Guy Berger

I don't understand why gas stations don't hike prices to $5 or $6 per gallon or whatever to solve this problem... I had to wait in line for an hour to fill up on Sunday. Fortunately I can walk to most places and don't drive much, otherwise this would be a serious drag. Guy

Off to my 2nd tri. Guy

The great economist Rudi Dornbusch once said `The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.`

Amen. No, it's not BS. The government definitely did. I just don't think that it played a significant role in what was ultimately, for a while, an extremely profitable industry. Guy

1) An op-ed in which economist Ken Rogoff argues that the cost to US taxpayers of cleaning up this mess will be upward of $1 Trillion. 2) An op-ed from Nicholas Brady and Paul Volcker calling for a resurrection of the Resolution Trust Corporation 3) A review of today's historic events 4) A more general article on the crisisi

As far as I know that has not happened... yet. I am sad to say, but the US government is going to have to step in and bail out the guys who are responsible for much of this mess - the banks. It's going to be ridiculously expensive, foreigners are going to own massive amounts of US assets, but that's a small price to pay to avoid an implosion of the US (and maybe global) financial system. Guy

It doesn't decouple the loans... but it does decouple the lender. This isn't necessarily a problem in and of itself if the lending process is well-supervised/regulated or if the person who purchases them is intelligent enough to remember the incentives faced by the lender. But neither of these things happened, apparently. For what it's worth, securitization of loans existed for a long time before this crisis, and it will come back. It just got extremely out of hand this time around. Guy

So Greenspan holding interest rates way down year after year after year had absolutely NOTHING to do with it? Greenspan is also culpable from a regulatory standpoint. That said... this crisis has many, many fathers and I would hesitate to put Greenspan in the top 5. Guy

I think you're being silly by suggesting that the solution to the crisis is to turn to the Libertarians, the one group who would remove any and all regulation immediately. This problem was brought upon us in large part due to the wonderful Republican "free enterprise solution" of removing "unnecessary" regulation. Now that this has been discredited, I don't think you'll convince many (other than Berigan) that we should carry this approach even farther... Moose, let me make a couple of points regarding the bipartisan nature of the problem and the Libertarian view. 1) My understanding is that this this sub-prime lending mess was started by Bill Clinton. For political (not economic) reasons, his administration pressured the banks to lend money to the poor (read "blacks"), with the threat of penalties if they didn't. This continued under the Bush administration. The banks would not have made the loans in the first place if they had not been pressured to by the government. The primary reason why subprime mortgage lending by banks and other institutions grew so rapidly during the past 5-6 years was that it was immensely, immensely profitable. While the argument you made surely does account for some of the expansion, I would assume this was a tiny fraction of the whole. Guy

Yes. The basic connection is that right now there is an extreme fear of risky assets (what people call a "flight to quality"), hence a massive outflow of capital from Russia's stockmarket. Furthermore, if Russia's banking system is similar to that of others around the globe, its banks have "exposure" to Lehman/whoever or someone who does. It's like a giant ball of yarn, once you pull on one end you may end up unraveling the whole thing. Guy

...AND (and I'm not making this up), AND... "in return, the federal government will receive a 79.9% stake in the company." The government just paid $85 billion dollars to buy 80% of AIG??? What the holy motherfucking fuck???? source It's a loan, not a transfer. It's unclear how much of this loan will be paid back. Guy

A government bailout of AIG is very BAD news. Worse than AIG actually going under? Again, I don't profess to know the particulars. I'm reading the posts of those who do with great interest. Disclaimer up front: I work in the financial services industry, so I am not a disinterested party. Here's a summary of why an AIG bailout matters. 1) Financial institutions currently have on their balance sheets many assets whose value is maintained by the fact that it is insured by AIG. That is, even if the underlying asset goes down in value, AIG promises to pony up the difference. 2) This in turn implies that if AIG is no longer able to honor its insurance, those assets drop dramatically in value. 3) So an AIG default would imply further writedowns for those financial institutions. 4) Such writedowns would leave financial institutions even shorter on capital at a time when such capital is scarce. i.e., bring them closer to possible insolvency. 5) Even those that do not become insolvent will become more tightfisted with lending in order to conserve capital. 6) Thus -- whether through insolvency of financial institutions or tightening of lending standards -- the functioning of the financial system will become further impaired. Guy

From my understanding of G-S and G-L-B (which admittedly is superficial), this is not a convincing argument. Bear Stearns, Lehman, Merrill Lynch - these are investment banks, hence the repeal of the law did not affect them. And the depository institutions that have failed so far had very little, if any, investment banking activities. The root cause of this crisis - excessive lending/borrowing - could have occurred with or without the integration of investment and depository banking under one roof. Guy

I went to the CNN site and read the entire article. While I don't understand all of the particulars, it sounds really bad and a little frightening. You should be particularly frightened because people in the know don't understand all of the particulars. Guy

Yup. There were even CDOs of CDOs, titled CDO^2, CDOs of CDO^2s titled CDO^3. Staggering.

