Dividend Stocks - The Dividend Daily » Blog Archive » The Bailout Precedent was Set in 1998, but That’s Not the Point

Dividend Stocks - The Dividend Daily » Blog Archive » The Bailout Precedent was Set in 1998, but That’s Not the Point: "It has become abundantly clear that no one learned a single thing from the collapse of Long-Term Capital Management. Every single entity involved in our current crisis should be absolutely ashamed of themselves, from the Fed that insisted on a record number of consecutive interest rate cuts, to the mortgage lenders who forgot the most basic rule of lending, to the investment banks that used huge leverage with derivatives schemes to game a clearly inflated housing market, to the insurers like AIG who backed the mortgage products that weren’t worth the paper they were printed on.

The precedent of government intervention had already been set, but the most egregious part of this situation is that no one learned their lesson afterward."

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Dividend Stocks - The Dividend Daily » Blog Archive » The Bailout Precedent was Set in 1998, but That’s Not the Point

Dividend Stocks - The Dividend Daily » Blog Archive » The Bailout Precedent was Set in 1998, but That’s Not the Point: "The “smartest” money (the best and brightest money managers on Wall Street) surely remember the federal bailout of failed hedge fund Long-Term Capital Management back in 1998. LTCM was initially extremely successful in its fixed income arbitrage plays, but required huge amounts of borrowing leverage to profit from their complex system (sound familiar?). LTCM’s strategy was based on bond price convergence, and as bond prices diverged due to changing overseas market conditions, assumed gains turned into gigantic losses.

Eventually, in order to prevent a perceived catastrophe, the Federal Reserve Bank of New York (FRBNY) stepped in. The FRBNY encouraged a number of investment banks to work together at that time to reach a bailout plan for LTCM, because the size and scope of its positions were “too big,” and the firm’s imminent failure threatened to have a huge impact on markets worldwide.

Does this sound like deja vu to anyone else?"

Dividend Stocks - The Dividend Daily » Blog Archive » Raising the FDIC Limits is Another Pipe Dream

Dividend Stocks - The Dividend Daily » Blog Archive » Raising the FDIC Limits is Another Pipe Dream: "The Bottom Line
The Fed needs to continue to orchestrate deals like they did with JP Morgan Chase (JPM) and Washington Mutual. In that case, the FDIC didn’t take any hit, and WaMu was removed from the equation. The new Corporate America is being formed now, and there’s no sense in delaying the inevitable consolidation. What we definitely don’t want is the FDIC becoming the next AIG, in a case where the insurer is financially unable to make good on its contracts."

Bloomberg.com: U.S.

Bloomberg.com: U.S.: "Paulson's plan, sent to Congress Sept. 20, would mark an unprecedented government intrusion into markets and increase the nation's debt ceiling by 6.6 percent to $11.315 trillion. Officials may also start a $400 billion Federal Deposit Insurance Corp. pool to insure investors in money-market funds."

Business Feed Article | Business | guardian.co.uk

Business Feed Article | Business | guardian.co.uk: "'This is a new phenomenon for every major player in this place and there are no dress rehearsals. That is why the market is so jittery. This has to work the first time,'"

Bloomberg.com: U.S.

Bloomberg.com: U.S.: "Treasury Secretary Henry Paulson's plan to end the rout in U.S. financial markets may derail the dollar's three-month rally as investors weigh the costs of the rescue.

The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York. While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real U.S. interest rates."

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: Treasury seeks unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.

Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world's largest economy to a standstill. The bill would prevent courts from reviewing actions taken under its authority."

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: "``He's asking for a huge amount of power,'' said Nouriel Roubini, an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.''"

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: "As congressional aides and officials scrutinized the proposal, the Treasury late yesterday clarified the types of assets it would purchase. Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage- related assets and, after consultation with the Federal Reserve chairman, ``other assets, as deemed necessary to effectively stabilize financial markets,'' the Treasury said in a statement.

The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program."

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: "The plan would raise the ceiling on the national debt and spend as much as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. Paulson is asking for the power to hire asset managers and award contracts to private companies. Most provisions of the proposal expire after two years from the date of enactment."

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: "Paulson spent the morning today appearing on the Sunday television talk shows to build public support for his plan. He urged quick approval by Congress, saying financial markets are ``fragile.'' While the plan should have ``mortgage relief components,'' he suggested legislative changes should be kept to a minimum.

``We want this to be clean, we want this to be quick,'' Paulson said on Fox News Sunday.

Speaking on NBC's ``Meet the Press, he said: ``This is not a position where I like to see the taxpayer, but it is far better than the alternative.'' He added that assets bought by the Treasury would later be sold, recovering some money for the government."

