What is wrong with the US economy? Part 2

[Esoteric]

The cap on executive pay is toothless

- It's not retroactive
- It only really applies to firms with "extraordinary" bailouts - aka Citi, AIG, BofA/Merrill
- It applies to the top 20 execs, not the MDs to drive most of the business
- Even then, salary is capped at 500k, but the execs can get options that vest once the government is repaid

 

[Ivan Seeking]

Re Gokul: The stock options could allow the CEOs to make as much as they did before, but only if the companies succeed and pay back the loan.

 

[Ivan Seeking]

The cap on executive pay is toothless

- It's not retroactive

That would be illegal.

- It only really applies to firms with "extraordinary" bailouts - aka Citi, AIG, BofA/Merrill
- It applies to the top 20 execs, not the MDs to drive most of the business

Limits government intervention to the most extreme cases.

- Even then, salary is capped at 500k, but the execs can get options that vest once the government is repaid

This about about the loan money and not what happens afterwards. Surely you aren't suggesting that loan-dependent intevention should be made permanent.

 

[Esoteric]

That would be illegal.



Limits government intervention to the most extreme cases.



This about about the loan money and not what happens afterwards. Surely you aren't suggesting that loan-dependent intevention should be made permanent.

I have no objections. Obama put forward a plan to cap executive pay to quiet the average populist Joe. The plan gives him political clout with the "enraged" middle class, while not really doing a damn thing to Wall Street (thankfully).

I'm happy with that; it's not draconian by any stretch of the imagination, which is what I hoped for.

 

[Ivan Seeking]

I have no objections. Obama put forward a plan to cap executive pay to quiet the average populist Joe c-unt.

Do you have any evidence or are you just blowing smoke?

The plan gives him political clout with the "enraged" middle class, while not really doing a goddamn thing to Wall Street (thankfully).

Apparently the defenders of corporate excesses at the expense of taxpayers disagree.

I'm happy with that; it's not draconian by any stretch of the imagination, which is what I hoped for.

That is a contradiction. You are happy because you didn't get what you hoped for?

 

[Esoteric]

Do you have any evidence or are you just blowing smoke?
Apparently the defenders of corporate excesses at the expense of taxpayers disagree.
That is a contradiction. You are happy because you didn't get what you hoped for?

The evidence is in my original post, it's toothless. Obama is playing the political game. He's appeasing the middle class, while not completely pissing off Wall Street.

Wheres the contradiction? I hoped it wouldn't be draconian.

Take Morgan Stanley for example: These guys have roughly 30 or so people on their executive management team, some of whom like Mack and Chammah already forgoed their bonus anyway. These are the guys that this plan would affect -- a group of individuals that represents less than 1% of the organization and many of whom are not even tapping into the pool this year.

 

[edward]

I can't believe this:

Joe the Economist.

The ubiquitous Samuel Joseph Wurzelbacher, aka “Joe the Plumber” and “Joe the War Correspondent,” will soon add a new moniker to his profile — “Joe the Economist.” Politico reports that House GOP congressional aides decided to invite Wurzelbacher to a meeting on the stimulus in hopes that it will attract some media attention:

http://beltwayblips.dailyradar.com/story/joe_the_plumber_advises_gop_ers/

I saw this on John Stewart and thought it was a joke.

 

[Astronuc]

The ubiquitous Samuel Joseph Wurzelbacher, aka “Joe the Plumber” and “Joe the War Correspondent,” will soon add a new moniker to his profile — “Joe the Economist.” Politico reports that House GOP congressional aides decided to invite Wurzelbacher to a meeting on the stimulus in hopes that it will attract some media attention:

I heard about that too. Wurzelbacher is apparently now a consultant to the GOP.


BTW - it's "Joe the Notaplumber".

 

[turbo]

BTW - it's "Joe the Notaplumber".

 

[Ivan Seeking]

The evidence is in my original post, it's toothless. Obama is playing the political game. He's appeasing the middle class, while not completely pissing off Wall Street.

How do you know? Has it been published?

