News What is wrong with the US economy? Part 2

[Astronuc]

At about 1400 EU (1300 GMT)

London    4,744.9   -4.7% 
Paris     3,862.9   -5.3% 
Frankfurt 5,499.6   -5.1%

ASIA MARKETS
Asian stocks plumb depths on a wave of selling
Nikkei ends at lowest since Feb '04; Sell-off greets Shanghai after holidays

Pressured to Take More Risk, Fannie Reached Tipping Point
http://www.nytimes.com/2008/10/05/business/05fannie.html
By CHARLES DUHIGG
“Almost no one expected what was coming. It’s not fair to blame us for not predicting the unthinkable.“— Daniel H. Mudd, former chief executive, Fannie Mae

When the mortgage giant Fannie Mae recruited Daniel H. Mudd, he told a friend he wanted to work for an altruistic business. Already a decorated marine and a successful executive, he wanted to be a role model to his four children — just as his father, the television journalist Roger Mudd, had been to him.

Fannie, a government-sponsored company, had long helped Americans get cheaper home loans by serving as a powerful middleman, buying mortgages from lenders and banks and then holding or reselling them to Wall Street investors. This allowed banks to make even more loans — expanding the pool of homeowners and permitting Fannie to ring up handsome profits along the way.

But by the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.

For a time, that decision proved profitable. In the end, it nearly destroyed the company and threatened to drag down the housing market and the economy.

Dozens of interviews, most from people who requested anonymity to avoid legal repercussions, offer an inside account of the critical juncture when Fannie Mae’s new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation’s financial health, to the brink.

Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data.
. . . .

Germany is guaranteeing deposits after it criticized Ireland and Greece from doing the same, while resuing Hypo for the second time in less than a week.

BNP Paribas is helping to rescue Fortis.

This week is going to be interesting.

 

[D H]

We have met the enemy and he is us

In the words of Walt Kelly, "We have met the enemy and he is us" -- us physicists, that is.

From last night's 60 Minutes (http://www.cbsnews.com/video/watch/?id=4502673n" )

"How much of this catastrophe had to do with the instruments that Wall Street created and chose to buy…and sell?" Kroft asks Jim Grant.

"The instruments themselves are at the heart of this mess," Grant says. "They are complex, in effect, mortgage science projects devised by these Nobel-tracked physicists who came to work on Wall Street for the very purpose of creating complex instruments with all manner of detailed protocols, and who gets paid when and how much. And the complexity of the structures is at the very center of the crisis of credit today."​

From http://physicsworld.com/blog/2008/09/killed_by_complexity_1.html" :

Have rocket scientists built ‘financial weapons of mass destruction’?…

The answer is yes — at least according to the investment guru Warren Buffett, who has been warning for some time that complex financial instruments such as ‘derivatives’ are far too complicated for mere mortals to understand. Indeed, five years ago Buffett described derivatives as a “financial weapons of mass destruction”.

Now that derivatives have apparently helped bring down one of the world’s largest investment banks, should the rest of us be blaming the rocket scientists — PhD physicists and other bright sparks — who helped develop these financial instruments and the mathematical algorithms needed to make sense of them?​

 

[mgb_phys]

"The instruments themselves are at the heart of this mess," Grant says. "They are complex, in effect, mortgage science projects devised by these Nobel-tracked physicists who came to work on Wall Street for the very purpose of creating complex instruments with all manner of detailed protocols, and who gets paid when and how much. And the complexity of the structures is at the very center of the crisis of credit today."​

No it was pure greed - which is what Wall St is supposed to be about.
The riskier the bet the bigger the pay off - if it isn't your money which do you choose?

There are similair stories in all the software engineering journals - why didn't the software spot bad trades? Because the software was run by the same people making the trades and so they fixed the rules, things like an assumption that interest rates would be the same as the previous year, but that house price would fiollow the same upward trend since 1945.

 

[Astronuc]

I heard that a physicist or some physicists were involved or at the root of this.

Nonsense!


Lack of integrity on the part of managers and financial folks had to do with it, and they need to stop pointing fingers and look at themselves.


