News What is wrong with the US economy? Part 2

[Greg Bernhardt]

Previous discussion here:
https://www.physicsforums.com/showthread.php?t=130611

Feds leave interest rate unchanged at 2%

Market reacts in a triple digit loss.

AIG down 45%

 

[turbo]

What do you think, Greg? Will the Feds bail out AIG? From what I've read, AIG has a pretty solid insurance division that could be spun off safely - it's the exposure to derivatives and bundled debt held by their investment wing that are problematic.

 

[Astronuc]

The Dow Industrials just jump 150 pts into positive territory. Perhaps the Fed acted to support AIG, but AIG is still down so some other component must have jumped.

 

[Astronuc]

The Federal Reserve has asked Goldman Sachs and J.P. Morgan Chase to lead a lending facility for AIG of between $70 billion and $75 billion, according to two people familiar with the situation. The New York Department of Insurance has permitted some of AIG's regulated insurance subsidiaries to provide the parent with $20 billion of liquid investments.

Of course, they and others would benefit if AIG went under and they could pick up the insurance business, and leave the derivatives business to the trustee.

 

[Greg Bernhardt]

What do you think, Greg? Will the Feds bail out AIG? From what I've read, AIG has a pretty solid insurance division that could be spun off safely - it's the exposure to derivatives and bundled debt held by their investment wing that are problematic.

I'm certainly not smart enough in economics to know what is best or likely. I see reports that Greenberg's CV Starr may try to take over AIG as early as tomorrow however another source is saying AIG may get loan package from Federal Reserve.

Short covering rally has AIG at down 15% now off of 45% low.

 

[Greg Bernhardt]

wow AIG explodes to the upside! Fed must be bailing them out.

edit: not so fast on that recovery :D

 

[Astronuc]

AIG has recovered from it's lows. Investors are in a buying mood. BAC, JPM and HPQ were positive earlier, but a number of other components have turned positive.

One can watch the action on the Dow30 with this Yahoo interactive (if you don't mind a 15 min delay).
http://finance.yahoo.com/q/cp?s=^DJI

 

[Greg Bernhardt]

AIG looks to blow past 1 billion volume! Anyone know what the record is? It's got to be close.

 

[turbo]

AIG is in billion+ shares traded territory and has given back some of its earlier gains.

 

[Astronuc]

1,027,870,201 shares of AIG traded as of 3:11 pm

They actually went + for a few minutes.

The day started with just over 71 million shares being dumped. The rallies today have been sparked by rumors that the Fed will intervene to support AIG. If that doesn't happen by tonight, look for another drop tomorrow.

 

[turbo]

Citigroup, Bank of America, and JP Morgan Chase are posting gains - seems like there is some comparison-shopping going on, and perhaps speculation about who gets to pick up the pieces of AIG.

 

[Astronuc]

So this explains the rebounds of AIG and the Dow. Earlier in the day, CNBC reported that the Fed was considered some intervention, then that didn't happen and AIG settled down. This afternoon, Bloomberg News reported Fed intervention. Seems like the business news is pumping AIG. The Fed might act, or it might not. It shouldn't, but let the chips fall where they may.

After sliding about 150 points, the Dow Jones Industrial Average pulled into positive territory before lapsing again after the Fed's announcement, only to rise again on the latest AIG report by Bloomberg News.

"The spike was just off Bloomberg's report that the government may provide a loan to AIG. Whether the Fed cuts or not is totally irrelevant," said Peter Boockvar, equity strategist at Miller Tabak.

Of course, Michael Bloomberg has an interest in supporting the battered financials based in NYCity.

 

[turbo]

The Fed might act, or it might not. It shouldn't, but let the chips fall where they may.

I agree - the Feds seem to let the "market work" when everything is going well, then step in when companies are failing. For the market to actually work, we need to let businesses with bad investments fail. It's a big market, and someone will step into pick up the business. Locking in profits for investment banks and dumping their risks on the taxpayers has got to stop.

Thanks to John McCain, his buddy Phil Graham and other de-regulators, the banks run amok then scream for help when they get over-extended - those fellows hate socialism when it comes to the common man, but they worship corporate socialism.

