Originally posted by: LegendKiller
Originally posted by: GrGr
You make it sound as if US finances is a cardhouse waiting to implode. Are things that bad?
The US can survive rough times. I think the current bubble mentality is insane; the US believes it can do whatever and there is never any real consequence. Inflate to infinity, recreate old Trusts and Ponzi schemes under new names, invade those too weak to defend themselves, start arms races, militarize etc. Reinflating the bubble economy would be just more of the same that has brought us to this point.
The US is following the same curve England did pre WWI as the old Empire declined. I think it is better for the US to take the hit now, while it is still manageable, than to push it into the future (through a bail out). Then when the inevitable crash eventually comes will be even bigger and hit far harder.
But maybe you are right and bailouts are the only option to a systemic wipe out of US finances. But I don't think we are at that point yet, are we?
Things are pretty bad out there and I don't think people realize this. I work in securitization, an area that will probably get a lot of attention in the future, since it partially allowed the mortgage market to take off. It's also a bad finance market to be in right now, layoffs everywhere, the viability of it being questioned, and losses across the whole finance market.
I specifically work in the asset backed commercial paper market (ABCP), where we take long-term assets and fund them in the short-term market. This is the same market where the Structured Investment Vehicles (SIVs) funded. The sivs funded higher risk assets with the short-term funding and were punished by the market heavily.
Essentially, banks set up "conduits" which issue ABCP, while we negotiate bonds from issuers. Issuers can be from the smallest equipment leasing company, to the biggest student loan companies. All of them need short-term funding, until they can issue "term" bonds, whereby investors buy bonds that go out 1+ years.
Now, the ABCP market, for 20+ years, was healthy. It sustained some dings, where funding costs were higher, but nothing like now. Traditionally, the market funded at Libor + 0 spread. LIBOR is what the English banks charge eachother for funding (akin to the Federal Funds rate). This was great for issuers, since they could fund short-term at very low costs. The conduits (except for many SIVs) are supported by the host-banks, through letters of credit and liquidity agreements (Liqs/Locs). It was thought that nobody would allow a conduit to sustain a loss to commercial paper, so the CP funded at risk-less rates. They usually funded at 30-120 days long, very short term.
However, starting in August, the market dried up. What used to go for LIbor + 0%, now goes for Libor + 50bps (.5%), or more. This is because people do not want to buy riskless paper for anything but a premium over riskless rates.
You see this everywhere, bonds that are essentially riskless, now go for massive premiums, all of which will eventually either get eaten through reduced profitability, or passed to consumers. Keep in mind, that this is a $1Tr market, just ABCP, the securitization market is trillions upon trillions of dollars.
For example, I recently saw a credit card securitization bond price for Libor + 1.1%. Last year it priced at Libor + .05%. This is a AAA bond that if it were to sustain losses, it would equate to 40% consumer defaults, something that would only happen in the most severe of Great Depressions.
So, since it's not about risk, since these are riskless assets, it's about something else. That something else is liquidity. The financial sector, as a whole (issuers, banks/underwriters, investors) are leveraged. They are also loathe to let go of money in a pending economic downturn. Thus, they make you "pay up" for getting funding (liquidity). Things *ARE* pretty bad out there, it just hasn't hit the middle-market yet, since it takes a while to filter down. You will see this hurt the economy pretty badly.
If banks fail, this will only get worse Credit will dry up, people will become more risk-averse, the economy will certainly contract, and we will go into a severe recession. That I am sure of.
If we bail out banks, something which I am loathe to do, it presents a moral hazard. I certainly think there needs to be regulation and increased capital requirements. I also think the mortgage market needs a massive overhaul.
What should be done? I really don't know. I think doing nothing and letting banks fail is a bad idea. I think bailing them out presents massive problems. I think bailing consumers out present the same problems.
Personally, I'd like to see the banks get some help, but only enough to keep them on life support until these write-downs are re-recognized and assets come back up. If that happens I would like to see them give up quite a bit, including increased regulatory oversight, capital requirements, and perhaps some prosecution.
On the consumer side I would like to see some people get help, but much the same as the banks, not much.
It's a big fricking mess that everybody created, and I mean *everybody*. Responsible borrowing and lending went out the door for greed and I think it's too little to just chastise people.
As far as changes, I definitely think that there needs to be a borrowers bill of rights passed in congress. The banks/lenders got their legislation in 2005 and it's an un-even equation right now.
Don't be fooled, I am as big of a financial darwinist as you'll ever find. However, I can see the harm letting the financial market fail. It *WILL* hurt everybody and cause massive problems.
People who think that the banks should be allowed to fail on their own, are the same who say idiotic things like "we will turn xx country into a parking lot" or "all corporations are bad" or "it's greedy bankers". Without realizing the ramifications of their points. It's narrow minded and idiotic to take such a tunnel vision on everything. It's very indicative of how stupid some of our population is.
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