Fannie Mae & Freddie Mac - the big bailout?

[Snugglebear]

Originally Posted by prescient63

Could you link that document? That description sounds incorrect after listening to his meeting with congress, but what he says and writes could easily be two different things.

Section 8. Review: Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

(What he wrote)




(What he said?)

So in something as brief as a 2 or 3 page outline, he explicitly calls for no regulation or oversight, yet at the hearing with Congress he claims it would've been presumptuous of him to suggest a mechanism of oversight. Man that scares me.

[Etoille]

its funny because modifying jurisdiction of the USSC would take a constitutional amendment and the USSC always has the right to determine whether they have the authority to review an act of congress.

its completely hysterical b/c if it wer ethat easy congress would just do that all the time and it would work.



typical though. cheney didn't read the constitution. bush didnt read the constitution. why assume that paulson, a bush appointee from goldman sachs who made their money doing the EXACT same thing we're crying about people doing now, has actually read the constitution?


congress can pass that law all they want even if they DID want to. the USSC has jurisdiction to determine whether they have constitutional authority to hear a case resulting from it unless congress manages to get an amendment to the constitution passed.



anyone else find it hilarious that no one in the bush admin either took government 101 or thinks the rest of the country didn't either? i mean granted we are totally the united states of lazy, stupid, and entitlement but there are SOME people who know wtf is going on lol

[Eomer]

Figured I'd post a few links of Warren Buffet pretty much predicting everything that is coming to pass right now. I haven't heard him say much in the past couple weeks, maybe cause he's not a press whore like many others and he's just getting drowned out, I don't know. But to be honest, he's one of the few people whose opinion and course of action I'd trust without qualification. I wonder what he thinks about the bailout package?

March 2003: BBC NEWS | Business | Buffett warns on investment 'time bomb'

Berkshire 2002 Annual Report excerpt: MyProps.org - Warren Buffett: "Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal" (2002) - Housing Bubble and Bear Links

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. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.

Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

So if this was so fucking obvious 5+ years ago to Buffet, why in the hell didn't we do anything about it? I'm honestly curious about this. If this whole sham really was as insane as Buffet made it out to be 5+ years ago long before the housing market collapse, why in the fuck wasn't something done? Or was it not as self-evident as Buffet seems to think it was.

[Kugbok_Fennin]

I for one think most of these guys have read the constitution and found ways around it. I think they also prey on the fact that your average American has not read the constitution nor do they realize the power they have as citizens. As such they have been able to do anything they want.

That said, these assholes are LYING, they are doing illegal shit, that is clearly against the constitution. They of course claim their lawyers have "interpreted" the constitution in such a way that it allows them to get away with it. Forget the fact the constitution isn't open to interpretation as it is already written in the English language.

[Jedah]

Originally Posted by Eomer

So if this was so fucking obvious 5+ years ago to Buffet, why in the hell didn't we do anything about it? I'm honestly curious about this. If this whole sham really was as insane as Buffet made it out to be 5+ years ago long before the housing market collapse, why in the fuck wasn't something done? Or was it not as self-evident as Buffet seems to think it was.

There was still money to be made and we were in a whirlwind of deregulation demagoguery. Our national focus has also been myopically focused on foreign affairs because it was cast as some sort of life or death struggle.

[Soriak]

You bolded the answer:

Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.

It's not as easy as saying you want to monitor/regulate something. It's a global market, plus you can't exactly monitor private agreements that aren't conducted over a regulated exchange.

[Lyrical]

Originally Posted by Chaotic

And what it means


I've been really busy with school and work and i've been trying to catch up with it - but basically at this point all they are talking about is the bailout and what it means.


What caught my attention is this 700B$ thing and it being the biggest government bailout since the great depression - are things really that bad or are the just squawking because it's an election season?

From what I understand, this has hit the financial sector due to default on loans, primarily home loans (foreclosures) and I know variable rate mortages had alot to do with that. I know this has hit really hard here at home, I was just reading figures (I live in NY, long island, one of most expensive real estate markets) Long story short figures for 2006/2007/Current for median home value in nassau / suffolk counties have been apprx (off the top of my head I just read it in the paper) 580,000/474,000 ---- 552,000/438,000 ------ 502,000 / 358,000 which is one HELL of a hit. Thats about a 20% home value decrease over three years - which honestly is EXCELLENT for me, because home prices are starting to become affordable, but I really want to know:


What does this mean for the average person? Is this something I should be worried about? I was about to buy a car, should I not? etc.

I can tell you that bankers are not friendly people right now. Since they are losing so much with the home part of their portfolio, they are tightening up on other lending (including cars). The rules keep getting tighter every month, and it all seems overdone. The banks went from being too lenient, to being too harsh.

If you are in the market for a new car, I would suggest you buy the car now, unless you have a sterling credit score and two years of solid work experience at the same place. The rules keep tightening, and it seems like there are tighter standards every month. To give you an idea, I have a friend that had a credit score of 800 (90% of Americans have a worse credit score than him). And he still didn't get the best rate on a new car because he fit the self-employed category. The banks automatically hit him with +3/4% on his rate, even though his credit was great and he had a high income.

