The Sky is Falling! Or is it?

[blueskies]

So, I've been struck my how these huge catastrophic financial events are unfolding right now in the US, and how, around my neck of the woods, noone's talking about it. Are people talking about this in your area? What are they saying?

[Biciclista]

let's see. I went to a plant nursery today and the guy said that at plant warehouses they have immense numbers of plants that are not getting sold.
When i met my Italian tutor, she said no one is booking private lessons and the language classes are much smaller this year.
And when I tried to sell my car for blue book ($10,000 for a 4 door sedan) Someone made an offer for $5000. You've heard about all the unsold SUV's and Pickuptrucks.
houses are vacant all over the country.

I'd say things are REALLY bad and getting worse!

[Flur]

I used to work for Merrill Lynch and have quite a few friends working in the financial markets, so I hear about it a lot. People in that line of work are afraid for their jobs and are under a lot of stress because everything is so unpredictable (for traders, this makes it REALLY hard for them to do their jobs!).

I'm personally not all that worried about it. I'm very bullish on the market and in my experience that's typical for people my age (30-35) who work in the financial markets. Every dip in the market is a buying opportunity, a chance to get stocks for good long-term companies cheap. Now is the time to invest in the best and hold your cards for the return trip up. :)

[Zen]

I'd say the general populace isn't talking about bank bail outs because they don't understand them.

What they do understand is the gov't bails out big banks but not small businesses and it's impossible to fill up their gas tanks.
They understand they have to change their grocery shopping habits.

I think they're just hoping things get straightened out because there's nothing else they can do about it.

[Biciclista]

very well said ZEN!



I'd say the general populace isn't talking about bank bail outs because they don't understand them.

What they do understand is the gov't bails out big banks but not small businesses and it's impossible to fill up their gas tanks.
They understand they have to change their grocery shopping habits.

I think they're just hoping things get straightened out because there's nothing else they can do about it.

[blueskies]

I agree, Zen, that a large number of people have no knowledge of basic economics.

I wanted to put the size of this bail-out in perspective for myself--- how much is $700,000,000,000? The answer is that it is equal to more than 25% of the total US government revenues for 2007!
So, our congress is being asked (and seems willing!) to give the Secretary of the Treasury authority to spend the equivalent of 25% of all tax money raised last year to buy up "at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act."

We are going to buying bad debt at an extraordinary volume!

Further, the bill specifically provides for no review:

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

I am deeply troubled.

[blueskies]

Not meaning to go all doom & gloom on everyone. Just feeling concerned about the state of the nation & planet that we are leaving for our young people...

[smilingcat]

hmmm...

The financial market has painted themselves into a corner.

Another nice way to put it is the feds and the treasury are caught between a rock and a hard place. And this is being very nice.

BTW, its not $700billion. The feds have pumped in over $600billion already and they are adding another $700B. This round of infusion will be more like $1trillion.

nope credit is really tight and everyone is sort of waiting for the shoe to fall off.

Most people are under the assumption that the federal reserve is part of the US govt. Well, its not...

I'm sure Mr. Silver being in the banking industry can say a few words. Maybe like me, he doesn't want to say too much.

I'm not saying much cause I already got into a huge drag out argument with a person who has demonstrated his complete lack of understanding how and why RTC was created to this latest bailout plan. I'm sort of expecting the federal reserve to issue a $500 note and a $1,000 note in not to distant future. These two denomination was available about 80 years ago... I think...

Lastly, I'm not counting on my social security at this point.

smilingcat

[Irulan]

I think it really depends on your personal situation. We have a disabled relative who is on a fixed income - you bet she feels it every time she has to decide on cat food or groceries for herself. The upcoming winter utility bill is already source of stress..

We follow the markets daily and are watching the kids college funds drop. They aren't for the long term so we see it more. The rest of it we'd like to hope is for the long term.

Also, housing is fairly stable in my community. It hasn't gone as high so the drops haven't been so bad.

[Aggie_Ama]

I notice it but I don't hear it much out of my neighbors. Maybe on a local scale with gas and groceries but I don't think they are as aware of the bank buyouts, mortgage mess, etc..... We all got homes when it was easy, most of us didn't have to put anything down. My husband and I bought smaller than we were approved for, our neighbors did not. Our household is still making cuts and doing things to stretch a dollar but some of our neighbors are buying camper trailers, new trucks, etc... Maybe they have a different situation than us, I don't know.

