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Old 08-10-2008, 14:48   #61
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@sneuman - we saw how much the bailout helped. It was a waste of money that the taxpayers will be paying for for years. If I eff up my personal finances, I don't expect to get bailed out. I pay the consequences.

There were plenty of existing National and International financial institutions that were ready and willing to snap up the failing investment houses at a bargain. Instead the government gave them a freebie that is going to cost the american taxpayer.

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Regulation did prevent the current problems. For decades. Problem was allowing, encouraging and then defacto forcing banks to take part in nonsense.

Simple solution was to understand that a functioning banking system is a fundamental part of the Capitalist system. and for that you need banks and because it is fundamental you make damned sure you keep certain banks doing boring old banking (even with a few knobs on to keep folk from getting comatose ).........And let the Investment Banks / Hedge Funds etc alone try and become masters of the universe (with their own money or the money of investors, not borrowed via the boring banking system on an industrial scale) - and if (and when) some fail it does not fundamentaly matter. Expensive for some and messy but fundamentally not mattering (and in many respects a good thing ).....and the only way to create that situation was by Govt Regulation. Wayyyy too late now for that to be part of the fix. If their is one - "Buddy, can you spare a trillion?"
You realize that the only banks that are doing well are the ones that took advantage of the repeal of a portion of the Glass-Steagall Act, right? The ones that were hedging their bets between Retail banking and Investment banking are holding steady. The Investment houses are the ones that crashed and the easily-excitable Democratic congress freaked out and spent a few hundred billion to "fix everything."
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Old 08-10-2008, 15:01   #62
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The only bone I'd pick with this is the assumption that everyone seems to be making that it was de-regulation that caused this problem.

I would ask why whenever there is an economic problem, we automatically blame it on de-regulation and the free market, but I already know the answer to that one (no education in basic economics in this country).

Look into what happened here more deeply (ie - beyond the sound bites on TV) and you'll find his wasn't started by de-regulation at all, but by government policies imposed on the industry. That ain't de-regulation, folks.
But even Warren Buffet (in 2003) called derivatives "weapons of financial mass destruction". He said they were open to "huge-scale fraud". Fraud is clearly something one "regulates" against.

http://news.bbc.co.uk/2/hi/business/2817995.stm
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Old 08-10-2008, 16:48   #63
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The overall problem is extremely complicated and as such I thought that Gord May’s short email #38 defining the GLB act and the measures implemented in 2004, which further deregulated the industry are a major part of the entomology why we face our present day problems. In addition Tao's post, as usual, on matters financial/markets provides an accurate, concise yet far ranging historical explanation on what happened when those acts noted by Gord May are allowed then used/abused for self aggrandisement.

The only point missed, in an otherwise excellent combined effort, was that SIV’s (Structured Investment vehicles) were bought by the final buyers/investors as “Secured” Structured Investment Vehicles in so far as although the bankers will be synonymous with greed, avarice and arrogance… Stupid they weren’t. They required the mortgagee to take out a insurance in case of default and the next shoe won’t be the credit card default( although it is a shoe that will eventually fall), but the inability of the insurer to cover the loss. In effect, the reason why these toxic sub-prime loans were sold so successfully to European and other International banks and investment houses was the fact that these investments were bundled with certain guarantees.

An avalanche of mortgages is about to default and as Tao stated the $700Billion package is not enough. It represents less that one year volume of sub-prime mortgages.

To finish on a more positive note; if countries can provide a consensually coordinated, fully integrated national and global solution for the liquidity problem, while in parallel successfully address this next chapter in the mortgage saga, then the all important, but presently battered confidence factor will recover, as it always does from these recurring debacles( It is only the period which varies).

My view is that governments will be forced to create a united solution to these problems. Some may be dragged screaming to the table, but attend they will and a workable solution to the global problem will be found. They shall because they must. They must, because they all understand that without a working solution everything stops and such the world comes to a halt… And that is unacceptable… to them and their citizens. It will take a few weeks for the agreed programmes to date, to begin to pick up speed, but this period will be looked back on as the “beginning of the end of the problem”. So don’t cancel Christmas yet. The really sad part about all of this is that, as in all previous times the short term myopic historical recall of financial services, the supervisory bodies and the individuals they serve will surface and in a few years time, the next new craze will be presented as the best new vehicle and off we go again.

