AMosely

Were you asking this because you don't know why, or you wanted to discuss the underlying reasons? This is a pretty big event, an the Fed's reaction to it is a good indicator of the severity of the economic problems in America today.

Even our anti-regulatory President and his Federal Reserve chairman (not a moron but rather one who operates in a very experimental and varied environment that relies on belief and instinct more than actual intelligence) could not ignore the capitalist catastrophe that would have occured had they allowed B&S (now known as just 'BS') to actually tank. It would have resulted in a depression instead of just a recession, which would actually affect rich people instead of just poor people, so they had to act. The question is whether it will be enough (in conjunction with the agressive interest rate cuts, $150b 'stimulus' and other regulatory changes). Economic disturbances like this really shine the blacklight on the wealth gap in America, and just how financially fragile most Americans are. It's interesting to me that CNN is now devoting most of their time to these people and FOX is devoting none.

This is all fallout from the sub-prime predatory lending mess, which had been predicted as far as its occurance but not in terms of effects. The government (Executive and Fed) opted to take a primarily wait and see approach, though they now appear to be seeing enough to scare them into some pretty bold moves. Despite what Bush is saying (which, as usual avoids any hard truths), to a conservative Fed bold moves mean the problem is potentially very serious. None of this is really bothering wealthy people, at least not yet, who have plenty of liquidity and therefore can sail through this without even reading about it. The B&S collapse would have bothered these people so the government acted with taxpayer money.

Here is my question for the thread - does the B&S collapse indicate a need for more preemtive regulation in the financial markets to prevent predatory or otherwise excessively high-risk investment? If not, what if the risk targets what is considered one of the core principles of the American economy - home ownership?

El_Gringo_Grande

I believe it should be regulated.

Risk taking is a part of capitalism and that is fine. What you shouldn't be able to risk is the well being of the nation as a whole.

The preemptive kind is difficult to do. Those with the money will say that the government is stopping the market from operating and thus preventing them from their god given right to make lots of money. And in some cases they might be right.

But there are times when it is just so obvious that certain sectors are heading for a cliff and, when they go over, many people are going to be hurt. The S&L was one and the other was this Sub Prime fiasco. Come on, any person with an once of brains watching "Flip this House" episodes could see that things where going crazy with no basis in reality. Any time you have two out of work slackers that are obviously brain dead yet can get a $400,000 loan to buy a house that should be condemned you know there is some kind of pyramid scheme going on and it isn't going to turn out well.

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Steeler

Gringo, I think it's closer to a Ponzi scheme. Or several thousand Ponzi schemes being run by securities brokers based around faith in the housing bubble.

Mosely, I asked because I wanted to hear what other people think about the situation, and I wanted to drop a Colbert joke in there.

The economic realities of this crisis make it inevitable that the Fed will make an ATTEMPT to halt or slow a catastrophic market crash, even if it means breaking from their previously-held laissez-faire ideology. The invisible hand of the market has broken a finger, but the Fed may not have a big enough splint.

Worse, they may be treating the wrong injury. I don't think liquidity is really the barrier to economic growth at this specific moment. The problem at the investor level is that no one knows exactly how much of any given security is tied up in one of these junk mortgage s**tpiles. And no one has any real way of knowing until the bulk of the foreclosures go through and the holders can get a fraction of their investment back at auction. The big boys are hoarding their cash, hoping to have enough to last them through the worst of the downturn.

Which may be why the BS bailout is only the first case in a new lending program for the Fed. They are laying the groundwork for a recovery some 3-5 years down the line, when the surviving banks will be able to buy up the collapsed banks and begin lending again with a little help from Uncle Sam's wallet. Maybe. Of course, if they continue to link economic health with liquidity and investment instead of infrastructure and cost of living, it's just on to the next bubble and the next crash, Greenspan-style.

What is most frustrating is that the principle architects of the crisis get to row away with most of their millions intact, and the rest of us are left to wade through the inevitable inflation. Hey, maybe I'll get a cheap fire sale house out of the deal in the end, but still...

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ScratchMonkey

How is this different from the dotcom bubble?

I'll bet if you dig into subprime regulation you'll find perverse incentives that drove the bubble. The problem wasn't too little regulation, but perverse regulation that rewarded bad decisions, and put all the risk on the back of the taxpayer.

Put the risk back where it belongs, on the backs of the decision makers. Let them fail and bear all the costs (and profits!) of their decisions.

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Steeler

If you can find some perverse incentives I'd be happy to hear them. Simply assuming they exist isn't a particularly compelling argument.

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xTYBALTx

I'm not entirely certain that I know how to put my feelings on the issue into words, but I'll try. Hopefully something useful can come of it.

