And now?

[kenberg]

So the bipartisan consensus for action is fading.

 

 

Apparently the Republicans and the Democrats in the House and the Senate thought they had a deal. So did the president, as he said Wednesday evening. . Then Senator McCain decided he had to suspend his campaign to assist in negotiations. Now instead of a deal there is an alternative Republican proposal.

 

Senator McCain, with a word, could have kept these negotiations on track Here are the words he chose (from USA Today):

 

>In a statement released late Thursday, McCain's campaign said that he "did not attack >any proposal or endorse any plan," and that he urged "all sides … to cooperate and >build a bipartisan consensus for a solution that protects taxpayers."

 

In short, the Senator has no idea what to do, except I guess fire the head of the SEC. If a guy has no idea what to do, I think he could help best during difficult negotiations by shutting up.

[PassedOut]

Yes, events yesterday were shocking, and that's certainly unusual for Washington, DC: Talks Implode During a Day of Chaos; Fate of Bailout Plan Remains Unresolved

 

WASHINGTON — The day began with an agreement that Washington hoped would end the financial crisis that has gripped the nation. It dissolved into a verbal brawl in the Cabinet Room of the White House, urgent warnings from the president and pleas from a Treasury secretary who knelt before the House speaker and appealed for her support.

 

“If money isn’t loosened up, this sucker could go down,” President Bush declared Thursday as he watched the $700 billion bailout package fall apart before his eyes, according to one person in the room.

 

It was an implosion that spilled out from behind closed doors into public view in a way rarely seen in Washington.

McCain swooped into Washington to pose as a hero and then sat like stone while the bipartisan deal fell apart. I used to like the guy.

[glen]

What we have right now is total chaos brought by injecting presidential politics into very serious negotiations," New Mexico Gov. Bill Richardson

And now? -> total chaos

 

Gotta luv some of the positioning here: "Main Street" against "Wall Street" -> spin, spin, spin...

[pclayton]

It's funny the House Republicans are the ones holding up this thing. I think a few of them actually woke up and figured out what would actually happen to the economy if we raised the ceiling on the national debt by 20% to ingest this beast.

 

Also funny how a 'phased' approach suddenly is palatable and won't have the disastrous consequences as Paulson predicted.

 

Whenever Bush starts talking about how people are going to lose their retirement accounts and their homes through foreclosure, it should be a red flag that those things aren't going to happen. Did you buy into a Lehman fund that bought up pools of mortgages? Yeah, youre probably going to hurt a little bit, just like all of us that bought flimsy dot.com stocks. Hopefully you had the sense to diversify a little and buy some emerging market funds like Romania that is doing great. or New Zealand which is up close to 10% this year.

 

And the homes? Well, maybe you shouldn't have taken out the 2nd mortgage for the vacation, the Bayliner, and the kid's college that you forgot to fund along the way.

[jdonn]

I'm so glad McCain is doing this. He is making himself look like a complete nitwit, and that's combined with Palin's stiring interview with Katie Couric. I am confident that the election is now in the bag.

[cherdano]

I agree that the explanations given by the administration are unsatisfactory, but that doesn't mean that doing nothing is better.

Anyway the problem is not about losing investments, retirement funds etc., but about credits becoming generally unavailable (which would lead to more business going bankrupt, and possibly a major recession).

[pclayton]

I agree that the explanations given by the administration are unsatisfactory.

Anyway the problem is not about losing investments, retirement funds etc., but about credits becoming generally unavailable (which would lead to more business going bankrupt, and possibly a major recession).

Arend:

 

There's money out there for lending to businesses and homeowners with good credit. I would argue that we still have a very elastic economy.

 

If there is a need for capital, the needs will be met. There may be some short term pain (although that can be filled by extending vendor credit lines).

 

I'll bet some of the Emirates funds are just licking their chops right now.

[cherdano]

I agree that the explanations given by the administration are unsatisfactory.

Anyway the problem is not about losing investments, retirement funds etc., but about credits becoming generally unavailable (which would lead to more business going bankrupt, and possibly a major recession).

