Wall Street and the Financial Meltdown

[AggieGroove]

This is the best explanation I have send to date. wish I could take credit for deciphering the problem like this....

timeblog.com/curious_capitalist/2008/09/you_want_specifics_sean_decour.html#more

The simplest (and this is simplifying a lot) explanation:


Bob took out a mortgage for $1000 from Steve on which he agreed to pay back $2000 over the next 30 years. Steve split that $2000 into five packages of $400 and sold them to Jack for $300 each.* Jack has bough dozens of these little $400 packages. He combines 10 of them from 10 different people into a $4000 security that pays interest. Which he then sells to Jim for $3500.**
Jim says hey, I'm an institutional investor and I got a diversified security that pays steady returns over a 30 year term and is backed by real estate value. Yay me for safe investing! It's even rated AAA by the bond agencies.***

Unfortunately, Bob didn't get the big raise he was counting on at work. Now he can't afford the mortgage payment on his house. So he goes to Steve, his local banker, and asks for a renegotiation. Steve tells him that he can't because the loan has been split up among many buyers and sold several times and they're definitely not willing to renegotiate their fixed rate of return even if Bob can find them. So Bob defaults on his mortgage, and Steve forecloses on Bob's house to recoup the loan.

Unfortunately lots of houses are getting foreclosed and put on the market. Now Steve can't sell Bob's house for $1000. He can only sell it for $500. Meanwhile, Jim hears about this on the news and realizes its happening all over the country. Jim realizes he has no idea how much, if any, of his securities are actually going to pay out. He tries to sell them to Ted the other institutional investor, but Ted is trying to sell his mortgage securities too.
No one is quite sure how much these securities are worth, but they definitely seem like they're worth less than what was paid for them, and the real estate backing them doesn't look so hot either. So everyone is trying to sell and no one is buying. The value just keeps dropping lower and lower, but still no buyers come.

Now Steve has some nice girl named Judy who wants to buy a house. And two fellows named Ben and Luke who want to start a business and go to college respectively. But Steve can't get any money from Jim or Jack because they're getting wiped out by the falling value of their securities. Fortunately, Judy has an Uncle Sam who has a money printing machine and he wants to buy up a bunch of these securities so that their value will stabilize and people will start buying and selling them again. Then Steve can get the money to lend to Judy to buy her house, and Luke to go to college and Ben to start his business.

But Uncle Sam's wife, HoR, won't let Sam do it. HoR says that Jack and Jim are jerks who don't deserve to have any money because they don't work hard down at the tire plant like everyone else. And Bob is stupid for counting on that promotion so he shouldn't have taken out that loan in the first place. HoR forbids Sam from buying anything. So Judy doesn't get her house, Ben doesn't get his business, and Luke doesn't go to college. All because HoR wanted to get even with people for being jerks, even though really she just ended up punishing Judy and Ben and Luke who didn't do anything wrong at all.

Then there was a Great Depression and the Economy tanked and everyone lost their jobs. The end.


*Note that at this point, Steve has made a real and immediate profit of $500 and wants to lend out another mortgage right away.
**Jack has also make a $500 real and immediate profit on every "batch" of mortgage securities he sells. Jack wants to go buy more of these from Steve so he can keep buying and slicing and packaging them.
***Jim gets a bonus from his boss for doing so good and borrows money from Steve to buy a bigger house.

[Bornthrilla]

Well alrighty then. I think I got lost somewhere between Steve and Judy ... or was that Jim.

[Aggie77]

Though I agree we haven't hit the rough patch yet (probably Q4), I don't see the Great Depression II on the horizon. Even the 777 drop in the market was only about a 10% drop compared to GD-I, which was about 30%. Even a 30% drop today wouldn't have the impact it did the 1920s. The US economy is global now and much, much more flexible, significantly less dependent on manufacturing.

An Uncle Sam sneeze is a Chinese/European/Russian/Saudi flu bug, that flu bug will get mediated quick fast and in a hurry. Not to say it will not be a painful recovery, but capitalism is King and the USA is the pinnacle. This is not a ten year recovery period like GD-I.

