Largest ever bank heist

It has gone from a document less than 5 pages to an overblown 400 in this iteration!
In order to get a democrat majority they needed a lot of pork and a lot of barrels.

Can't wait to see the easter eggs in this one!

Crazy!

The market bailout is unpopular, but the rest of the world expects us to do something if they are to retain any sort of trust in US markets. I'd rather just see regulations or other policy changes that help prevent the same problem from occurring again in a few years, but if they must bail out the market, that money should not be provided without such changes. Bush and his cronies are opposing any changes, which I think is a terrible idea.

I think that the bailout money is more of a gesture to other countries than anything. I read somewhere that the actual capital losses of the US market over the past few months is about 5-6 trillion, with over 1 trillion of that occurring in a single day. It's hard to see how a fraction of that infused back into the market will actually help, except to induce another artificial paper gain for a while.

batari, on Thu Oct 2, 2008 8:01 AM, said:

Exactly. Without the bailout, US economy is virtually dead to the world.

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I hoped to find more regulations being introduced with the bailout, but that seems not the case.

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Nope. Without the bailout, the available free capital in the USA is close to ZERO. Which means, US economy is completely stuck. This would cause deflation and dramatic economy shrinking, causing losses in a much bigger dimension than what we have seen so far.

The bailout makes free capital available, preventing healthy industries to suffer even more from the bank disaster. So the money (mainly) doesn't go to those who caused the crash, but to those who rely on a functioning banking system.

BTW: I wonder why nobody talks about the massive subventions into the US automobile industry. THOSE are really, really bad.

Thomas Jentzsch, on Thu Oct 2, 2008 8:54 AM, said:

In addition, it will not help the US automotive industry to become more competitive.

The problem with regulations is that no one can point to a regulation that would have prevented this mess.

Actually, no one really understands the mess itself anyway.

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Can you explain that a little further? That doesn't follow what I've been reading.

The point of the bailout is to put banks on a better footing so that they will continue to loan money to other people. How it's supposed to do that, no one knows, other than some vague generalities.

Some economists think we are close to the end of the world, some think we aren't. Who knows? Some version of the bailout will likely go through and so we'll never know for sure.

vdub_bobby, on Thu Oct 2, 2008 9:03 PM, said:

It feels a bit like the end of Fight Club, it's just missing the fireworks.

Speaking of Fight Club, that reminds me that the the Ikea catalogue has surpassed the Bible as the most published work in 2006, which probably is a sign of the apocalypse just as well. At least the soundtrack is ready.

BDcjemEqr1o

Cybergoth, on Thu Oct 2, 2008 3:39 PM, said:

Things are falling apart quicker than a Poäng chair.

batari, on Thu Oct 2, 2008 8:52 PM, said:

Ours seem to be pretty robust though. We even have Pello chairs for the kids

batari, on Thu Oct 2, 2008 12:01 AM, said:

The proper way to regain trust would be to put some of the crooks in jail. If investors see that crooks are free to rob people, should the government's apparent willingness to take taxpayers' money to cover some of the shortfalls created by the crooks inspire confidence?

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Bush and McCain have tried to reign in some of the abuses. McCain introduced legislation in 2005 to bring F&F under control, but were opposed on what was essentially a straight party-line vote (all of the Republicans who are still in Congress voted Aye; all such Democrats Nay).

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That is absolute nonsense. What has happened is that a number of institutions, starting with Fannie Mae and Freddie Mac, have worked to create investment products that were difficult to evaluate carefully. They claimed to investors that they had done due diligence in selecting the assets that went into the bundled products (lying through their teeth), and sold their products far above their actual worth. The products were then bought and sold in the securities marketplace, at prices which had more relation to F&F's claimed valuation than their actual worth. When it became apparent that F&F had been selling junk securities and labeling them AAA, the values plummeted.

The money was not lost when people realized that the securities were junk and the values plummeted. The money was lost when F&F fraudulently misrepresented the assets to entice buyers to pay more than they were worth. The markets simply didn't realize it at the time.