As anyone familiar with my past posts is aware, I am generally skeptical of attempts to regulate markets and I require a firm establishment of wrongdoing before blame is pinned upon a person or institution. One of the reasons I feel this way is because humans are fallible. We make mistakes all of the time. Human fallibility is one of the primary reasons for having markets in the first place: The fact that we make mistakes - and big ones at that - is a reason to have markets, not a reason not to tighten them up or regulate them. The Wall Street sharks at companies such as the Former Bear Stearns, Goldman Sachs, etc, are the "firemen" of financial markets: In extremely oversimplified terms, these firms try to buy what they think is undervalued by others and to short what they think is overvalued by others. This actually has a smoothing effect on the economy.

That, of course, is the ideal situation. Not only are humans fallible, but we are also susceptible to irrational psychological phenomena:

Irrational Exuberance, circa 1998.
Tulip Mania, circa 1636.

And of course other examples abound. Call it groupthink, call it mob psychology, call it what you will. The point is that people get caught up in the swing of things and do stupid things. And that while this stupidity may seem obvious in retrospect, it was certainly anything but obvious as the time. We can all sit here and say that we knew housing prices were bound to fall. That the ARM mortgages would default at a higher rate than anticipated. But if we were so confident that this would happen, why weren't we shorting companies whose balance sheets were full of mortgage backed securities? Because we thought it might happen, but weren't sure. Or we weren't sure of when. Or sure of how severe. Or maybe we're just saying that now but didn't actually think it at the time. I have started keeping track of my predictions so that I can test them. On "2/15/07" I predicted that downtown San Diego housing prices would fall 10%. Congratulations to me! But I wasn't confident enough in that prediction to actually put money on it.

Bear Stearns is (was) well known for its' high level of employee stock ownership. I believe that 50% of all BSC stock was employee held. The former CEO of the company was the second largest shareholder. What's my point? That no one had more riding on the success of BSCs' investment decisions that the very people making the decisions. And if people whos' very livelihoods depended upon good returns from mortgage backed securities didn't see this coming, then why would anyone else? Who has more of an incentive to ensure good returns than the people at BSC? And before anyone brings it up, BSC doesn't do golden parachutes. The former BSC CEO went from billionaire to (possibly) broke over the weekend. I don't have his full asset/liability sheet in front of me, but he certainly won't be buying any yachts anytime soon.

Go easy on the financial sharks. They're only human. I don't see any reason to suspect fraud or criminal action. Just a bunch of people making bad assumptions and mistakes. That's part of the game, and those who made mistakes just got cleaned out. There's no need for us to pile on.

A man learns to skate by staggering about and making a fool of himself; indeed, he progresses in all things by making a fool of himself.

* George Bernard Shaw

Never attribute to malice that which can be adequately explained by stupidity.

* "Hanlon's Razor" by Robert J. Hanlon

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ScratchMonkey

http://ca.lp.org/lp20050802.shtml

http://demonstrations.wolfram.com/Ex...ePriceBubbles/

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bkelly

Claiming all this is fallout from sub-prime is like saying all the miners died because the canary croaked.

bkelly

bkelly

Right. It's not like James Cayne was given and then sold $15.4M worth of stock three months ago.

Perhaps he would like the can of Lima beans I have in the back of my pantry.

bkelly

xTYBALTx

I believe his wealth is though to be somewhere around $10-30M right now, right? That's what folks were saying over the weekend. But I don't have his full asset/liability list, and I doubt anyone else making estimates about his worth does either. So we're all guessing. But if I had to guess, I'd guess that he has a few big ol' mortgages to pay off yet and other contractual obligations which are far in excess of $30M.

Daily News speculation regarding his worth.

Wiki entry.

Edit: Daily News says he might be worth "double" the $27.4M he just paid for two condos in NYC - assuming they're paid off.

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AMosely

Do you live on planet Earth? I could understand skepticism about the eventual effects of the sub-prime business, but in this case its now a fact - known at least as early as June 2007 - that B&S was placing way too much hedge fund investment in shaky sub-prime mortgages. This began the cascade the took the firm down.

xTYBALTx

I believe that bkelly was referring to the larger financial issues, not just BSC.

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bkelly

And you're putting that out as something to pity him over? Where do I sign up for a job where I can destroy a company worth billions and make millions a year doing it?

bkelly

xTYBALTx

I don't advocate pity - I advocate the absence of hatred.

And to answer your question, there are usually quite a few want ads for upper management in the Economist. Maybe you can sign up there? Or maybe you can try to follow in James Cayne's footsteps: Apparently the key is to drop out of college and learn how to play bridge:

He's also, apparently, fond of the marijuana. Maybe that's the key!

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Current good song: Justice - Stress

Steeler

A sufficient level of negligence is indistinguishable from malice. In any case, in the Sandbox we seem to spend far too much time discussing the merits of each others' emotional responses to the situation rather than the elements of the situation itself.

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