole problem seems to be heading towards a global meltdown. http://www.augustreview.com/news_commentary/global_banking/imminent_financial_crisis?_2008070394/ The only solution is to stock up on beer and beer nuts Imminent Financial Crisis? You won't see this repeated in U.S. media outlets, but Europe is running scared of an impending financial disaster. Barclays Capital, the Royal Bank of Scotland and Fortis are pulling away from the U.S. financial markets. The withdrawal of funds from New York institutions has not been reported, but amounts to at least a mini-run on the banks involved, similar to what happened to Bear Stearns in March; the run may be expanding. The only solution is to stock up on micro brew beer and peanuts (beer nuts) These major financial institutions in Europe are predicting imminent, major economic and market meltdowns. Fortis expects a complete collapse of the US financial markets within a few days to weeks. That explains, according to Fortis, the series of interventions of last Thursday to retrieve € 8 billion. “We have been saved just in time. The situation in the US is much worse than we thought”, says Fortis chairman Maurice Lippens. Fortis expects bankruptcies amongst 6000 American banks which have a small coverage currently. But also Citigroup, General Motors, there is starting a complete meltdown in the US" [“Fortis made cash call in face of expected U.S. 'meltdown',” CNBC News [on-line], www.cnbc.com/id/25451427/for/cnbc, June 30, 2008.] At the same time, the Royal Bank of Scotland headlined warnings of a global crash: The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. “A very nasty period is soon to be upon us - be prepared,” said Bob Janjuah, the bank’s credit strategist. A report by the bank’s research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with contagion spreading across Europe and emerging markets. “The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets,” he said. [“RBS issues global stock and credit crash alert,” Telegraph, on-line edition, June 19, 2008.] Lastly, Barclays Capital warned clients to "batten down the hatches for a worldwide financial storm": "Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall “below zero”. [“Barclays warns of a financial storm as Federal Reserve's credibility crumbles,” Telegraph, on-line edition, June 28, 2008.] On July 2, U.S. Treasury Secretary Henry Paulson's European speech was covered live on CSPAN. He gave considerable lip-service to what would happen if a number of U.S. banks were to fail, including even a major U.S. bank. No bank names were mentioned, but the fact that he brought it up indicates that the Europeans are very concerned about it.

Now that there are no more Commies, I guess the Euro Eliteists are out to destroy us. Oh, and don't forget to contribute to the editor's "non profit" organization.

Or, relax, and enjoy the ride.

whether there are still communist or not is for another thread but I am very anti communist and if you look at Viet Nam and China and their attacks on people of religion; I am afraid it still exists.
I tend to agree with this author and yes it has been supported in multiple sources. I hope he is wrong but a global crash is around the corner.

Λοιπόν, αδελφοί και οι συμπολίτες και οι στρατιώτες, να θυμάστε αυτό ώστε μνημόσυνο σας, φήμη και ελευθερία σας θα ε

hugoestr

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Posted: 10-Jul-2008 at 14:16

[quote =Pikeshot1600]None of this is new. It has been going on forever. And you, hugo, are correct. The way it goes is to make the money up front and then to pass along the risks to someone else. If something collapses, there is always the inevitable taxpayer bail out. [/quote]

This to me is the reason why there should be strong regulation laws and enforcement of financial activities. The government must bail out these bad practices to prevent a total descent into financial chaos.

And if we, as taxpayers, are going to ultimately have to pay the bill for this nonsense, we as taxpayers must have guarantees that a greedy people and an industry will not put the economic welfare of everyone in peril.

I had an insight this morning about the market. We have been taught that the market can magically figure out needs and the best solution for those needs. There has been a push into bringing market solutions for nonprofit endeavors.

The insight that I had was that it is not the market that is useful, but a system of quick feedback that is. Having quick feedback allows us to correct wrong directions.

Part of the problem with the latest credit sector is that the feedback wasn't there. Those who designed the vehicles created a time bomb mechanism into them to give them time to unload the bad debt. The quick feedback mechanism was tampered with, creating a lag time which prevented a quick change in direction.

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Posted: 10-Jul-2008 at 14:19

With regard to the speciufic situation the US is in today, a point I bhaven't seen mentioned yet is that in previous economic depressions including the great one, the US was self-sufficient in pretty well everything. Even as late as the '70s the US propensity to import (the degree to which people would spend extra income on imprts) was trivial.

Inter alia that meant that increasing incomes or lowering taxes resulted in an pretty linear increase in spending on domestic goods and services, which meant in turn that Keynesian solutions worked and the dollar in general stayed solid.

That now is far from true, and makes it very difficult to extrapolate from what happened in past situations - though it is reminiscent of what happened in Britain and France with the disappearance of the empires and their associated currency zones.

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Posted: 11-Jul-2008 at 16:47

The stock market index is a good indicator of the economical status of a company. The value of shares has dropped in various sectors, especially the big three automotive and accompanying suppliers. Yet sectors like petrol have been doing well. The NYSE has seen volatile swings over the past months. Normally real estate has been a safety valve in a troubled market, however, much of the US has seen property values diminish.

Instead of focusing on a macro scale of economics (which is a most important financial indicator) let's see what micro experiences we have been going through or have personally heard of in order to bring this market economy experience closer to home. We are our own financial indicators.

For starters I have talked to a many in the automotive field who have lost their jobs due to layoffs. Personally I have seen more sales of homes and vacant business tenants then any time I remember in the past. A lost tax base ensues. We have heard of home foreclosures and thankfully I am not in that predicament. Recently I talked with an owner of a landscaping business. He had told me that he has not had any commerical contracts this summer. It is a first for him. He still maintains his private lawnmowing business to earn his living. The big three (as it used to be called for GM, Ford, and Chrysler) has lost market share and stock value. Now all one reads about is more hourly and salary layoffs. A trip to the local grocery store feels like an indulgence at one of those fancy exotic cheese and wine boutiques. The prices have increased exponentially. Gas/petrol is another indicator of the times.

We have been astounded by the diminsihed return of our mutual funds as of late and we are also aware of the limited value of the dollar in our daily lives. Call this what you will. We all need to survive. As Americans we can look at this as another moment in time that shapes the way we live.

hugoestr

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Posted: 11-Jul-2008 at 19:02

Originally posted by gcle2003

With regard to the speciufic situation the US is in today, a point I bhaven't seen mentioned yet is that in previous economic depressions including the great one, the US was self-sufficient in pretty well everything. Even as late as the '70s the US propensity to import (the degree to which people would spend extra income on imprts) was trivial.Inter alia that meant that increasing incomes or lowering taxes resulted in an pretty linear increase in spending on domestic goods and services, which meant in turn that Keynesian solutions worked and the dollar in general stayed solid.That now is far from true, and makes it very difficult to extrapolate from what happened in past situations - though it is reminiscent of what happened in Britain and France with the disappearance of the empires and their associated currency zones.

Ah! very good point.

Leonidas