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Old 08-10-2008, 17:10   #64
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The really sad part about all of this is that, as in all previous times the short term myopic historical recall of financial services, the supervisory bodies and the individuals they serve will surface and in a few years time, the next new craze will be presented as the best new vehicle and off we go again.

I recommend tulips:

Crashes: The Tulip and Bulb Craze
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Old 08-10-2008, 17:36   #65
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The difficulty with the CRA blaming is that it only applied to depository institutions who were only responsible for 20% of sub-prime mortgages. Nothing about it required imprudent lending to people who could not repay or were higher risk. The depository institutions had a much lower proportion - around half in riskier groups with higher rates. As I understand it the CRA was aimed at ensuring a proportion of funds raised in less desirable areas read minority groups were loaned there to creditworthy people rather than being diverted to the benefit of the more affluent. Not an undesirable imprudent or unjust aspiration surely.
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Old 08-10-2008, 18:02   #66
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Wonderful!

Thanks for that!
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Old 08-10-2008, 18:48   #67
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1- Much like the simple-minded house-buyer who only wants to know what the monthly payment will be, the "investors" in SIVs only wanted to know what the yield would be and naively (as it turned out) believed the AAA credit ratings attached to the products.

<snip>

2 - ...the sales force kept placing the product with entities throughout the western world and collecting their staggering bonuses each December, and all was right with the world.

<snip>

3 - Since their inception, SIVs were "mark-to-model" investments, meaning that they were deemed to be worth what their creators, and then the entities that bought the "investments," said they were worth. Why? Because, in the absence of a transparent market to provide legitimate price-discovery, there was simply no way to place a meaningful valuation on them.

Tao - As usual a great analysis. I noted what I think are some pertinent quotes...

1 - If you don't know what it is. Don't buy it. If it can't be explained to a 12 year old don't buy it. If it isn't connected to "hardware" (i.e. tangible stuff) don't buy it.

2 - I used to hang out with traders. I couldn't beleive the amount of money these "kids" were able to throw around. If 25 year old kids are making $500k a year a) something illegal is going on or b) Something is being sold that is all hype. You wind up a 25 year old trader and go tell him to sell snot and he is going to figure out how to sell more snot than anyone. Usually to another 25 year old. And there is no oversight on these fellows.

3 - See item 1. If you can't explain it to a 12 year old and you can't explain how it adds value (makes money) it probably doesn't. If it can't be directly linked back to tangible assets then it is probably pure imaginary wealth. If I am paying 5 percent on my mortgage payment, how in the hell is a derivitive of my mortgage going to pay 7, 8 or 9 percent.

The 25 year olds will blow smoke up your ass and try to explain the "leverage" etc etc. but I'm only paying 5% so where's the extra 2, 3 or 4 coming from.

Answer - It ain't coming.

I know they don't trade these for the yield on the underlying mortgages. They trade them on the "perceived" value like bonds. Blah, blah, blah...
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Old 08-10-2008, 22:40   #68
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<snip> If you don't know what it is. Don't buy it. If it can't be explained to a 12 year old don't buy it. If it isn't connected to "hardware" (i.e. tangible stuff) don't buy it.<snip>
As if to prove Dan's observation, I came across this on-point factoid today, from Addison Wiggin, who puts out the 5-Minute Forecast for Agora Financial each business day.

* * * * *

"Just out of curiosity this morning, we sought out the best and worst performing sectors over the last 12 months:

Worst: Dow Jones U.S. Mortgage Finance Index, down 95%.
Best: Dow Jones U.S. Brewers Index, up 17%.

That pretty much sums it up, eh?"

* * * * *

Draw your own conclusions, CFers.

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Old 09-10-2008, 00:34   #69
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Lets not forget Beanie Babies and Baseball cards

Please explain the Beanie Baby craze of the 1990s. | Ask Metafilter

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Old 09-10-2008, 03:57   #70
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But even Warren Buffet (in 2003) called derivatives "weapons of financial mass destruction". He said they were open to "huge-scale fraud". Fraud is clearly something one "regulates" against.
BBC NEWS | Business | Buffett warns on investment 'time bomb'
The Initiative for Policy Dialogue at Columbia University offers a good primer on derivatives:
Backgrounder: Derivatives ~ by Randall Dodd


Goto: IPD's Capacity Building and Journalism Program; Economic Journalism Training
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Old 09-10-2008, 05:06   #71
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Now...What the hell should i do with my term deposits in the bank?
Sorry Maren, I should have been clearer in my question.

