The financial pandemic...

[anilsinghd]

Final Nail in the Coffin!

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoHW3zyqTeAA&refer=worldwide

Good Bye Wall Street and I-Banks!

 

[positivelook]

Latest!

http://hosted.ap.org/dynamic/stories/F/FINANCIAL_MELTDOWN?SITE=DCUSN&SECTION=HOME&TEMPLATE=DEFAULT

 

[anilsinghd]

UBS to slash 1,900 jobs

HSBC announced to slash 1100 last week.

Its getting painful people!

 

[coolphool]

Proves my point that all these IIM-A/IIT-D/Ivy Leagues types are better than us Public School educated types at nothing but screwing things up even royally.

All these Wall Streeters would go to all these High Flying campuses with IQ literally flowing in its sewers. And what these High IQ tyrants give us is the biggest screw-job in history!

 

[sidchhikara]

Financial Crisis Explained !! - Part 1

Here is a humorous take on the Wall Street badmashi ...well explained.

The original article is by Arnab. Here's the link........

http://greatbong.net/2008/10/01/the-great-wall-street-meltdown-part-1/

The Great Wall Street Meltdown Part 1

Published October 1st, 2008 in Economics.
Warning number 1: This is a long post, part of a multi-post series on the crisis in the financial markets.
Warning number 2: I never took an Economics or Finance course in my life. I will not quote economists or provide citations and statistics. Not because I want to be simple and lucid. It’s because my knowledge of finance is extremely limited. All that follows is based on my understanding of the present financial situation, an understanding formed by reading the popular press.
Warning number 3: Which means that everything I say below may be wrong. But what’s wrong in that? At least, I didn’t get half a million dollars bonus and an apartment in Manhattan as reward for being “wrong”. Right?