In order for the markets to function efficiently, asset prices must reflect real worth. A major effect of this bailout--and part of the reason it's exactly the wrong medicine, is that it will prop up the market price of any asset people think they might be able to unload on the government. Not just assets covered in the current bail-out plan, but also any asset class that people think the government might bail out in future.

Much of the 'investment' marketplace is a big pyramid scheme. Trying to bail out a pyramid scheme will simply increase the losses.

What needs to happen is for the government to use regulations to ensure that the market will correct itself in an orderly fashion, and then it needs to allow that correction to happen. I'd much rather have my 401K drop 30%, but have the 70% of value that it keeps be based upon real assets, than have it retain its price as long as nobody's trying to cash out, and then drop 30% when more people start retiring. Especially if the latter course of action would result in major inflation such that the dollars in the 401K wouldn't have the purchasing power of today's dollars.

vdub_bobby, on Thu Oct 2, 2008 2:03 PM, said:

I can think of quite a few things that would have caused F&F to crash much sooner, swallowing up a lot less money and not becoming such a big mess; I can also think of quite a few things that would help resolve it. Of course, if F&F had crashed sooner, nobody would even think of spending $700 bailing them out.

First of all, I'd like to see something like the following definition of predatory lending codified into law and forbidden: A person commits the crime of predatory lending if he makes a loan and both of the following apply: (1) There is no plausible scenario by which the loan might be ultimately paid back without default. A loan is considered to be 'ultimately paid off' when it is paid off, and any money that was borrowed to pay it off is also paid off. (2) He has a reasonable belief that he will profit from the loan even if the borrower defaults.

I would consider predatory lending, by that definition, to be a form of fraud. Fannie and Freddie would have crashed much sooner, creating much smaller losses, were it not for the practices of predatory lenders who fit the definition above.

Secondly, I would require that no credit default swap may be listed as an positive asset unless the seller follows certain rules, including publishing certain information about all the credit-default swaps it sells; no mortgage-backed security may be listed as a positive asset unless certain information for each mortgage therein is obtained and periodically validated, including the credit rating of the borrower at time of origination, reliability of payments, and payment schedule. If the borrower's credit rating was not determined, the mortgage may not be listed as a positive asset.

As for resolving the issue, I'd start by disentangling mortgage-backed securities by requiring that the owners acquiesce to a consolidation by lottery. For a simple example, if 20 people each had 1/20 shares of 20 mortgages and five wanted to consolidate, then five mortgages would be selected completely at random from the 20 and given to the five people who wanted to consolidate. Those peoples' shares of the other mortgages would then be distributed to the other shareholders. The net effect would be that five people would hold independent mortgages, and the other people would hold 1/15 shares of 15 mortgages.

In the credit default swap marketplace, I would require that (1) no credit default swap may be paid unless certain properties (at minimum, seller and value; preferably counterparties as well) have been made public for some period of time (e.g. a week); (2) no credit default swap may be paid unless the fact of its triggering has been made public for some period of time (e.g. a day); (3) a company whose assets are insufficient to cover all of the outstanding credit default swaps it has written may only pay out early-triggering credit default swaps at a certain rate, thus avoiding have all of the CDS sellers' assets to to the people whose swaps triggered first.

Those rules sound reasonable?

vdub_bobby, on Thu Oct 2, 2008 2:03 PM, said:

The point of the bailout is to buy a getaway car for the bank robbers.

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If the government were to refuse the bailout, but put in regulations to ensure that the market corrections resulting from such refusal were orderly, it would hardly be the end of the world. Many assets which were priced above their real worth would see significant reductions in valuation (anywhere from 0.1% to 99.9999999%, though most probably between 5-40%). The market transparency would cause an influx in new capital, the dollar would rise relative to other countries, and things would soon return to normal.

If the government goes through with the bailout, we'll soon be in the same situation again, except hundreds of billions, if not trillions, poorer. The bailout won't fix the disparity between asset valuations and worth, but will instead perpetuate it. One of two things will happen: either (1) the government will ultimately refuse a bailout, while it still has a choice, or (2) it will continue to grant bailouts until foreign investors dump the U.S. dollar and a $100 bill is about enough to buy a loaf of bread. Scenario #2 would be the end of the world. Scenario #1 may or may not be the end of the world, depending upon how many trillions of dollars the government wastes before wising up.