What I saw at the WH press briefing is that the spokesman wasn't sure about that one; ie enforcement of the provisions. If your point is that it won't apply to everyone, then I guess your point is that anyone taking money should fall under the same rules?

 

[Ivan Seeking]

I saw this on John Stewart and thought it was a joke.

It is both true and a joke.

I predict that Joe will embarrass the GOP by getting arrested for drunk driving, or something similar.

 

[mheslep]

Why should driving under the influence be beyond the ordinary for Congress?
http://www.washingtonpost.com/wp-dyn/content/article/2006/06/13/AR2006061300627.html
http://en.wikipedia.org/wiki/Chappaquiddick_incident

 

[Ivan Seeking]

Why should driving under the influence be beyond the ordinary for Congress?
http://www.washingtonpost.com/wp-dyn/content/article/2006/06/13/AR2006061300627.html
http://en.wikipedia.org/wiki/Chappaquiddick_incident

Chappaquiddick?? Well, geez, what about Ulysses S. Grant? I think he drove his horse while drunk as well.

Of course your former President would be included on a drunk drivers list. But we were talking about Joe der wunderklempner.

 

[Astronuc]

The implications in this article are just amazing. Talk about a massive failure!

The rise and (almost) fall of America's banks
http://biz.yahoo.com/ap/090207/banks_on_the_brink.html

Pen-and-paper tellers to a global catastrophe: Tracing the rise and (almost) fall of US banks

These days, you can roll up to an ATM at the grocery, the pharmacy, the gas station, the hardware store, the office, even the ballpark. You can check your Bank of America balance on your iPhone. You can text Chase, and Chase will text you back.

That's banking today: It has grown from an almost quaint relationship between teller and customer into a massive, dizzyingly interconnected network that touches almost every adult in this country.

And right now, the federal government -- working without a road map, and without a net -- is putting together a plan to keep U.S. banks from collapsing.

Not just to get the banks lending again. To keep them alive.

The government is expected to announce Monday a plan that analysts expect will include lifting soured mortgage assets off selected banks' books, possibly along with guarantees against other losses and maybe more direct injections of cash.

Financial industry experts say it is a matter of choosing the best of several options, none of them very palatable.

And no one knows for sure what will work because nothing like this has happened in living memory.

Getting it wrong could trigger a replay of what happened after Lehman Brothers collapsed last fall -- the stock market in free fall, seizure of the credit markets, ripples of layoffs. Perhaps even a run on other banks -- so many customers rushing to pull out their cash that it would make the bank run in "It's a Wonderful Life" look like, well, a feel-good holiday movie.

"The banks are at a terrible junction," says Robert Reich, a labor secretary under President Bill Clinton. "The bottom is falling out. Almost every area of the credit markets, we're finding people unable to repay their loans. That means many banks are basically insolvent."
. . . .

Perhaps Reich is overstating it, or he's spot on, and it's pretty out there.

Washington and Wall Street are still playing the blame game. But most financial experts agree that a cocktail of bad economic policies and lax government oversight led lenders, borrowers and investors to take huge risks.
. . . .
Banking was a simpler affair, and a no-nonsense one: If you didn't make enough money to qualify for a loan, you didn't get one.

But in the 1980s, falling interest rates and loose lending standards opened banking to the masses.
. . . .
Some ingredients of the S&L mess, such as cheap credit, loose lending standards and weak oversight, also are part of the current debacle. But two new trends -- the rise of the global banking behemoth and the packaging of debt into securities that investors could buy and sell -- made this meltdown unique.

And much worse.

In the span of a decade, Citigroup, Bank of America and JPMorgan Chase, once bread-and-butter providers of free checking accounts, grew into international banking conglomerates that buy and sell stocks and manage assets for fees.
. . . .
These banks lured first-time homeowners, many of whom believed housing prices would go up forever, with attractive lending rates and lax requirements. Bad credit, no credit -- it seemed almost anyone could get a mortgage loan.

But instead of holding on to the loans themselves, a modern version of the old pen-and-paper model, the banks bundled them into securities and sold them to investors across the globe.
. . . .

