Get The Hell Out: Part II

Quote from Arnie:

I think one BIG mistake on the part of the Fed is trying to outlaw recessions vis a vis the Bears Stearns bailout.

They (BSC) made a mistake......misjudged risk, they should pay the piper. All that crap about a domino effect was just to cover their (Fed) actions.

By trying to delay the inevitable, they have just garanteed a worse outcome for everyone.
More...

Indeed. I could not agree with you more.

When Greenspan did it, I do believe we got the beginning of the spectacular residential real estate bubble.

Bernanke, to be fair, inherited a lot of that baggage, but instead of dispensing some strong medicine, seemed to follow the Greenspan playback to the last technical element.
 
Quote from hayman:

I went all cash and bonds 2 weeks ago, and will not come out of the foxhole until after the election. Come January, I will re-assess the situation.

Right now, my 3.4 % MoneyMarket is looking pretty darn good.....not keeping up with inflation, but better than losing a pile.
More...

That's funny because that's exactly what I did and I'll be staying out too at least untl the election and longer if the socialists take over as much as they seem they're going to.
 
Excellent Commentary All
.......................................................

I do use Bloomberg for entertainment....

I find it quite amazing that they can talk all day....

Sometimes finding something worthwhile to talk about
is difficult....

Bloomberg does set up genre....be it positive or negative....

And tends to set the atmosphere of the game....

However what is happening....is on the charts....
 
The system is so complex that solutions to big problems once they start, like the insolvency of a large primary dealer, are not events that can be facilitated with subtlety, there is no time, they necessitate a sledge hammer approach. If you haven't already read Bookstabber’s "Demon of our own design" as he explains it very well.

I know the Fed shouldn't have bailed out LTCM and I used to think that the Fed erred with BSC but the more I talk to experienced people who are familiar with the workings of the banking system I am no longer so sure about BSC. The argument about an institution being too big to fail makes some sense with BSC and the complex relationships that proliferate the system these days, it made little sense with LTCM but I agree it set the stage for a slide down the slipper slope of moral hazard and certainly encouraged banks to take on far more risk and leverage than they should have having seen the Fed put in action (remember that Bear was the hold out that didn't want to go along with the LTCM bail out and were forced to).
 
I agree with you on BSC, Mvic. We will never know what 'what would have happened if' the Fed never forced their bailout. I am not so sure that it would just have been another investment bank going out of business and the world would have continued like as if nothing happened (like e.g. Rogers said 'We had IBs going out of business in the 70s, in the 80s and it was no big deal, and now we just bail them out?'). How does he know it would not have had a catastrophic effect today?

The difference IMO between primary dealers of today and previous illiquidity situations at IBs decades ago is the dollar amount of OTC CDS exposure that goes through the entire banking system like a spider web. One domino falling over could cause a prolonged financial meltdown and bank runs that help nobody.

However, IMO it is time now to look into moving these derivatives - CDS in particular - to regulated exchanges and out of the OTC market. I think Kenneth Griffin from Citadel has been vocal recently about that point (see http://www.nytimes.com/2008/05/13/business/13sorkin.html?ref=business ).

P.s. To anybody who thinks the BSC bailout now encourages banks to take on risk blindly because they "don't have to cover the check because the Fed does". Go ask the bank stock holders - many of them high ranking bank managers and directors - around the world who lost 100s of billions, fired bank CEOs (BSC, Wachovia, Citibank) and tens of thousands bank employees in credit and bond departments that were fired worldwide on how they feel about taking on extra risk now. I don't think they need a couple big investment banks to declare bankruptcy just now to learn their lesson at this point. At least not for the next 10 years or so.
 
Quote from makloda:

I don't think they need a couple big investment banks to declare bankruptcy just now to learn their lesson at this point. At least not for the next 10 years or so.
More...
An excellent point. Risk awareness has increased recently, but the pendulum will swing the other way when institutional memories inevitably fade, allowing the cycle to continue.
 
Quote from ByLoSellHi:

Breaking below 1370 on the spooz did serious technical damage today, HG.

And oil is spelling FUBAR with its funky price action.
More...