The backdrop
In a land far far away (the United States of America) a long long time ago, there was a great housing boom.
Okay wait. I am getting a bit ahead of myself.
So first a little perspective.
In the US, buying a house is considered to be one of the best investments one can make. This is particularly true because the government, as part of long standing policy, encourages people to own their own homes by allowing tax-deductions on mortgage interest payments. This means if you took a loan to buy a house and are making monthly payments towards the mortgage as well as toward property taxes, the government puts some of that money back into your pocket by allowing you to deduct a per centage of those expenses from your federal taxable income. In other words, a certain portion of your house-ownership cost is written off by the government from your tax bill.
Since the US government does not consider providing any such relief to people who rent (though such people are generally worse off than home owners), the financial incentive to own a home is that much greater.
So yes. Where were we? Yep. The housing boom. For the last few years, prices of houses were going up and up in the US driven by ever-increasing demand. So much so that people, many many of them in fact, started thinking like Mr. Bullah below:
“Hey this house is worth $500,000. In a year it will be $600,000. So if I can sell it then, I can get a 20% return on investment. ”
Of course there is a small problem. Bullah’s net worth, in terms of his savings, are $10,000 (2% of the house’s cost). And just to make things worse, he has a bad credit history having defaulted on his credit card bills a few times. In order to make the very basic minimum down-payment for the house (usually 20% of the cost), he needs $100,000 i.e. $90,000 more straight away.
He goes to the bank.
Now in normal situations, the loan officer would look at Bullah’s bank statement and his credit history and show him the door telling Bullah politely (after all his name is Bullah) that he just does not have the equity to make such an expensive purchase.
However these are not normal times.
What happens is that on seeing Bullah’s loan application, the loan manager smiles, shakes Bullah’s hand and provides him the loan on his down-payment. Yes the full $90,000. Plus the loan manager also provides as loan the rest of the house cost (i.e. loans him an additional $400,000) enabling Bullah to take possession of the house right away with zero-down.
So what does Bullah provide as collateral? Nothing.
The only catch is that in exchange for the high (and unreasonable) risk the bank is taking on giving this loan , it expects a very high rate of interest from Bullah. This transaction between Bullah and the banker (let his name be Lucky Chikna) is what is known, in common parlance, as “subprime lending”. Lucky Chikna is happy because he is going to get a lot of money as interest for his investment (albeit more than a bit risky), which, in turn, is going to translate to a higher commission for him.
And Bullah—he is only too glad to get any loan.
As he tells his worried brother Chutiya: “Don’t worry about the high rate of interest. In a year, we will recovered our money and quite a bit more. So no problem.”
And so this came to pass that thousands of such “sub-prime” loans are written by greedy creditors out to make a fast buck on the high interest rates and then accepted (often many loans at once), with glee, by equally greedy common citizens who think, based on advice given by “pundits”, that the housing market would be the golden goose that would keep on giving. Year after year.
The Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Mortgage Corporation, nicknamed Freddie Mac, are special private corporations that have strong government ties. Fannie Mae and Freddie Mac were started by the US government so that they may provide credit to the banks (i.e. the primary lenders who loan money to people to buy houses). This was to enable primary lenders to provide more mortgages to common people and thus promote home ownership.
In short a Baap ka baap.
Let me explain how I think this works (the actual process is a bit more involved). Say I buy a house for $500,000. The total amount I have to pay back to my bank at the end of thirty years (my mortgage period) is $600,000 distributed over monthly payments. The bank however has to pay the seller of the house $500,000 right away and then wait for 30 years before they have their full principal and interest back. In other words, the money would be “stuck” for that period of time.
This is where Fannie Mae/Freddie Mac come in. They go to the bank and if they believe that the bank has followed sound lending practices, they buy the mortgage from the bank for say $520,000. Which means that the bank gets its $500,000 back immediately along with $20,000 interest without having to wait for years. It has thus not only made a profit but it has recovered its principal leaving it free to re-invest this amount into another mortgage.
Now Fannie Mae/Freddie Mac will be the party responsible for collecting on the $600,000. Since the mortgage was bought for $520,000, at the end of the mortgage period it will have made a $80,000 profit.
Now where did Freddie Mac/Fannie Mae get this $520,000? Why doesn’t it worry about the fact that its money will be stuck for 30 years? That is because Freddie Mac/Fannie Mae sell what are known as mortgage-backed securities to investors.
Just like an index fund allows an investor to invest in a bouquet of companies with the spread of companies reducing his risk of betting his money all on one horse, a mortgage-backed security (MBS) allows an investor to own stakes in a large number of different kinds of mortgages.
So when Freddie Mac/Fannie Mae make the $80,000 profit on its $520,000 investment, it can keep a per centage of the $80,000 as its commission and passes on the rest as dividend to the MBS-holders i.e. all those who made an investment in that particular mortgage.
Now as is evident, higher the rates of interest are on the mortgages that form an MBS, more are the payouts to the investors in that MBS. With financial experts betting on the housing market to grow and with the consistently high returns on such securities, the prices of MBSs appreciated greatly with investment banks, institutional investors like pension funds and hedge funds all rushing in for a piece of the action. And added to the fact that securities issued by Freddie Mac/Fannie Mae had an implicit backing of the federal government (i.e it was “expected” that the government would cover the investment in case of financial downturns) and one can understand the craze for Freddie Mac/Fannie Mae MBSs.
Now were Freddie Mac/Fannie Mae head honchos well-aware of the shaky foundations of the MBSs they were peddling? You bet they were. But then why should Bullah and Lucky Chikna be the only greedy ones when Lambu Atta , the big boss of Freddie Mac/Fannie Mae is also in the game? Buoyed by the high returns on MBSs, the management of Freddie Mac/Fannie Mae helped themselves to obscene bonuses and vulgar pay-increases. Of course, in the midst of all the excesses, they conveniently forgot that their charter officially stipulated that they were to use their profits to buying more mortgages, increase capital flow in the housing market and thus push down mortgage interest rates.
Money as they say does strange things to memory.
In the lucrative business of buying mortgages, Freddie Mac/Fannie Mae were not the only players in the town, though they were the largest. Different kind of financial institutions like insurance companies and even normal banks were falling over themselves in order to buy sub-prime mortgages from the primary lenders and sell them as part of their investment products. Yes those very loans that had been given to credit-unworthy people like Bullah who had no assets to cover the huge amounts of money they had taken out.
Something was bound to give. With a financial disaster of a war, rising national debt, falling dollar, job losses and out of control oil prices, those people who had taken multiple mortgages out on their $10,000 bank account no longer had the money to make the high monthly payments.
The buyers they had predicted would buy their houses at a premium—well they were no where to be found.
So thousands and thousands of home-owners just threw up their hands and declared bankruptcy. Houses were foreclosed and seized. People were evicted.

 

[sidchhikara]

