BAILOUT [strike]STRUCK DOWN[/strike] PASSED DOW PLUMMETING!

The bailout did nothing. Just like the Fed dumping $630 billion did nothing. People are still pulling their money out of money markets, credit is still frozen, and the stock market is still crashing. Unless the housing market recovers the banking crisis will continue, because without a housing recovery our banking system is still insolvent. Banks have absolutely no reason to extend credit. Everybody has a reason to horde cash or gold. No government bailout of any asset bubble has ever worked. It doesn't matter whether we're talking about railroads (a la the Long Depression), tulips, or housing.

Originally Posted by Zergrinch

Given what's happened, I find it funny that the Dow plummets when the bailout was struck down. And it also plummets after the bailout is approved.

I'm sure the collective wisdom of our elected representatives will prevail, and the next bailout will work much better.

hahaha!

Originally Posted by Adol

http://speaker.gov/img/AIGinvoice.jpg
Apparently the AIG chaps are spending their $85 billion dollar bailout about as responsibly as a fratboy spends an inheritance from Rich Uncle Pennybags. HOW CHARMING. One can only imagine that JPMorganChase will spend its share of the bailout money on a skyscraper made out of bricks of cocaine.

Can anyone really say they're surprised?

I figure the folks at Morgan-Chase are a little bit smarter then the AiG execs. So they'll use their bailout money to boost their stock price, then all the insiders will dump. Then and only then can they buy cocaine, booze, and hookers. It's what I'd do.

Originally Posted by Adol

Serious question: why is it that these companies that are "too big to fail" are even allowed to exist? It seems that if a company's failure would have apocalyptic consequences for the economy, they should probably broken up to avoid HAVING to bail them out over and over.

Mostly because this "too big to fail" nonsense is bullshit the pundits crank out. The other reason is because nobody is enforcing trust laws, much less accounting laws, and/or any other laws that govern finance. As sick as it might sound this is probably a good thing. If our financial institutions were forced to reveal just how insolvent they were mass chaos and panic would ensue.

There's only one institution "too big to fail"; the central government.

Jam it back in, in the dark.

Originally Posted by Zergrinch

How can you say it didn't work, when it hasn't even started yet?

I'm trying to maintain a little optimism by saying it'll do nothing. It hasn't blown up in our faces....yet. Which is entirely possible considering the circumstances.

As Rep. Peter DeFazio (D-OR) so candidly pointed out.

Quote:

"If we don't deal with the foreclosures and the deteriorating values, then, when the values drop another 5 or 10 percent, we're going to find there's another trillion dollars in junk securities out there and we will have already maxed out our credit and more people will have already lost their jobs. People are not spending because they are afraid they will lose their jobs. Their wages haven't increased. They are worried about the real economy, not the Wall Street economy. This bill will not solve the underlying problems."

Regardless of whatever the Paulson Plan accomplishes, if DeFazio is right the economy will be in even deeper shit. The bad news does not even begin to end there.

Investors are going around to financial institutions worldwide and screaming "PROVE TO US YOU'RE FUCKING SOLVENT!" and then when the institution can't it fails. The government responds by "pulling a Hoover" and dumps all the liquidity/debt it can into the financial company/system as some form of a "rescue". Most governments (unlike Hoover's) are not sitting on a huge surplus in their budget. So a bailout could potentially threaten a country's credit rating (which DeFazio alluded to) and/or increases the possibility the government will have to declare bankruptcy at a later date. Kind of like what is happening to Iceland right now.

There's nowhere I can't reach.

Originally Posted by a lurker

However, if we knew how poorly these institutions are doing, a worldwide panic is inevitable. Therefore, these institutions are not too big to fall?

We're already in a panic tbat began with the liquidity crisis. (at the end of '07) The question is how much damage will there be, and who will be left standing. Seeing the investment banks and financial houses all bomb at once is unlikely if not impossible. Seeing as how they're already dead. Their zombie corpses are just feeding off the Federal Reserve and government to stagger onwards. Hoping to be revitalized in the future.

That doesn't mean they're "too big to fail". The perception of all these institutions failing at once that would trigger some massive runs by depositors. Which is basically what I mean't by mass chaos and panic.

Originally Posted by Shin

Actually, the reason you even have a housing bubble is because of the moves your government made to soften the blow after the dotcom bubble burst. Sure, in the long run everything has the potential to go to shit much worse than would have happened in the first place but saying that one cannot bail out an economy after a bubble bursts is just plain wrong.

The mess is a lot bigger then just the dot-com bust. If we blow another bubble we will continue to compound the mess. The business cycle is being interrupted (if not overtly manipulated by the Federal Reserve) with all the bubbles being blown.

Another bubble being blown is exactly what I'm hoping won't happen.

Originally Posted by Shin

You don't know much about accountancy do you? "Accounting" laws are some of the most strictly enforced that there are. If a company ignores them, they'll never get an audit signed off and will never persuade anyone to invest in them. They'll also get a massive fine.
(snip)

Originally Posted by Zergrinch

I disagree here. FASB Statement No. 157, effected November 2007, redefined fair value for financial instruments by mandating a mark-to-market rule. The asset must be valued at the exit price, the price you can get if you sell it on the open market.

The SEC has suspended it's marked-to-market accounting rules. This was a part of the Paulson bailout. Essentially helping the financial institutions lie about their overall value to investors. Which is what I originally meant when I said accounting laws are not being enforced.