No matter how incompetence you may think our federal legislators may be, they will not get in the way of the wealthy on the hunt for a buying opportunity. Half of the US is getting ready to go on sale at super discounts. From real estate, to stocks, to manufacturing, you name it. The first on the block appears to be banking. Do think it’s by accident that banking has just been consolidated into five major players BAC, Goldman Sachs, Citi, Morgan Stanley, and JP Morgan Chase. It amazed me how huge banks like Wachovia, Washington Mutual just got sucked up without even a belch.

I say all that, to say that this may have started out as failed housing crisis, but I’m willing to bet the capitalist see the low hanging fruit and it just about ripe. But I could be out of a job tomorrow, which would mean GD II for me.

[AggieGroove]

Sept 30, 2008 23:22:48 GMT -5 Aggie77 said:

Though I agree we haven't hit the rough patch yet (probably Q4), I don't see the Great Depression II on the horizon. Even the 777 drop in the market was only about a 10% drop compared to GD-I, which was about 30%. Even a 30% drop today wouldn't have the impact it did the 1920s. The US economy is global now and much, much more flexible, significantly less dependent on manufacturing.

An Uncle Sam sneeze is a Chinese/European/Russian/Saudi flu bug, that flu bug will get mediated quick fast and in a hurry. Not to say it will not be a painful recovery, but capitalism is King and the USA is the pinnacle. This is not a ten year recovery period like GD-I.

No matter how incompetence you may think our federal legislators may be, they will not get in the way of the wealthy on the hunt for a buying opportunity. Half of the US is getting ready to go on sale at super discounts. From real estate, to stocks, to manufacturing, you name it. The first on the block appears to be banking. Do think it’s by accident that banking has just been consolidated into five major players BAC, Goldman Sachs, Citi, Morgan Stanley, and JP Morgan Chase. It amazed me how huge banks like Wachovia, Washington Mutual just got sucked up without even a belch.

I say all that, to say that this may have started out as failed housing crisis, but I’m willing to bet the capitalist see the low hanging fruit and it just about ripe. But I could be out of a job tomorrow, which would mean GD II for me.

Very well stated....I agree with everything you said!

[aggiejazz]

I suggest everyone actually look at your investment value today and to get an accurate accounting of how much you have now.

I made the mistake of thinking there is a 100 percent direct correlation of the market value I see on the financial channels' market tickers and my investments. I, like a lot of people are a little more diversified so my 401K isn't as bad as I thought. A 10 percent loss in the Dow or S&P didn't mean I was down 10 percent that day. I gained more confidence in my awareness that I have options of moving to safer investments for now and that all my money is not going "to hell in a ham basket".

Another lesson is to look at what you have and protect it in bad times. Don't spend too much time fretting over what you lost hoping to recoup the loss by keeping what you have expose to high risk markets.

You can ease back into the stock market a little at a time so you won't hate yourself later if the market turn blazing hot - fat chance of that for now - and you are totally out of the stock market.

[AggieGroove]

money.cnn.com/2008/10/03/news/economy/house_friday_bailout/index.htm?postversion=2008100309

The House today passed a far-reaching and historic plan to bail out the nation's ailing financial system, CNNMoney reports. The bill passed 263 to 171 after strong lobbying by the White House and party leaders. Last week, the House defeated an earlier version of the bill, shocking the markets and congressional leaders. "We all know that we are in the midst of a financial crisis," House Republican Leader John Boehner said before voting for the bill.

So now what happens? I will have a full report...as some artificial sweeteners (pork) added to the bill! ;D ;D ;D

[aggiejazz]

I have waved the white flag.

[Aggie77]

To late, fear has the market by the throat, Dow down 750 points right now.

[Aggie One]

And down goes Frazier!!

[AggieGroove]

money.cnn.com/2008/10/07/markets/markets_newyork/index.htm?cnn=yes

A 5-year low
U.S. stocks are clobbered for the 2nd straight day, with Dow losing 500 points. Investor gloom persists.



