The Bailout Backfire Conspircy...

DJ...

DJ...

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My first ever blog. I felt it necessary to highlight in laymans terms what I perceive to be a major conspiracy in the financial world, that will trickle its way into the pockets of every single South African. I have been thinking about this for some time now and cannot make sense of how we landed up in this situation, nor can I make sense of the proposed bailout plan.

It is fairly long read, but for anyone who wants to understand how we landed up in this mess and in frank terms, why we should be even more concerned moving forward, then give it a read and feel free to poke holes in my tin-foil hat...

http://mybroadband.co.za/vb/blog.php?b=484
 
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Very interesting. Not being an economist I am a bit slow with some of the concepts, but it has been clear that these bailouts are protecting bad business, and your comments ( which must be the case ) about the inflationary effects are scary. The sheer numbers are horrendous - the CIA World Fact Book gives SA's GDP as about $283billion, and the US bailout is reported as $700billion! Our whole country would have to produce for just under 3 years without eating to provide that sort of money ( to my layman's eyes! )!
:eek:

Like Bob Mugabe, just print more money!

BTW that would be "layman's".
 
DJK said:
My first ever blog. I felt it necessary to highlight in leymans terms what I perceive to be a major conspiracy in the financial world, tht will trickle its way into the pockets of every single South African. I have been thinking about this for some time now and cannot make sense of how we landed up in this situation, nor can I make sense of the proposed bailout plan.

It is fairly long read, but for anyone who wants to understand how we landed up in this mess and in frank terms, why we should be even more concerned moving forward, then give it a read and feel free to poke holes in my tin-foil hat...

http://mybroadband.co.za/vb/blog.php?b=484
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I think this influx of money into the US economy is going raise US inflation and ultimately devalue the US dollar. The question is whether the world is prepared to continue using the U$ as the defacto world currency given the mismanagement of the their economy.

Every US crisis seems to get bigger and more expensive to fix, at some point the US is going to have to bite the bullet and accept a recession.
 
Nice blog DJK, but I'm not sure that it is 100% correct.

AFAIU Freddie Mac and Fannie Mae are US Govt backed mortgage houses (not insurers). Effectively they provide the cash for the banks to offer mortgages by operating in the secondary mortgage market. AIG is in trouble because of poor investments in sub-prime derivatives (which no-one seems to understand), rather than because of claims.

I'm in agreement with you to a point about letting bad businesses fail, unfortunately allowing the entire banking system to fail is not feasible. Ironically the solution to save capitalism seems to be nationalisation of of the financial markets:)
 
I posted this in another thread, but some might have missed it. I found it very interesting and scary.

Its not so much about the current sub-prime chaos but it explains why the current financial system is failing(and is going to fail even more). This guy has been talking about what is happening now from about 4 years ago if I recall correctly.
http://www.chrismartenson.com/crash-course

BTW, this looks like timfoil hat stuff but try and disprove it. I found it hard.
 
alloytoo said:
I think this influx of money into the US economy is going raise US inflation and ultimately devalue the US dollar. The question is whether the world is prepared to continue using the U$ as the defacto world currency given the mismanagement of the their economy.

Every US crisis seems to get bigger and more expensive to fix, at some point the US is going to have to bite the bullet and accept a recession.
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I believe that the world has been preparing itself for some time to move away from the USD as the global defacto benchmark and FX trade, but this will certainly be a slow process. Evidence is abound, such as oil exchanges moving to what is perceived to be, a more stable EURO. I doubt this will be the final nail in the coffin, but it certainly does hammer home some of the nails required.

arf9999 said:
Nice blog DJK, but I'm not sure that it is 100% correct.

AFAIU Freddie Mac and Fannie Mae are US Govt backed mortgage houses (not insurers). Effectively they provide the cash for the banks to offer mortgages by operating in the secondary mortgage market. AIG is in trouble because of poor investments in sub-prime derivatives (which no-one seems to understand), rather than because of claims.

I'm in agreement with you to a point about letting bad businesses fail, unfortunately allowing the entire banking system to fail is not feasible. Ironically the solution to save capitalism seems to be nationalisation of of the financial markets:)
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Fannie Mae and Freddie Mac are now nationalised mortgage houses, but they did a lot more than hold exposure to these markets - if this were merely the case, they could probably have stayed afloat for some time with their near-zero-rated overdrafts. They did however package, own and guarantee MBS deals. AIG had no choice but to insure these deals due to market forces as well, but through their investment divisions they, much like all other major asset managers, exposed themselves heavily to the market as well. It was a double-edged sword for them when the market came tumbling down, and I have no sympathy for them.