In the old days, credit had been based on the borrower's ability to pay back the loan.
. . . .

But the good times didn't last long.

When the housing market began to decline in 2006, subprime loans -- those made to people with the worst credit -- were the first to self-destruct. That caused massive financial losses at the big banks and claimed the first casualties of the financial crisis.

Then, early last year, Bear Stearns, a venerable 85-year-old investment bank, began to teeter.

The bank suffered huge losses tied to subprime securities. Its stock plunged, and investors raced to pull their money. Bear Stearns was bought by JPMorgan for a meager $10 a share in a government-brokered fire sale.

Six months later, the crisis spread to Lehman Brothers, a 158-year-old investment bank that helped finance America's railroads. And, this time, the government decided not to step in.

Lehman collapsed in the biggest bankruptcy in U.S. history. Immediately, banks around the world, seized by fear, stopped trusting almost anyone, and lending, the lifeblood of the economy, dried up.

Seemingly overnight, two of the biggest names in global finance were gone.

To the even greater alarm of most Americans, the stock market went haywire. The Dow Jones industrials, in what amounted to a slow-motion crash, plunged 2,400 points over eight straight trading days in October. By late November, retirement accounts were cut almost in half.
. . . .

Financial experts don't expect the United States to go the way of Iceland, where a collapse of the banking system last month threw the tiny country into turmoil and toppled the goverment.

What keeps them up at night is a scenario closer to that of Japan, which bungled its own bank bailout in the 1990s and limped along during a "lost decade" of anemic economic growth and high unemployment.
. . . .
Goldman Sachs estimates the government would need to shell out $4 trillion or more to absorb all the banks' troubled mortgage and consumer debt.

How big is $4 trillion? It's more than one-third of the economic output of the United States in a year.
. . . .

. . . .
Seidman believes a similar plan has the best chance of success. And he claims it would cost taxpayers far less because the government wouldn't have to buy bad assets or inject more money into troubled banks.

Instead, the government's expenses would be largely limited to the cost of cleaning up the seized banks and selling them back into the private sector, Seidman says.

"If we don't do it, we risk staying right where we are -- pumping more money into insolvent banks and keeping them alive at the expense of healthy ones," he says.

That's what happened to Japan, which injected billions of taxpayer dollars into the banking system and spawned a legion of "zombie banks" -- financial institutions that take government money but don't lend it out. . . . .

We live in interesting times.

 

[Astronuc]

Coming up on a 2 year anniversary -

Crisis Looms in Market for Mortgages
http://www.nytimes.com/2007/03/11/business/11mortgage.html

This is a significant problem in the financial sector of the US economy. People are issuing sloppy or in some cases false research. They aren't scrutinizing the data, and therefore some/much research lacks integrity.

For the most part - this matter mainly pertains to sub-prime mortgages, but it will affect those with ARMs and home-equity loans.

Well, depending on how bad the situation is, it could precipitate a mini-crash. Not that a crash will occur, but don't be surprised if it does.

BTW -

from Is Wall Street Losing Its Luster?
Markets abroad are making inroads
http://www.usnews.com/usnews/biztech/articles/070304/12wall.htm

Of course, a favorite mantra of business is - "we are overregulated". But then recent scandals involving Enron, Worldcom, Global Crossing, Adelphia, . . . . show that corporations are not over-regulated, but perhaps poorly regulated, and certainly deficient with respect to self-regulation.

We can add the financial institutions and banks to the list of sectors that were poorly regulated.

 

[OmCheeto]

The implications in this article are just amazing. Talk about a massive failure!

The rise and (almost) fall of America's banks
http://biz.yahoo.com/ap/090207/banks_on_the_brink.html

We live in interesting times.

Indeed we are.

So how do we fix it? Or is this the wrong thread to be discussing that? I think we have 3 or 4 going on right now.

I think we should remove some of the mechanisms which have been invented over the past 3 decades which seem to have either masked or magnified the problems.

