One of the big problems with bailouts is that once somebody gets bailed out, then everyone expects to be bailed out. Here’s a great example from the Yahoo "Gossip Boards": [Posted on the Lehman board]
Here’s what happened to Lehman today- but "twogrey3" is a "Strong Buy":
Fresh concern about Lehman Brothers’ ability to raise extra capital and worries about the health of other financial institutions plunged US equity markets into the red as the boost the markets received from the US government’s bail-out of Fannie and Freddie all but disintegrated.
Lehman shares plunged by as much as 46pc, the largest one-day percentage fall since the beleaguered investment bank went public in 1994, while the Dow Jones Industrial Average closed down 280.01 points at 11230.73,
twogrey3’s confidence is not without basis:
A 45 percent slide in the shares of Lehman Brothers Holdings Inc on concern it was struggling to raise desperately needed capital, stirred speculation that a U.S. government-sponsored rescue was increasingly likely.
The forced-sale of the Bear Stearns brokerage in March and the pre-emptive seizure Sunday of mortgage finance giants Fannie Mae and Freddie Mac has set a template that U.S. financial authorities might find hard to avoid.
While the government would be very reluctant to intervene yet again, especially if it required taxpayers’ money, several experts say there may be no alternative to avoid a systemic financial crisis.
How will the markets make any sense while investments are chosen, not on the worth of a company, but on the likelihood that they will be bailed out?
Wherein U of W prof Menzie Chinn is shown to ben an idiot.
Here’s a different take from WaPo:
“Don’t Like Bailouts? Consider the Alternatives”, by Steven Pearlstein, Washington Post, September 10, 2008.
Number of false assumptions? Count me in, Steve
Lehman that is revenues not income. MER also had negative revenues!!! When in history has so many companies report negative revenues?
Negative income? Yes; But negative revenues?
Did this happen in the 30’s?
Only in the current post modern securitization age. When you can report negative revenues in the multi billions, the Gov will come in to inject liquidity.
“The brokerage expects to post negative net revenue of about $2.9 billion”
The quote was left out ? —> previous
the point is the Fed knows MER, GS, LEH create liquidity and add to the money supply. These entities feed the economic engine that floats down to jobs. When LEH leverages capital 40:1, that -2.9 billion equals 116billion gone in 90 days. The reason the fed has opened their window to these pseudo banks.
John M #2 – Love that article…that guy is a piece of work. The part about moral hazard was particulary funny…people should pay for their mistakes, but just not in this case, unless you are a foreclosed homeowner of course (but you never mattered anyway!).
Anti-spam word…COLLUDE…very appropriate
… and in another blow to Fantasy-Land Finance, FASB is no longer letting M&A deals just make up values for the companies’ assets:
“WaMu, National City Lose Suitors on Accounting Rule”, by Jonathan Keehner and Linda Shen, Bloomberg, September 10, 2008.
WM down another 24 percent around 11AM this morning, by the way, and LEH back in negative territory. Another rough day on the Street?
John,
I fear that the Fannie and Freddie collapse demonstrates the severity of our failing economy.
I like yourself believe that this is most under reported and downplayed event in modern times. Our government just nationalized the mortgage market, breaking the stock holders while protecting the foreign bondholders.
I see no possibility for economic recovery in the U.S. under the current or pending new leadership on either side of the aisle.
mtnmike -
I was never in favor of the bailout (simply because I believe houses need to find their market on their own, and I don’t believe a person should be eligible for a below-market-rate mortgage on the backs of the taxpayers), but the entity that broke F&F shareholders was management, not the government.
Agnostic,
By June of 2003, the tech bubble had burst,the overnight FED rate was reduced to 1% and the U.S. economy was on it’s knees. Housing was the easiest new unsustainable bubble to temporarily inflate our failed economic underpinnings.
Fannie and Freddie management did exactly what government told them to do with the funds that our government made possible, “pass out money at any cost.” We now know what that cost was.
The plan was for the purposely induced inflation to also force up wages making it possible for ARMS and Resets to be paid…but it didn’t. Wages actually declined in real purchasing power and as they say, it busted up the game.
Thanks for the note.
mtnmike said
The plan was for the purposely induced inflation to also force up wages making it possible for ARMS and Resets to be paid…but it didn’t. Wages actually declined in real purchasing power and as they say, it busted up the game.