Doubt it's just CDO investments. I've been hearing that AIG trading desks have some seriously underwater/mishedged CDS (credit default swap) positions. This may betray my ignorance, but prior to your post I would have considered a CDS to be a type of CDO. Isn't a CDS essentially a firm-specific CDO? No. a CDS is an insurance contract on debt -- guaranteeing against default of that debt/bond. So if the debt/bond does default, the insurer pays out. Hence credit default swap. a CDO (collateralised debt obligation) is a bond with assorted underlying financial assets as collateral, also generating the interest payments. Lots of these use subprime bonds as collateral.

Was talking to a normally unflappable, conservative-minded, very experienced stockbroker today, and he agrees with Chuck. Of course he's concerned, Larry. He's going to have a tough time making any sales for a few months. The ironic thing is that people's money is safer in mutual funds right now than in a bank. Unless you think the US government is going to go belly up, bank deposits (up to $100K) are FDIC insured. Mutual funds are not. Guy FDIC is woefully underfunded and there is sufficient doubt that it could handle a full blown crisis. I still prefer my mutual funds, thank you, as I don't think all their holdings would necessarily go to zero. The FDIC is underfunded, but it is a (near) certainty that the US government would make sure that all deposit insurance would pay out. To do otherwise would generate a massive countrywide (excuse the pun) bank run which would truly cripple the US financial system and completely defeat the purpose of having deposit insurance in the first place. Of course, there is the possibility that the US government itself would be unable to raise debt or taxes sufficiently to cover all insured deposits, but I would say this is extremely unlikely. Is that true about insured deposits requiring up to a year to be paid out? I was not aware of that. edit: Checking the FDIC's website: Looks like there is a distinction between regular deposits and brokered deposits; the former are paid out pretty quickly - if not, that would again defeat the purpose of deposit insurance. I should note - I am not arguing that people should liquidate their mutual funds and move the money to FDIC-insured accounts. As Conn said, a well-diversified mutual fund is not going to go to 000 and in the long run stocks will probably bounce back. It's just that if short-run safety is your paramount objective, FDIC-insured accounts are the way to go. Guy

Rick did not play on The Final Cut at all. However, he did play on A Momentary Lapse of Reason as a session musician. As far as Rick - a real pity. It was nice to see one of the major obituaries acknowledge him as the dominant musical sound on the group's early recordings. Later on, he was overshadowed by the larger personalities in the band - but the group made its based recordings while he was contributing as a composer. Guy

If they passed muster with supposedly-sophisticated institutional investors, chief risk officers at major financial institutions and all the "smart" people in national policymaking circles, I don't think you can be so harsh on state insurance regulators. Guy ps How could I forget the rating agencies!!!!!!

Was talking to a normally unflappable, conservative-minded, very experienced stockbroker today, and he agrees with Chuck. Of course he's concerned, Larry. He's going to have a tough time making any sales for a few months. The ironic thing is that people's money is safer in mutual funds right now than in a bank. Unless you think the US government is going to go belly up, bank deposits (up to $100K) are FDIC insured. Mutual funds are not. Guy

At least part of the problem is that AIG wrote a lot of insurance contracts for the kind of shaky financial assets that are currently putting so much pressure on financials' balance sheets. So if the company gets downgraded by the ratings agencies, so do the insured assets, meaning another round of downgrades/losses for financials owning the insured assets. And so the circular firing squad continues... This article from the WSJ discusses the latest developments; key point: "Indeed, the company's woes could pose problems in many corners -- a concern that has the federal government on watch. AIG's massive assets mean that its millions of traditional insurance customers will likely get claims paid, no matter what happens next. But AIG's shares and debt are widely held, and the firm is used by many companies world-wide to manage a range of risks, including exposure to investments in subprime mortgages. Its demise would potentially make it harder or more expensive for businesses to control their risks."