Part 2

But then the question remained: who would buy these seized homes?
No one. Cause people had no money—a state technically called “Loot gayee Laila”. Banks, once they realized that the housing bubble had popped, had tightened their lending policies (after the horses had all bolted) and so loans were no longer easily available. Houses stayed on the market forever. Their prices nose-dived.
And mortgage-owners were left holding non-performing, fast deprecating assets on which they had to pay property tax in order to keep holding onto them till a buyer could be found.
Remember that $600,000 payment Freddie Mac/Fannie Mae needed in order to pay the dividends to the MBS holders and also take their commission, the expectation of which had forced MBSs to stratospheric levels ?
Well the news was that there was no $600,000 coming.
MBSs , once bought at high premiums, had started losing their value rapidly.
Disaster was now at the gates. For banks who had invested in mortgages themselves. For Freddie Mac/Fannie Mae. For people who had bought MBSs. For anyone who had guaranteed a mortgage or bought one. In short, ruin for most of the economy as black suit bankers sat on a mountain of useless MBSs that was often not worth the piece of paper written on.
Was that all? As the line from Bombay Boys goes “Abhe khatam naheen hua chutiye”.
I made one gross oversimplification in my preceding narrative. (Well more than one. But bear with me.)
When greedy banker Lucky Chikna gave the loan to Bullah, he told him that Bullah will get the loan only if he takes out an insurance on his mortgage so that if in the (unlikely) case that Bullah cannot make good on his financial commitment, the insurance company will pay the remaining amount on the mortgage. Bullah now has to make monthly payments for his mortgage insurance (over and above his mortgage payments) but Bullah doesnt care. Cause he has the pot of gold at the end of the rainbow. The fact that the mortgage is insured is also good for Lucky Chikna as he has covered his bases, should someone ask him what kind of risk mitigation steps he has taken.
Now let’s consider the situation from the point of view of the insurance company. Ibu Hatela, the big chief, suddenly gets all these house-buyers who want mortgage insurance and are ready to pay a nice premium for them. Ibu thinks to himself :” This is good. With the way the housing market is, there is not much chance of the house buyer going bankrupt–he will always be able to sell his house and make a lot of money. So no chance of him defaulting. Let me keep on selling these insurance products.”
And so he keeps selling. Because his company is well-known, the insurance-buyers never ask him “Do you have assets to cover all your insurance liabilities?”After all, when we buy car insurance from Geico or Progressive, do we ever stop to ask them if they actually have the money to pay $25,000 for damages, if I total someone else’s car? No we do not.
And so insurance companies kept on making out these insurances far beyond their covering capacity. The premiums were like “free money”, insuring (as one expert opined) cars in a country where there were no car crashes. Why just housing? Companies started insuring any kind of big loan with the guarantee of coughing up the cash should the loaner default. Just like mortgage-backed securities, these “I shall pay up when you cannot” instruments (technically called credit default swaps) were being bought and sold on the market at high premiums and companies who were dealing in them were raking in the profits.
What that meant was Ibu Hatela would sell the rights to collect premium from Bullah to another guy, say Ballu Bakra and Mr. Bakra would in turn sell that credit default swap to someone else. The market for credit default swaps were red hot —AIG, one of the biggest names in insurance had $78 billion worth of swaps !
Again, all this was fine till the day the housing market went boom. Thousands of people began to default on their loans. All the cars in that crash-free world had just run into each other. The insurance companies and the buyers of credit default swaps, needless to say, did not have the cash to cover the claims. With the housing market going down, different other kind of business deals started going sour. Even more debt insurance claims were made. And the more they were made, the deeper the owners of credit default swaps sank into the swamp.
Then of course there were the investment banks—the Bears and Sterns and the Lehmans of the world. They had their proverbial finger in each of these superhigh yield pies be it the mortgage-backed securities or the credit default swap markets. As a result of years of high-paying lobbying initiatives, the investment banks had made sure that they operated under the minimum of controls and oversight, freeing them to take unreasonable risks while investing.
Initially it all went according to plan. Even better than the plan as a matter of fact. The more they raised the stakes and the more outrageous the risks they took, more money they got.
Income forecasts were manipulated by taking into account the so-called “value” of the credit default swaps whereas in reality it was nothing but “funny money” that existed only in an optimistic future, a tomorrow that would ultimately never come. And with such rosy forecasts and on the back of its great current “performance”, Wall Street paid out record performance bonuses across the board.
Till of course disaster struck. The MBSs sunk to junk and people started calling in the credit default swaps. The banks did not have enough assets to cover even a fraction of its liability.
When angry young man Amitabh Bachchan says on screen: “”Main paanch lakh ka sauda karne aaya hoon, aur mere jeb mein paanch phooti kaudi bhi nahin hai!” (I have come to conduct a deal for 500,000 but I do not have even 5 paise in my pocket) it sounds macho and cool. Now when investment banks are shown to have followed that same principle, it’s quite horrifying. To put it mildly. No wonder then that investor confidence and their overall credit-worthiness suffered.
The only way for the Lehmans and the Bears and Sterns to be able to survive would have been to raise money from the market and use it to discharge their obligations. But the credit market had frozen up. No financial entity in Wall Street was trusting anyone else with their resources. Starved of its cash flows, an investment bank like Lehman Brothers that had survived the Great Depression and two World Wars went belly-up. So did Bear Sterns before it was acquired.
AIG and Freddie Mac/Fannie Mae were in danger of coming to their knees but since they were considered too critical to fail , they were given federal life-lines through infusion of tax money to keep them afloat.
Two of the biggest banks–Washington Mutual and Wachovia were not so lucky and was taken over by other corporations.
And most importantly, the High End Girlfriend Index, the true indicator of the value of Wall Street fatcats, collapsed spectacularly.
The face of the financial world had changed within a few weeks.
But the drama..that was just beginning.
[Part two has the political fall-out of the Wall Street Collapse]

Note: All names used for exemplary purposes in above blog-post are characters from the surreal epic “Gunda” (1998), one of the greatest movies ever made. More details here

 

[samarkadian]

Capitalism in Crisis!!

All recent rollercoaster of world's financial sanctuary could also be seen as Down fall of Capitalist's ideals.Many could be disagree with this as there is wave of sympathy for banks and economy all over.

But Should the Banks be bailed out?

If yes, then why, when it is evident that they themselves created this bubble?

Secondaly, Should workers pay the price? Why?

I see this as starting of the end of capitalism.

 

[coolphool]

All recent rollercoaster of world's financial sanctuary could also be seen as Down fall of Capitalist's ideals.Many could be disagree with this as there is wave of sympathy for banks and economy all over.

But Should the Banks be bailed out?