Arend:

 

There's money out there for lending to businesses and homeowners with good credit. I would argue that we still have a very elastic economy.

 

If there is a need for capital, the needs will be met. There may be some short term pain (although that can be filled by extending vendor credit lines).

Ok, I will trust the opinion of economist Phil Clayton over the opinion of all other economists whose opinion I have been reading in the last couple of days.

 

Here a sample quote from a Washington post article (that is overall critical of the administration's plan):

Economists tend to agree that the nation's economy is at serious risk as the flow of credit threatens to freeze. Just yesterday, the interest rate at which banks lend to each other rose steeply, as it has every day this week, suggesting that lenders are hoarding cash. History shows that when this happens, a broad economic crisis can follow, for instance, the Great Depression and Japan's decade-long recession in the 1990s.

http://www.washingtonpost.com/wp-dyn/conte...8092504531.html

 

Anyway, suddenly coming up with a completely different plan after days of negotiations, as the House Republicans have done, makes about as much sense as McCain's Tuesday statement "I haven't had a chance to read the Paulson proposal yet" (which is all of 3 pages long). Especially as I haven't seen a single credible economist claiming their plan might actually work.

[blackshoe]

Whatever the government does, they are going to screw this up. The question is not "if", but "how bad". As to whether one solution would be better than another, we will never know, in spite of all the finger pointing that will no doubt occur after the fact.

[mike777]

I guess I feel more hopeful. Democracy in action is messy. It sounds like they are having a heated debate and not rubber stamping this Bill. I think that is a good thing. OF course politics enters the debate when politicians are involved and I think that is ok. I think the alternative would be worse.

[PassedOut]

Whatever the government does, they are going to screw this up.

Seems that things are already screwed up pretty badly. Do you think that the government will now make it worse?

[pclayton]

Whatever the government does, they are going to screw this up.

Seems that things are already screwed up pretty badly. Do you think that the government will now make it worse?

Similarly, will doing nothing make it worse?

[mycroft]

The problem is not with people in houses, it's with companies with just-in-time inventory systems. Because their inventory costs were so high, they cut back by buying what they needed, exactly enough before when they needed it to have it trucked in a day before. The only way to do that, without having mounds of cash lying around for the busy days, is to have a line of credit that can be dipped into when necessary - basically converting storage costs into interest charges. It worked out cheaper - especially if, if a hitch in the system hit, you could just cut the working hours of the employees until the stuff came in, then hit them for extra work to catch up. But that's okay, you're paid on a regular salary...

 

"credit crunch" = "no money for line-of-credit, or at least much higher carrying charges" = the difference between profitability for these "lean, mean" companies and inability to produce anything = no cash for truckers, either = much lower sales for the inventory people whose company is designed completely as "do shipping and inventory work for 1000 JIT companies" =...

[Al_U_Card]

And what if the government just printed up $??? billion in cash and made it available to anyone that wanted to buy up a foreclosed home (at market value)? The buyer need only prove their creditworthiness and the government ponies up the down-payment of, say, 10% as a "finders fee" for those who can afford it. Now we have a bunch of houses that are no longer "bad risks" and the buyers can use them as collateral for any number of credit purposes. Only one stipulation.

 

ONE (extra) HOUSE per buyer. No proxies, no transfers within a year etc.

 

That way, everyone wins and everyone shares.

[mike777]

"The Investor Perspective on Bailouts – A Statement from CFA Institute President and CEO, Jeff Diermeier, CFA

 

 

 

NEW YORK, September 23, 2008 – Today Jeff Diermeier, president and CEO of CFA Institute, made the following statement on the recent financial market turmoil:

 

 

 

"By and large we are very fortunate to live in a period of relative economic prosperity fueled by huge expansions of the global work force, productivity-enhancing technology, and more harmonized economic and financial policies. But we have collectively managed to rain heavily on our own parade through a combination of exuberance, carelessness, and undoubtedly some malfeasance. To say that risk has been misestimated or mismanaged is an understatement of rare proportions.