Meanwhile - Dow industrials break below 10,000 mark; Nasdaq composite plunges 4%.


Grandma's Advice Will Get You Through Hard Times
http://www.npr.org/templates/story/story.php?storyId=95420469

It might be worthwhile looking at Tim Harford's, The Logic of Life: The Rational Economics of an Irrational World (Hardcover), Random House, Jan 2008.
https://www.amazon.com/dp/1400066425/?tag=pfamazon01-20

 

[D H]

I heard that a physicist or some physicists were involved or at the root of this.

Nonsense!

Lack of integrity on the part of managers and financial folks had to do with it, and they need to stop pointing fingers and look at themselves.

I agree -- nonsense. These quantitative analysts, or "quants" certainly helped contribute to the financial crisis. Was it their fault? No. Their management chose to ignore that the mathematics was over their heads when the quants were making their employers billions (trillions?) of dollars in profits. Management could have asked about the underlying modeling assumptions, could have had a different group of "Nobel-track" physicists assess the models against risk, and could have had yet another group of "Nobel-track" physicists independently verify and validate the models. Did they do any of these things? Not that I can see.

 

[Astronuc]

Dow industrials down 400 points - NASDAQ down more than 5% (almost 6%)

At about 4:17pm EU (3:17 pm GMT)

 London     4,665.5  -6.3% 
 Paris      3,786.5  -7.2% 
 Frankfurt  5,431.0  -6.3%

And governments and central banks are scrambling/stumbling to do something to reinstate confidence in the battered financial markets.

 

[mgb_phys]

could have had yet another group of "Nobel-track" physicists independently verify and validate the models. Did they do any of these things? Not that I can see.

They are required to track the possible losses from their models - unfortunately the same people making the trades are allowed to do this!
It's like expecting a drug addict to track their dose!

 

[Astronuc]

Dow 30 Industrials: 9,825.36 -500.02 -4.84%

Seems like the markets are racing for the basement. I wonder if they will halt trading.

I also wonder how far it will drop before recovering.


Three minutes later!

Dow 30 Industrials: 9,749.85 -575.53 -5.57%

but it seems to have slowed down a little.

Dow 30 Indu high in the last 12 months: 14,280.00
Now: 9,875.85 (1100, Oct 6) - a drop of ~4400 pts (~31%)

NASDAQ high during the last year: 2,861.51
Now: 1,846.39 - 1015 pts (~35%)


In Europe (~4:50 pm EU):

London    4,601.9 -7.6%
Paris     3,730.0 -8.6% 
Frankfurt 5,351.9 -7.7% 
DJ Stoxx    241.8 -7.5%

 

[nuby]

Jim Cramer's perspective: http://www.msnbc.msn.com/id/27045699/

 

[mheslep]

From last night's 60 Minutes (http://www.cbsnews.com/video/watch/?id=4502673n" )

"How much of this catastrophe had to do with the instruments that Wall Street created and chose to buy…and sell?" Kroft asks Jim Grant.​

...Grant is one of the country’s foremost experts on credit markets...

CBS too easily confuses TV talking heads and book authors that will give them a sound bite with 'foremost experts'. The 60 minutes episode never mentioned Fannie and Freddie, not once. What a fluff piece.

60 Minutes requested interviews with top executives at Bear Stearns, Lehman Brothers, Merrill Lynch , Morgan Stanley, Goldman Sachs, and AIG. They all declined.

What about interviews with Dodd/Frank/Oxley/Bennet/Waters/Schumer? Greenspan?

Lack of integrity on the part of managers and financial folks had to do with it, and they need to stop pointing fingers and look at themselves.

And lawmakers.​

 

[Astronuc]

Congress hears Lehman sought millions for execs
http://news.yahoo.com/s/ap/20081006/ap_on_go_co/meltdown_lehman

WASHINGTON - Days from becoming the largest bankruptcy in U.S. history, Lehman Brothers steered millions to departing executives even while pleading for a federal rescue, Congress was told Monday.