The selling of bundled securities might be a good one to go by the wayside.
Banning sub-prime mortgages.
Banning short selling during the above two adjustments. (We don't want another Soros, Black Wednesday incident)

But I'm a newby simpleton as far as economics goes. So I invite severe and immediate retribution to my 3 little ideas.

 

[Astronuc]

The selling of bundled securities might be a good one to go by the wayside.
Banning sub-prime mortgages.
Banning short selling during the above two adjustments. (We don't want another Soros, Black Wednesday incident)

The bundling of securities or financial instruments should be more transparent so the risks are well known.

Definitely get rid of sub-prime mortgages, and require a down payment. It used to be that if one could not qualify, one did not get a lone. The system has to return to that discipline.

I'd go a step further and limit interest rates on credit cards. No more sub-prime credit cards, or cash back loans. If one cannot afford, one does not get credit, and lines of credit are limited to a fraction of one's income.

Short selling could be limited, but then why not limit the upside too?

I think there does need to be better regulation on executive compensation. For example, tie corporate tax rates to the ratio of the total compensation of CEOs to those lowest paid working for the corporation or for companies hired by the corporation or minimum wage, whichever is the greatest.

See - How to fix the economy

 

[mheslep]

Short selling could be limited, ...

Why do you think that will do any good?

I think there does need to be better regulation on executive compensation. For example, tie corporate tax rates to the ratio of the total compensation of CEOs to those lowest paid working for the corporation or for companies hired by the corporation or minimum wage, whichever is the greatest...

Again: Movie stars? Lawyers? Why single out CEOs?

 

[Astronuc]

Why do you think that will do any good?

I indicated could, not should. It's a matter of limiting speculations in both directions.

Again: Movie stars? Lawyers? Why single out CEOs?

Movie stars and lawyers do the work. CEOs don't necessarily. Corporations have management teams, and most of the work is done by employees. The funds for corporations come from investors, not necessarily high-priced CEOs. Compensation should be tied directly to work - not the whims of compensation committees.

I think celebrities, movie stars, entertainers, and athletes are over-compensated. But people are willing to pay high prices for entertainment, or subscribe to magazines that flaunt the dysfunctional lives of celebrities and other nonsense.

 

[The Dagda]

Watching the news earlier and they said that CEO's of banks shouldn't get payed 5 times as much as say a professor of economics. Just a quick question as this seems the thread to ask, why are these people who seem to be no more clued up than the average economist paid 5 times as much to mess up? Is this a culture we want to condone, or do we want to condone performance over stupidity? Why do we encourage people who mess up on a regular basis?

 

[mheslep]

Movie stars and lawyers do the work. CEOs don't necessarily.

That could be another great post signature.

 

[mgb_phys]

The selling of bundled securities might be a good one to go by the wayside.

Would you still be allowed to sell shares in banks?

Banning sub-prime mortgages.

What's sub prime? Any body that is below average income ? Anybody who isn't a millionaire? Or just somebody that the bank manager hasn't played golf with for the last 20years.
We could also stop people who aren't middle aged, middle class and middle managers having credit cards or bank accounts.

Banning short selling during the above two adjustments. (We don't want another Soros, Black Wednesday incident)

That wasn't short selling so much as a government declaring that something was more than the market was prepared to pay.
The problem with banning shorting is that it means everybody in the market has an incentive to talk up the value of everything. Shorting points to crashes it doesn't cause them

 

[OmCheeto]

Short selling could be limited, but then why not limit the upside too?

I didn't know that there was a comparable opposite to short selling. Are you talking about going long? I was under the impression that someone who went long usually owned the security for quite some time, whereas someone going short only borrowed it for a little while, sometimes as briefly as a day.

Ha ha! Did you know it takes wiki only 3 sentences to explain "long", and about 30 pages to explain "short". I wonder why that is?

Btw, did you notice that the removal of the uptick rule (7/6/07) http://finance.yahoo.com/echarts?s=SPY#chart3:symbol=spy;range=5y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined" with the beginning of the collapse of the market?
Do you think it was just a coincidence?