 

[Greg Bernhardt]

I agree - the Feds seem to let the "market work" when everything is going well, then step in when companies are failing. For the market to actually work, we need to let businesses with bad investments fail. It's a big market, and someone will step into pick up the business. Locking in profits for investment banks and dumping their risks on the taxpayers has got to stop.

They didn't bail out LEH. The fed seems to make an argument that they are too big to fail. Too vital to the economy and if AIG fails then it could create a domino effect. I don't know this, but just what I hear. Your thoughts.

 

[Jimmy Snyder]

Of course, Michael Bloomberg has an interest in supporting the battered financials based in NYCity.

But nothing to gain on a short-lived spike.

 

[Astronuc]

But nothing to gain on a short-lived spike.

No, certainly, but he and Wall St need to prevent panic and instill confidence, so others don't go down like LEH.

One would only benefit from a spike if one was doing insider trading, which some companies and individuals have done.

 

[turbo]

They didn't bail out LEH. The fed seems to make an argument that they are too big to fail. Too vital to the economy and if AIG fails then it could create a domino effect. I don't know this, but just what I hear. Your thoughts.

I have read that parts of AIG could be spun off safely and securely. If that can happen, the remainder with large exposures to risky speculative investments should be allowed to fail. Share-holders can hold stock in the stable insurance sector of the company, though the stock values of the segments with high debt ratios will tank, and shareholders will lose money. At least they wouldn't lose as much as if the entire company was allowed to tank, and give up its insurance business.

If the Fed steps in with the taxpayer's piggy-bank to rescue investment banks, it degrades the value of our currency because we are assuming debt that once made tidy profits for the investors. The only way to get the banking industry re-regulated is if the Feds let banks fail so that share-holders get stung and demand greater regulatory oversight. Share-holders don't demand greater regulation during boom-times, and if they are shielded from busts by infusions of our tax dollars, they never will. Just my opinion - I'm not an economist and I don't play one on TV.

 

[Astronuc]

They didn't bail out LEH. The fed seems to make an argument that they are too big to fail. Too vital to the economy and if AIG fails then it could create a domino effect. I don't know this, but just what I hear. Your thoughts.

According to some financial summaries, AIG has a market capitalization of about $10 B, but that's probably with their stock beaten down. On the other hand, they apparently have their hands in about $1 trillion of financial instruments (how much is debt?). Now the question is how much of that is under the insurance business, and how much is under the financial engineering part of the business. LEH had about $0.6 trillion in debt.

The Fed should audit the heck out of AIG, but that would take time. Will the Fed act without due diligence? Wall Street is wanting action now, at least by tomorrow.

Interest position they are in.

Experts have saying for months that the derivatives markets are so complex that no one really knows how much debt there is and how much of it is bad or uncovered.

 

[Astronuc]

U.S. Trade Deficit of $62.2 Billion Exceeds Forecast (Update2)
http://www.bloomberg.com/apps/news?pid=20601103&sid=ajxmHgy3j8Dg

Sept. 11 (By Timothy R. Homan, Bloomberg) -- The U.S. trade deficit widened more than forecast in July as oil imports soared to a record, overshadowing gains in exports.

The gap grew 5.7 percent to $62.2 billion, the largest in 16 months, from a revised $58.8 billion in June that was bigger than previously estimated, the Commerce Department said today in Washington. Total imports and exports were the highest ever.

Americans paid a record $124.66 a barrel for foreign crude oil, more than offsetting increases in shipments of automobiles, aircraft and machinery to buyers overseas. While a weak dollar has made U.S. goods more affordable, shrinking economies in Europe and Japan may stifle export growth in coming months.

The weakening dollar is a double edged sword. It is supposed to spur exports, but the imports, particularly oil and energy products are still significant.

This should turn around in Aug and Sep as oil prices have dropped considerably in the last 4 weeks. But still - the trade deficit means the US is losing capital and accumulating debt.

 

[quadraphonics]

But still - the trade deficit means the US is losing capital and accumulating debt.

The trade deficit, on its own, doesn't imply either of those things. There are numerous other avenues besides trade that capital follows into and out of the United States (FDI, for example), and numerous other factors that come to bear on debt growth (the budget deficit not least among them). And that's without considering the particulars of the interactions between the trade deficit and other factors, such as inflation and real growth.