Dodgy businesses should not be bailed out, regardless of what direction the market was moving in. There has always been a dark cloud looming over the ABS market which has steadily been on the incline for a decade now. But IMO, they were merely fuelling a bubble that had to burst its seams, and it is ludicrous that an insurance company knowingly exposed themselves to the ABS/MBS market so heavily without hedging against the downside.

Ha, I also spotted the ironic aspect of the bailout as you correctly pointed out in the last part of your post. But ask yourself one question: Is the US still an industrial capitalist society, or are they using the word capitalist to hide a more kleptocratic model that has been running the US financial markets for some time?
 
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arf9999 said:
Nice blog DJK, but I'm not sure that it is 100% correct.

AFAIU Freddie Mac and Fannie Mae are US Govt backed mortgage houses (not insurers). Effectively they provide the cash for the banks to offer mortgages by operating in the secondary mortgage market. AIG is in trouble because of poor investments in sub-prime derivatives (which no-one seems to understand), rather than because of claims.

I'm in agreement with you to a point about letting bad businesses fail, unfortunately allowing the entire banking system to fail is not feasible. Ironically the solution to save capitalism seems to be nationalisation of of the financial markets:)
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AIG's problem is all the CDS's (basically insurance) they wrote on subprime mortgages and because they were rated AAA they weren't required to back these up with any assets, which is why I think you can also blame the ratings agencies for a lot of this mess, both with this and with the way they rated ABS.

You could also conceivably blame the government for their implicit guarantee of Fannie and Freddie, they might not have caused the problem but they definitely made it worse.



DJK said:
I believe that the world has been preparing itself for some time to move away from the USD as the global defacto benchmark and FX trade, but this will certainly be a slow process. Evidence is abound, such as oil exchanges moving to what is perceived to be, a more stable EURO. I doubt this will be the final nail in the coffin, but it certainly does hammer home some of the nails required.



Fannie Mae and Freddie Mac are now nationalised mortgage houses, but they did a lot more than hold exposure to these markets - if this were merely the case, they could probably have stayed afloat for some time with their near-zero-rated overdrafts. They did however package, own and guarantee MBS deals. AIG had no choice but to insure these deals due to market forces as well, but through their investment divisions they, much like all other major asset managers, exposed themselves heavily to the market as well. It was a double-edged sword for them when the market came tumbling down, and I have no sympathy for them.

Dodgy businesses should not be bailed out, regardless of what direction the market was moving in. There has always been a dark cloud looming over the ABS market which has steadily been on the incline for a decade now. But IMO, they were merely fuelling a bubble that had to burst its seams, and it is ludicrous that an insurance company knowingly exposed themselves to the ABC/MBS market so heavily without hedging against the downside.

Ha, I also spotted the ironic aspect of the bailout as you correctly pointed out in the last part of your post. But ask yourself one question: Is the US still an industrial capitalist society, or are they using the word capitalist to hide a more kleptocratic model that has been running the US financial markets for some time?
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You'd expect the world to move towards using the Euro more as a reserve currency but, for all their mistakes and problems, at least the US is integrated, the scenes of the Europeans essentially fighting amongst themselves can't be reassuring to e.g. the Chinese.

I'm not sure I can agree with saying its no fault of the homeowners though. If you took out a mortgage you knew you couldn't afford to pay is that not your fault? There's plenty of blame to go around.

Ideally it would be better to let firms fail, eliminate moral hazard etc. but are the costs to everyone else worth it? Its not as if these firms can fail in isolation and not impact the rest of the economy.
 
Syndyre said:
You'd expect the world to move towards using the Euro more as a reserve currency but, for all their mistakes and problems, at least the US is integrated, the scenes of the Europeans essentially fighting amongst themselves can't be reassuring to e.g. the Chinese.

I'm not sure I can agree with saying its no fault of the homeowners though. If you took out a mortgage you knew you couldn't afford to pay is that not your fault? There's plenty of blame to go around.

Ideally it would be better to let firms fail, eliminate moral hazard etc. but are the costs to everyone else worth it? Its not as if these firms can fail in isolation and not impact the rest of the economy.
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The homeowners were not given correct advice, were encouraged to bite more than they could chew and many, if you dig deeper were certainly not told about their interest rates increasing after a certain time frame as well. Whilst they are to blame to a certain extent for their own situation, the crisis is not any fault of theirs - that is more the point I was trying to get across. They should also not be tossed on the street to suffer, whilst the banks who put them there are being bailed out.