AMERICA'S MONEY CRISIS
Bush: 'We're going to come through'
Economy vs. inflation: Fed saw equal risk
Pensions lose $2 trillion
Bernanke's speech on economic conditions
Bernanke: Economic outlook weaker

Since hitting a peak about a year ago, the Dow has fallen to a 5-year low.


NEW YORK (CNNMoney.com) -- Wall Street's drubbing continued Tuesday, with a 500-point loss bringing the Dow's two-day slump to nearly 900 points, as the Federal Reserve's plan to loosen credit markets failed to temper investor pessimism.

Fed Chairman Ben Bernanke's dour economic outlook in an afternoon speech added to the day's weakness. And a report showed consumer borrowing in August fell for the first time since January 1998.

The Dow Jones industrial average (INDU) lost 508 points or 5.1%, closing at the lowest point since Sept. 30, 2003.

The Standard & Poor's 500 (SPX) index fell 5.7% and closed below 1,000 for the first time since Aug. 27, 2003. The Nasdaq composite (COMP) lost 5.8% and ended at its lowest point since Aug. 18, 2003.

"There is this feeling that no matter what is done, it won't be enough, " said Darin Pope, chief investment officer at United Advisors of Secaucus, N.J.

Credit markets remained tight Tuesday, but showed some improvement from the previous day. Treasury prices inched lower, with the yields modestly higher. The dollar slumped versus other major currencies. Oil and gold prices gained.

Stocks plunged nearly 370 points Monday, with the Dow to losing as much as 800 points during the session, as the $700 billion bank bailout plan and European government's attempts to prop up faltering banks failed to soothe investors.

Stocks initially rose Tuesday on the Fed's credit plan, but turned lower by midmorning.

"Nearly every day there is another announcement where something is going to be done to prop up the markets," Pope said. "Stocks might see an initial pop, but then the skepticism kicks in."

Bernanke's remarks exacerbated the stock selling. He said the economic outlook has worsened and the financial crisis will hurt the economy well into next year. He also implied that more interest-rate cuts are on the way. (Full story).

The minutes from the last Fed policy meeting were released shortly after Bernanke's speech. The minutes showed the bankers were equally worried about growth and inflation at the Sept. 16 meeting, in which they opted to hold interest rates steady. The meeting had occurred one day after Lehman Brothers filed the biggest bankruptcy in history. (Full story)

After the close, aluminum makers Alcoa (AA, Fortune 500) reported weaker quarterly sales and earnings that missed estimates due to a weakening in aluminum prices and demand. The Dow component also suspended its dividend. Alcoa stock fell 6% in extended-hours trading.

Fed plan: The Federal Reserve said Tuesday it will buy commercial paper, short-term debt that companies use to finance daily operations, from individual companies. Panicky investors have been less willing to buy this kind of debt lately, making it hard for companies to get the money they need to operate.

The Fed move is aimed at creating a market for this kind of debt, ultimately loosening up the frozen credit markets. (Full story)

Businesses depend on the credit markets to function on a daily basis, and the absence of ready capital has hurt consumers and the broader financial system.

"It's another step in the right direction, but it's hard to get too excited about this because nothing yet has worked," said Bill Stone, chief investment strategist at PNC Financial Services Group.

"Eventually, if they [the government] stack up enough things, something will work," he said.

The government has taken a number of dramatic steps of late to try to get the markets functioning properly again amid the housing collapse and subsequent credit crunch.

On Monday, the Fed made an additional $300 billion available to banks in return for a range of damaged assets, on top of another $300 billion already available. The Fed could expand that to $900 billion total by the end of the year.

And on Friday, President Bush signed into law the $700 billion bank bailout, which involves the Treasury buying bad debt directly from banks in order to get them to start lending to each other again.

Stone said that it's positive that the Fed and the Treasury are taking aggressive and creative approaches to handling the current crisis. However, people are exhausted after all that's happened and they are less willing to cheer initiatives that won't kick in for some time.