And lets not forget Fiscal 2009 State Budgets, effective JULY 1, 2008...

http://www.cbpp.org/1-15-08sfp.htm
http://www.cbpp.org/3-13-08sfp.htm

The State governments are responsible for preventing the recession, statistically...
Spend it while you can, hire 'em now mentaility comes to an end in 3 weeks.

And round 2 of the same in January 2009... No need to fear though, inaugurate a new chief.

Osorico
 
Posted in another thread, but it's worth posting again, IMO:

"This is disturbing...

One of the writers here at The Sovereign Society forwarded this graph from the St. Louis Fed earlier this week. It shows how much banks have borrowed from the Federal Reserve going back to 1910.

As you'll notice, banks have somewhat increased their borrowing over the last year...

bankborrowingchartil3.jpg


What assets have banks used as collateral to borrow much of these new funds from the federal reserve (i.e. U.S taxpayers)?

Let's just say a huge proportion of it is comprised of mortgage backed asset paper, for which the fed has exchanged treasury notes, as good as cash, on a par value basis (based on the inflated appraisals of these underwater mortgages), in return."
 
Quote from makloda:

I agree with you on BSC, Mvic. We will never know what 'what would have happened if' the Fed never forced their bailout. I am not so sure that it would just have been another investment bank going out of business and the world would have continued like as if nothing happened (like e.g. Rogers said 'We had IBs going out of business in the 70s, in the 80s and it was no big deal, and now we just bail them out?'). How does he know it would not have had a catastrophic effect today?

The difference IMO between primary dealers of today and previous illiquidity situations at IBs decades ago is the dollar amount of OTC CDS exposure that goes through the entire banking system like a spider web. One domino falling over could cause a prolonged financial meltdown and bank runs that help nobody.

However, IMO it is time now to look into moving these derivatives - CDS in particular - to regulated exchanges and out of the OTC market. I think Kenneth Griffin from Citadel has been vocal recently about that point (see http://www.nytimes.com/2008/05/13/business/13sorkin.html?ref=business ).

P.s. To anybody who thinks the BSC bailout now encourages banks to take on risk blindly because they "don't have to cover the check because the Fed does". Go ask the bank stock holders - many of them high ranking bank managers and directors - around the world who lost 100s of billions, fired bank CEOs (BSC, Wachovia, Citibank) and tens of thousands bank employees in credit and bond departments that were fired worldwide on how they feel about taking on extra risk now. I don't think they need a couple big investment banks to declare bankruptcy just now to learn their lesson at this point. At least not for the next 10 years or so.
More...

I used to strongly disagree with you on this issue, but I'm not as confident in my own opinion any more. If a few of the 'too big to fail' institutions did, it could spell Armageddon.
 
Quote from Mvic:

The system is so complex that solutions to big problems once they start, like the insolvency of a large primary dealer, are not events that can be facilitated with subtlety, there is no time, they necessitate a sledge hammer approach. If you haven't already read Bookstabber’s "Demon of our own design" as he explains it very well.

I know the Fed shouldn't have bailed out LTCM and I used to think that the Fed erred with BSC but the more I talk to experienced people who are familiar with the workings of the banking system I am no longer so sure about BSC. The argument about an institution being too big to fail makes some sense with BSC and the complex relationships that proliferate the system these days, it made little sense with LTCM but I agree it set the stage for a slide down the slipper slope of moral hazard and certainly encouraged banks to take on far more risk and leverage than they should have having seen the Fed put in action (remember that Bear was the hold out that didn't want to go along with the LTCM bail out and were forced to).
More...

The way I look at it is this:
The FED isn't just there to grease the wheels of the economy. They are very important in terms of psychology for the general uneducated public. If the public sees a "banking system" that doesn't bail out banks, they might fear that their money isn't safe in any bank. So, the move IMO wasn't so much about saving one bank, it was really to send a message to the public that the FED will do whatever it can to protect the system.

So, even though it may seem that they "don't care about the economy", tell that to a factory worker who is scared that their life savings could evaporate from some bank. Granted, this is apples to oranges, but again, the general uneducated public doesn't make the distinguishment. So protecting the banking system IS protecting the economy.
 
You must log in or register to reply here.
Back
Top