As well, executives who feared for their bonuses in the company's last months were told not to worry, according to documents cited at a congressional hearing. One executive said he was embarrassed when employees suggested that Lehman executives forgo bonuses, and cracked: "I'm not sure what's in the water."

The first hearing into what caused the nation's financial markets to collapse last month, precipitating a $700 billion bailout, opened with finger-pointing and glimpses into internal company documents from Lehman's chaotic last hours.

Rep. Henry Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee, said the giant investment bank was "a company in which there was no accountability for failure." Lehman's collapse set off a panic that within days had President Bush and Treasury Secretary Henry Paulson asking Congress to pass the rescue plan for the financial sector.

Richard S. Fuld Jr., chief executive officer of Lehman Brothers, was among witnesses called to testify.

"What has happened is an absolute tragedy," Fuld said in prepared remarks. "I feel horrible about what happened."

Waxman read excerpts from Lehman documents in which a recommendation that top management should forgo bonuses was apparently brushed aside. He also cited a Sept. 11 request to Lehman's compensation board that three executives leaving the company be given $20 million in "special payments."

. . .

 

[Astronuc]

Bears see red on Wall Street
2:35 PM ET
Dow 30 Industrials: 9,622.41 -701.53 (-6.79%)
2:37 PM ET
NASDAQ: 1,792.22 -155.17 (7.97%)

 

[Astronuc]

Citigroup sues Wachovia, Wells Fargo for $60B
http://news.yahoo.com/s/ap/20081006/ap_on_bi_ge/citigroup_wachovia_lawsuit

NEW YORK - Citigroup Inc. said Monday it has filed a complaint in New York Supreme Court against Wachovia, Wells Fargo and the directors of both companies seeking more than $60 billion in damages for interfering with the bank's planned takeover of Wachovia's banking operations.

The complaint, brought on Saturday and filed Monday, seeks more than $20 billion in compensatory damages and more than $40 billion in punitive damages from San Francisco-based Wells Fargo & Co. for tortious interference. Citigroup also seeks relief from Wachovia for what it called its bad-faith breach of the banks' contract.
. . . .

Hmmmm. This gets interestinger and interestinger.

tortious interference = the causing of harm by disrupting something that belongs to someone else -- for example, interfering with a contractual relationship so that one party fails to deliver goods on time. (ref: nolo.com)

See also - http://www.lectlaw.com/def2/t061.htm

People need to learn to play and work together nicely.

 

[LowlyPion]

Citigroup sues Wachovia, Wells Fargo for $60B
http://news.yahoo.com/s/ap/20081006/ap_on_bi_ge/citigroup_wachovia_lawsuit
Hmmmm. This gets interestinger and interestinger.

tortious interference = the causing of harm by disrupting something that belongs to someone else -- for example, interfering with a contractual relationship so that one party fails to deliver goods on time. (ref: nolo.com)

See also - http://www.lectlaw.com/def2/t061.htm

People need to learn to play and work together nicely.

They thought they had a deal for the assets and Wells Fargo came along and offered a better all around package. CITI needs to get over themselves. With the market awash with opportunities, you'd think they had better things to do with their attention.

My opinion is that it's an excuse and likely a distraction to internal CITI problems.

 

[BobG]

The conservative approach is to do due diligence, which means checking the balance sheets and fundamentals of a company. Buffett is no dummy, and he is generally not reckless.


Here's this mornings (0700 EDT) financial picture:

About 1100 in Europe, or 1000 GMT

German DAX 30 index down 4.3% at 5,546.55 (low 5,447.03 about noon local)
French CAC 40 index down 4.8% at 3,884.43 (low 3,818.16 about noon local)
U.K. FTSE 100 index down 4.8% at 4,740.64 (low 4,670.89 about 1100 local)

Commerzbank down 21% after European bailouts
Royal Bank of Scotland down 13%
HBOS down about 50%, HBOS down 19.5% in London

With financial sector in disarray, Europe indexes drop around 5-6%

Indonesia was down 9.9%

Russian RTS index plunges 14 percent ; Micex tumbles 15%

S&P 500 futures fell 34.4 points to 1,073.90 and Nasdaq 100 futures dropped 44 points to 1,433.25. Dow industrial futures fell 268 points.