The best scenario would be to inform the market that the era of bailouts is over.

Noelio, on Wed Oct 1, 2008 11:44 PM, said:

A higher percentage of Democrats than Republicans favored the earlier one. Senators who were up for re-election often opposed it, but those who weren't up for re-election favored it.

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My favorite is the rule which provides that makers of toy arrows don't have to pay the excise taxes charged for real arrows. While there's nothing wrong with that rule, it really doesn't belong in emergency legislation.

vdub_bobby, on Thu Oct 2, 2008 10:03 PM, said:

I am no expert by far, but outside the USA (and UK maybe) there is no discussion. All experts I am aware of favour a bailout (though not exactly like it is done now). Due to the huge amount of bad credits on the markets, nobody trusts anybody anymore, even if the risks are very low. Reduce the bad credits and you regain trust. Then necessary credits will become available again.

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Without a bailout, this is not the end of the world, but the (at least for many years) end of US economy. Which will have major negative impact on global economy.

Being outside the USA, I would see this as a chance for a fairer, better functioning, better regulated global market. But I would also be afraid of a super power with a floored economy.

So capitalism didn't win over communism, it just lasted a decade longer.

Cybergoth, on Fri Oct 3, 2008 12:27 AM, said:

Communism's still alive and kicking: see Cuba, China, etc.

vdub_bobby, on Fri Oct 3, 2008 5:09 PM, said:

Cuba, yes. But today's China has some extremely rough capitalism.

supercat, on Thu Oct 2, 2008 10:35 PM, said:

What SEC rules were broken?

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As I understand, they wanted to create a new government agency to control F&F. The dems opposed it because they felt the goal was to force F&F to raise their standards on what loans they could buy, thus making it more difficult for some minorities to obtain loans.

I don't think you can blame the sub-prime mortgage market for everything. While the passage of the bill might have helped, I think the major force in the crash was the historically low interest rates from 2002-2006 thanks to Greenspan, which helped caused the housing boom. It's not hard to imagine how the unprecedented explosion of construction, home prices (which then faltered, leaving millions underwater on their home loans) and the low interest rates all combined to create disaster.

Even among those who bought homes during the boom, are not underwater, and got 30-year-fixed mortgages, it makes me wonder if these securities aren't all that great either. I have a 30-year-fixed at 5.25%, no PMI. I can't imagine that 5.25% will be considered a great return on your money for that long. This is typically only 2% above inflation, and in 2008 a 5.25% return would lose money.

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What is nonsense?

I don't believe the bailout money will change everything. However, if it gives foreign investors more confidence in US markets, whether justified or not, that is worth something.

As for the US markets, the total market cap of publicly traded companies was around 25 trillion, and they have lost roughly 20% of their value in the past few months.

batari, on Fri Oct 3, 2008 2:14 PM, said:

Loans were written by people who (1) could not have reasonably expected that they'd ever be repaid, and (2) stood to profit regardless. These loans were then misrepresented and resold. How is that not fraud?

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Why were the floodgates of home lending opened to such ridiculous extremes? The notion that someone should be able to buy a $300,000 house with no money down, no verification of income, and not even so much as a Social Security Number is patently unreasonable. No legitimate lender would ever make such a loan. On the other hand, the housing bubble would have crashed in 2005 if housing prices didn't keep going up. So rather than allow a small market crash, Congress opened up the floodgates to all manner of fraudulent demand so as to keep pushing housing prices skyward for another few years.

After all, if the housing market had crashed in 2005, nobody would have thought of bailing anyone out. So the solution was to make sure the problem could get monstrously insanely big before crashing, so then the government would "have" to bail out the market.

(unprintable language omitted).

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A 30-year fixed mortgage is a great thing to have. It provides an excellent hedge against many types of bad economic conditions. The two main things it does not protect against are deflation and some types of currency revaluations (it provides an excellent hedge against inflation if the loan remains denominated in 2008 dollars, but in some countries the dollar amounts on loans can get inflation-adjusted).