 

[Astronuc]

The trade deficit, on its own, doesn't imply either of those things. There are numerous other avenues besides trade that capital follows into and out of the United States (FDI, for example), and numerous other factors that come to bear on debt growth (the budget deficit not least among them). And that's without considering the particulars of the interactions between the trade deficit and other factors, such as inflation and real growth.

How is the trade deficit financed? By borrowing - which means paying back more than borrowed? And how about sovereign investment funds - and are those sovereign investments funds loaning capital, or are they actually 'buying' assets, i.e. spending.

By themselves, a monthly or yearly deficit is not bad, but the US has had chronic deficits (both in trade and in the federal budget - and the federal government is still financing the wars in Iraq and Afghanistan by supplemental spending which doesn't count against the deficit - except that it really does ) and there is no sign the situation will change.

What real growth? I'd like to see real growth - particularly in infrastructure - or energy development. But 66% of the US economy is consumption - of stuff - that depreciates or wears out.

By themselves - one failure wouldn't be a big deal except for the investors and employes. But there has been a string of failures - and perhaps more to come.

Big firms' failures aren't the last of it
http://marketplace.publicradio.org/display/web/2008/09/15/pm_recap_q/

An example of how convoluted the financial markets are -

And don't forget that Lehman Brothers had a very big closet and there are still some very big shoes in there to drop.

Let me give you a case in point there: Today's bankruptcy filing lists the biggest single creditor as a Tokyo-based bank, Aozora Bank. It's on the hook for a $463 million bank loan. Well, it turns out that Aozora may be based in Tokyo, but it's actually controlled by Cerberus Capital Management, the big U.S. private-investment firm. Now, Cerberus issued a statement today that its exposure is really "significantly less" that Lehman's balance sheet might indicate because it's protected by what it calls "risk-management instruments." Well, guess what they are? They are essentially these exotic insurance policies that others are going to have to cover now -- if they can afford it.

 

[quadraphonics]

How is the trade deficit financed? By borrowing - which means paying back more than borrowed?

I'm not disputing that the United States does a bunch of borrowing and is accumulating debt. But the fact of a trade deficit, even a sustained one, is not sufficient to conclude that debt is accumulating. There are any number of ways to fund a trade deficit without borrowing money.

And how about sovereign investment funds - and are those sovereign investments funds loaning capital, or are they actually 'buying' assets, i.e. spending.

Either way, it's foreign capital that ends up in America, and so must be taken into consideration before the claim "trade deficit = net capital loss" can be taken seriously. Note that the annual FDI inflow to the United States is on the same order of magnitude as the trade deficit.

By themselves, a monthly or yearly deficit is not bad, but the US has had chronic deficits

I would contend that the budget deficit is more worrisome than the trade deficit; I'm not convinced that even sustained trade deficits are necessarily a bad thing, depending on how everything else works in relation to them. They often keep inflation down, and in order for them to be sustained, the suplus countries must loan their dollar earnings back to the US in order to keep their currency from equalizing the trade balance, making it cheaper to borrow money in the US (which boosts business investment and dampens the effects of the budget deficit).

There's also the issue that much of the trade deficit is simply an accounting artifact. A huge portion of China's exports, for example, are actually from American companies who built or otherwise invested in China, and so a big portion of the captial "leaving" the United States is still owned by Americans. There are rules for retaining this capital in China, but the end result looks a lot more like FDI from America into China than a simple transfer of capital.

What real growth? I'd like to see real growth - particularly in infrastructure - or energy development. But 66% of the US economy is consumption - of stuff - that depreciates or wears out.

Real growth is a technical term that refers to growth in inflation-adjusted GDP. Everything depreciates or wears out. Also, a consumptionp-led economy is a *good thing*. The only alternative is an export-led economy, which is only appropriate if you're a lot poorer than most of the world economy.

 

[Astronuc]

http://news.yahoo.com/s/nm/aig_loan_dc

(Reuters) - The Federal Reserve is negotiating a $85-90 billion secured bridge loan for American International Group, according to a report on CNBC.

Shareholders would be severely diluted by the bailout that involves the bridge loan. The government would receive AIG warrants for most of its equity in the bailout being negotiated. CNBC said the deal would give AIG incentive to sell its assets quickly to help pay off the bridge loan.