This guy probably wouldn't think so:

http://lenderama.com/2008/03/the-uptick-rule/"
by Wade Young on March 12, 2008
The abolishment of the uptick rule has most likely ushered in a new era of volatility in the financial markets with money moving back and forth between the stock and bond markets. And volatility in the financial markets translates into volatility for interest rates. Time will tell, but the elimination of the uptick rule will undoubtedly contribute to future market declines which, in turn, will affect the mortgage market.

Though I've seen opposite opinions on the matter.

 

[OmCheeto]

Would you still be allowed to sell shares in banks?

I don't see why not. But I buy and sell my shares over the internet.

What's sub prime? Any body that is below average income ? Anybody who isn't a millionaire? Or just somebody that the bank manager hasn't played golf with for the last 20years.
We could also stop people who aren't middle aged, middle class and middle managers having credit cards or bank accounts.

I thought "sub-prime" meant that people were being given mortgage interest rates at below the prime lending rate, with a balloon payment at the end, such that if they had to make payments at the beginning of the mortgage that was the same as at the end, they would not qualify for the loan.

Or have I totally misinterpreted the term?

That wasn't short selling so much as a government declaring that something was more than the market was prepared to pay.
The problem with banning shorting is that it means everybody in the market has an incentive to talk up the value of everything. Shorting points to crashes it doesn't cause them

From my interpretation of everything I've read, it was short selling that made Mr. Soros a billion dollars in less than a week.

http://www.telegraph.co.uk/finance/2773265/Billionaire-who-broke-the-Bank-of-England.html"
By David Litterick
Last Updated: 3:50PM BST 13 Sep 2002

On Black Wednesday, Mr Soros's bet paid off. In the following days, he unwound his positions, paying back his original borrowings and ending with a profit of around £1 billion. As a parallel play, Mr Soros bought as much as £350 million of British shares at the same time, gambling that equities often rise after a currency devalues.

He admitted that his actions had benefited no one but himself and, at the time, claimed that the only thing that could save Britain was a common single currency - a view he continues to hold.

I do not see how what he did falls outside of the definition of short selling.

I have read up on Mr. Soros though, and I think I like him.

And I do not fault him for doing something that many say is ok.
And of course it was completely legal.

Perhaps everyone in the world should have shorted England that year, and then we'd all be billionaires! If only we'd had his credit rating.

How would that work? First everyone in England sends £1000 to everyone in America. Just as a loan of course. Then we send those billions of pounds to our friends in France, who send us the exchange rate equivalent in Francs. Then the Stirling tanks as predicted by everyone and their brother. So now our Francs are worth twice what they were before in pounds. So we send half of our Francs back to our British friends because that's what we borrowed. And we add an extra quid because they let us borrow it. And our French buddy's have lost half of their money and are no longer our friends. Oh well. We're richer.

Hmmm... No wonder they have such a high tax burden in France. They're idiots.

 

[The Dagda]

Watching the news earlier and they said that CEO's of banks shouldn't get payed 5 times as much as say a professor of economics. Just a quick question as this seems the thread to ask, why are these people who seem to be no more clued up than the average economist paid 5 times as much to mess up? Is this a culture we want to condone, or do we want to condone performance over stupidity? Why do we encourage people who mess up on a regular basis?

I have my answer then I think, we do it but it is wrong. Good I thought so too. Pay should be related to performance not just the need to attract psuedo intellectuals to the position.

 

[Astronuc]

Pay should be related to performance

Exactly.

15 Companies That Might Not Survive 2009
http://finance.yahoo.com/news/15-Companies-That-Might-Not-usnews-14279875.html

So let's see where these companies are in Dec '09.