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Although stock prices, in the long term, reflect the value at which stocks may ultimately be redeemed, changes in price from day to day do not generally reflect changes in value. If an attempt by 5% of shareholders to unload their holdings over the course of a month would cause a stock's price to fall from $100 to $20, then the stock is really only worth $20/share. The price drop from $100/share to $20/share would not represent a loss of value, since the stock would have only been really worth $20/share beforehand. People wouldn't realize that until after the price fell, but the money was lost when prices exceeded worth; the correction wouldn't cause the loss, but would only reveal the loss that had already occurred.

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I don't think it will give investors more confidence. It certainly shouldn't. What would give investors confidence would be throwing crooks in jail, and working to ensure that markets are transparent. The bailout will simply attract more crooks to the market to collect more free money.

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Again, that's a meaningless number. The price may have gone down 20%, but that doesn't imply anything about their underlying value.

Thomas Jentzsch, on Fri Oct 3, 2008 2:13 AM, said:

The fundamental problem in the marketplace is the gap between assets' prices and book values, versus their actual worth. The government's bailout will serve to increase this gap for all assets it does not purchase. Very bad. Further, it will reward people who were betting that they could scam the government. Is that really a good idea?

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If Congress had driven a stake through the heart of the bail out and passed a law requiring that a large sign be posted on Wall Street saying "If you lose money, YOU LOSE MONEY", the markets would have recovered just fine.

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You should be getting very worried. The Secretary of the Treasury has just been given the power to drain the economy of billions of dollars and filter the money to his friends. Don't doubt that he will use it.

I wonder whether it would be better to learn Chinese or Russian.

supercat, on Sat Oct 4, 2008 3:49 AM, said:

Which of the two is so far less involved in "money globalization"? I'd assume China?

In case you want invest somewhere, I'd suggest Japan though, it can impossibly get any more downhill for them.

supercat, on Sat Oct 4, 2008 4:49 AM, said:

Which is defined by what? The market, right? So if you let the market drop to nowhere, you will only increase that gap. And eventually this goes down do zero!

Remember: Everthing is only as much worth as the market pays for it. If nobody wants to buy for any price, everything becomes worthless. Even you car, house etc. and finally even your $$$ on the bank. All their worth is only virtual too.

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Nope, it will stabilize their actual worth. Big difference!

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I understand that you have that free market ideology. Even though it is currently proving that is doesn't work well. So what makes you so convinced it won't increase the crisis even further?

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Unlike the USA, Europe is not that much relying on foreign money. Our economy is not build on massive debts like yours. So, yes it will suffer, but on a much smaller scale.

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IMO China is more likely to become world's economic power nation #1 (soon!). Russia is way to much relying on raw materials. Even India will be a better choice.

Thomas Jentzsch, on Sat Oct 4, 2008 1:27 AM, said:

My house is worth something not because anybody is willing to pay me for it, but because it provides me shelter and comfort. My car is worth something not because anybody would want to buy it, but because it takes me places. Gasoline is worth something to me not because I can sell it to people, but because it fuels my car. Stock is worth something not only because people will pay for it, but also because it represents a share of a company that has useful things like buildings, equipment, and other stuff, plus the ability to use those things to produce more useful stuff.

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I should have said for unpurchased assets similar to those it does purchase (which people might expect it to purchase in future).

How will the government stabilize their worth? What is the actual worth of a $350,000 mortgage for a house which may have been worth $150,000 when new, but which has been abandoned by a non-paying owner and has since been trashed to the point that the structure cannot be made habitable except by a tear-down and rebuild? Some of those mortgages are worth less than $1.00. Not $100. One dollar. I suppose you could say their worth is "stable", since it really can't go further down, but I don't think the government is needed for such stabilization.

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The apparent crisis is going to increase further, regardless of what the government does, because the real crisis has already grown much larger than is immediately apparent.