Company news: After the close Monday, Bank of America (BAC, Fortune 500) reported a steep drop in profit that was short of estimates and cut its dividend. The bank also said it will raise $10 billion through a stock sale and that the company will need to set aside money for bad loans through the coming year. Shares fell over 26% Tuesday. (Full story)

Also late Monday, Wells Fargo (WFC, Fortune 500) and Citigroup (C, Fortune 500) both agreed to a legal standstill in their battle for Wachovia (WB, Fortune 500). (Full story)

AIG (AIG, Fortune 500) was in the spotlight Tuesday, in the second of several House hearings into what led to the current crisis. The government had to bail out the insurance giant with an $85 billion credit line last month to keep it from imploding. (Full story)

On Monday, the House Oversight Committee questioned Richard Fuld, chief executive of Lehman Brothers, which went bankrupt last month.

A variety of financial stocks fell Tuesday, including American Express (AXP, Fortune 500), Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Goldman Sachs (GS, Fortune 500), Merrill Lynch (MER, Fortune 500) and Morgan Stanley (MS, Fortune 500).

Morgan Stanley shares had fallen as much as 40% during the session on rumors that Japanese bank Mitsubishi UFJ was going to back out of its deal to buy a stake in the company. However, Morgan denied the rumor. (Full story).

But the declines were broad, with all 30 Dow components sliding. Besides the financials, other big losers included Walt Disney (DIS, Fortune 500), GM (GM, Fortune 500), Pfizer (PFE, Fortune 500), Home Depot (HD, Fortune 500) and Wal-Mart Stores (WMT, Fortune 500).

A variety of transportation stocks slid, with airlines, truckers and railroads falling. The Dow Jones Transportation (DJTA) average lost nearly 5%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners seven to one on volume of 1.73 billion shares. On the Nasdaq, decliners topped advancers by over four to one as 2.9 billion shares changed hands.

Global markets: Markets overseas were mixed Tuesday, a day after taking a drubbing everywhere.

Australian markets rallied after the government cut short-term interest rates by a full percentage point, surprising investors. Asian markets ended lower.

European markets were mixed. Russian markets opened late, but managed gains after having been shut down Monday following a steep selloff.

Credit markets: Measures of bank nervousness remained at elevated levels Tuesday, but showed some improvement.

The difference between the 3-month Libor and the Overnight Index Swaps fell to 2.93% from a record high of 2.97% earlier in the day. The Libor-OIS spread measures how much cash is available for lending between banks and is used by banks to determine rates. The bigger the spread, the less cash is available.

But 3-month Libor, the rate banks charge each other to borrow for three months, rose to 4.32% from 4.29% Monday.

The TED spread, which is the difference between 3-month Libor and what the Treasury pays for a 3-month loan, fell to 3.56% after hitting an all-time high of 3.95% Monday.

The wider the spread, the more reluctant banks are to lend to each other, rather than from the federal government. When markets are fairly calm, banks charge each other premiums that are not much higher than the U.S. government's.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose to 0.69% from 0.44% late Monday, with investors looking for a slightly better return on their money. Last month, the 3-month bill skidded to a 68-year low around 0% as panicked investors fled stocks.

Treasury prices dipped, propelling the yields. The benchmark 10-year note fell 6/32, lifting the corresponding yield to 3.47% from 3.45% Monday. Treasury prices and yields move in opposite directions.

Oil and gold: U.S. light crude oil for November delivery settled up $2.25 to $90.06 a barrel on the New York Mercantile Exchange, after ending the previous session at an eight-month low.

COMEX gold for December delivery rallied $15.80 to settle at $882 an ounce.

Other markets: In currency trading, the dollar slipped against the euro after hitting a 14-month high against the European currency on Monday. The dollar also slipped against the yen, giving up earlier gains. (Full story)

The price of gas decreased for the 20th consecutive day, according to a survey of credit card activity.

[AggieGroove]

This is another good offering as I am thinking recovery as the markets continues to tank....

money.cnn.com/2008/10/08/pf/money_crisis.moneymag/index9.htm

Your retirement

Will I ever be able to retire?

If you have several years, if not decades, to go, don't worry. Yes, your 401(k) and IRAs have taken a significant hit. But history shows that you'll make up 80% of your bear market losses within the first year of the recovery, according to Standard & Poor's Equity Research.