"There's value here! I promise!" *waves magic wand* "Just as much as when we packaged these mortgages!" *flails magic wand*

Originally Posted by Shin

It's all actually turned out ok for the British banking system.

Which is why the British Banking System doesn't need a bailout does it? Oh yeah... yeah sure.

Originally Posted by a lurker

Help me out here, since I'm not well-versed in Chicken Little;

If anything it's more like Humpty Dumpty.

Around this time last year the DOW hit a nice peak at 14,100. Look at it where it currently stands today.

Humpty Dumpty sat on a wall.
Humpty Dumpty had a great fall.

Hahaha!

All the king's horses and all the king's men
Couldn't put Humpty together again.

D'oh!

This thing is sticky, and I don't like it. I don't appreciate it.

Originally Posted by Shin

I never said that. I know full well that the government is bailing out the banks but I was suggesting that our banking system has a long-term future and is simply in need of a quick cash injection to get rolling again.

It is not all that different after the Paulson Plan works it's magic.... ideally. There's even a news story hitting the headlines today that the US treasury might grab a stake in our zombie financial institutions. Very much akin to the British bank bailout. (Thanks for the idea!)

Originally Posted by Zergrinch

I think the intent of the Paulson bill (it's not really a bailout man, not unless Treasury pays large premium for those financial assets) was to staunch the bleeding.

Mark-to-market does not work in these unusual circumstances. There IS not market to mark to - disposing of assets at what can be considered fire-sale prices is hardly a 'fair' value. If your neighbor is selling off his perfectly operational car at say, $100 due to desperation, should you write down the value of your car to $100? Yet that's what mark-to-market essentially means, and it's basically the mechanism that starts the dominoes tumbling.

(Let's pretend we're actually capitalists for a second.)

The dominoes started to fall when a) no buyer could be found and b) the market could not price these "assets". With mark-to-market rules being abolished the Treasury is paying a high premium for assets that the market is either too scared to price or is unwilling to pay the price that is asked. In either case they cannot be sold on the market. Their value is essentially zero.

How this works into your scenario:

If my neighbor can't sell his car for any price, then his car's value is zero. Whether he tells me his car is worth $100 or not. Seeing as how my neighbor's car value is fucked due to a lack of demand. If I try to sell what cannot be sold I'll be just as fucked.


I am a dolphin, do you want me on your body?

Originally Posted by Zergrinch

Let's say you have a perfectly usable car that you can't sell to the market at any price. You can still ride it around, drag race it around the freeway and stuff like that. Does it mean that the car's value is zero?

I would argue that the market assigning a value of essentially zero to the car, is a failing of the market and not the car.

Value is the amount somebody will pay. Which just brings us around full circle to what I said originally.

I suppose we could just re-package all the paper derivatives as toilet paper though. I'd personally love to wipe my ass with that shit.

I was speaking idiomatically.

Originally Posted by Shin

Value is the value in use of the asset.

If somebody will pay to utilize in some form said asset it has value. Otherwise, it's zero. Try looking at real estate in the inner city parts of Detroit. No buyers, no users, no demand, no value.

That's not a market failure. That's how the market works.

Originally Posted by Shin

Likewise, on a very simplistic level, whilst banks can't sell on these debts at present, this doesn't mean they have zero value. Not every single mortgage is going to default and the value is the future revenue streams in the form of interest, plus the value of the property securing the loan in the first place which might not be as much as it was this time last year but still isn't zero.

In the future it may have value. In the present it does not when the buyer of last resort is the government.

I said we were pretending to be capitalists and I meant it dammit.

What kind of toxic man-thing is happening now?

Originally Posted by Shin

But you're just plain wrong. IF you owned a bit of land and you couldn't find anyone to buy it and someone came along and said to you that as you couldn't find a buyer you might as well just give it to them, you wouldn't, simple as that. The only reason you would would be if holding the land was costing you something and you needed the cashflow.

Even talking on a strictly theoretical level, nothing ever has zero value because future potential value is always a consideration. Nothing is ever enacted on a straight supply and demand current value basis, that's elementary school economics. The reality is that future potential earnings on one side and the opportunity cost of selling or holding the asset on the other side always feature in these transactions. The very concept of there being no buyers so the asset has no value is ridiculous because anything that's free, by the very nature of trying to divide by zero has, mathematically infinite demand.

This has nothing to do with investing and everything to do with accounting.

The mark-to-market rules were instituted so that the financial institutions would be forced to write down the value of their holdings as the fair value. Fair value is whatever you can get on the open market right now. It is entirely of a subjective nature to the present. Future value considerations are thrown out the window.

FELIPE NO

Originally Posted by Zergrinch

The concept of fair value being mark-to-market falls apart when the market freezes, like what we're seeing here. It is not FAIR for you to assign a VALUE of zero to instruments whose values are tied to assets (in this case, mortgages backed by US houses) that still have value. Unless, of course, you're telling me American houses are REALLY worth the fire-sale prices they're going for now...

Nothing works the way it's suppose to in a recession. Throwing out the rulebook is not going to restore trust or confidence. There can be no trust as long as the mark-to-market accounting rules are suspended. Only a reason for the creation of more mistrust. Nobody knows what the financial outfit's balance sheets are worth and there's no way to know.

I don't particularly care if we agree on any of that. Events will prove it right or wrong all in due course. Sooner rather then later. There's not much of a reason to continue this. Continuing is only bound to strain more nerves.

What, you don't want my bikini-clad body?