I think some people don't understand or just think it can't get worse. My husband is very worried, his nursery is slow because they aren't building new homes. They have been around for a long time and shouldn't have any issues with the economy but you never know. But he is worried about how much more the economy can fall.

And like Irulan said, my husband's grandmother is very aware. She relies on social security and what was left from the VA from her husband. She drives his old Dodge Dually but can't afford the diesel, she also can't afford to sell it and cannot take her sister (she has muscular dystraphy) to the doctor without a car. Against her pride she gets food from Angel Food Ministries.

[Irulan]

I do know this, being three months away from being mortgage free, with not other debt but a car payment, feels pretty darn good right now.

[Zen]

... I'm sort of expecting the federal reserve to issue a $500 note and a $1,000 note in not to distant future.

And one of these bills will have my photo on it :rolleyes:

[Pax]

I agree, Zen, that a large number of people have no knowledge of basic economics...

So true, myself included. I know I just bought a house and have more debt than I've ever had in my life right now. I know my mom has it tough with an unsold home in FL and being stuck with the motorhome my dad wanted (payments on both). I know that if my honey and I can keep our jobs we'll be okay and will be able to help our moms...and that's pretty much all I know about economics.

I wish we weren't bailing out the banks, but with my limited understanding I think it means we might not end up in a depression which would cost many many people their jobs?

[Pax]

I just wrote my Senator and Congressional Representative, I want them to just STOP and take a breath before they "fix" the financial crisis. It's moving way too fast and being propelled by the same greedy idiots who got us into the crisis in the first place. Arrrrgggghhhh!

[Zen]

Good for you!
You're right, we do need to slow down and think things through before printing up money and throwing out the window.

I know it won't fix anything but I'd like to see some of these golden parachute boys be held accountable.

[Pax]

Good for you!
You're right, we do need to slow down and think things through before printing up money and throwing out the window.

I know it won't fix anything but I'd like to see some of these golden parachute boys be held accountable.
The very idea that we give that kind of power with ZERO oversight to Paulsen is mind boggling. :eek:

[blueskies]

And capitalism, as a system, cannot work if we let people keep the profits from risky investments, while the taxpayers cover the losses when those deals go wrong.

I've called my senators. I want accountability, and I want the equity holders to pay first. If they want us to bare the losses, then they can walk away from their ownership & profits & bonuses.

[Pax]

And capitalism, as a system, cannot work if we let people keep the profits from risky investments, while the taxpayers cover the losses when those deals go wrong.

I've called my senators. I want accountability, and I want the equity holders to pay first. If they want us to bare the losses, then they can walk away from their ownership & profits & bonuses.

We teach these kind of lessons to kindergartners, I can't for the life of me figure out why we would teach people that there is NO risk, do whatever you want and you'll still profit. It makes me want to bang my head on the wall. :mad:

[Mr. Bloom]

I'm sure Mr. Silver being in the banking industry can say a few words. Maybe like me, he doesn't want to say too much.


A correction and clarification: Don't confuse banks and investments banks...they're very different. I'm a banker and have a long term relationship orientation...I manage risk and submit to substantial regulatory oversight. Investment bankers are "transactionally" (aka "what's in it for them") oriented and they sell risk to someone willing to buy it...they tend to be unregulated although the products they sell may be regulated.

The fact is that the government created this problem nearly 20 years ago. There was a time when homeownership required equity and a lot of documentation to qualify. It was the GOVERNMENT who imposed the expectation on the industry of making home ownership a right and not a privilege...and the investment bankers found new ways to enable the political mandate by packaging and selling the risk to unsuspecting (but sophisticated) investors...who threw more money into the game...loosening risk and oversight...and voile - the bubble pops.

I disagree with some...the time to ACT is NOW. It's not investment bankers that they're bailing out, it's MAIN STREET America. The largest institutions are so, so, so intertwined that a liquidity crisis could be epic in it's impact and it will be years in correction...and it will permeate all areas of this economy.

So, what am I doing personally? Nothing much is different. I sold some mutual funds to raise our "cash" position to 50% of our portfolio, but I've not sold a single stock..because I like the stocks we own. I am keeping all cash in FDIC insured deposits (go to FDIC.gov for advice on how to get more than $100,000 in coverage or look for one of the banks that subscribes to the CDARS program (http://www.cdars.com/index.php)).