And IMO, the cost vs benefit over the long term sways more in favour of letting them crash than bailing them out.
 
DJK said:
The homeowners were not given correct advice, were encouraged to bite more than they could chew and many, if you dig deeper were certainly not told about their interest rates increasing after a certain time frame as well. Whilst they are to blame to a certain extent for their own situation, the crisis is not any fault of theirs - that is more the point I was trying to get across. They should also not be tossed on the street to suffer, whilst the banks who put them there are being bailed out.

And IMO, the cost vs benefit over the long term sways more in favour of letting them crash than bailing them out.
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I agree that's the case with a lot of homeowners, obviously some knew what they were doing and bet on rising house prices so they could either sell or refinance but at least as many didn't realise the implications of ballooning interest rates etc.

I saw someone, I think it might have been one of McCain's advisors actually, was advocating government refinancing of up to 20% of each mortgage, at a lower interest rate, with the terms being restructured to lower repayments etc. I can't remember the details but it seemed like a good idea on principle. The problem is if people bought at inflated prices then do you try and keep house prices inflated or let them fall and then have people walk away from houses with negative equity.
 
 
Syndyre said:
I saw someone, I think it might have been one of McCain's advisors actually, was advocating government refinancing of up to 20% of each mortgage, at a lower interest rate, with the terms being restructured to lower repayments etc. I can't remember the details but it seemed like a good idea on principle. The problem is if people bought at inflated prices then do you try and keep house prices inflated or let them fall and then have people walk away from houses with negative equity.
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Smoke and mirrors if you ask me. Let;s dig into those figures a little more to understand why:

Median mortgage value: $300,000
Number of affected households: 5 million
Total refinancing requirements based on 20%: $300 trillion (max)

Again, they wouldn't do this on top of the bailout, it would be ridiculous IMO. They would need to scrap the bailout plan to do so and that isn't likely to happen. Lets see what affect that has on US Treasury notes thereafter as well...:rolleyes:

They have royally cocked up, and are royally cocking up again to save the skin of a few...
 
Yes I did and unfortunately you've now forced my to openly admit that I agree with arf :sick:. You can't let the banks fail and bring down the economy even if it means bailing out bad business practices. IMO anyway. Between a rock and a hard place and all that. ;)
 
alanf85 said:
Yes I did and unfortunately you've now forced my to openly admit that I agree with arf :sick:. You can't let the banks fail and bring down the economy even if it means bailing out bad business practices. IMO anyway. Between a rock and a hard place and all that. ;)
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Explain to me then what you think would happen if many of the major banks shut up shop? Oh, hang on, they have already. Granted many are still operating.

It is a rock and a hard place, I agree. It might risk a total failure of the economy, but I sincerely hope that laws are passed to better regulate how banks, money managers and insurance companies operate moving forward and to protect the consumer more. I doubt anyone could argue that point with a straight face or braincells for that matter.

I came to a realisation the other day that I am partly to blame for this mess. The company I worked for in the UK provided most of the fixed income related research to the insurance giants around the world. AIG were my direct responsibility as well and I made a small fortune from their business. :o Now look where it got me...:D

But back to the topic:

There are may ways to skin a cat, and I don't think a total bailout is going to be the most effective in the long run. I also have a major issue with the way it is being implemented and how the less than average joe is being forgotten. They are effectively bailing out the very companies who started this mess in the first place, and are bailing them out for reasons that should make any person on the street stand up and take notice. One cannot allow administrations such as the Clintons and Bush's to continue fscking things up financially, for the benefit of a few. A lot of this started with some of the major Clinton administration changes, which opened the market up to de-regulation and abuse - he benefitted substantially, and directly from some of these changes after he left the oval office...
 
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DJK said:
Smoke and mirrors if you ask me. Let;s dig into those figures a little more to understand why:

Median mortgage value: $300,000
Number of affected households: 5 million
Total refinancing requirements based on 20%: $300 trillion (max)

Again, they wouldn't do this on top of the bailout, it would be ridiculous IMO. They would need to scrap the bailout plan to do so and that isn't likely to happen. Lets see what affect that has on US Treasury notes thereafter as well...:rolleyes:

They have royally cocked up, and are royally cocking up again to save the skin of a few...
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True, this is the actual article, reading it properly now it does seem rather implausible:

We need a firewall to break the downward spiral of house prices. Here's how it might work. The federal government would offer any homeowner with a mortgage an opportunity to replace 20% of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. This would be available to new buyers as well as those with mortgages. The interest on that loan would reflect the government's cost of funds and could be as low as 2%. The loan would not be secured by the house but would be a loan with full recourse, allowing the government to take other property or income in the unlikely event that the individual does not pay. It would by law be senior to other unsecured debt and not eligible for relief in bankruptcy.