So prices went up, working class wages went down… What happened to the difference?
V.I.
The “difference” is what brought down the entire market. It’s the difference between what lenders have on their balance sheets and the real market value that can be supported by the current average wage level.
The cost of materials is driven by a global market, the cost of labor is driven by a local market. The U.S. has a massive glut of labor due to job losses for the past eight consecutive months while at the same time importing job seekers in the way of some 100K legal immigrants per month. Yep, that ought to work.
mtnmike -
Looking at Syron’s and Mudd’s comp packages, I’m a little hard-pressed to believe the congressmen and senators, or White House tools, had guns to F&F’s heads to get them to buy or originate mortgages. I think the better explanation is the agencies, like everyone else, believed the underlying RE could never decline in value, ergo, balance sheet expansion was a “safe” means to higher salaries, bonuses, etc.
Everyone wants to find the sinister ulterior motive that led to the dumb borrower getting screwed, but once again, I think Occam’s Razor applies: GREED. My two Ameros. But I agree with everything else you said in #8.
The investors who invested in the funding made available by Fannie Mae and Freddie Mac programs thought it safe to do so based on the fact that Fannie Mae and Freddie Mac were government sponsored. Regardless of the fact that they are private companies they still had the benefits of a government backed company.
Yes, the economy is definitely suffering. However, the blame cannot just lie in the people running it. We all have to take responsibility. After all, didn’t we all take part in it somehow?
agnostic (#13) -
About that underlying belief that RE will never decline in value. Over the last couple of years, twist and I have seen over and over again that professional forecasters are apparently twisting their models to spit out rosy scenarios when the obvious continuation of a clear trend points to disaster. For example, most forecasters today are predicting a strong rebound in house prices about the end of 2008, simply because if they don’t, the damage will be unthinkable.
I think the most egregious example we found was when Fannie’s chief economist put up graphs on Nov 8, 2006 predicting that house prices would slide until mid-2007, and then unaccountably rebound. In retrospect, it’s irresistible to conclude that in many cases like this the models and analysis were tweaked until the result was at least modestly palatable to the researchers’ bosses.
karlyn -
Nothing personal, but I don’t believe I have any responsibility for the illusory run-up in housing prices. (I sold a condo in 2005 and began renting on a hunch that prices did not fit incomes, either nationally or here in Phoenix.) Nor do I feel like my taxes should be increased to pay higher (more) interest on national debt which was assumed in order to keep two socialistic agencies functional, in order that home prices can still remain artificially high.
John –
Why do you have to be so negative all the time?
Isn’t it about time we had another dose of Jay Butler – where has he been all summer, anyway, when we needed him?
agnostic -
That is a serious question that people I respect at church have asked, and that I’ve asked myself.
For what it’s worth, almost everyone else in my immediate and extended family are delightfully optimistic. They have accomplished some amazing things with that positive attitude. On the very day Paulson announced the GSE bailout, a recent project by my kid brother was profiled in the New York Times.
Jay Butler gets well rewarded for what he does, and it’s not just money.
John -
For Scott’s next project, may I suggest “How To Manage A Loan Portfolio” for the suits at Feddie?
“Jay Butler gets rewarded…not just money” – I’m agonizing to know what that means.
John -
P.S. I have rolled up my quarters, dimes, and nickels and am contemplating a Lehman bid.
Agnostic,
I agree with you on your post (16).
I don’t think I’ve ever seen a bandaid pulled off of a wound in a slower fashoin. Are we ever going to let the chips fall where they may and just take our medicine. Probably not. With this government it looks to me like a 20 year slow bleed!!!! I’m not an expert on this stuff (half the time I don’t even know what you guys are talking about), but if this is a capitalist country then shouldn’t we just let the market “happen?” Interest only, and negative am loans didn’t do much good for our housing market and isn’t that basically what our government has now gotten us into with other countries???????? I’m watching clients every day “modify” their notes. These are people who CAN afford to pay their current terms!! Wish I could “modify” my tax liability! But I pay my bills, mortgage, and even my taxes so I guess I don’t qualify for any type of bailout. Silly me. If I only knew in advance that we’d ALL pay for my house I would’ve opted for a 6 bed 4 bath 3 car garage and then just “modified” when I couldn’t afford it. Guess I’m stuck with what I got now.
igor says “oversold”—-HA!