Tough love.

 

[Greg Bernhardt]

Fed takes over AIG to the tune of $85B
http://money.cnn.com/2008/09/16/news/companies/AIG/index.htm?cnn=yes

 

[turbo]

Fed takes over AIG to the tune of $85B
http://money.cnn.com/2008/09/16/news/companies/AIG/index.htm?cnn=yes

we are screwed! Once again, the feds have used their infinite wisdom to screw the taxpayers to support the crooks that have de-regulated and gamed the banking/investment scams to make fortunes. Thanks Bush/McCain!

Edit: I should have included a nod to McCain's butt-hole buddy Phil Graham, who engineered so much of the the financial de-regulation in the first place, but that would play into McCain's hands. He is a creep, he has always been a creep, and he always will be.

 

[Astronuc]

Interesting terms

The line of credit to AIG, which is available for two years, is designed to help the company meet its obligations, the Fed said. Interest will accrue at a steep rate of 3-month Libor plus 8.5%, which totals 11.31% at today's rates. AIG will sell certain of its businesses with "the least possible disruption to the overall economy."

The government in turn will receive a 79.9% equity interest in AIG. It will also have the authority to veto the payment of dividends to common and preferred shareholders.

Sensible. It will be interesting to see if the dividends are paid or vetoed. Let's see what assets are sold.

They only have to sell about 7-8% of their $1.1 trillion.

AIG might be a good long term investment. Two years will pass quickly.

 

[Greg Bernhardt]

AIG might be a good long term investment. Two years will pass quickly.

Maybe, but it should open around $1 tomorrow with the share dilution.

 

[Astronuc]

I'd like to see the details. The common stock won't necessarily fall to $1, unless there is another class of stock being issued, which will be held by the Fed. All I know now is there is a loan guaranteed by AIG's assets/equity. I wonder what their liabilities are.

The 11+% interest rate is pretty stiff and that'll motivate AIG to sell off assets and retire the loan ASAP. Perhaps investors will take a wait and see tack, but the stock could be volatile until the future for AIG becomes clearer.

I'd be interested in what Hank Greenberg has to say. Back in May this year, Greenberg — still AIG's top shareholder — was very critical of management saying that AIG is overstaffed and overspends on directors and lawyers.

Seems Greenberg is interested in AIG.

Is Greenberg Making A Play For AIG?
http://www.forbes.com/business/2008/09/16/aig-insurance-greenberg-biz-wall-cx_lm_0916aigupdate3.html

 

[Greg Bernhardt]

I'd like to see the details. The common stock won't necessarily fall to $1, unless there is another class of stock being issued, which will be held by the Fed.

How does the fed get to own 80% unless AIG issues another 10.2B in stock?

 

[Astronuc]

How does the fed get to own 80% unless AIG issues another 10.2B in stock?

That's the part that is not clear to me at the moment. Perhaps they'll issue warrants or a new class of preferred stock. I'm not sure how they are calculating the equity, given that the $85 billion is backed by assets. I guess the details will eventually come out tomorrow, later this week, or perhaps by the end of the current fiscal year.

 

[russ_watters]

I'm not disputing that the United States does a bunch of borrowing and is accumulating debt. But the fact of a trade deficit, even a sustained one, is not sufficient to conclude that debt is accumulating. There are any number of ways to fund a trade deficit without borrowing money.

I'd like to clarify/emphasize this. It seems like there is a widely held belief that the "trade deficit" works the same way as the "federal budget deficit". They are not the same. One is the yearly increase in the accumulation of federeal government debt and the other is the yearly difference between imports and exports - with no accumulation of a "trade debt".

Further, it isn't even useful to speculate about how much of the trade deficit is financed by debt - the number cannot be converted by any method to give a debt number. Most certainly there is some fraction of our total imports financed by adding debt. And there is also some fraction of our total exports financed by giving credit. I suppose you could subtract the credit from the debt and find out if our foreign trade improves or hurts our debt situation overall, but I don't know that those numbers are even commonly tracked - and they have nothing to do with the "trade deficit".