If yes, then why, when it is evident that they themselves created this bubble?

Secondaly, Should workers pay the price? Why?

I see this as starting of the end of capitalism.

Your argument is screwed up to start with.

The problem wasnt due to capitalism to begin with. It was because of a powerful federal government that made rules and laws that made it easier for the Wall Street bankers to gamble and take up risks that the limits set by free-market principles wont have allowed. And how did these rules and laws that allowed such egregious behavior? It was due to the lobbying efforts of Wall Street in Washington DC.

Is a bailout Capitalistic in nature? No way. Capitalism prescribes punishment of bad business practices and behavior by filtering out rogue elements who indulge in such.

Bailout is as anti-capitalism as it gets. It is socialism. Socialism for the rich to begin with. The government will buy the bad investments made by Wall Street Bankers. The taxpayers will foot the bill.

The biggest bullshit I hear in all this mess is that the taxpayers will be the first ones to be paid back once all this is over. By most estimates, an average family will end up subsidizing this bailout by shelling out 10000 dollars. Is the government going to mail us checks of 10000 dollars if and when they turn around these bad investments that they are assuming. They say its going to take 5 years at the least to accomplish this. I am not even asking for the interest. Am I going to get back the principle at the least. Considering that I am still waiting for my 300 dollar stimulus check, a 10000 dollar check wont happen in a 1000 years.

I am not an advocate of capitalism. I am objectivist. By that I mean cut through the crap and come to point and put the blame where it deserves to rest.

Blame it on America's drift towards socialist policies. It has enabled the government to retain a lot of control over almost everything including its Financial sector. The players in the Financial sector lobby the government that is supposed to regulate them, to make rules and laws that favor their greed. For a few pieces of silver the government has sold off the country to a greedy few who have nothing to do with Capitalism. They are swindling thugs to say the least.

I am kind of concerned that we will give the govenrment more power to regulate the Fianancial sector by blaming lack of regulations as a cause of what has happened. This will just be magnifying the current mistakes and when the chickens come home to roost, it will be even worse than it is now.

By the way it is not the end of Capitalism. It may be the beginning of capitalism as capitalism is all about finding the right equilibrium. It punishes bad behavior and rewards the good one. So, the bad behavior of a drift towards socialism will be punished to the point that it will break the governments back and its ability to regulate any further and thus the control of the Financial sectors will be returned to the people who understand the concept of risk and returns better than the government.

 

[positivelook]

Your argument is screwed up to start with.

Is a bailout Capitalistic in nature? No way. Capitalism prescribes punishment of bad business practices and behavior by filtering out rogue elements who indulge in such.

Bailout is as anti-capitalism as it gets. It is socialism. Socialism for the rich to begin with. The government will buy the bad investments made by Wall Street Bankers. The taxpayers will foot the bill.

The biggest bullshit I hear in all this mess is that the taxpayers will be the first ones to be paid back once all this is over. By most estimates, an average family will end up subsidizing this bailout by shelling out 10000 dollars. Is the government going to mail us checks of 10000 dollars if and when they turn around these bad investments that they are assuming. They say its going to take 5 years at the least to accomplish this. I am not even asking for the interest. Am I going to get back the principle at the least. Considering that I am still waiting for my 300 dollar stimulus check, a 10000 dollar check wont happen in a 1000 years.



By.

Bhai Phool
Well u r saying tht will govt. send u the cheque of 10,000 or wht, now tell me one thing wht are the options they have otherthan bailout and now even Bailout is announced but US economy is struggling and last night was a nightmare for all those who have smthing todo with share market even though good for those who used the opportunity as short selling. Anyway i come to the point that they dont have much options oher than bailout cos economy is struggling and since january Americans lost job figure is 7,50,000 so if this figure kept on goin like this the trouble will increase for the normal americans and dont forget that those who are loosing jobs have also paid taxes before. I know stupidity of few individuals have put US in this mess but this is wht the realty now. Europe is also following the same mess now as like US so now its not only US or europe its the whole globe which is down.
Lets see India we have maintained a growth rate of 9% from last few years but this time it will be a miracle if we get upto 8%. So wht i think is govt. have smthing to do and thts wht they r trying. No harm in bailout, afterall govt. have the responsibility to act in this kind of crisis.

Abhimanyu Phougat

 

[brahmtewatia]

thot provoking thots... indeed !

investment analyst nd entrepreneur dr. marc faber concluded his monthly bulletin with the following:

"the federal govt sending each of us a $ 600 rebate. if we spend tht money at wal-mart, the money goes to china. if we spend it on gasoline it goes to the arabs. if we buy a computer it will go to india. if we purchase fruit nd vegetables it will go to mexico, honduras nd guatemala .

if we purchase a gud car it will go to germany. if we purchase useless crap it will go to taiwan nd none of it will help the american economy.

the only way to keep tht money here at home is to spend it on prostitutes nd beer, since these are the only products still produced in US. i've been doing my part.'

thot provoking thots... indeed !

 

[sjakhars]

Is it like this?