The individual could repay the loan at any time or could refinance the remaining loan on more favorable terms as long as the principal did not increase. A 30-year amortization of the government loan would make the payments low, and a life-insurance policy would protect taxpayers if the borrower dies before the loan is repaid. If the homeowner chooses to accept the loan, creditors would have to accept the 20% mortgage repayment, reducing the monthly payments of principal and interest by 20%.

Consider a homeowner who has a mortgage equal to 90% of the value of his home. The 15% decline in the value of his house that may be needed to bring it back to its prebubble level would shift that homeowner into negative equity. Further price declines would make default attractive. But the 20% mortgage replacement loan would take the loan-to-value ratio to 72% from 90%, making it unlikely that prices would fall far enough to push him into negative equity. An interest saving that could be as large as $3,000 a year would provide a strong incentive to accept the mortgage-replacement loan, even if the individual thinks that he might temporarily have a moderate level of negative equity.

Although the total size of the mortgage-loan program might be as much as $1 trillion, this would not be comparable to other government spending or to a swap of government bonds for impaired assets. The government would instead have a fully offsetting claim on individuals who could be counted on to repay their low-interest government loans. The cash that the banks and other creditors would receive from the government to replace the existing mortgages would be available to finance new loans.
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As I see it if the banks go under the economy will suffer severely average Joe will pay the consequences will those bank CEOs retire to the Bahamas. If the banks are bailed out the average Joe won't be hit so severely and maybe in the future the tax payer might even make some money out of it while the CEOs will still be sitting in Bahamas. Some say this problem goes as far back as my favourite pres the Peanut
 
Loads of good info there...but I disagree with some of it.

insurance companies such as Fannie Mae, Freddie Mac
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:confused: Those aren't insurance companies. They are taking the knock...but not because they insured something.

In my opinion, the market needs a shakeup, not a bailout. Let them fall.
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Good idea in principle...but easier said than done. Is the shakeup worth the risk of a total collapse?

Banks lend money irresponsibly to hundreds of thousands of people worldwide.
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And people loan money irresponsibly.

Nothing about this bailout makes sense to me.
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It does to me. Sure people are getting away with fckin murder here....but this is the lesser evil imo. If there is no bailout, then there is a real chance of the market & liquidity crashing completely. Hell...even with the bailout its looking shaky. Even if there is only a 1% chance of a crash, it is worth letting the bastards getting away with it....because the 700bn will look like small change if half the GDP gets wiped out.;)

btw, have you read Liar's Poker?
 
HavocXphere said:
:confused: Those aren't insurance companies. They are taking the knock...but not because they insured something.
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Actually they held more than just exposure - they originated the CDS deals as well AFAIK. But yes, they weren't an insurance company per se (typed that at 4am...:o)

HavocXphere said:
Good idea in principle...but easier said than done. Is the shakeup worth the risk of a total collapse?
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I think it is - history will repeat itself. Although the financial sector's market cap does make up a significant percentage of total US AND global market capitalization, so letting them fall entirely isn't plausible, I agree there. OK, I concede, it does make some sense looking at the bigger pitcure.

So then lets look at it from another perspective - what other solutions are there to this problem? I agree that this might be the lesser of two evils, howevert there certainly cannot be just 2 workable solutions? Because this current solution places economies the world over on a longer term upward inflation cycle and lets not forget about the 5 million ex-homeowners.

In fact lets look at this from more of a selfish perspective. This solution impacts us heavily, however the problem doesn't. I am somewhat of a bastard because they brought this on themselves, so I say fsck'em. Opens an opportunity for globalization in the financial sectors as banks like Standard ad FNB are afforded the opportunity to play a more pivotal role in first world economies. It will also result in inflows of capital to SA as investors seek gains elsewhere (although who will be there to process the trade, or even invest...:eek:)

I am just brainstorming here I suppose, but I think that is necessary during this time. The bailout supports the companies whereas (if I were forced to choose a US party) I would choose the more democratic route for the people, or at least find a balance. Lets face it, those who will benefit post-bailout are not the average joes who know nothing about the investment markets.
 
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