 

[gravenewworld]

I'd like to clarify/emphasize this. It seems like there is a widely held belief that the "trade deficit" works the same way as the "federal budget deficit". They are not the same. One is the yearly increase in the accumulation of federeal government debt and the other is the yearly difference between imports and exports - with no accumulation of a "trade debt".

Further, it isn't even useful to speculate about how much of the trade deficit is financed by debt - the number cannot be converted by any method to give a debt number. Most certainly there is some fraction of our total imports financed by adding debt. And there is also some fraction of our total exports financed by giving credit. I suppose you could subtract the credit from the debt and find out if our foreign trade improves or hurts our debt situation overall, but I don't know that those numbers are even commonly tracked - and they have nothing to do with the "trade deficit".

Many economists believe that the federal deficit directly affects our trade deficit. This is known as the twin deficit theory.
If politicians really cared about stimulating our economy they wouldn't be arguing for more tax cuts, but they would instead be advocating for larger increases in government spending. Government spending is an endogenous component of total GDP while taxes work through exogenous methods which means tax cuts will have a weaker overall affect

 

[turbo]

The AIG bailout is proof that the neo-cons don't believe that the free market can work. AIG should have spun off the profitable insurance business so that their shareholders would still have some equity after the derivative-heavy investment segment failed. The Fed has ensured that the necessary failure/correction/healing will not happen or will happen only very slowly, and that is short-sighted, IMO. If they wanted to help our economy and improve our faith in it, they should have taken steps to back-stop the FDIC so that ordinary people don't lose their savings when large commercial banks start failing.

 

[Astronuc]

Share of Constellation Energy Group (CEG) fell 38% to $29.55 as it disclosed ties to Lehman Brothers, but closed at 35.76 yesterday. I expect they'll rebound today or if not, later this week. Constellation was built up around the old Baltimore Gas and Electric.

The company said its liquidity remains sound despite the bankruptcy of the Wall Street firm. Constellation said in a filing with regulators that Lehman Brothers' total commitment within existing credit facilities stood at $150 million. Constellation said it holds excess liquidity of approximately $2 billion, excluding the existing Lehman commitment.

 

[Astronuc]

Stock futures slip after U.S. government's AIG move

S&P 500 futures fell 6.6 points to 1,209.70 and Nasdaq 100 futures dropped 7.75 points to 1,725.25. Dow industrial futures lost 25 points.

"Due to this week's failures in the financial sector, banks, insurance firms, the fund industry, and non-regulated financial institutions will have to absorb further losses," said Tim Brunne, a strategist at UniCredit. "There is systemic pain in the financial world."

"The futures are down on disappointment the job couldn't get done privately, but this should end up being a positive," said Marc Pado, a strategist at Cantor Fitzgerald.

U.S. stocks climbed on Tuesday on speculation of an AIG rescue, which took away from an initial negative reaction to the Fed's move to keep interest rates at 2%. The Dow industrials rose 141 points, the Nasdaq Composite added 27 points and the S&P 500 rose 20 points.

AIG fell nearly 27% in pre-market trade.

As of this post, over 4 million shares of AIG have been traded in pre-market (NYSE that is).

 

[Astronuc]

The NY Times has decent overview of the AIG rescue.
http://www.nytimes.com/2008/09/17/business/17insure.html

This graphic explains the situation - http://graphics8.nytimes.com/images/2008/09/17/business/17aig.span.jpg

But government officials reluctantly backed away from their tough-minded approach after a failed attempt to line up private financing with help from JPMorgan Chase and Goldman Sachs, which told federal officials they simply could not raise the money given both the general turmoil in credit markets and the specific fears of problems with A.I.G. The complexity of A.I.G.’s business, and the fact that it does business with thousands of companies around the globe, make its survival crucial at a time when there is stress throughout the financial system worldwide.

“It’s the interconnectedness and the fear of the unknown,” said Roger Altman, a former Treasury official under President Bill Clinton. “The prospect of the world’s largest insurer failing, together with the interconnectedness and the uncertainty about the collateral damage — that’s why it’s scaring people so much.”

It should never have gotten to this point. Hence the call for re-regulation.