Iska matlab wo paisa kisi samudra me nahi dooba, na hi aag me jala, kisi na kisi ke paas hai aur wo enjoy kar rahe hain ya kar chuke hain, iska matlab wo paisa abhi bhi market me hai, jaise agar aapne mujhse 100 rs leke Domino's pe Pizza khaya to wo 100 rs gaye Domino's ke paas, Am I correct? aapne mujhe 100 rs nahi lautaye jaise ki Lehman se loan le ke logon ne nahi lautaye par wo paise hain to abhi bhi market me, iska matlab koi to is paise se dhanwan jarur bana hai, My question is, Who is that Rich person? aur agar wo market me nahi hain to kya kisi ne bank locker ya tijori me rakh diye hain aur chabi kho di hai?

I am really weak in this financial thing, could someone please clear it for me and others like me?

US Economy is totally credit based Economy and so is their life style.

For a layman, Lehman brothers just borrowed money from some financial institutes with interest and landed that to their clients at some higher interest rates. Now their clients are unable to payback the money and hence the Lehman Brothers. All their credit is now their debit ..... so bankrupt.

I hope i am right ....... Economist plz let me know

 

[brahmtewatia]

I am really weak in this financial thing, could someone please clear it for me and others like me?

sitaram ji, my abv post # 50 nd yr. post # 51 were posted at the same time (08:46 hours). if u wud hav read my post, before posting yrs... then i guess u wouldn't hav asked this question

wo paisa umrika mein hi hai, aur wo enjoy kar rahe hein as explained by dr. marc faber

 

[anilsinghd]

Anyone wishing to know what's the reason for the current day market turmoil , this is a very decenbt read with layman-ish approach.

Thanks Sid for sharing it with us.


Exactly this mechanism did happen! Greed led to leverage and leverage led to what we are seeing today!

 

[anilsinghd]

Iska matlab wo paisa kisi samudra me nahi dooba, na hi aag me jala, kisi na kisi ke paas hai aur wo enjoy kar rahe hain ya kar chuke hain, iska matlab wo paisa abhi bhi market me hai, jaise agar aapne mujhse 100 rs leke Domino's pe Pizza khaya to wo 100 rs gaye Domino's ke paas, Am I correct? aapne mujhe 100 rs nahi lautaye jaise ki Lehman se loan le ke logon ne nahi lautaye par wo paise hain to abhi bhi market me, iska matlab koi to is paise se dhanwan jarur bana hai, My question is, Who is that Rich person? aur agar wo market me nahi hain to kya kisi ne bank locker ya tijori me rakh diye hain aur chabi kho di hai?

I am really weak in this financial thing, could someone please clear it for me and others like me?

Sitaram ji did you go through the posts of mine in response to Sunil and Vijay.

Much of this was in equities of the banks that failed.

In a sense it was the price of their stocks and bonds that was hyped , over hyped and waht not ! Everything was over levered.

That money does no more exists now because it was on books!

Imagine yourself as a simple investor in lehman stock , a 100 dollar price at Jan 08 and now worthless ! On one share you lost 100$ , so imagine when these companies have millions of stocks!

And every companies share are going down !



And many companies have ceased to exist!

 

[anilsinghd]

Phool is right in saying that there was a lot of ill-management , laziness on part of federal govt , but Abhi is right in saying this is not just about Wall Street , its about Main street now.

It is not only a crisis of banks , wall street now , its a crisis of confidence , its a crisis of the economy at large.

Banks are very vital part of any economy and no govt / economy can afford to loose them !

750,000 job losses only in US thus far , many on the horizon. Imagine if the banks fail , there wont be any lending to corporations and so manufacturing , production activities will freeze up , more job losses and ultimately main s treet will feel the pain.

This was a necessary evil so to say. I guess thinking that one will get the 10k$ rebates 5 yers down the line is foolishness as aptly said by Phool , but imagine the situation if the economy recovers , u get a lot! More jobs , more prosperity!


Though it wont be end of capitalism, capitalism is based on entreprenuership , sooner or later we will find entrepreneurs willing to take risks!

 

[devdahiya]

Mr Nayan Chanda Writes on the issue and i quote:



Containing this financial pandemic cannot be left to national agencies. Global regulation is now a must.


NAYAN CHANDA
26 Sep 2008

Nayan Chanda
Sars is back. Though this time, it is a different sort of pandemic; not one that thrives in the dank wet markets of Guangdong, but rather in the marble corridors of New York and Washington. The Severe Acute Respiratory Syndrome that burst out in China in 2003 spread around the world, killing 800 people in the course of a few months. Now it is the Shameful Abdication of Responsibility Syndrome that has mutated across Lower Manhattan and Washington DC, felling financial giants and forcing several million people out of their homes.

To mention greed as one of the causes of the crisis is not to join the moralistic chorus rising from politicians such as John McCain, who recently proclaimed “We’re going to put an end to the greed!” Moralising ignores the fact that greed is the mother’s milk of global commerce. The search for ever higher returns has driven traders and financiers ever since humans have learned to exchange goods or sought to grow their wealth through investments.