 

 

 

Our 96,000 investment professional members, who every year commit to putting their clients’ interests first, operate in financial markets around the world. Many are responsible for overseeing some of the largest pools of investment capital anywhere.They believe one question must be answered: ‘What do market regulators, central banks, and we, as investment professionals, need to do to ensure that the financial market excesses that led to the current turmoil does not escalate into an erosion of investor confidence that will last for years to come?’

 

 

 

In a survey of CFA Institute members, 39 percent (4,650 total respondents) said the bailout plan was reasonable, and necessary. Another 19 percent said government officials should go further to prevent collapse of the capital markets. By comparison, a total of 34 percent said the plan was either excessive, inappropriate, that taxpayers should not assume losses of the financial sector, or that the government was wrong to launch the bailout and that it should go no further."

 

 

 

On the Regulators and Regulation

 

"The results of this survey confirm that the majority of our members believe that the absolute primary objective of global regulators must be to coordinate their efforts to protect the integrity of financial markets and to restore confidence in the functioning of our global financial system. Initial temporary measures are needed to deal with the crisis at hand. After the dust has settled I encourage all major markets to work together to address the underlying issues and to consider revisions of capital markets regulation. If that process takes a year or two of study to address our long-term needs, so be it.

 

 

 

Further, we should not abandon self-regulation as an objective for capital markets. Indeed, it was the regulated sector — commercial and investment banks — whose problems have caused the significant problems we are experiencing. Consequently, we do not believe that more regulation, with the potential for unintended negative consequences, is the answer. Instead, better, more cohesive and transparent regulation, combined with better enforcement, should be an important part of any proposed solution.

 

 

 

Ultimately our global financial system is best protected by those in the industry who put their clients and their professional priorities ahead of short-term business priorities. These are professionals who exercise care, prudence, and due diligence before putting clients’ funds into various investment instruments, and who consider whether an investment vehicle is appropriate for sale to a client. Without adopting this ethical perspective every day we put our regulators in a continual position of playing catch up."

 

 

 

On Short-Selling

 

"Last week’s actions were marked by particularly strong concerns over expanded disclosure and emergency curbs placed on short-selling for nearly all financial stocks. CFA Institute has been a long-time supporter of short-selling and believes that shorting serves an important role in maintaining orderly markets. Selling short allows the market's collective wisdom to be reflected in security prices, and there are important needs in the market where shorting balances risk.

 

 

 

Consequently, we do not support the steps taken by regulators throughout the world to limit short-selling by investors whose positions reflect their assessment of the investment climate. On the other hand, we do support regulators’ efforts to stem market manipulation through abusive practices such as naked short-selling."

 

 

 

 

On Addressing Moral Hazard

 

"Of all the actions taken recently, however, none is more controversial or important than the proposal to create a taxpayer-financed liquidity pool. To be sure, a taxpayer-funded exit for firms responsible for the toxic instruments is difficult to accept and more than 1,500 respondents to our survey expressed displeasure with this aspect of the bailout plan. Even with these monumental steps, market turbulence will likely continue for some time to come. We must be certain to confirm that our government will not be routinely available to bail out any risky behaviors of any industry. There must be consequences to the risk-takers and I am hopeful that the moral hazard created by government bailouts will become an important debate for the economic agenda going forward.

 

 

 

There is no doubt that the proposed $700 billion pool to purchase damaged securities will be quite different from the Resolution Trust Company process of the early nineties. Nevertheless, the U.S. Treasury will need to accumulate the collective wisdom of all market participants in dealing with the purchase and resolution of these securities in a transparent way that will stand up to scrutiny. It must serve the purpose of making this transfer of risk from financial firms to the broader public successful in saving the public from a more costly and painful collapse of the global financial system."

 

 

 

What Investors Need

 

"For now, we must focus on prompt and aggressive actions until clarity and stability can be reestablished. First, greater transparency of investment portfolios is an important tool that will allow regulators to discourage manipulation and diagnose financial ills in our increasingly complex financial world. In cases involving private investment funds, such information should be kept by the regulator under lock and key for an appropriate period to prevent others from front-running these firms.