Ah - this is what I've been looking for

Under the plan, the Fed will make a two-year loan to A.I.G. of up to $85 billion and, in return, will receive warrants that can be converted into common stock giving the government nearly 80 percent ownership of the insurer, if the existing shareholders approve. All of the company’s assets are being pledged to secure the loan. Existing stockholders have already seen the value of their stock drop more than 90 percent in the last year. Now they will suffer even more, although they will not be totally wiped out. The Fed was advised by Morgan Stanley, and A.I.G. by the Blackstone Group.

 

[Astronuc]

The NYTimes article I cited gives some background on AIG.

Here is an op-ed piece that provides additional info.


Wall Street’s Next Big Problem, MICHAEL LEWITT, Op-Ed Contributor

But there is a bigger potential failure lurking: the American International Group, the insurance giant. It poses a much larger threat to the financial system than Lehman Brothers ever did because it plays an integral role in several key markets: credit derivatives, mortgages, corporate loans and hedge funds.

Late Monday, A.I.G. was downgraded by the major credit rating agencies (which inexplicably still retain an enormous amount of power in the marketplace despite having gutted their credibility with unreliable ratings for mortgage-backed securities during the housing boom). This credit downgrade could require A.I.G. to post billions of dollars of additional collateral for its mortgage derivative contracts.

Fat chance. That’s collateral A.I.G. does not have. There is therefore a substantial possibility that A.I.G. will be unable to meet its obligations and be forced into liquidation. A side effect: Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression.

This last paragraph is interesting since the government felt that there was/is sufficient collateral to provide an $85 billion loan.

And here's the problem -

As a result, the credit default market is best described as an insurance market where many of the individual trades are undercapitalized. But even worse, many of the insurers are grossly undercapitalized. In one case in the New York courts, the Swiss banking giant UBS is suing a hedge fund that said it would insure nearly $1.5 billion in bonds but was unable to do so. No wonder — the hedge fund had only $200 million in assets.

As I been saying - the US economy (and much of the world's economy) is over-leveraged - and this has been allowed to happen because of lack of regulation - as well as bad business practices. Too many people took too much risk, i.e. gambled - and some big gamblers lost their shirts.

 

[Greg Bernhardt]

Near 2005 levels with the DOW. Tough times! MS -35% GS -20% C -12% GE -8% F -8% GM -8% Only positive is Sandisk. Props to those who saw that coming!

 

[Astronuc]

GE and UTC are down quite a bit. Maybe because of the concerns over the aircraft engine business. GE also has a lot of business in the financial sector.

I think the market over-reacted.

AIG should be a good buy now. If they do it right, they'll pay off that loan ASAP, and share price should recover. I'm curious about how the warrants will be executed and what will happen with the new stock, i.e. will AIG retire it or leave the common stock diluted? It's interesting that it is common and not preferred stock.

Uncle Sam seizes AIG to avert crisis

"A disorderly failure of AIG could add to already significant levels of financial market fragility," the Fed said in a prepared statement. Interest rates would likely have risen, lowering consumer buying power, and weakening the economy.

Edward Liddy, former chief executive of Allstate will replace Robert Willumstad, who was named AIG CEO in June. The Wall Street Journal reported Wednesday that Willumstad's ouster came at the insistence of U.S. Treasury Secretary Henry Paulson as part of the government's takeover of the insurance giant.

AIG shares fell 36% in early trade, to $2.38.

The government's deal dilutes current shareholders by giving the government a 79.9% stake in the insurance company, with the power to eliminate dividends.

A statement from the Federal Reserve stressed that taxpayer interests would be protected.

The government should suspend dividends until the loan is paid.

 

[edward]

Our whole financial system has become very bizarre. If I went to Las Vegas to gamble would AIG have insured me against any loss??

The answer of course is no, but at what point do we draw the line. Insuring against any speculative loss only guarantees more risky investment.

The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn't make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week's collapse of the investment bank Lehman Brothers.

http://www.businessweek.com/bwdaily/dnflash/content/sep2008/db20080916_387203.htm?campaign_id=rss_daily

AIG must have had substantial involvement in the practice of insuring risky investments. The FED allowed lehman to tumble, yet bailed out AIG.

I wonder if AIG might have had had involvement with lehman, other than insuring that their rent would be paid.