If you're planning to retire in the next few years, the answer is still yes, with a bit of effort. Why? The decade before you quit your job and the first five years that you're out of the work force are vulnerable times. How much your investments earn - or lose - during this time will go a long way toward determining how much money you can afford to spend for the following 30 years or more.

Say you planned to quit this year and begin withdrawing 4% of your retirement funds annually. If you started with a $1 million retirement portfolio last year (split 70% stocks, 30% bonds), the market has already cut that down to $833,000. That means if you pulled 4% of your remaining money out, you'd be left with just under $800,000 after Year One, cutting your odds of having your money last 30 years from nearly 80% to less than 50%.

Sounds scary. But you can fix this problem. For starters, pledge to work one more year. A study from T. Rowe Price found that putting in another 365 days at the job would boost your annual retirement income by 7%. Work three years more and your retirement income could soar by 22%.

By staying at your desk longer, you can also delay taking Social Security benefits. For each year you put off starting your benefits between ages 62 and 70, you boost your Social Security payments by 8%.

What if you don't want to - or can't - work longer? You still have an option: spend less. The traditional advice is to withdraw 4% of your assets in the first year of retirement and boost subsequent withdrawals by the inflation rate. But in this type of market, consider withholding your inflation adjustments for the first three years after you retire. T. Rowe Price found that a retiree with a 55% stock/45% bond allocation in 2000 would have cut his odds of running out of money by half simply by following this approach.

What should I be doing with my portfolio?
Every long-term investor has to face nerve-rattling times like this - likely more than once - and your success will hinge on your ability to keep a cooler head than many others around you.

If you own a diversified portfolio, your asset-allocation strategy has probably protected you from the worst of the storm. While the S&P 500 has lost more than a quarter of its value over the past year, a portfolio consisting of 70% stocks and 30% bonds has fallen around 17%, thanks to the gains fixed-income funds enjoyed.

Still, markets like this are a good time to check if your asset-allocation strategy is still appropriate for your time horizon and if you need to rebalance. You'll likely find that you own too big a stake in bonds - or at least more than you bargained for.

Let's go back to that portfolio of 70% stocks and 30% bonds. If you hadn't traded in the past year, the market would have shifted your mix to 62% stocks and 38% fixed income. That might feel good now because bonds are less volatile, but it will mean that you will lose out on the higher returns on stocks when the market eventually recovers.

If you're selling bonds to add to stocks, what's safe to buy? It's fair to assume that the government's efforts to bail out Wall Street will add to our national debt, which will likely push up interest rates. Basic-materials stocks tend to do well when rates rise. So consider T. Rowe Price New Era (PRNEX), which owns energy and mining stocks. New Era is a member of the Money 70, our list of recommended funds and ETFs.

Also, beef up your blue chips. As Lehman and WaMu shareholders learned, not every large company can weather tough times. But as a whole, the category clearly can. The Vanguard 500 Index (VFINX) is the safest way to invest in the largest American companies.

Another sound option is the Fairholme fund (FAIRX). The managers of this Money 70 fund follow the Warren Buffett school of investing. They buy a stock only if it's trading well below its intrinsic value - perhaps a richly populated universe after this market meltdown.

If you see that the bond portion of your portfolio is underperforming, consider Treasury Inflation-Protected Securities (TIPS), one of the few types of bonds that can do well when rates rise.

I'm retired. What does this mean for me?
If you're living off a collection of dividend-paying stocks, it may feel as if you've been hit by the perfect storm. Not only have financial stocks, which generate around a quarter of all the dividends produced by the S&P 500, taken a huge beating - they've sunk nearly 45% since the start of this bear - but 30 blue-chip financial firms have cut their dividends.

Worse still, not all of the income you'll receive this year will be eligible for the beneficial 15% tax rate. For dividends to qualify for the rate, the company that issues them must pay taxes on them. And since many banks and brokers are reporting huge losses, they may not owe a penny to Uncle Sam this year.

