Republicans and The Credit Crisis
This seemingly innocuous power point slide from the Securities and Exchange Commission (SEC) was used in June of 2004 to explain to market participants a new ruling on how broker dealers could compute their "net capital". Instead of the previous fixed limits on leverage of 10:1, broker dealers like Lehman Brothers could use their own "internal models" to determine how much leverage they could put on their capital. As we saw with the crash of Bear Stearns and now Lehman Bros., both firms were leveraged more than 30:1.
When you combine this ridiculous willingness to let broker dealers determine their own leverage with the decision three years later to alter the short selling rules to make it easier to short a stock, you have a recipe for financial chaos. These are both Bush administration SEC moves. They stem from a idealogical hatred of regulation. They cannot be blamed on Democrats. This needs to be stated clearly by Obama and Biden.
Please, let's not have another Obama speech going into infinite detail about why the Bush administration, with support from McCain, is responsible for all of this chaos. No one except nerds would remember a word of it. What Obama needs is to get his staff to sloganize this someway. He needs about a 5 word statement that is memorable and accurate. Otherwise, he should just pass on this one.
September 14, 2008 11:26 PM | Reply | Permalink
Please see what I say below... Here's my sloganization:
"Obama's Tax Breaks = A stabilized middle class making stable mortgage payments again."
September 15, 2008 12:16 AM | Reply | Permalink
hoppy,
how about:
"McCain/Palin leading us into the 18th Century"
September 15, 2008 11:39 AM | Reply | Permalink
put a COMMA after Palin.
September 15, 2008 11:40 AM | Reply | Permalink
Please, could someone explain if I should be worried about the 6 * 10 ** 13 credit default swap market? I know that Phil ("Even his friends don't like him.") Gramm set up the regulatory structure after practicing on energy things. Is that a bad sign? I mean if a debtor defaults, can the effects be magnified?
September 14, 2008 11:28 PM | Reply | Permalink
Google "counterparty risk". :-)
September 14, 2008 11:37 PM | Reply | Permalink
I googled it. Are you saying that Peter who insured me against Paul not repaying my loan, won't pay up if Paul screws me? I think that worries me. :-) But, I am only leveraged 18-1 because I am prudent, so Pam doesn't have to worry. Truly.
September 15, 2008 12:03 AM | Reply | Permalink
The Wall Street banks have set up a fund -- $70 billion -- "to arrange an 'orderly resolution' of derivative exposures between the stricken investment bank Lehman Brothers Holdings and its counterparties."
Anyone know how this is going to work or where (one of the FRB's "facilities" no doubt) they're getting the money to fund the fund?
September 15, 2008 2:25 AM | Reply | Permalink
Now that's what I'm talking about. Bankers shuffle $70 billion amongst themselves to disappear their bad debts, while home owners owe the same amount as before.
70 billion dollars is enough money to write $70,000 checks to each of a million struggling home owners.
That money would buy them enough equity to refinance on affordable terms. Bankers would get their worst mortgages disappeared, AND homeowners would get to keep their homes. Win-Win!
September 15, 2008 3:14 AM | Reply | Permalink
I like it. Please also suggest over at Elizabeth Warren's post...
September 15, 2008 3:48 AM | Reply | Permalink
Hey!
You don't think that bankers are going to agree to lower the stated value of the collateral for mortgages on their books do you? They worked hard to get people to sign those mortgages at prices inflated anywhere from 20% to 200% above realistic values based on comparable rented properties, and have made sure that bankruptcy judges have no power to lower the value of those mortgages to match current values - although the same judge can lower the stated value of second homes and yachts.
That $70 billion slush fund is just to be used to shift whose books the overpriced mortgages appear on. The weaker companies will sell them to the stronger companies (like Bank of America) and add to the centralization of financial control in America. "Centralization of financial control" is, of course, a euphemism for avoidance of effective competition and turning control over America to the super-wealthy.
What do you want the bankers to do? They are predators. Are you asking them to lay off their prey?
September 15, 2008 10:48 AM | Reply | Permalink
Ellen,
Going back to my concern, won't Lehman Bros going bankrupt trigger some CDS's? Or do they have enough money to pay off bondholders?
For your concerns: I'm not sure what the $70 billion fund does, but would it it be used to satisfy or guarantee cash obligations,on a temporary basis. So more like a liquidity injection, but not a capital transfusion?
`
September 15, 2008 3:21 AM | Reply | Permalink
Without seeing Lehman's books (and you z2v and I wouldn't know even if we did) it isn't possible to know what the fallout from its bankruptcy will be.
We should, however, concentrate on its book of insurance, that is the insurance it sold to holders of any number of types of financial instruments to protect them form a default by the obligors.
What's the effect on holders of that insurance when Lehman goes bankrupt and can't make good on its promises?
On the one hand, no effect because the underlying insured instruments haven't defaulted; the holders of the insurance Lehman wrote haven't lost anything.
On the other hand, terrible effects because a portion of the value of those insured instruments was based on the fact that they were insured against default and now they aren't. The value attributable to insurance is lost and the value of the instrument decreases.
Thus, if you're a bank and part of your capital consists of those instruments formerly insured by Lehman, you've just suffered a hit to your capital -- and therefore, the amount you can lend to Main Street(?) has been reduced among other problems you have.