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: "A failure by the government to support the U.S. financial system could lead to ``a depression,'' Senator Charles Schumer, a New York Democrat told reporters yesterday. ``To do nothing is to risk the kind of economic downturn this country hasn't seen in 60 years.''"

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: "Democrats also will include a plan to stem foreclosures, which may involve tapping the loan-modification abilities of the Federal Housing Administration, the Federal Deposit Insurance Corp., and Freddie Mac and Fannie Mae, Adamske said. Frank, a Democrat from Massachusetts, is chairman of the House Financial Services Committee."

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: "Senate Majority Leader Harry Reid said that while he has misgivings about the rescue plan, ``the consequences of inaction could be catastrophic.''"

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: "The Treasury is seeking authority to step in as buyer of last resort for mortgage-linked assets that few other financial institutions in the world want to buy, following government takeovers of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group Inc.

``Democrats will work with the administration to ensure that our response to events in the financial markets is swift,'' House Speaker Nancy Pelosi said in a statement.

The majority party will seek to reduce mortgage foreclosures and create ``fast-track authority'' for an overhaul of financial regulation, Pelosi said. Democrats will ensure ``the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms.''"

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: "Paulson is seeking an expansion of federal influence over markets that hasn't been seen since the Great Depression, said Charles Geisst, author of ``100 Years of Wall Street'' and a finance professor at Manhattan College in New York.

Depression Era Agency

Geisst likened the plan to the Reconstruction Finance Corp., which was chartered by Herbert Hoover in 1932 with the goal of boosting economic activity by lending money after credit markets seized up."

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: "The ban on legal challenges of actions by Treasury is ``distasteful, it's unfortunate and it's bad precedent, but this is an emergency and you have to act,'' said Jerry Markham, a law professor at Florida State University and author of ``A Financial History of the United States.''

``What you don't want happen is to have lawsuits that will slow things down and cause problems,'' he said."

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: "The proposal would raise the nation's debt ceiling to $11.315 trillion from $10.615 trillion and require the Treasury secretary to report back to Congress three months after Treasury first uses its new powers, and then semiannually after that.

Paulson would gain discretion to act as he ``deems necessary'' to hire people, enter into contracts and issue regulations related to a revival of U.S. mortgage finance, according to a three-page proposal. The Treasury would ``take into consideration'' protecting taxpayers and promoting market stability."

Bloomberg.com: Worldwide

Bloomberg.com: Worldwide: "Reverse Auctions

The Treasury may hire managers to purchase the assets through so-called reverse auctions, seeking the lowest prices, Treasury said yesterday. The document specifies that Treasury may buy only assets issued or originated on or before Sept. 17."

FT.com / In depth - Political wrangle over US bail-out fund

FT.com / In depth - Political wrangle over US bail-out fund: "“I don’t like the fact that we have to do this. I hate the fact that we have to do this,” Mr Paulson said. “But it is better than the alternative.”"

FT.com / In depth - Political wrangle over US bail-out fund

FT.com / In depth - Political wrangle over US bail-out fund: "The political negotiations came as Hank Paulson, US Treasury secretary, called on other nations to follow the US lead in tackling the problems in the global financial system. “I will be pressing my colleagues around the world to design similar programmes for their banks.” The US is not asking other governments to join its proposed fund."

FT.com / In depth - Political wrangle over US bail-out fund

FT.com / In depth - Political wrangle over US bail-out fund: "Mr Paulson said the US scheme should be open to all banks with “significant operations” in the US – including foreign banks, even though this may be politically controversial in the US.

“The American people don’t care who owns the financial institution. If the financial institution in this country has problems it has the same impact whether it is US or foreign-owned,” he told ABC’s This Week. The passage of the legislation is considered essential to avoid a renewed tailspin in world financial markets. “I don’t like the fact that we have to do this. I hate the fact that we have to do this,” Mr Paulson said. “But it is better than the alternative.”"

Bloomberg.com: Economy

Bloomberg.com: Economy: "Senator Christopher Dodd, the Banking Committee chairman, said the plan's framers should consider the full debt load of U.S. consumers, possibly including credit cards."

Bloomberg.com: Economy

Bloomberg.com: Economy: "Senator Richard Shelby, an Alabama Republican who has advocated that markets should be allowed to penalize bad bets, warned that bailout could saddle taxpayers with large debts.

``This could be the biggest bailout in the history of the country and could ultimately cost $500 billion to $1 trillion,'' Shelby, the ranking Republican on the Senate Banking Committee, said in a Bloomberg Television interview yesterday."