Sept. 16 (Bloomberg) -- Lehman Brothers Holdings Inc.'s London landlord, Songbird Estates Plc, said rent payments for its largest tenant in the Canary Wharf financial district are insured by American International Group Inc.

http://www.bloomberg.com/apps/news?pid=20601102&sid=a6AZtcTRcqnE

Ironic that American taxpayers are now protecting foreign entities, and will probably have to borrow from China in order to do it.

 

[Astronuc]

Financial entanglement!

Interesting that LEH was allowed to fail because the markets expected it and could handle it, but they could not handle the failure of AIG. I'm guessing because AIG was the firewall for many customers being protected from big losses associated with companies like LEH.

I imagine there will be re-introduction of regulation on captilalization.

AIG has big business in Asia where it was founded - in Shanghai China.

Warning: IMF head: worst of financial crisis may lie ahead
http://biz.yahoo.com/rb/080917/gulf_union_imf.html

JEDDAH (Reuters) - The worst of the financial crisis may still lie ahead and more major financial institutions may face trouble in coming months, IMF director general Dominique Strauss-Kahn said on Wednesday.

"The roots of the crisis are behind us, the roots being the fall in housing prices. The consequences for some financial institutions are still in front of us. We have to expect that there may be in the coming weeks and coming months other financial institutions with some problems," he said.

http://www.businessweek.com/investor/content/sep2008/pi20080917_475626.htm

Just another day of volatile trading.

 

[Gokul43201]

With all the talk about AIG and the Fed bailout, no one seems to be commenting on the index that's talking the worst beating today - the Nasdaq!

I wonder if it's the new short selling regulations imposed by the SEC that's keeping tech stocks low today.

 

[Gokul43201]

Prescience:

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear...[They] are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

-- Warren Buffett, from his Letter to Shareholders, 2002 Berkshire Hathaway annual report

 

[Astronuc]

S&P ups AIG short-term ratings to 'A-1' from 'A-2', which should bolster AIG - maybe.

Interesting development to watch
Morgan Stanley shares hit by merger talk after earnings

BOSTON (MarketWatch) -- Shares of Morgan Stanley were down more than 30% in afternoon trading Wednesday after it pre-announced earnings and investors reacted to a speculation the company may be compelled to hunt for a suitor if the stock continues to fall.
. . . .
Morgan Stanley after Tuesday's closing bell announced its quarterly earnings ahead of schedule, and the results topped expectations even though profit fell from the year-ago period.

The Wall Street firm was not in merger talks as of late Tuesday, although more volatility in the shares may force Morgan Stanley to pursue a merger partner, most likely a well-capitalized bank, according to the report, which sourced people close to the matter.
. . .
CNBC.com reported Morgan was forced to announce quarterly results early after spreads on its credit default swaps rose sharply on Tuesday. Morgan Stanley shares lost more than 10% on Tuesday.
. . . .

All Dow30 components were down today.

Goldman's market capitalization sits at 45.09B, while Morgan Stanley is at 24.12B. Goldman seems in better shape, but I guess people are wondering about what has not been revealed about liabilities.

GE is getting battered by concern over the financial services division.

 

[turbo]

It's tough for some people like myself who don't have the income to grab bargains during market upsets, and who have to watch the real value of our savings and investments be eroded by all the corporate welfare being doled out. Even if the FDIC were properly capitalized (and Warren Buffett's recent pull-out of the deposit insurance business indicates doubts on his part in the face of likely commercial bank failures) those of us with FDIC insured deposits are faced with the prospect of watching our hard-earned savings (with minimal interest, thanks to the Fed cutting the rates to the bone to keep Wall Street happy) be further eroded by the devaluation of the dollar against foreign currencies. There are a lot of shoes that remain to be dropped, and I don't think the US economy is going to look too good for at least a couple of years or more.

I hate to be a wet blanket, but living with a medical disability with NO income aside from the meager interest on our savings, and my wife's paycheck makes me a helpless bystander to this train-wreck. McCain's cave to lobbyists, the Keating affair, the Savings and Loan debacle, and Phil Graham's further deregulation of US finance companies convince me that we need a real house-cleaning in Commerce and heavy and honestly-applied re-regulation to inspire confidence in our economy and re-energize it. I re-iterate, though, that re-regulation of banks (investment banks in particular) will never happen unless the shareholders of those banks are made to endure some heavy losses as they fail. Bail-outs subvert re-regulation and saddle the US taxpayers with the responsibility of paying for the mistakes that made the executives of those banks so rich. I have mutual funds in my 401K and IRA accounts that hold shares of some of these banks. I would much rather lose value incrementally as some of these holdings fail than to watch the value of all of our currency fall as it is diluted by bail-outs.