Huge volumes of savings sloshing about the global financial system searching for high returns had settled on the hot US real estate market. Soon the sorcerer’s apprentices on Wall Street invented instruments like subprime mortgages that hooked the unwary with low teaser rates that would become exorbitant over time. It seems everybody wanted to buy into red hot subprime mortgage-backed securities and associated derivative instruments. Even those not caught in the frenzy unknowingly came to own some of the toxic investments as Wall Street wizards sliced and diced such mortgage-backed securities into investment packages sold to the world.

Things were going well until the real estate bubble burst and millions of American homes went into foreclosure. Company after company finding its balance sheet turning red, “discovered” with a shock, that there was subprime in its soup. Massive losses incurred by the mortgage backed securities brought down Bear Stearns, Freddie Mac & Fannie Mae and Lehman Brothers. Even the insurance giant AIG, which had insured such subprime-laden investments, disclosed massive losses from its own investment in subprime mortgages. Subprime mortgage-backed securities have turned out to be greed’s latest vehicle, a worthy successor to the one-of-a-kind surefire ‘winners’ that came before it, ranging from Tulips to North Sea oil and internet start ups.

The absence of transparency that fuelled the 2003 Sars crisis was similarly apparent in the case of the subprime virus. What makes the subprime mania so much more dangerous than past financial crises is its scale and its lightning speed, reminiscent of the Sars virus that spread across the world faster than any of its pathogenic predecessors. With 24-hour financial news and electronic stock trading, the lure of making a killing with fancy instruments in the US property market was turned into a magnet for individuals and institutions from all over the world.

The analogy breaks down, however, when it comes to containing the pandemic. When the Sars crisis broke, the World Health Organization was in place to monitor the rise of the pandemic, lead worldwide research on sequencing its genome, and develop measures to stanch the spread of the pathogen. The subprime crisis has exposed the failure of such supervision and the absence of any effective regulation. As a result, these deceptive instruments, ignored by credit rating agencies, could mutate into lethal toxins, wiping out a trillion dollars of investor wealth worldwide and claiming the livelihoods of untold thousands, all in the space of one week.

All conversations, even among the ardent free marketers, is about more effectively regulating the market. The WHO brought Sars under control by imposing travel restrictions, grounding airplanes and quarantining passengers. It will take longer to contain the financial pandemic that burst forth on Wall Street; by the time this mess is cleaned up, the global economic landscape could look vastly different than it does today. In this radically different world, it will be time to think radical thoughts, such as drawing up global rules and enforcing them vigorously to prevent greed from mutating into deceptive and lethal tools.

If anything, the latest crisis stretching from New York all the way to Tokyo has proved beyond doubt that the financial world is too interconnected to be left at the care of only a few national agencies who were inept, or worse, complicit. Managing global finance needs global governance.

 

[spdeshwal]

The worst hit and sufferers are the Pensioners!

Sitaram ji did you go through the posts of mine in response to Sunil and Vijay.

Much of this was in equities of the banks that failed.

In a sense it was the price of their stocks and bonds that was hyped , over hyped and waht not ! Everything was over levered.

That money does no more exists now because it was on books!

Imagine yourself as a simple investor in lehman stock , a 100 dollar price at Jan 08 and now worthless ! On one share you lost 100$ , so imagine when these companies have millions of stocks!

And every companies share are going down !



And many companies have ceased to exist!

You are absolutely right Anil, and the worst hit group is that of pensioners, who lost to the tune of US$ 3 trillion. They have lost their life long savings and their only "Buddape ka sahaara"
The effect is being passed on to smaller economies like AU and NZ who always had closer financial ties with US. In australia, Auto Industries, Telecom and banks have already lost thousands of Jobs. Australian Dollor is now trading at a two year low and has now fallen by 29 per cent since hitting a 25-year high of 98.49 US cents in mid July.
It seems this is the just begining.

 

[naveenbazad]

my feeling

bridges will fall but that does not imply bridges cannot be made .... i think situation will revive ....

not following analysts comments nowadays but some where in the middle of all the news someone write senseful things and give full logics .....

the things i feel that regular models in the market not work nowadays which every body knows .. and every model that works .. works for only 2 3 months and after that they become outdated .... they have to be thrown away but since banks work on stagnant same models they r bound to fail...

i can be wrong ...

thing that works nowadays is hit and run ....
if u r big enough like big ppll then they still show profits even in this market and they always take precaution .... as precaution is always best )))))))))... hheyyy precaution means by buying options of the things on which u r heavily betting

 

[coolphool]

Bhai Phool
now tell me one thing wht are the options they have otherthan bailout and now even Bailout is announced but US economy is struggling and last night was a nightmare for all those who have smthing todo with share market even though good for those who used the opportunity as short selling. Anyway i come to the point that they dont have much options oher than bailout cos economy is struggling and since january Americans lost job figure is 7,50,000 so if this figure kept on goin like this the trouble will increase for the normal americans and dont forget that those who are loosing jobs have also paid taxes before. I know stupidity of few individuals have put US in this mess but this is wht the realty now. Europe is also following the same mess now as like US so now its not only US or europe its the whole globe which is down.
Abhimanyu Phougat

There is a big flaw in the argument in that the crisis is not about Wall Street and it is about the main street. It does nothing but give a slight populist sentiment to it.