Bloomberg.com: Economy

Bloomberg.com: Economy: "House Financial Services Committee Chairman Barney Frank said Congress within two weeks will pass legislation letting the Treasury take on financial companies' soured assets to help revive credit markets. ``I'm pretty sure this will be Treasury being the one that executes it because you don't have time to create a new agency,'' Frank said today in an interview on Bloomberg Television's"

How Financial Madness Overtook Wall Street - TIME

How Financial Madness Overtook Wall Street - TIME: "By the estimate of William Poole, former head of the St. Louis Fed, bailing out the creditors of the two big mortgage firms, Fannie Mae and Freddie Mac, could cost taxpayers $300 billion. Think of that as about a year and a half in Iraq."

How Financial Madness Overtook Wall Street - TIME

How Financial Madness Overtook Wall Street - TIME: "The market lost faith in AIG too, but the government was forced to save it. A major reason is that AIG is one of the creators of the aforementioned credit-default swaps. What are those, you ask? They're pixie-dust securities that supposedly offer insurance against a company defaulting on its obligations. If you buy $10 million of GM bonds, for instance, you might hedge your bet by buying a $10 million CDS from AIG. In return for that premium — which changes day to day — AIG agrees to give you $10 million should GM have an 'event of default' on its obligations.

But as a way to make sure that swap meisters can make good on their obligations, they have to post collateral. If their credit is downgraded — as was the case with AIG — they have to post more collateral. What put AIG on the brink was that it had to post $14 billion overnight, which of course it didn't have lying around. Next week, the looming downgrades might have forced it to come up with $250 billion. (No, that's not a typographical mistake; it's a real number.) Hence the action. If AIG croaked, all the players who thought they had their bets hedged would suddenly have 'unbalanced books.' That could lead to firms other than AIG failing, which could lead to still more firms failing, which could lead to"

How Financial Madness Overtook Wall Street - TIME

How Financial Madness Overtook Wall Street - TIME: "ere's how leverage works in reverse. When things go well, as they did until last year, Lehman is immensely profitable. If you borrow 35 times your capital and those investments rise only 1%, you've made 35% on your money. If, however, things move against you — as they did with Lehman — a 1% or 2% drop in the value of your assets puts your future in doubt."

How Financial Madness Overtook Wall Street - TIME

How Financial Madness Overtook Wall Street - TIME: "Lehman's fall shows the downside of using borrowed money. Even though Lehman has a 158-year-old name, it's actually a 14-year-old company that was spun off by American Express in 1994."

How Financial Madness Overtook Wall Street - TIME

How Financial Madness Overtook Wall Street - TIME: "For an example in our backyard, consider Lehman Brothers. Lehman was so flush, or at least felt so flush, that in May 2007 it sublet 12 prime midtown-Manhattan floors of the Time & Life Building — across the street from Lehman headquarters — from Time Inc., which publishes this magazine. Lehman signed on for $350 million over 10 years. (It's not clear what kind of hit, if any, Time Inc. will now face.)"

How Financial Madness Overtook Wall Street - TIME

How Financial Madness Overtook Wall Street - TIME: "Folks in the world of finance created, bought, sold and traded securities that were too complex for them to fully understand."

How Financial Madness Overtook Wall Street - TIME

How Financial Madness Overtook Wall Street - TIME: "Fear is so pervasive today because for years the financial markets — and many borrowers — showed no fear at all. Wall Streeters didn't have to worry about regulation, which was in disrepute, and they didn't worry about risk, which had supposedly been magically whisked away by all sorts of spiffy nouveau products — derivatives like credit-default swaps."

Why China Won't Come to the Rescue - TIME

Why China Won't Come to the Rescue - TIME: "Last December, the CIC (the China Investment Corp.) invested $5 billion for a 9.9% stake in Morgan Stanley (for which the bank must pay CIC a 9% annual dividend until 2010). On paper, that investment is now down more than 25%. Worse, Beijing paid $3 billion for a piece of the Blackstone Group just ahead of the private-equity firm's initial public offering last June — an investment that occurred about a nanosecond before the so-called subprime crisis began annihilating value on Wall Street and beyond. Fairly or not, the Blackstone stake has since become the symbol in China of a naive bunch of foreigners getting hooped by Wall Street sharpies. It's been the subject of withering public scorn in China and has drawn pointed private criticism from the highest levels of the Communist Party, banking sources in Beijing and Hong Kong have said. The message: Never again."

How Financial Madness Overtook Wall Street - TIME

How Financial Madness Overtook Wall Street - TIME: "But this time — for the first time since the Great Depression — problems in the financial markets are slowing the economy rather than the other way around."