How Wall Street Continues To Doom Itself
http://www.usnews.com/blogs/flowchart/2009/1/30/how-wall-continues-to-doom-itself.html

"Wall Street talent" is an oxymoron - Let the Wall St. "Talent" Walk
http://www.usnews.com/blogs/flowchart/2009/1/28/let-the-wall-st-talent-walk.html

 

[The Dagda]

Obama has put a cap on bonus payments of $500,000 but our MPs don't want to be so direct as it might send the talent out of the business, to be frank if our current mess is an indication of "the talent" it might do with some fresh ideas. That said some banks are still paying out 6,7 and even 8 figure bonuses to top execs, which I personally think is sameless, and shameful. I don't mind seeing the person in the high street bank getting a bonus (it is after all nothing to do with them and if they have done well then it should be rewarded) but given the people responsible for this mess were under these peoples control, it just seems wrong to me.

Thanks for the articles, they raised a wry smile.

I have to say and it's not something I ever thought I would say, but I'm with the libertarian right on this one.

 

[mgb_phys]

I don't see why not. But I buy and sell my shares over the internet.

So how is buying/selling shares in banks different from buying loans?

I thought "sub-prime" meant that people were being given mortgage interest rates at below the prime lending rate,

I hadn't heard of the baloon payment. but if sub-prime is lending at more than your best rate it applies to almost everybody. You have many different rates depending on the customer, the amount of deposit, the value of the loan etc. You will have a VERY good rate for your best customers, eg those with more than a couple of $M in deposit. Everybody else pays more than this - so presumably they are all sub-prime.

From my interpretation of everything I've read, it was short selling that made Mr. Soros a billion dollars in less than a week.

He bet that the value of a currency would go down, other people were happy to take his money and bet that the currency would go up.
He was right - they were wrong. they both saw the same market data, they both employed the same legions of economists, analysts, quants and dealing experts.

The black wednesday when Britain left the ERM was different. The UK decided that the pound was worth 2.95 Deutschmarks - purely on the basis of national pride and fixed the exchange rate at that level. The market disagreed and would only give you say, 2.5DM for your pound. But the government had guaranteed the ERM rate, so you could buy a £ on the markets for 2.5DM, the government would exchange it for 2.95 DM and you could take that 2.95DM back to the markets and buy £1.18 - repeat!

Perhaps everyone in the world should have shorted England that year, and then we'd all be billionaires! If only we'd had his credit rating.

You can short without having to borrow the shares. It was fairly obvious that nothing had suddenly happened to make the £ worth so much (they hadn't discovered oil) so you simply change you £ savings to $, open a US$ account at your bank and wait for the rate to swap back. The tricky bit is that the reason the £ was so high was that UK interest rates were among the highest in the world (beaten only by Iceland!) so by keeping your money in £ you could earn 6% while in $ you could earn 2%.

 

[Astronuc]

I heard an interesting interview with Richard Goldberg who is author of "The Battle for Wall Street". He indicates that Wall Street represents a historical struggle/conflict between sellers (financial institutions) and buyers (investors, e.g. private equity firms, hedge funds, the public, . . .). Previously, the sellers had the advantage of control of technology, i.e. information. Now the access to information is also in the hands of the buyers - well some of them.

I think he argues that the game has changed, and what happened recently, is that the banks/financial institutions got caught with too much leverage, as well as bad ('toxic') assets, and perhaps some got caught selling bogus investments (CDS's, MBS's, . . . ).


The Battle for Wall Street: Behind the Lines in the Struggle that Pushed an Industry into Turmoil
https://www.amazon.com/dp/0470222794/?tag=pfamazon01-20

From the Inside Flap


A conflict of epic financial proportions has begun on Wall Street and will continue to rage on in the coming years. The opposing forces are the sellers: an army of commercial and investment bankers; and the buyers: an army of hedge fund managers and private equity groups. It is a battle about power—and about winning the hearts, minds, and wallets of the investment community. In The Battle for Wall Street, twenty-five-year Wall Street veteran Richard Goldberg analyzes the struggle for power between traditional sell-side financial institutions—who have seen their dominance upended during the 2008 financial crisis—and buy-side newcomers, and tells what it means for you and your financial future.