 

[Astronuc]

http://finance.yahoo.com/tech-ticker/article/56994/Top-Economist-Americans-Should-Worry-About-Bank-Deposits-if-Congress-Doesn't-Act]Top[/PLAIN] Economist: Americans Should Worry About Bank Deposits if Congress Doesn't Act

With the "financial storm of the century" hitting financial institutions, many Americans are worried about the safety of their bank deposits. While the FDIC insures individual accounts up to $100,000, the reaction to IndyMac's failure this summer -- lines outside retail branches -- shows Americans have limited faith in the Federal Deposit Insurance Corp., which guarantees individual accounts up to $100,000.

Update: "The banking system is safe and sound," Treasury Secretary Hank Paulson declared at a mid-afternoon press conference Monday, seeking to ameliorate such concerns.

"Nothing is more important than the stability and orderliness of our financial markets [and] regulators remain vigilant," Paulson continued. "We're working through a difficult period in our financial markets right now as we work of some of the past excesses, but the American people can remain confident in the soundness and resilience of our financial system."

But

That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

But the Treasury doesn't have the funds! So they'll have to issue more T-bills. But how much $100 billion, $200 billion, . . . ? What is sufficient to cover the deposits?

Whose going to buy them?

I wonder what's up with Citigroup?

It would help if people didn't panic, but realize that it will work itself out.

 

[nuby]

Bush said Wall Street is just having a "hangover", and McCain said the economy is fundamentally strong.

These guys running our country are so damn oblivious to the real world, it is no wonder the economy and stock markets are taking a hit.

But the real problem is, imo... They pissed the world off (and most Americans).

 

[LowlyPion]

Prescience: -- Warren Buffett, from his Letter to Shareholders, 2002 Berkshire Hathaway annual report

This would have been obvious to Buffet at least back in 2002 that Bush's stewardship of the financial oversight was breeding a malignancy that has now blossomed dramatically.

And who has been on the deregulatory bandwagon since the Keating Scandal and the Savings and Loan Fiasco - right through the recent prime rate disaster and now the mortgage meltdown - taking campaign funds from the industry these last two decades?

All those surpluses turned to a red ink crisis now in under 8 years. And this was supposed to be the President with an MBA?

 

[Astronuc]

I was listening to Terry Gross interview Michael Greenburger about the economy. Michael Greenberger calls the government bail-out of insurance giant AIG a "50-50 proposition."

In addition to the nearly $9 trillion federal debt (from chronic deficits), the federal government has assumed another $5 trillion or so debt from Fannie Mae and Freddie Mac. And of course, the Fed has recently pick up more obligations on behalf of Bear Stearns and AIG. In principle, the Fed will recover and actually earn money on AIG - in theory even if AIG goes bankrupt. Then the Federal gov could in theory still recover its loan, but a lot of other people will loose big time.

Could Wall Street Woes Set Off A Global Crisis?
http://www.npr.org/templates/story/story.php?storyId=94686428

It's interesting what he says about McCain who was one of the big proponents, along with his buddy Phil (you're a bunch of whiners) Gramm, of de-regulation (which really meant essentially no regulation if possible).

Bush and McCain have no credibility on this matter. To say the fundamentals are strong is absurd, given the clear evidence that they are not! To assert the economy is strong or great is pure delusional thinking.

And for McCain (who with his wife has multiple houses and millions of dollars) to talk about Wall Street greed now is the height of hypocrisy.

 

[gravenewworld]

All of the nonsense going on on wall street is just that--wall street. The economy is much bigger than just how the stock market and big firms are doing on wall street. Top 3 biggest problems right now with the economy


1.) Ridiculous budget deficits over the last 8 years

2.) The pathetic savings rate of Americans (compare ours to Japan's or China's)

3.) The big S word---stagflation