As long as you diversify among different stocks as well as different sectors, dividend investing still has a lot of appeal. One strategy that's holding up, relatively speaking: Instead of focusing on companies with the highest yields - which could simply be a sign that a payer's share price has tanked or the dividend is at risk - concentrate on companies that are consistently growing their payouts over time. By doing so, the Vanguard Dividend Growth fund (VDIGX) has kept its exposure to the financial sector to only around 11%, and the fund is down just 10% so far this year, about half what the overall market has lost.

In the wake of the near failure of AIG, another worry for retirees is whether to buy an immediate annuity. In exchange for handing over a lump sum of money to an insurer, you get monthly or annual payments guaranteed for life with one of these policies. In this environment, it's hard enough to have faith that your financial institution will be around for the next three months, let alone three decades.

But bear in mind that no major insurer has failed in this meltdown. Even though AIG required $85 billion in loan guarantees to stay in business, it was the parent company that needed the help - not its insurance subsidiary.

In the event your insurer does fail, your state's life and health insurance guaranty association will attempt to find another carrier to take over the failed firm's contracts. If that can't be done, state guaranty funds will cover at least $100,000 in benefits (around 20 states cover more).

There is one reason to hold off awhile before you enter a new contract: Rating agencies like A.M. Best, Moody's, Fitch and Standard & Poor's are likely to re-assess the financial health of insurers in the wake of the financial crisis. Wait to see which insurers maintain the highest ratings.

How will I know when things are recovering?
An oft-quoted Warren Buffett bit of wisdom goes that the stock market is designed to transfer money from the active to the patient. Keep that in mind when you wonder when this crisis is over for good.

Let's remember what this crisis is all about. It's not just about problems with bad mortgages and toxic mortgage-backed bonds. "That's just the tip of the iceberg," says Charles de Vaulx, portfolio manager for International Value Advisers. The reason that we're still stuck in a bear market and that loans are hard to come by is the ongoing crisis in confidence in the financial system that greases the wheels of the economy. It may take months, if not longer, for the markets to get enough courage to overcome this.

Whether you're an investor or a would-be borrower looking for a sign of better days to come, pay attention to the so-called overnight London Interbank offered rate. Libor is a rate banks charge one another. The lower it is, the greater the likelihood that banks are willing to lend freely - and the sooner this credit crisis may be over.

Historically, Libor has run fairly close to the federal funds rate, which the Fed is currently targeting at 2%. But lately the overnight Libor has fluctuated between around 3% and 6%, an indication that banks still perceive a great deal of risk in the market.

In the short run, that's not great news for investors or consumers waiting for banks to start lending again. In the long run, however, the fact that banks are starting to consider risk isn't necessarily bad. After all, says Steven Romick, manager of the FPA Crescent Fund, "the reason we're in this mess is that financial institutions tried to make money without any regard to the concept of risk."

Additional reporting by Joe

[AggieGroove]

money.cnn.com/2008/10/13/news/international/gumbel_eurobank.fortune/index.htm?postversion=2008101313

Just trying to give everyone a synopsis of what's going on in our world! Dow up 936 today!

Europe to U.S.: You messed up the rescue, too
The plans for a massive bank bailout by European governments differ strikingly from the U.S. approach.

By Peter Gumbel, Europe editor
LAST UPDATED: OCTOBER 13, 2008: 1:56 PM ET


PARIS (Fortune) -- First you mess up the world's financial system. Then you blow the rescue of it. Now let's show you how to do it properly.

That, in a nutshell, is the less-than-flattering message European governments are sending to the U.S. as they mount their own gigantic bank bailout. The plans, announced Monday after two weeks of dithering, involve Britain, Germany, France and some others recapitalizing national banks that require help, and providing state guarantees and other measures to kick-start the stalled credit market. The details are strikingly different from the U.S. approach adopted by U.S. Treasury Secretary Hank Paulson and the Federal Reserve Board. And there's a big reason for that: The Europeans think Paulson got it badly wrong, and have watched aghast as he failed to restore confidence in the world's financial system.

In particular, they now think - and are openly saying - that it was a huge mistake to allow Lehman Brothers to fail. But they also believe that the $700 billion bailout plan was badly misdirected. Rather than buying up toxic assets, as the Paulson plan initially intended, they believe the role of government intervention should be to recapitalize the banks directly in exchange for some control of operations. That's at the core of the European plans announced Monday (and apparently the direction Treasury is now heading, too).