The analysts who wanted to shove the bailout down the taxpayers throat on the Monday when the congress first rejected it was to look at the 777 point drop in the dow. I saw the final minutes of the debate on the floor. The dow plunged nearly 300 points in 15 minutes alone. Then the dow started to recover over the next couple of debates.

So these same swindling analysts come out and told us that the Dow is recovering in the hope that the Congress will pass the bailout soon.

Through this whole analysis, it left me wondering if the Market is some tangible entity that visits these financial analysts when no one else is around and whispers its future course of action and its current intentions, in the analysts' years.

These analysts are so dead-sure about their understanding of the market that they will bet their mothers' dignity on it.

So, they create this whole impression that the markets are recovering in the hope that the bailout will pass and if it doesn't then the sky will crash on all off us.

Sp, on Friday with much blackmail and threats the bailout finally passes the congress. Guess what, the down gained nearly 250 points before the debate went to the floor in the congress. Then it crashed 300 points (mostly during the final counting of the votes) after the bailout passed.

So now our dear analysts are in a dilemma because they could not explain such a big one-day drop in the Dow despite the bailout being passed by the government.

So they shove fresh swine-crap right out of the pen to their viewers. They tell us that the bailout wasn't about the stock-market in the first place. It was about the credit market. Thats where according to them we will see the difference in the days to come.

These analysts have been feeding us BS for all these years. The truth is that markets can never be predicted and understood in advance. They tell us whatever adds the extra 'zeroes' to their paystubs. They need to walked in front of firing squads for what they have done not just to the US economy but to the entire world's economy.

Same should be the fate of all those who got in the IIM-rat race so they could join the roving gangs of Financial Analysts and Investment Bankers and never gave an honest analysis of what was going on in the market to those of us who are novices and trusted these thugs with our life's savings.

The truth of the matter is that the US Government has been running humongous deficits for the last seven years, running into several Trillion dollars. Their national debt alone is around 11 Trillion dollars. They borrow all they can from countries like China and oil-producing countries of the middle-east. And if they still cannot cover the deficit, they print the difference and flood the currency markets with money that is no better than monopoly-dollars.

Due to a flooding of the Global currency markets with fake US dollars issued by none other than the US treasury itself, the confidence in th US markets and its currency has dropped. Most foreign investors have either pulled out their US investments and invested it elsewhere in other denominations like the Euro. Others have stopped investing in the US economy outright.

This has led to a liquidty crunch in the US markets. We are running short on cash. We are a credit-based economy. No one is lending to us anymore. Our domestic cash reserves have been exhausted on foreign military adventures. OUr Government's credit card limit of 11 Trillion dollars has been exhausted too.

Yes, the crash of the mortgage industry is a considerable cause too. But dont forget that it didnt happen overnight. The fact of the matter is that the mortgage industry was also a victim of the liquidity crunch as foreign investors are refusing to pump in any more money into the US economy.

Where is the 700 Billion dollars (which is now 840 Billion dollars) going to come from? Most of it will obvisously come from tax-payers. The rest will be irresponsibly printed and shoveled into the market by the US treasury.

How do I know all this. Responsible fiscal-conservatives had been yelling this from the top of their voice for the past 5 years. But, then no one listened to them. "Oh Come on! US is the most powerful nation in the world, it will never happen to us." "Loonies, isolationists." Such were the insults tossed at us when we asked of our Government to be fiscally responsible.

The fiscal conservatives saw all the ingredients of a financial-tumble in the way the Government spent like an 18-year old who just got their first Credit Card.

This is the reason the fiscal-conservaitves are strongly opposed to the bailout. We do not want the US Treasury to print anymore Monopoly money. We want real money. Only a strong US Dollars that is worth what it says on it, can restore the confidence of the Foreign investors in our Economy.

 

[anilsinghd]

There is a big flaw in the argument in that the crisis is not about Wall Street and it is about the main street. It does nothing but give a slight populist sentiment to it.

The analysts who wanted to shove the bailout down the taxpayers throat on the Monday when the congress first rejected it was to look at the 777 point drop in the dow. I saw the final minutes of the debate on the floor. The dow plunged nearly 300 points in 15 minutes alone. Then the dow started to recover over the next couple of debates.

So these same swindling analysts come out and told us that the Dow is recovering in the hope that the Congress will pass the bailout soon.

Through this whole analysis, it left me wondering if the Market is some tangible entity that visits these financial analysts when no one else is around and whispers its future course of action and its current intentions, in the analysts' years.

These analysts are so dead-sure about their understanding of the market that they will bet their mothers' dignity on it.

So, they create this whole impression that the markets are recovering in the hope that the bailout will pass and if it doesn't then the sky will crash on all off us.

Sp, on Friday with much blackmail and threats the bailout finally passes the congress. Guess what, the down gained nearly 250 points before the debate went to the floor in the congress. Then it crashed 300 points (mostly during the final counting of the votes) after the bailout passed.

So now our dear analysts are in a dilemma because they could not explain such a big one-day drop in the Dow despite the bailout being passed by the government.