 

 

 

Second, as the dust settles, we need to know which institutions and what instruments will and should benefit from a government guarantee — a so-called ‘risk-free asset.’ By definition the least risky asset is one backed by the full faith and credit of a national government. Therefore, governments must act carefully to avoid sending a message that such guarantees will apply in all cases, even if they take temporary measures, as some have recently, to permit markets time to let underlying fundamentals stabilize.

 

 

 

Third, we do not believe a blanket ban on short sales is appropriate or will stem negative market sentiment. Whatever restrictions that have been implemented must be temporary and re-evaluated in an accelerated time frame.

 

 

 

Lastly, and most importantly, local markets should create high-level task forces to define the future of capital markets regulation in the future. CFA Institute is willing and able to help lead this from concept to reality."

 

 

 

CFA Institute

CFA Institute is the global association for the investment profession. It administers the CFA and CIPM curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has more than 96,500 members, who include the world’s nearly 83,000 CFA charterholders, in 134 countries and territories, as well as 136 affiliated professional societies in 57 countries and territories. More information may be found at www.cfainstitute.org.

 

© 2008 CFA Institute. All Rights Reserved. Contact Us | Sitemap | Forms | Terms and Conditions | Privacy Policy | RSS

[pclayton]

And what if the government just printed up $??? billion in cash and made it available to anyone that wanted to buy up a foreclosed home (at market value)? The buyer need only prove their creditworthiness and the government ponies up the down-payment of, say, 10% as a "finders fee" for those who can afford it. Now we have a bunch of houses that are no longer "bad risks" and the buyers can use them as collateral for any number of credit purposes. Only one stipulation.

 

ONE (extra) HOUSE per buyer. No proxies, no transfers within a year etc.

 

That way, everyone wins and everyone shares.

It would cheaper if they just sent out Xanax. Maybe some chocolate too :)

[mike777]

The problem is not with people in houses, it's with companies with just-in-time inventory systems.  Because their inventory costs were so high, they cut back by buying what they needed, exactly enough before when they needed it to have it trucked in a day before.  The only way to do that, without having mounds of cash lying around for the busy days, is to have a line of credit that can be dipped into when necessary - basically converting storage costs into interest charges.  It worked out cheaper - especially if, if a hitch in the system hit, you could just cut the working hours of the employees until the stuff came in, then hit them for extra work to catch up.  But that's okay, you're paid on a regular salary...

 

"credit crunch" = "no money for line-of-credit, or at least much higher carrying charges" = the difference between profitability for these "lean, mean" companies and inability to produce anything = no cash for truckers, either = much lower sales for the inventory people whose company is designed completely as "do shipping and inventory work for 1000 JIT companies" =...

Over 90% of Americans live paycheck to paycheck. Keep in mind over 40% of Americans pay zero in income tax.

 

These large investment banks live on overnight loans.

 

call it just in time cash if you wish. :)

[Al_U_Card]

In a survey of CFA Institute members, 39 percent (4,650 total respondents) said the bailout plan was reasonable, and necessary. Another 19 percent said government officials should go further to prevent collapse of the capital markets. By comparison, a total of 34 percent said the plan was either excessive, inappropriate, that taxpayers should not assume losses of the financial sector, or that the government was wrong to launch the bailout and that it should go no further."

My only question would be: That 34% that say that the bailout is wrong, are they the best investment counselors as well as the honest ones or......

[mike777]

Getting rid of the capital gain tax would flood the economy with money but of course that will never pass.

 

The middle class own stocks also and would be helped but anything that makes rich people richer will never pass.

 

Somehow it seems people want a plan that helps them but not the top 2%. :)

 

Part of the problem is if over 40% do not pay income taxes...any tax cut plan does not put money in their pocket, and of course helps the top 2% alot more, I guess won't pass.

[Lobowolf]

Keep in mind over 40% of Americans pay zero in income tax.

Lest you think that's too much, they'll probably be getting rebates soon!

[mike777]

Keep in mind over 40% of Americans pay zero in income tax.

Lest you think that's too much, they'll probably be getting rebates soon!