Consider the First National Bank of Pottsylvania, run by Boris Badenov. He offers $100 two-year certificates of deposit at 41.4% interest (so after two years, you get $200 back). Initially investors are skeptical, but a few investors each month put their money in and sure enough, two years later, it they get paid back double. Soon, more and more investors start putting their money in; the number of investors doubles every year until suddenly Boris stops paying people. People raid the bank and find the vault empty. What happened?<p>

Actually, as it happens, Boris was simply pocketing half the money people put into the bank. The other half was used to pay off earlier depositors. As long as people kept putting money into the bank at an increasing rate, the new deposits would be more than enough to pay off the earlier obligations; anything left over could go in Boris' pocket. Once deposits stop accelerating, Boris leaves town with all his pocketed cash.

Note that people didn't lose money when the bank crashed. People had been losing money all along. Every $100 someone put into the bank meant $50 more was lost into Boris' pocket. One would not be able to predict which individuals would end up making money and which individuals would lose money, but every single $100 deposit would be another $50 loss that somebody would have to eat.

Note that trying to keep the pyramid scheme afloat by injecting more money will do nothing to curb losses. It is mathematically impossible to bail out any pyramid scheme involving non-trivial payoffs.

It is fundamentally impossible for the pyramid of investments in mortage-backed securities and derivatives to come anywhere close to making good on its obligations. It is going to crash. It may be possible to delay the crash for a few months, or even years, by injecting an exponentially-increasing amount of money to pay off earlier investors, but that will only increase the amount of money lost.

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The issue isn't just economic. It's military. If the U.S. keeps pumping money into the pyramid until its economy totally collapses, its military will effectively cease to function. The effect of that will either be nuclear Armageddon or a takeover by another superpower. So which do you think--China or Russia? Or should we surrender ourselves to China in the hope that China will use its military to protect its new asset from the Russians?

supercat, on Sat Oct 4, 2008 7:19 PM, said:

Right, that what it is worth to YOU. The market may think different. And the "profit" you make from using something is independent from its market worth.

E.g. Someone drowning would pay $1000s of dollar for a life belt, but still its market worth is maybe a few $100.

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Yup. But to make a stock interesting, many people have to believe that this company is (or is going to be) profitable. Which not only includes making good, useful stuff, but also being able to sell it.

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Right. But it can stabilize the worth of the still intact houses to stay closer to the initial $150,000. Without stabilization and the current excessive supply of houses, those houses will massively loose worth too. And even those who based their solid financial model on the "real" value wouldn't be able to finance their houses anymore too.

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Agreed. But unlike you, I am convinced that strong, efficient counter measures are possible.

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Of course it's not worth to put any money into that bank. And I strongly doubt this is done with the bailout money.

As far as I understand, the bailout intends to secure real values from further suffering due to unreal values crashing.

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Which function are we talking about? If your military would concentrate on home protection, you could cut costs by maybe 80% or 90%. If you want to continue to try to rule the world by military power (too), the costs will ruin the US economy sooner or later anyway. Even without a crisis.

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Now you understand.

Seriously: The more financal interests are spread and mixed worldwide, the lower the chance for a major war which would automatically ruin the attackers assets too. So as long as China is investing into US economy, you are pretty safe from them.

Thomas Jentzsch, on Sat Oct 4, 2008 1:18 PM, said:

You realize that chinese investors started bailing out of this early on as soon as they realized what was going on right?

That's part of what got this rock rolling now rather than in a year or two.

Mord, on Sun Oct 5, 2008 1:11 AM, said:

Can't bame them for that, right?

To keep them staying, provide them a stable, steadily growing economy.

Thomas Jentzsch, on Sun Oct 5, 2008 4:09 AM, said:

I agree. Hopefully the americans will do that for us Canadians as well. Unfortunately our economies are too closely tied that we can't just bail as easily as other countries.

However as it's been pointed out, there's been nothing done to try to keep this from happening again, or to make the people who caused it pay for what they've done.

Mord, on Sun Oct 5, 2008 10:46 AM, said:

I suppose (and hope) the former will be done, after the crisis has been analysed completely. E.g. the kind of utterly greedy investment banking which we had during the last years, will not be possible anymore. There have been warning about the system being doomed for at least 10 years and politicians ignored them. Now they HAVE TO react.