If banks don't start lending soon, it is going to contribute to an even slower economy. Small businesses employ alot of people, but now they can't get capital they need. Banks have tightened up their home lending practices to the point that qualified people would have tough times getting a home. So then home prices drop, because no one can finance them. And banks don't even want to loan to each other anymore.

At the end of the day, you can put all of the economic stimulus out there for the consumer and flood the banks with cash reserves, but if the banks are fearful, it won't matter. When Japan had its decade long recession, it was because the banks wouldn't lend to anyone (even if it was a good use of debt) and the cash just sat in the banks.

So in a round about way, if you plan on financing (and the debt is a good use), do it now. Unless this RTC they are talking about passes, banks will get tighter and tighter (and there is still no guarantee they will start lending again). If you need a dependable car, you might want to get it now. If you can get buy on a beater, it probably won't matter.

[Kugbok_Fennin]

Originally Posted by Eomer

Figured I'd post a few links of Warren Buffet pretty much predicting everything that is coming to pass right now. I haven't heard him say much in the past couple weeks, maybe cause he's not a press whore like many others and he's just getting drowned out, I don't know. But to be honest, he's one of the few people whose opinion and course of action I'd trust without qualification. I wonder what he thinks about the bailout package?

March 2003: BBC NEWS | Business | Buffett warns on investment 'time bomb'

Berkshire 2002 Annual Report excerpt: MyProps.org - Warren Buffett: "Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal" (2002) - Housing Bubble and Bear Links



So if this was so fucking obvious 5+ years ago to Buffet, why in the hell didn't we do anything about it? I'm honestly curious about this. If this whole sham really was as insane as Buffet made it out to be 5+ years ago long before the housing market collapse, why in the fuck wasn't something done? Or was it not as self-evident as Buffet seems to think it was.

I know a few people who predicted this would happen. Ron Paul, Bob Chapman to name a couple. Not to mention anyone with a real understanding of economics would be able to figure out.

You honestly think they didn't see this happening? I for one am not that naive to think these economic guru's (I.E. Greenspan, who engineered all of this FYI) didn't see this coming.

Now if they knew this would happen and still did it anyways, isn't that criminal? Of course these guys all knew this would happen and they would be saved by a bailout.

So in essence they have allowed the country to destroy itself and they collect all the profit from the original loans, and have their loses recouped through a massive federal bailout that will only further destroy the middle class.

[Eomer]

Originally Posted by Soriak

You bolded the answer:



It's not as easy as saying you want to monitor/regulate something. It's a global market, plus you can't exactly monitor private agreements that aren't conducted over a regulated exchange.

I'm no expert on any of this shit, but can you explain to me why it is not possible to have regulations for this kind of thing? Can't they just outright ban these kinds of instruments? Or at least bring in regulations to monitor them? Why is it that there's strict regulations for most financial stuff, yet it's apparently a complete Wild West with these derivatives. I honestly don't understand.

Who gives a shit if they're private agreements? If I call up a competitor and tell him to back off on a project that I'm going after and he agrees, that's a private agreement. It's also collusion and bid rigging. And I'd never do that. cough.

Originally Posted by http://www.alternet.org/columnists/story/99812/financial_weapons_of_mass_destruction/

According to Marketwatch, the derivatives market is somewhere around $500 trillion. No, that's not a typo. That's trillion.

To put it in perspective, Marketwatch reminds us that the U.S. gross domestic product (GDP) is about $15 trillion. The GDP of all nations combined is approximately $50 trillion. The total value of all the real estate in the world is estimated at $75 trillion and the total value of all the world's stocks and bonds is about $100 trillion. But there's a $500 trillion market in derivatives!

I mean, how does that make any fucking sense? At all?

[Snugglebear]

No one can understand collateralized debt obligations and the traunches they divide them up into, much less regulate them. There was a similar vehicle several years back that was kinda like the CDOs that got regulated. But the cost of understanding a CDO is more than the paper is worth, even when it was worth real money. I assume that is why Paulson threw up a Goldilocks figure like $700 billion - even he doesn't know how much triple-A rated worthless paper is floating around for sure.

Edit - Apparently India has its own unique bailout mechanism:

CEO murdered by mob of sacked Indian workers - Times Online

[Soriak]

Originally Posted by Eomer

Who gives a shit if they're private agreements? If I call up a competitor and tell him to back off on a project that I'm going after and he agrees, that's a private agreement. It's also collusion and bid rigging. And I'd never do that. cough.