Much of the griping has been taking place anonymously, so as not to cause political ructions. But France's Finance Minister Christine Lagarde cast aside diplomatic niceties on the eve of last weekend's G-7 meetings in the U.S. when she told French radio: "as soon as you let one domino fall, the rest risk crashing down."

While not defending Lehman - "there were certainly bad decisions taken by that bank, bad management," she said, Lagarde nonetheless argued that allowing the investment bank to fail merely heightened anxiety in international banking and led to the seizing up of interbank lending. It's an argument that has now become conventional wisdom in Europe, where the mantra for this week's rescues is: Relax, no bank will be allowed to fail.

Too complex, too opaque
The second lesson from the U.S. handling of the crisis concerns the way government money is best used. Here the Europeans have a valuable precedent: Sweden's banking crisis in the early 1990s, which was resolved by the state forcing a consolidation and clean-up of the system even as it kept the banks afloat. Starting in Sept. 1992, the government in Stockholm announced a general guarantee for the whole of the banking system, encouraged the central bank to organize massive injections of liquidity, and created a state agency that essentially forced banks to give up any remnants of make-belief accounting and quickly write down the value of their assets to much more realistic levels. The strategy worked, and Urban Bäckström, the former Swedish central bank president who played a central role in the rescue, has said that "prompt and transparent handling" of the problems were a key to the success.

By contrast, the initial Paulson plan involved the U.S. government buying up the problem securities of banks in a procedure that risked being anything other than prompt and transparent. "It looks as complex as the credit derivatives that caused the problem in the first place," one top European finance official told me, on condition I didn't quote him by name.

Of course, this is not exactly a time to crow, and there are some big unanswered questions about the European solution, too. One is just how tough governments will be in imposing their conditions on national banks, including forcing mergers of stronger and weaker ones. That's particularly a concern for Germany, which has the most fragmented banking sector of any of the big European nations and has the biggest potential for discovering nasty surprises. Germany's problem is that any banking consolidation is likely to run into opposition from regional authorities, who have a say in the running of savings banks networks. And with national elections scheduled for next year, the fragile coalition government under Chancellor Angela Merkel doesn't have a very strong hand to play.

Her finance minister Peer Steinbrück, who could end up as her challenger in the election, has been among the most vocal European government official complaining about how the problems started in the U.S. sub-prime market - and how they will result in the erosion of American influence. "The U.S. will lose its superpower status in the world financial system," he has said, predicting that the dollar will also lose ground to the euro and the Japanese yen.

Stock markets for the moment are applauding the concerted European response. Only time will tell whether they're getting it right. It puts a huge onus on governments to fix the system, and the track record there is mixed. France nationalized its banks in the 1980s under President Francois Mitterrand for ideological reasons, but made such a mess of the job that it privatized them again. Still, after two weeks of conflicting and contradictory moves and statements in Europe, a bit of coordination certainly feels good - and if it looks like it stands a good chance of working, all the better.

[aggiejazz]

Oct 6, 2008 13:51:28 GMT -5 Aggie77 said:

To late, fear has the market by the throat, Dow down 750 points right now.

It seems like I wasn't too late. The S&P has gone another 13 percent.

[AggieGroove]

emac.blogs.foxbusiness.com/2008/10/23/the-credit-rating-agencies-moment-of-shame/

another excellent read....when u get a chance and stop worrying about the FB team!

[AggieGroove]

Oct 13, 2008 19:23:34 GMT -5 AggieGroove said:

money.cnn.com/2008/10/13/news/international/gumbel_eurobank.fortune/index.htm?postversion=2008101313

Just trying to give everyone a synopsis of what's going on in our world! Dow up 936 today!

Europe to U.S.: You messed up the rescue, too
The plans for a massive bank bailout by European governments differ strikingly from the U.S. approach.

By Peter Gumbel, Europe editor
LAST UPDATED: OCTOBER 13, 2008: 1:56 PM ET


PARIS (Fortune) -- First you mess up the world's financial system. Then you blow the rescue of it. Now let's show you how to do it properly.