Goldberg explains how, for over 100 years, the sellers held all the power. They made markets, controlled information about markets, and largely managed markets, while buyers were participants with limited power or influence, or none at all. He shows how, with the revolution in information technology, buyers gained access to the same data as the sellers and quickly became an equally powerful force in the marketplace—just as the numerous new pools of liquidity made money more readily available. The author examines the various drivers of large-scale trading technology, the "agents of change" that include private equity, hedge funds, endowments, sovereign wealth funds, and the major exchanges that are fast becoming global financial supermarkets.

With an insider's eye, he looks at the various strategies and initiatives currently under way as a wide range of powerful firms fight to manipulate this new generation of financial technology to their advantage. Throughout the book, he draws on the experiences of many of the sell- and buy-side "generals" in the battle.

With prominent sell-side players either out of business or humbled into restructuring as commercial banks, Goldberg offers dire predictions for some and success for others. And as Goldberg reveals the factors that will create future winners, those who stay ahead of these changes will profit in their careers and their investments. This book will be your guide.

Seems worth a read.

 

[OmCheeto]

So how is buying/selling shares in banks different from buying loans?

Because if you buy a share, you first look at the company's prospectus and watch the news and read the paper and decide if it is a company that you think will grow and profit. This can be done by just about anyone. I do it for $100 a month. Though I've found my broker is charging me $4 each time so the market would have to go up 4% each month for me to break even, so I do not think this is a good idea for me as I do not make much money and 4% growth per month is a bit high. I may switch to annual investments. Though it is fun to say you are in the market because the only people I know of who are in the market are rich and I like to pretend I'm rich.

Loans are different in that I don't think people like myself could afford to buy a loan. I might be able to afford a share of a loan that has been bundled, but I would not have access to the details of the original loan once it has been traded and rebundled with other loans. I think it would take an army of accountants to see if my $100 was being invested wisely. I think this loan packaging has been pointed to as one of the causes of the current economic downturn.

Here's a little blurb that speaks of the confusion I'm trying to convey:

Sep 25, 2008 -- http://clarkhoward.com/liveweb/shownotes/2008/09/25/14103/"
A New York Times reporter has traced the sale of just one of the weirdo investments that blew up on Wall Street and helped cause the mess we're in right now.

Here's the scoop: Bear Stearns came up with an investment package called "Bear Stearns Alt A Trust 2006-7" that was valued at $1.3 billion. Basically, they went out and bought more than 2,000 Alt A (liar's loan) mortgages with the average price tag being $450,000. More than half of the loans were made in the bubble states!

Then Bear Stearns took the trust and divided it into 37 different bonds that they split off for sale to investors. So what you had was a situation in which nobody knew how many loans failed; how many were going to fail going forward; and nobody knew how to value these investments. That's why there's so much confusion in the economy.

This scenario was played out over and over again. One person takes a mortgage; it morphs, moves in pieces and slices to investors around the world; and is structured, divided and repackaged. By the time the investments were sold and re-sold and re-sold again -- and then the foreclosures start -- you have a mess that nobody can define or figure how to put a price tag on.

Since economics is a social science, I don't think it's a good idea to have confusion, or a mess, or something no one can figure out.

People will then not know what to do. Then they'll sit on their money. And then the economies of the world will get sluggish, and then we will be where we are today.

I'd answer your other questions, but I'm late for work.

Yes, I still have a job. Knock on wood.

 

[mgb_phys]

Loans are different in that I don't think people like myself could afford to buy a loan. I might be able to afford a share of a loan that has been bundled, but I would not have access to the details of the original loan once it has been traded and rebundled with other loans.

When you buy into a pension fund or a GIC/ISA you don't necessarily know which companies shares are being bought. If it is a market tracker you are buying shares in all the stocks in a particular exchange. The only guarantee you have is that the market will set a fair price for them.
If you buy an individual stock you are placing more trust in the company - you don't go and inspect their books or check their plants or count goods in their warehouse, you rely on the auditors to mean that their annual accounts are good.
If like Enron, the accounts are bad because the auditors had an ulterior motive to agree them - you are screwed.
The loans are just the same, you and any other large and small investors can't inspect each house with a mortgage - you rely on S+P and other ratings agencies. If they are signing off on bad loans because they will get more business/commision you are screwed.
But it's not the fact that you are buying loans that matters.