I just hope we can get over 50% of the voters not paying any income tax....then we can really have some power and pass alot of stuff.

 

Just no VAT please.......:)

[kenberg]

Mike, the note from the CFA (Certified Financial something or others I suppose? A=Accountants I guess although other possibilities come to mind) looks to be worth reading and thinking about. Thanks.

 

I don't owe any money, no one owes me money, I own a perfectly satisfactory house that is paid for, most of my investment is handled by places such as TIAA-CREF and I think little about it. I have no credit card debt. I have Medicare and supplemental coverage. I lead a simple life.

 

 

What I want, very much, is that people who hold a great deal of money and power do not screw things up. To me, it has been obvious for at least ten years that credit card debt is completely out of control, and when the great housing appreciation was in progress I thought it reached insane levels. You heard about people with very modest jobs buying $500,000 houses. No matter the sophistication of the financial environment, you just cannot spend more money than you make forever. If I could look at all this debt and say it is nuts, why could not the bankers, investment or otherwise? Why couldn't Congress? Or FNMA (I gather you are connected with them but I am not holding you personally responsible)? These guys are supposed to be professionals and know what they are doing. It is not very soothing to know that the same guys who brought us to this mess are the ones who are going to steer us, hopefully, out of it.

 

 

 

But it was McCain's actions that prompted the post this morning. Loose cannon doesn't begin to describe it.

[Al_U_Card]

Keep in mind over 40% of Americans pay zero in income tax.

Lest you think that's too much, they'll probably be getting rebates soon!

I just hope we can get over 50% of the voters not paying any income tax....then we can really have some power and pass alot of stuff.

 

Just no VAT please.......:)

What is the percentage if we only consider adults?

[mike777]

Mike, the note from the CFA (Certified Financial something or others I suppose? A=Accountants I guess although other possibilities come to mind) looks to be worth reading and thinking about. Thanks.

 

I don't owe any money, no one owes me money, I own a perfectly satisfactory house that is paid for, most of my investment is handled by places such as TIAA-CREF and I think little about it. I have no credit card debt. I have Medicare and supplemental coverage.  I lead a simple life.

 

 

What I want, very much, is that people who hold a great deal of money and power do not screw things up. To me, it has been obvious for at least ten years that credit card debt is completely out of control, and when the great housing appreciation was in progress I thought it reached insane levels. You heard about people with very modest jobs buying $500,000 houses. No matter the sophistication of the financial environment, you just cannot spend more money than you make forever. If I could look at all this debt and say it is nuts, why could not the bankers, investment or otherwise? Why couldn't Congress? Or FNMA (I gather you are connected with them but I am not holding you personally responsible)? These guys are supposed to be professionals and know what they are doing. It is not very soothing to know that the same guys who brought us to this mess are the ones who are going to steer us, hopefully, out of it.

 

 

 

But it was McCain's actions that prompted the post this morning. Loose cannon doesn't begin to describe it.

Lol I have a CFA Charter and we are not accountants... :)

Chartered Financial Analyst.

I work for TIAA-CREF lol. We have a weird and complicated ownership structure....I bet 99% of the people working there do not understand it. :) Andrew Carnegie started the company....nonprofit and not for profit is not quite the same thing but it is complicated.

 

My wife is a top complaince manager for one the largest banks in the usa if not theworld. Her stories are so funny. The public has no idea how much regulation there is already, just that regulation does not mean not going out of business. :)

 

Having lived in CAlif, I never understood how people could afford the homes out there. :) $500,000 bought you total junk house. :) granted this is West of I5 but why live in calif east of I5 :)

 

Note we can talk about 3 major kinds of debt.

home loans

credit cards.

Billions in overnight lending.

 

add in if 90% of us live paycheck to paycheck and owe on credit cards and owe alot on our homes....it adds up. :)

[y66]

Similarly, will doing nothing make it worse?

 

It's already getting worse. The WSJ reported today that new unemployment filings for the week ended Sept 20 hit the highest level since 9/11.

 

Don't think doing nothing is a choice. Even Paul Krugman (the guy who coined "cash for trash") agrees that something has to be done.