That, in a nutshell, is the less-than-flattering message European governments are sending to the U.S. as they mount their own gigantic bank bailout. The plans, announced Monday after two weeks of dithering, involve Britain, Germany, France and some others recapitalizing national banks that require help, and providing state guarantees and other measures to kick-start the stalled credit market. The details are strikingly different from the U.S. approach adopted by U.S. Treasury Secretary Hank Paulson and the Federal Reserve Board. And there's a big reason for that: The Europeans think Paulson got it badly wrong, and have watched aghast as he failed to restore confidence in the world's financial system.

In particular, they now think - and are openly saying - that it was a huge mistake to allow Lehman Brothers to fail. But they also believe that the $700 billion bailout plan was badly misdirected. Rather than buying up toxic assets, as the Paulson plan initially intended, they believe the role of government intervention should be to recapitalize the banks directly in exchange for some control of operations. That's at the core of the European plans announced Monday (and apparently the direction Treasury is now heading, too).

Much of the griping has been taking place anonymously, so as not to cause political ructions. But France's Finance Minister Christine Lagarde cast aside diplomatic niceties on the eve of last weekend's G-7 meetings in the U.S. when she told French radio: "as soon as you let one domino fall, the rest risk crashing down."

While not defending Lehman - "there were certainly bad decisions taken by that bank, bad management," she said, Lagarde nonetheless argued that allowing the investment bank to fail merely heightened anxiety in international banking and led to the seizing up of interbank lending. It's an argument that has now become conventional wisdom in Europe, where the mantra for this week's rescues is: Relax, no bank will be allowed to fail.

Too complex, too opaque
The second lesson from the U.S. handling of the crisis concerns the way government money is best used. Here the Europeans have a valuable precedent: Sweden's banking crisis in the early 1990s, which was resolved by the state forcing a consolidation and clean-up of the system even as it kept the banks afloat. Starting in Sept. 1992, the government in Stockholm announced a general guarantee for the whole of the banking system, encouraged the central bank to organize massive injections of liquidity, and created a state agency that essentially forced banks to give up any remnants of make-belief accounting and quickly write down the value of their assets to much more realistic levels. The strategy worked, and Urban Bäckström, the former Swedish central bank president who played a central role in the rescue, has said that "prompt and transparent handling" of the problems were a key to the success.

By contrast, the initial Paulson plan involved the U.S. government buying up the problem securities of banks in a procedure that risked being anything other than prompt and transparent. "It looks as complex as the credit derivatives that caused the problem in the first place," one top European finance official told me, on condition I didn't quote him by name.

Of course, this is not exactly a time to crow, and there are some big unanswered questions about the European solution, too. One is just how tough governments will be in imposing their conditions on national banks, including forcing mergers of stronger and weaker ones. That's particularly a concern for Germany, which has the most fragmented banking sector of any of the big European nations and has the biggest potential for discovering nasty surprises. Germany's problem is that any banking consolidation is likely to run into opposition from regional authorities, who have a say in the running of savings banks networks. And with national elections scheduled for next year, the fragile coalition government under Chancellor Angela Merkel doesn't have a very strong hand to play.

Her finance minister Peer Steinbrück, who could end up as her challenger in the election, has been among the most vocal European government official complaining about how the problems started in the U.S. sub-prime market - and how they will result in the erosion of American influence. "The U.S. will lose its superpower status in the world financial system," he has said, predicting that the dollar will also lose ground to the euro and the Japanese yen.

Stock markets for the moment are applauding the concerted European response. Only time will tell whether they're getting it right. It puts a huge onus on governments to fix the system, and the track record there is mixed. France nationalized its banks in the 1980s under President Francois Mitterrand for ideological reasons, but made such a mess of the job that it privatized them again. Still, after two weeks of conflicting and contradictory moves and statements in Europe, a bit of coordination certainly feels good - and if it looks like it stands a good chance of working, all the better.

Refresh from 2008....did the US get it right or what?

Is the EU doing the same thing now?