Some may say "what if the FDIC fails?". It won't, because the government can print money...This would be incredibly inflationary, so if this happened, the best thing you could do would be to buy tangible assets immediately...things like cars, collectibles, and real estate...

Long term, this will materially reduce our flexibility. America's not the growth engine of the world anymore. Our influence and impact will reduce...and it's time for us to recognize that and adjust our global behavior accordingly.

In the end, I have no crystal ball. But, don't panic, don't overreact, don't think this is political. It is real. Be sober, be careful, be conservative. Expect volatility in the markets, and if you don't have tolerance for volatility, consider your options. I do not fear a tornado, but if I see one, I better respect its power;)

Just a humble opinion from the trenches...

[VeloVT]

I think Mr. Silver pretty much has it right.

I'm a little scared though. This is huge.

Also there is a part of me that worries that "the plan", which (although I have not studied it in great depth and cannot claim deep understanding of it) currently includes commitments to foreign banks that have invested in bad American debt, will end up not being able to avoid something that looks a whole lot like debt monetization...

[blueskies]

I watched the senate hearings today & realized that I had misunderstood the bail out plan. I now get (I think) that the plan is aimed at unsticking the market for mortgage related assets to free up capital/liquidity, rather than aimed at bolstering troubled financial firms. Will it work? I don't know. I'm comforted that Warren Buffett thinks it's a good idea.

[Pax]

I watched the senate hearings today & realized that I had misunderstood the bail out plan. I now get (I think) that the plan is aimed at unsticking the market for mortgage related assets to free up capital/liquidity, rather than aimed at bolstering troubled financial firms. Will it work? I don't know. I'm comforted that Warren Buffett thinks it's a good idea.
I heard that as well, and support it.

It is my personal desire that the greedy people who became wealthy (or more wealthy) from the practices that caused this crisis...are no longer wealthy. They should have to help pay for the mess they created.

[chutch]

I think my biggest concerns are the lack of oversight and that the people who caused this mess are going to get out with hefty bonuses.

I've never understood that- if your company is about to go under and you've got $10million+ to give to the CEO you're firing, why wouldn't you put that money towards the company's well-being? Who decided that was a good idea- what's the history behind this practice?

Does anyone else get money if they were to be fired or their company go under?

(Disclaimer: I do not have a lot of knowledge or experience with any of this stuff although I am trying to understand and learn more)

[blueskies]

Here's an interview with Warren Buffett on the matter:

http://www.cnbc.com/id/26867866/site/14081545/

I trust him.

Also, in his testimony yesterday, Paulson said he welcomed oversight & that transparency & accountability were essential.

[VeloVT]

One thing that Mr. Silver's post makes me think:

While it is true that this crisis is not partisan in origin, much of the blustering we are hearing, both from senators and from Paulson & Bernancke, IS to greater or lesser degree political. Do not forget that, although their positions are not partisan positions, the Secretary of the Treasury and the Chairman of the Fed serve at the pleasure of the president.

Sometimes it's not as easy as it seems to disentangle the "professional opinions" of knowledgeable people with their political biases.

Just saying...

[smilingcat]

I think it really depends on your personal situation. We have a disabled relative who is on a fixed income - you bet she feels it every time she has to decide on cat food or groceries for herself. The upcoming winter utility bill is already source of stress..

We follow the markets daily and are watching the kids college funds drop. They aren't for the long term so we see it more. The rest of it we'd like to hope is for the long term.

Also, housing is fairly stable in my community. It hasn't gone as high so the drops haven't been so bad.

Oh dear, I didn't mean it quite that way when I said "I'm not counting on my social security". What I meant by is that it will be worth very little after the heated inflation kicks in. That is why I also said, maybe we will see $500 and $1000 notes. Inflation is bound to happen if you just print money in large quantity and flood the market. Well, just print $700billion. When there is no tangible assets to back it up, the newly printed money will dilute what is out there. Dilution of $$ simply means that insted of spending $3.00 for a loaf of bread, you now spend $5.00 for a loaf.