But some good news of holders of ImClone.
Eli Lilly and Co. to buy ImClone Systems for $6.5 billion


EU countries are apparently doing their own thing. From MarketWatch "Europe didn't reach an accord on bailouts over the weekend, and instead each country is handling the fallouts on their own."

Remember money knows no borders.

It's probably smart to move money somewhere safe ... like Iraq's stock market.

 

[Astronuc]

The Dow 30 Industrials recovered from their low of 9,533.29 to close the day at 9,955.50, or -369.88 (-3.58%) from the opening.

One has to be very wise in selecting good stocks. In the long term, I think GE, JPM, JNJ, MMM, UTX and some others would be good long term investments.

GM looks like they are in trouble, and they'll need capital to turn themselves around - otherwise they'll be filing bankruptcy.

 

[kronon]

Its very easy to take for granted what is right with the US economy.

 

[Astronuc]

Its very easy to take for granted what is right with the US economy.

If one is living well on borrowed money or other peoples money, all is well until one has to pay up. If one looks behind the curtain, all is not well, and the economy is pretty skewed to the upper 10%.

Meanwhile - Wachovia, Citi, Wells Fargo to halt litigation
http://www.reuters.com/article/topNews/idUSTRE49546820081007
By Elinor Comlay and Paritosh Bansal

NEW YORK/WASHINGTON (Reuters) - Wells Fargo & Co and Citigroup Inc agreed on Monday to a 44-hour truce in their fight over regional bank Wachovia Corp after a weekend of legal wrangling.

Wells Fargo and Citigroup have been battling over the bank since Wells Fargo announced an offer Friday that bested Citigroup's proposal a week ago.

As part of their agreement on Monday to suspend all litigation, effective immediately, the three banks also said they would cease any formal discovery activities.

The increasingly bitter dispute has drawn in U.S. Federal Reserve officials looking to broker a deal. Sheila Bair, chairman of the Federal Deposit Insurance Corp (FDIC), said she expected an agreement "that serves the public interest" to be reached Monday, although the FDIC is not involved in the negotiations.

A person familiar with the situation said the various options discussed in the talks with the government included dividing up Wachovia between the two feuding companies. The source added that Wells Fargo would still like to buy all of Wachovia.

Good move.

 

[OmCheeto]

Lucky duckies

that's what's wrong with the US economy...

quack...



um. just kidding btw.

 

[jal]

"Days from becoming the largest bankruptcy in U.S. history, Lehman Brothers steered millions to departing executives even while pleading for a federal rescue, Congress was told Monday."

I expect that we will hear more horror stories from todays hearings.

People who use mutual funds as their preferred investments vehicles are often told by their friends that they are being scamed 1 to 2% because of the administration fees.
If your fund is being reduced by 1 to 2% per year by the administrators it will become apparent that eventually you will run out of money.

Ohhhh!
Let's pretend that the fund increases every year.
You won't get worried ...
And
The administrators will be able to get more and more money out of the fund.

This is baby economics... 1% of a hundred is less than 1% of 1,000

 

[Astronuc]

Why the turn around today?

Fed to buy massive amounts of short-term debt
Tuesday October 7, 9:51 am ET
http://biz.yahoo.com/ap/081007/financial_meltdown.html?.&.pf=banking-budgeting
By Jeannine Aversa, AP Economics Writer

Fed in bold move to thaw credit markets says it will buy massive amounts of short-term debt

WASHINGTON (AP) -- The Federal Reserve announced Tuesday a radical plan to buy massive amounts of short-term debts in a dramatic effort to break through a credit clog that is imperiling the economy.

The Federal Reserve, invoking Depression-era power under "unusual and exigent circumstances," will buy "commercial paper," a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls.

The $99.4 billion daily market for this crucial financing, which relies on investors rather than banks, has virtually dried up. Most investors have become too jittery to buy paper for longer than overnight or a couple days.