I am not looking for investment advice; my focus is on how to physically secure liquid assets in the face of pending bank collapses.

My philosophy as a single simple sailor has always been to:
Work hard, get paid well, never get in debt, spend thriftily, resist all temptations to tie up money in Get Rich Quick investment schemes and save the majority of your income so as to retire early with significant freedom chips and nothing to hold you back from cruising where you wish.

It worked for me, but now I wonder if a conservative bank like HSBC coulld crash and relieve me of life savings that have always been in a one month roll-over.

Where can you safely keep cash these days other than in your mattress, which would be a dangerous thing to do on a boat?
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Old 09-10-2008, 07:39   #72
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I am not entirely sure what this thread has to do with cruising, but for the sake of argument, let me leave everyone with this thought:

1. the market for used boats is currently depressed and consequently, there are some real deals to be had in relation to the recent past.
2. the cost of new boats will continue to increase as the cost of materials - e.g., resin (a petrochemical product), dacron (ditto) and metals such as aluminum (which requires a great deal of energy to produce) will likely also continue to rise.
3. an advantage to the purchase of a used boat (as opposed to the purchase of a used house) in the current market, is that none of the purchase price goes towards the cost of land, the value of which will likely continue to drop in the short term. In other words, unlike the cost of new boats, the cost of many new homes will also drop.
4. Furthermore, the cost of used boats is likely going to drop even more than housing because boats are still a 'luxury' item, while housing decidedly is not.

The end result is that when the economy rebounds and there are once again a large number of people with the wherewithal to purchase 'luxury' items such as a large boat, the initial differential between used and new boats will likely be disproportionately high. This can only operate so as to also push up the value of used boats in a disproportionate way.

Conclusion: The time has never been better to upgrade through the purchase of a larger used boat.

As to the security of deposits in banks, many countries such as Canada have Government deposit insurance, at least up to a specified maximum (e.g., $100,000.00). Keep your money in multiple insured banks to a balance below the maximum and, barring a complete collapse of the government, you should be fine.

In addition, in our country the purchase of Canada Savings Bonds (government issued bonds with a guaranteed interest over a fixed period) should also be quite secure. Once again, if governments are prepared to bail out banks, they will certainly be prepared to guarantee that they do not default on their own indebtedness. (And if they do, the currency that you have sewn into your mattress will also be essentially worthless).

Otherwise, one can always buy gold. However, take note: the cost of selling can be alarmingly high.

Brad
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Old 09-10-2008, 07:59   #73
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... but now I wonder if a conservative bank like HSBC coulld crash and relieve me of life savings that have always been in a one month roll-over.

Where can you safely keep cash these days other than in your mattress, which would be a dangerous thing to do on a boat?


Four things come to mind:

1. Many gov'ts have already taken steps to assure people like you that their deposits are safe.


2. You could split the cash into differing gov’t guaranteed accounts if you are particularly worried. US, Canada, Ireland are good examples.


3. You could also move some money to physical commodities. Gold is the best known but silver and platinum are also available. In the US, you can’t legally store cash (or a firearm, oddly enough) in a safety deposit box but you can store metals (and again, oddly enough, suppressors.) Worst case scenario is sunken treasure


4. A somewhat less liquid option is to move money to gov’t treasuries. You will get your money, you will a return on it; no guarantee on what the currency will be worth at that time.
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Old 09-10-2008, 08:23   #74
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Old 09-10-2008, 09:05   #75
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Worst: Dow Jones U.S. Mortgage Finance Index, down 95%.

Best: Dow Jones U.S. Brewers Index, up 17%.
Drowning our sorrows are we?

1929 all over?

Buy rope stocks
Buy gun stock
Buy jumping off high buildings stock

LOL...

BTW - Thanks Gord. My sentiments exactly...
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