[blueskies]

Inflation is bound to happen if you just print money in large quantity and flood the market. Well, just print $700billion. When there is no tangible assets to back it up, the newly printed money will dilute what is out there. Dilution of $$ simply means that insted of spending $3.00 for a loaf of bread, you now spend $5.00 for a loaf.

Yep!

[Mr. Bloom]

Here's an interesting release on the FDIC website.

http://www.fdic.gov/news/news/press/2008/pr08084.html

While I find the writer's claiming the industry's entire capital as the FDIC's a little disconcerting:rolleyes:, the parallel drawn to the recession/crisis of the early 90's is very real by comparison.

This is a cyclical crisis and every cycle turns;)

[Mr. Bloom]

Today's news was a surprise.:eek:

The headline will say that "Largest Point Drop in History"...which is true, but it's more relevant what the % loss is...6.98%.

Unfortunately, in nearly 21,000 trading days, that's the 17th worst percentage loss of the last 80 YEARS! Of the 16 worse days, only 4 have been since the early 30's:confused::rolleyes::eek:

Here are the numbers - compliments of some calculations off a Yahoo! data grab - Of those 16 days that were worse than today, the average change over the Dow over the next 3 months was -12.7%, 6 months was -13.7%, 12 months was -6.42%. In other words, history would imply (is past prologue???) that there's more downside ahead before things get better...and I'll personally be looking for the opportunties to buy...but for now, I'm on the sidelines.

Politics created today...politics may save the day tomorrow, but the world's trust is likely tarnished and will likely be that way for some time. My position from my 9/23 post remains unchanged and I'll be watching the market a lot more closely, but today is not a good day in my view:(:(

[Blueberry]

Mr. S-

I agree with you - today wasn't a good day. I only wish I had more answers...

CA

[bmccasland]

So Washington turned the package down. What I don't get is the entire "golden parachute" thing - if you drive a company into the ground, why would a CEO or CFO still get a lovely parting package? Why wouldn't the CEO and CFO (and their respective assistants) suffer financially if the company goes bankrupt? The rest of us mere mortals would have to sell stuff off, like million dollar homes, so why wouldn't they?

Secondly, whatever restrictions that got relaxed and thus taken advantage of, need to be put back!

[Tuckervill]

Those CEOs and CFOs have contracts with the companies that specify what their golden parachute will contain. I'm not sure how specific they are. My husband has a contract with his company, but it's not very detailed. When you're talking millions in salaries and benefits, there had better be a contract of some kind!

Those CEOs fall into some kind of special categories for officers of a company, and my husband falls into the salaried employee category, I think. So, labor laws and such do not apply to them like they apply to my husband. For instance, we work in an at-will state, which means he can quit or they can fire him for no reason at all. I am sure the contracts of the CEOs override all that, because of their status with the company and how the fall in the labor laws. They're not labor--I would guess they're some kind of contractor, officer, something else. I'm not explaining this very well.

Don't get me wrong--I don't think the golden parachutes in these deals are fair to the American public. But there is someone out there who can explain why it is in the best interest of the company to honor the contracts with the CEOs a closely as possible, and it seems to make sense to Congress.

Karen



Karen

[Irulan]

S

Secondly, whatever restrictions that got relaxed and thus taken advantage of, need to be put back!


Have you tried to get a loan lately? Requirements are already tightening way up.

[andtckrtoo]

Have you tried to get a loan lately? Requirements are already tightening way up.

DH and I signed up for a condo in Napa 2 years ago when things were great and it was being built. Of course, the loan is due now. We were able to get financing, but we had to jump through more hoops (lots more hoops - and needed a lot more proof) than we did for our house mortgage which is more $$. Honestly, though, I'm okay with that. I'd rather have to PROVE I can pay back a loan, than to be handed money because I asked for it.

[Mr. Bloom]

What I don't get is the entire "golden parachute" thing - if you drive a company into the ground, why would a CEO or CFO still get a lovely parting package?

Let's use a real example that I can relate to...ME! Several years ago, I accepted a new job with a bank in trouble. I left a bank that I had been with for 17 years, where I was doing an outstanding job... My concern in going to a new bank is "what if the problems are bigger than anyone knows?"