I think that's kinda the problem... except banks won't call up each other, they'll do the deal in the caymen islands or some place. Regulators are disturbingly powerless. In Switzerland, each canton (state) has their own bank - and the large ones have subsidiaries abroad. Not subsidiaries with actual employees/banks, simply legal entities to do things they aren't allowed to do here. You'd think a bank owned by the state, monitored by the state and with a board made up largely of people appointed by the state, would actually accept the state's regulations. They don't. Private banks have additional pressure from stockholders. If they are burdened by too much regulation, they'll possibly be bought out by a foreign bank and the state loses oversight. (subject to regulations by the country its headquarters are in)

That being said, I think the lack of transparency let much more build up than anyone would otherwise expect. Financial institutes are just now starting to put their cards on the table, which might be the beginning of the end. .

I mean, how does that make any fucking sense? At all?

Well, that's a little misleading. Derivatives aren't just CDS - they also include things like options and futures. If I remember correctly, CDS make up about $60tn though, which certainly is staggering. While the basics of Derivatives tend to be simple, it gets damn complicated very quickly. (especially when it's time to figure out how much they're really worth - as we're now seeing)

By the way: according to Wikipedia, the unregulated derivatives out there make up $600tn. The regulated ones make up over $1 quadrillion in a year. Not much opportunity to use that number outsides of derivatives.

What they all usually have in common is that they help spread the risk (success - you could say they were too good at doing this) and make things more predictable. Consider reinsurance companies, which sell insurance to insurance companies. (just for the example, they're not quite the same as derivatives but have the same goal) You have the insurance company that deals with people and sells them their policies, then it turns around and sells that insurance to a reinsurance provider. The benefit: If there are a lot of insurance claims in the US for a year, but very few in Europe, then US insurers won't go out of business - the reinsurance companies will cover them, while profiting from the few claims from Europe.

Reinsurance and the more basic derivatives still make sense to me. Like futures, where a producer can sell his harvest before planting it. That way he knows what he's going to get and won't get crushed if prices drop in the meantime. (The investor/speculator can take the risk of dropping prices. It's also a way to anticipate shortages down the road and provide an incentive for stocking up, so we don't have actual shortages) Consumers (like airlines for oil) can adjust their pricing for long-term planning, instead of having to raise surcharges on some days when oil goes up. The rest I'll have to leave to actual experts - assuming they even exist and people aren't just making up shit as they go along.

[rinthea]

Sigh, its not a lack of regulation or EVIL hedge funds drivinig down the value of CDS's... they are scapegoats like the recent short sellers...

Its dimwitted companies not listening to their risk management and selling CDS for minute fractions of what they're worth. Read what happens when you sell put options for a fraction of what they're worth. Selling a put option is a bet of a decline that has limited upside winnings, but potentially UNLIMITED (almost, dont get technical on me) downside losses. They made bad bets. AIG and co. The CDS arent to blame, they provide a valuable role. Morons making these bets are to blame.

Unlike the the witch hunt on short selling which is less than 1% of total stock trades, this witch hunt on CDS and derivatives will be very costly. Its 40% of the entire industry. The market for this will go on. Its a very valuable and crucial service. It will move to Asia, costing 10's maybe 100's of thousands of jobs.

Eomer, almost all of that large number of dollars in derivatives is hedged. Its not one way bets. There is no bid rigging or collusion. Most of it is stuff like BHP want to sell some ore to China. But it wont be out of the ground for a few weeks. So they enter an agreement with China. That is a derivative. Selling a condo you havent finished building yet? That is a derivative. Its not a mystical market. Its an essential part of modern day finance.

I made a diagram to explain the payoff that these bets (CDS adn put options on stocks) give. As you can see, the slim margin between the horizontal 0 line and the red line is the limited payoff if the stock doesnt drop (or the firm doesnt default on its credit), but if it does drop, losses are exponential.

FWIW berkshire sold $5 billion dollars worth of 15-20 year SP500 puts. Thats a $5 billion dollar limited gain. The difference between the black and red line at the top. Imagine the the losses if it goes bad.

[rinthea]

er i guess on that pic it should read 'Negative chance of default'... as the it goes further right, chances of default are obviously decreasing

[Lyrical]

So throughout all the chaos of the market, Buffett just bought a company last week, and is now buying $5B in shares of Goldman Sachs. Supposedly, he'll be getting preferred shares, but with warrants in them that would allow him to profit about $1B over the next five years. He made a comment that he expects that the bailout will fix the problem, and he said he wouldn't have spent $5B if he didn't think he the legislation wouldn't pass.

[Eomer]

Thanks Soriak and Rinthea, I can't say I understand much more of what's going on, but hey.

I guess what I'm getting at is this: it seems to me that the housing bubble popping in the US wasn't a cause of all this. It was simply a trigger. The actual cause is this convoluted mess in the derivatives market. I'll take Rinthea's word that not all derivatives are a problem, maybe not even most. But judging from Buffet's words and those of others, some derivatives are definitely a problem. Yet Soriak is claiming there's little that can be done to regulate these.

So let's say this bail out package works swimmingly, the markets correct themselves, the US government manages to over the next decade come close to breaking even on the purchase of all this toxic shit. Then what? We just wait for the next bubble or trigger to form to cause all this shit to come crashing down again?

Surely something has to be done other than just fixing the current symptoms, which is all I see this bailout package doing.