Basically, they went out and bought more than 2,000 Alt A (liar's loan) mortgages with the average price tag being $450,000.

If the ratings were honest then you could model what your profit/loss would be if 10%,20%,50% defaulted and if this would matter if the house price went up 5%,10%,20% a year.
The real problem is that it isn't in anybodies interest (except the short sellers) to cry foul - so everybody pretends they believe the most optimistic estimates.

More short sellers would have been good for the market. If a large number of people were betting that the price of these loans would drop by 50% then a lot of investors might have been more careful about buying them.

 

[Astronuc]

Well - we'll just have to see if this dire prediction holds true over the next 24 months.

More than 1,000 banks may fail, analyst estimates
RBC's Cassidy sharply raises gloomy view, urges avoiding banking stocks

SAN FRANCISCO (MarketWatch) -- More than 1,000 banks may fail during the next three to five years as the recession intensifies and loan losses climb, an analyst at RBC Capital Markets estimated on Monday.

In 2008, analyst Gerard Cassidy forecast 200 to 300 bank failures, but now he says the environment has deteriorated since then. See 2008 story on bank failures.

"Residential mortgage delinquencies remain at record levels, home-equity loan defaults are steadily rising and residential construction and land loan non-performing assets are skyrocketing for lenders with excess exposure to the weakest housing markets in the U.S.," Cassidy wrote in a note to clients.

"In conjunction with the slowdown in the economy, credit deterioration has accelerated in the commercial and industrial and commercial real estate loan areas," he said.

Since the mortgage-fueled credit crunch erupted in 2007, 34 banks have failed in the U.S. While Washington Mutual became the biggest bank failure in history last year, Cassidy expects most of the banks that collapse will be relatively small, with less than $2 billion in assets.

How much will that drain FDIC (Uncle Sam).

 

[turbo]

Well - we'll just have to see if this dire prediction holds true over the next 24 months.

More than 1,000 banks may fail, analyst estimates
RBC's Cassidy sharply raises gloomy view, urges avoiding banking stocks

How much will that drain FDIC (Uncle Sam).

Not a happy thought. If banks can refinance and forestall foreclosures for borrowers, they might be able to ride out the lean times. I see a problem with the greed of their managers, though. Rather than take the high road and pitch in, they may opt to keep credit really tight and rattle their tin cups to get more public money, which they may elect to keep, as they appear to have done during the initial bail-out.

 

[jreelawg]

One of the first things wrong with the economy in my opinion is our health care system. Imagine the amount of money that we pay the health insurance industry. We're talking a very, very large amount of money that people spend on "Health care", that doesn't go to health care. Imagine the bang for the buck we could get if our monthly bills all went to actual healthcare.

The underlying problem, I think, is 1: The level of corruption sponsored by greedy corporations, and 2: The dumbing down of our population to the point that regular folks will actually side with the greedy corporations.

 

[The Dagda]

One of the first things wrong with the economy in my opinion is our health care system. Imagine the amount of money that we pay the health insurance industry. We're talking a very, very large amount of money that people spend on "Health care", that doesn't go to health care. Imagine the bang for the buck we could get if our monthly bills all went to actual healthcare.

The underlying problem, I think, is 1: The level of corruption sponsored by greedy corporations, and 2: The dumbing down of our population to the point that regular folks will actually side with the greedy corporations.

Imagine indeed. It seems to me that the arguments against are pretty much redundant considering the sheer amount of cash wasted on a bloated and inefficient bureaucracy. Still it's a bit OT. What you'll find is one half is being fobbed off with the idea it's some sort of alien institution associated with communism. The selfish wealthy at least as usual seem to hate paying for anything that doesn't go directly to them as they see it, and of course many have an interest in businesses that are involved in the medical industry. Despite the fact that they could opt out under most nationalised systems and private companies can survive under nationalisation, they seem to think that it will be the end of the world. Never underestimate the power of ignorance.