So, to entice me, they offer me a "golden parachute". That is, if the company fails or is sold - in this case for reasons that predate me - I get $XXX. Now, I also give something up in return:

if I leave, I can't solicit customers or employees
I agree to not undermine the company's business efforts,
etc

Is this a Golden Parachute? By the strictest definition, yes. But why else would I take the risk of making a change? So, how else to struggling companies get turnaround talent??

Note: on my post yesterday, I made some careless calculation errors in the post above. Sorry.

Here's the not as bearish correction:

Here are the numbers - compliments of some calculations off a Yahoo! data grab - Of those 16 days that were worse than today, the average change over the Dow over the next 3 months was 1.76%, 6 months was 1.01%, 12 months was .16%.
(

[tulip]

So, to entice me, they offer me a "golden parachute". That is, if the company fails or is sold - in this case for reasons that predate me - I get $XXX. Now, I also give something up in return:

if I leave, I can't solicit customers or employees
I agree to not undermine the company's business efforts,
etc

Is this a Golden Parachute? By the strictest definition, yes. But why else would I take the risk of making a change? So, how else to struggling companies get turnaround talent??

Yes, but CEOs are responsible for being responsible, and it appears that many were not. And they still get highly VERY highly rewarded for essentially screwing up by not taking the necessary actions to fix problems--even problems that predate them (they are CEOs and that's there job in my opinion). That's what most people do not understand.

[bmccasland]

Two questions/points:
1) if Mr. Gold becomes the CEO of a company - and discovers there are financial problems that predated him. Does he make sure the light of day is shined on these problems, to the stock holders at least? Or does he keep quiet about them? If it's to his financial advantage to keep quiet (but unethical), and he allows things to continue because it'll make him oodles of money, then to me he doesn't deserve his golden parachute.

2) Mr. Gold has been CEO for a while, and things were profitable when he started, but because of decisions he helped guide, the company goes down the toilet. Again, to me he doesn't deserve the golden parachute.

I can understand taking a risk to turn around a business in trouble. What I don't understand is getting a tidy settlement package for allowing a company to fail.

If the laws become more lax, such as real estate loans, that doesn't mean you have to take the risk. I understand anti-descrimination laws. I don't understand getting a house with no money down (except for Vets, the VA loan thing I get). I don't get the constant barage of credit card offers I get in the mail either.

Whatever happened to the incentive to save for the future? :confused:

[blueskies]

A big part of the problem is that people in these financial companies were paid astronomical bonuses for raking in huge profits in the near term. The pay structures seem to reward short-term profiteering over the longer picture.

There was an interesting article in the NY Times explaining how a relatively small unit of AIG, the Financial Products unit, was responsible for its downfall. The individuals who were responsible made vast sums of money, and it looks like they'll get to keep it.

http://www.nytimes.com/2008/09/28/business/28melt.html?pagewanted=1&ref=business

This particular unit increased its annual revenue from $737 million in 1999 to $3.2 billion in 2005. Bonuses paid to the 377 employees of this unit over the last 7 years totaled 3.5 billion!

They generated enormous profits by collecting premuims to insure debt for a period of time, selling credit default swaps. "Because the underlying debt securities — mostly corporate issues and a smattering of mortgage securities — carried blue-chip ratings, A.I.G. Financial Products was happy to book income in exchange for providing insurance. After all, Mr. Cassano and his colleagues apparently assumed, they would never have to pay any claims."

The problems began when the underlying securities began to lose value. The contracts required AIG to put up collateral, collateral which they never expected to need. The portfolio of outstanding credit default swaps for AIG is valued at over $500 billion. That's a huge exposure, hence the need for the $85 billion bail loan from all of us.

The more that I read & begin to get a picture of this financial house of cards that's starting to tumble, the more that I believe that promoting inflation will be the cornerstone of our economic policy. They won't call it that, but that's what they're going to have to do keep the balls in the air. Wages won't keep up for regular people, the dollar will fall in value, and their will be a move toward a decreased standard of living for ordinary Americans. That's my prediction.

Mr. Silver, I've heard analysts saying that the total drop we've had in stock prices from their high is equal to that typically experienced over a bear market, and these analysts suggest that that indicates that it's nearly over. I don't think it's fallen enough, because housing prices are still too high relative to median income to sustain. Further, I don't think the drop in consumer spending has made its way into the system yet. Finally, I think every company in America is going to be looking for ways to reduce expenses right now & that translates into rising unemployment.