So they shove fresh swine-crap right out of the pen to their viewers. They tell us that the bailout wasn't about the stock-market in the first place. It was about the credit market. Thats where according to them we will see the difference in the days to come.

These analysts have been feeding us BS for all these years. The truth is that markets can never be predicted and understood in advance. They tell us whatever adds the extra 'zeroes' to their paystubs. They need to walked in front of firing squads for what they have done not just to the US economy but to the entire world's economy.

Same should be the fate of all those who got in the IIM-rat race so they could join the roving gangs of Financial Analysts and Investment Bankers and never gave an honest analysis of what was going on in the market to those of us who are novices and trusted these thugs with our life's savings.

The truth of the matter is that the US Government has been running humongous deficits for the last seven years, running into several Trillion dollars. Their national debt alone is around 11 Trillion dollars. They borrow all they can from countries like China and oil-producing countries of the middle-east. And if they still cannot cover the deficit, they print the difference and flood the currency markets with money that is no better than monopoly-dollars.

Due to a flooding of the Global currency markets with fake US dollars issued by none other than the US treasury itself, the confidence in th US markets and its currency has dropped. Most foreign investors have either pulled out their US investments and invested it elsewhere in other denominations like the Euro. Others have stopped investing in the US economy outright.

This has led to a liquidty crunch in the US markets. We are running short on cash. We are a credit-based economy. No one is lending to us anymore. Our domestic cash reserves have been exhausted on foreign military adventures. OUr Government's credit card limit of 11 Trillion dollars has been exhausted too.

Yes, the crash of the mortgage industry is a considerable cause too. But dont forget that it didnt happen overnight. The fact of the matter is that the mortgage industry was also a victim of the liquidity crunch as foreign investors are refusing to pump in any more money into the US economy.

Where is the 700 Billion dollars (which is now 840 Billion dollars) going to come from? Most of it will obvisously come from tax-payers. The rest will be irresponsibly printed and shoveled into the market by the US treasury.

How do I know all this. Responsible fiscal-conservatives had been yelling this from the top of their voice for the past 5 years. But, then no one listened to them. "Oh Come on! US is the most powerful nation in the world, it will never happen to us." "Loonies, isolationists." Such were the insults tossed at us when we asked of our Government to be fiscally responsible.

The fiscal conservatives saw all the ingredients of a financial-tumble in the way the Government spent like an 18-year old who just got their first Credit Card.

This is the reason the fiscal-conservaitves are strongly opposed to the bailout. We do not want the US Treasury to print anymore Monopoly money. We want real money. Only a strong US Dollars that is worth what it says on it, can restore the confidence of the Foreign investors in our Economy.

A very nice post , appreciated! Though it hits at what the cause of the crisis was , but it does not go well with protecting the common people!


The criticism for the I-Bankers is justified , but just pin pointing on IIMs and in last post on IITs is a bit too harsh. The whole of industry, federal govt are responsible for this.

Fannie MAc , Freedic Mac are quasi-federal and they played an vital role in creating all this mess. Common man's greed was also a basic factor , so just putting everything on Wall Street is a bit too harsh for my understanding.
Wall street only expolited that greed element of people , but it was the novel idea of the main street guys that "house prices cannot go down".

As my manager once categorised , it was herd behavious , only being human!

Well , there ain't much to dwell on the past.

What lies ahead should be the topic to talk about! And simply saying that main street will not be affected if we let the big banks go down is just very raw! Dow and other indices movements should not be directly related to bailout! There is something called "market prices in ".

It is never that the market prices in the events just when they do happen , the bailout was already priced in. One cannot and should not expect correlation with market and the policy meausres in very short term.
Also Bailout package is only necessary , not sufficient.
I am not saying that it does not affect the tax payers , yes it does , but it prevents what could be something similar to depression. Remember now we are already in recession , it can get much worse!

Arguments on foreign investments in US are decresing are naive , US treasuries holdings by Sovereign wealth fund s, foreign insitutions , govts are at an all time high.

The underlying cause of all this mess is the excessive leverage. Yes , the Wall Street was levered , but so was the main street. With 10k dollar per month salary , you are buying a 100,000$ home , you are levered.

What could be the effect on main street if policy measures are not taken ( including all this bail out package , rate cuts, liquidity injection etc ) :
Credit markets will remain at freeze , there will be no short term debt available for manufacturing , production companies , so that will go down. With finane hard to find , more foreclosures , credit card defaults would happen , making asset prices to go down further ( remember we are in an asset deflation mode these days ). That implies more job cuts , and all this is self feeding so the spiral will continue to grow.

The collateral damage to the economy will be much bigger than what the tax payers have to pay now.

To me it is quasi socialism , that is all are paying for some ( some is not little actually )!

Yes , letting down Wall Street ( if at all Wall street remains? GS , MS the last two remaining i-banks are already quasi nationalised ) and banks means a lot of collateral damange.

These are necessary policy measures which have to be taken not because Wall Street betrayed people , not because policy makers were at fault , not becasue independent institutions like IMF could not predict all this , but because people at large in their greedy mindset , levered themselves excessively!