And I am afraid the later won't happen as long as the profiteers simply played by the rules which where made by politicians. You cannot punish anyone for using existing laws and you cannot punish politicians for making bad laws.

And since we live in a democracy, everytime we look into the mirror, we see someone who is to blame too. We elected them, and I am afraid we will reelect the same type of politicians (no competence, but looks good on TV) over and over again.

From another thread: a primer on the scam:

Allow me to explain the scam. Dollar figures are somewhat arbitrary; I don't know how the conspirators actually divide the loot.

Adam (house flipper) has a house that's worth $50,000, and he'd like to earn some serious cash. So he and Bob ("lender") offer Charlie (random guy) a deal: sign a slip of paper and get $50,000 of free money and a place to live for a few months. Bob declares that the house is worth $400,000 and writes a $440,000 mortgage for Charlie. Charlie doesn't care that the house is being sold for many times its worth, since he's never going to pay for it anyway. He just knows he gets $40,000 of free money.

Anyway, Bob cuts Charlie a check for $40,000 and Adam a check for $400,000. Adam and Charlie know the house isn't really worth $400,000, but it behooves them to say it is, so Adam give Charlie a kickback so the house really only costs $200,000. At this point, Adam has made a $150,000 profit and Charlie has made a $40,000 profit, but Bob is $240,000 in the hole. He does, however, hold a mortgage with a $440,000 face value. No sane person would buy that a mortgage for anything near $440,000 or even $240,000, since there's no way it will bring in anything, but that's where David comes in.

David runs a credit-default-swap business. It's a little like insurance, except without the pesky regulations. David, who has a few tens of millions of dollars in assets, makes a deal with Bob: Bob pays David $100,000 up front to "insure" the mortgage, and in exchange for that David agrees to pay up to $440,000 if the borrower defaults. Now Bob has an "insured" mortgage, which he can sell for near face value. Bob was behind $240,000; if he spends $100,000 for insurance and sells the mortgage for $400,000 he'll come out $60,000 ahead. It would seem Bob's going to leave David in the lurch, but David has a plan of his own.

If David were to write just one of those policies, he would stand to lose about $300,000 (he was paid $100,000 to start with, and the house would likely have some residual value afterward). But if he writes a thousand of them, he'll take in $100,000,000 (which quickly gets sent overseas). Outsiders holding David's CDS (credit default swap) agreements see that his assets are large relative to the agreement they hold. There's no way they can know that he's got a few tens of millions of dollars backing up $300,000,000 worth of bad bets.

Sure enough, the mortgages go into default, and the holders of them come to David for reimbursement. David, however, has no intention of paying them. He's pocketed their payments, and simply points them to his few tens of millions of dollars to fight among themselves.

There's a bit more to it than that, but that's the basic gist.

How hard should it be for the government to recognize all the fraud going on and put a stop to it?

There's a very simple principle in economics: the only way someone can turn a profit without either generating wealth or improving the efficiency of resource allocation is if someone else loses money. In the above example, Adam, Bob, Charlie, and David all profit handsomely, but none of them does anything to generate wealth or improve the efficiency of resource allocation. It may be difficult for regulators to see exactly what's going on, but it should be obvious that Bob is giving Charlie free money for no sane reason. If one assumes that Bob is in business to make a profit, clearly Bob is using Charlie to scam someone else.

If Hank Paulson couldn't see that, he's an incompetent fool. If he could see that but didn't act to prevent it, he's a crook. In neither case should he be entrusted with $700B.

Thomas Jentzsch, on Sat Oct 4, 2008 1:18 PM, said:

Some damage control measures could reduce future damage, but a huge amount of damage has already happened but isn't apparent yet. No countermeasures can "prevent" that damage.

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I would suggest that a lot of the bailout money is going to find its way into the black hole of fraud-laden markets. What's needed is not an injection of cash, but the prosecution of the crooks involved.

Aren't the current actions supposed to be meassures to prevent general bank runs, which would kill any bank, even a healthy one?

E.g. the german government extended a guarantee to all private savings accounts yesterday.