That has made it increasingly difficult and expensive for companies to raise money to fund their operations. Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.

The unstable situation has left many companies vulnerable. The notion under the plan is for the government to provide a "backstop" that would give companies a new place to get cash, the Fed said. The action makes the Fed a source of credit for nonfinancial businesses in addition to commercial banks and investment firms.

The Fed's action helped lift investors' spirits. The Dow Jones industrials rose 145 points in early trading, a day after a huge selloff put the Dow below 10,000 for the first time in four years.

The Fed said it is creating a new entity to buy three-month unsecured and asset-backed commercial paper directly from eligible companies.
. . . .

This shows how mucked up the economy is and has been. The fundamentals are not strong and have not been for some time, as the fundamentals slowly degraded over time.

The market - left to itself - failed big time!

 

[Jimmy Snyder]

Its very easy to take for granted what is right with the US economy.

Well said, kronon. The 20% tail wags the 80% dog in the socialist mind.

 

[Gokul43201]

Its very easy to take for granted what is right with the US economy.

You may have missed the original point of this thread. The premise presented in the OP was that there was "nothing" wrong with the economy.

What is wrong with the US economy?

Nothing!

 

[Jimmy Snyder]

You may have missed kronon's point. The contrapositive of Nothing is not Everything.

 

[Gokul43201]

You may have missed kronon's point. The contrapositive of Nothing is not Everything.

Sorry, I guess I've been negligent. I seem to have missed all the posts that claimed that "everything" was wrong with the US economy. I will try to read through them if you would point them out.

 

[Jimmy Snyder]

Sorry, I guess I've been negligent. I seem to have missed all the posts that claimed that "everything" was wrong with the US economy. I will try to read through them if you would point them out.

You criticized the post that said that NOT everything is wrong.

 

[Gokul43201]

You criticized the post that said that NOT everything is wrong.

I didn't criticize it. I merely pointed out that the original claim that is being disputed in the thread is one that says there is nothing wrong. You can agree with the OP that nothing is wrong, or you can disagree, by pointing to counterexamples of things that are wrong. A discussion of what is right with the economy can be had in a separate thread.

 

[Jimmy Snyder]

Its very easy to take for granted what is right with the US economy.

Well said kronon, that is something wrong with the US economy.

 

[nuby]

Define economy...

 

[Astronuc]

MARKET SNAPSHOT
Stocks falter as sell orders kick in after Fed speaks
Central bank's move into commercial-paper market gives only short-term lift

NEW YORK (MarketWatch) -- U.S. stocks on Tuesday declined for a fifth session straight, extending a sharp sell-off that has the major indexes trading at or near four-year lows, as investors found little relief in the Federal Reserve's latest steps to ease frozen credit markets.

Equities remained sharply lower as minutes from the Federal Reserve's last formal meeting revealed rate cuts were put on the table at the mid-September gathering, and after Fed Chairman Ben Bernanke in a speech opened the door for a possible interest-rate cut soon.

Earlier, the Fed announced it would buy unsecured commercial paper in an effort to restart a market that has virtually shut down in recent weeks.
. . . .
"We have to keep in mind that we rallied about 400 points yesterday from the lows, and we have a 'sell-on-any news mentality.' This particular news from the Fed will help in the short term... to keep yesterday's bottom in place," said Peter Bookvar, equity strategist at Miller Tabak.
And, "how aggressive are you going to be ahead of earnings season?" asks Bookvar. "We have such frayed nerves; people are afraid to jump in no matter what."
. . .

This is getting silly.

Bernanke is now talking a rate cut. The market seems to have ignored the action to buy commercial paper. It seems that any intervention is taken as a sign that the situation is worse than it it - and the situation does become worse for the stock markets.

BTW - Morgan Stanley shares plummet with doubts over Mitsubishi deal cited -

Of the Dow's 30 components, all but two posted losses, with the Dow's biggest laggard proving to be Bank of America Corp. ExxonMobil is the only stock increasing at the moment.