September 15, 2008 4:25 AM | Reply | Permalink
The next problem arises by virtue of the fact that Lehman never had enough money to pay off on the insurance it wrote. There's nothing wrong with that -- at least according to modern financial theory.
Lehman wrote and sold and/or bought various defensive derivatives which would protect it (that is, payoff and provide monies with which it could make good on its insurance promises) in the event that loans it insured went into default.
But now and in addition to its not paying off on the insurance, it's not going to make fully good on its obligations under those derivatives, and if you're a counterparty holder of a Lehman derivative, the value of your derivatives have to be marked down and your capital with it.
September 15, 2008 4:39 AM | Reply | Permalink
Oh, no. I think I'm going to have to tell Pam that she should worry. And I know she wrote derivatives for Prudence. This really is a big shitpile as Eschaton would say.
September 15, 2008 10:13 AM | Reply | Permalink
Ellen,
Dagnab it all, You're right again. That's twice today.
TORONTO, Sept 15 (Reuters) - Sun Life Financial (SLF.TO: Quote, Profile, Research, Stock Buzz) said on Monday it expects to take a charge in the third quarter related to its Lehman holdings after the bankruptcy filing of Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research, Stock Buzz) over the weekend.
Sun Life, Canada's third-largest life insurance company, said the amount of the charge depends on a number of factors, including the amount of expected recoveries and actuarial cash flow testing that is not performed until the close of the quarter on Sept. 30.
http://www.reuters.com/article/marketsNews/idUKN1527430820080915?rpc=44
September 15, 2008 3:47 PM | Reply | Permalink
Asserting that an action (here, an SEC regulation) is "ridiculous" is no evidence that it is.
If anything deserves to be called "ridiculous" -- get ready for an unsupported assertion -- it was President Clinton's signing on to Graham-Lynch-Bliley.
September 14, 2008 11:34 PM | Reply | Permalink
Yes! But no one is going to argue that point.
September 15, 2008 12:04 AM | Reply | Permalink
Can we wait until after the election, to commence flogging the Reagan Democrats?
September 15, 2008 10:26 AM | Reply | Permalink
I said this on L. Warren's blog, but am reposting to see what J. Taplin thinks and because this post is specifically about bringing politics into this weekend's unprecedented financial crisis.
"I hope Obama ties the mortgage crisis to his tax cut plan. This chart is the best explanation I've seen: http://chartjunk.karmanaut.com/taxplans/
To my mind, he should say:
""""The debate is over. There are bigger tax cuts for the Middle Class under my plan. Hands down. Slam dunk. My plan is exactly what this economy needs: A stabilized middle class making stable mortgage payments again. Even Greenspan agrees:
"Greenspan: America Can't Afford McCain's Tax Plan... "I'm Not In Favor Of Financing Tax Cuts With Borrowed Money".""""
September 15, 2008 12:12 AM | Reply | Permalink
If what I'm reading about on the tubes and hearing on CNBC, etc. is true, the chances of tax cuts under a President Obama or McCain are pretty small.
This is a big deal.
September 15, 2008 12:20 AM | Reply | Permalink
AnnieW: They still each have to run on it. Tomorrow's going to be horrific, but hell, if reality mattered, Bush would voluntarily rescind his Top 1%'er tax cuts tomorrow for the good of the public, and save the country.
Obama must porove his is better than the plan McCain's been lying, I mean, "offering".
September 15, 2008 12:53 AM | Reply | Permalink
It's not going to happen Wade.
Bush is going to try his damndest to drag this out as long as he can and dump it on Obama or McCain.
September 15, 2008 1:34 AM | Reply | Permalink
I know, Annie, I know. Bush doesn't care about reality, and he doesn't care about America.
September 15, 2008 1:50 AM | Reply | Permalink
"We gotta get Government out of the way."
Ronald Reagan
YUP!.
Phil Gramm
September 15, 2008 9:08 AM | Reply | Permalink
Today is probably not a good day to "dis" Gramm-Lynch-Bliley (There'll be other days for that).
Both Lehman and Merrill Lynch are investment banks. Unlike Citigroup and J.P.Morgan-Chase they aren't combos of commercial and investment institutions permitted by G-L-B and were not subject to Glass-Steagall.
Lehman and Merrill failed due to their business models -- that is, a practice of "borrow short-lend long" combined with excessive leverage. But when solvency comes into question that practice becomes a recipe for disaster.
September 15, 2008 10:29 AM | Reply | Permalink
http://www.motherjones.com/news/feature/2008/07/foreclosure-phil.html
"Years before Phil Gramm was a McCain campaign adviser and a lobbyist for a Swiss bank at the center of the housing credit crisis, he pulled a sly maneuver in the Senate that helped create today's subprime meltdown."
By David Corn
July/August 2008 Issue
"Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown."
Read the whole thing. Then watch this Youtube and send both to every undecided voter you know.
http://www.youtube.com/watch?v=1mHsuL6FfY4+
September 15, 2008 2:09 PM | Reply | Permalink
There's another pin-the-tail game with Greenspan and the Fed as targets. http://www.motherjones.com/news/feature/2008/09/fix-it-fed-up-reforming-our-financial-system.html
September 15, 2008 5:07 PM | Reply | Permalink