Wall Street's Unraveling

Wall Street's Unraveling
Robert J. Samuelson
Sep 17, 2008

http://www.washingtonpost.com/wp-dyn/content/article/
2008/09/16/AR2008091602877.html

Wall Street as we know it is kaput. It is not just that Merrill Lynch agreed to be purchased by Bank of America or that the legendary investment bank Lehman Brothers filed for bankruptcy or that the insurance giant AIG is floundering. It is not even that these events followed the failure of the investment bank Bear Stearns or the government's takeover of Fannie Mae and Freddie Mac, the largest mortgage lenders. What's really happened is that Wall Street's business model has collapsed.

Greed and fear, which routinely govern financial markets, have seeded this global crisis. Just when it will end isn't clear. What is clear is that its origins lie in the ways that Wall Street -- the giant investment houses, brokerage firms, hedge funds and "private equity" firms -- has changed since 1980. Its present business model has three basic components.

First, financial firms have moved beyond their traditional roles as advisers and intermediaries. Now, most financial firms also invest for themselves. They use partners' or shareholders' money to place bets on stocks, bonds and other securities -- so-called "principal transactions."

Second, Wall Street's compensation is heavily skewed toward annual bonuses, reflecting the profits traders and managers earned in the year.

Finally, investment banks rely heavily on borrowed money, called "leverage" in financial lingo. Lehman was typical. In late 2007, it held almost $700 billion in stocks, bonds and other securities. Meanwhile, its shareholders' investment (equity) was about $23 billion. All the rest was supported by borrowings. The "leverage ratio" was 30 to 1.

Once assembled, these components created a manic machine for gambling.

Crisis hits home to threaten the Halifax

Crisis hits home to threaten the Halifax
The Times
Sep 17, 2008

http://business.timesonline.co.uk/tol/business/industry_sectors/
banking_and_finance/article4770075.ece

The crisis engulfing the world’s financial markets moved closer to home yesterday when Britain’s biggest savings group was hit by a selling stampede.

Regulators and HBOS itself, which owns Halifax and Bank of Scotland, rushed out statements to reassure its 15 million savers and stave off the unthinkable - a flood of customers trying to withdraw their money.

In America, the insurance giant AIG, which sponsors Manchester United, was teetering on the brink. David Paterson, the New York Governor, who is coordinating the rescue effort, gave warning that AIG had just one day left to resolve its financial problems before triggering "catastrophe". A collapse of AIG would plunge the credit crisis to new depths, since every leading bank has exposure to it.

One banker in London said: "Today is the day of fear and capitulation. It could be the bottom [of the crisis], but only if AIG gets saved. If not, then there’s going to be anarchy."

George Soros, the hedge fund supremo, said: "I’m afraid we’re not through the worst of it at all - in some ways we’re heading into the storm, rather than coming out of it."

North American stocks sink after government bailout of AIG; gold soars

North American stocks sink after government bailout of AIG; gold soars
The Canadian Press
Sep 17, 2008

http://canadianpress.google.com/article/
ALeqM5iqjpYnIbDQLZ3CtmrlqMNNGJZ8dQ

Market observers said investors are frightened by the scope of the financial troubles on Wall Street and are getting out of the market because they fear the worst. Concern is also growing that troubles in the financial sector could worsen problems facing the weak U.S. economy as credit for consumers and businesses dries up.

While investors abandoned stocks Wednesday, they bought gold as a hedge against rising risk. That pushed up the price of the December bullion contract by US$66.70 to $847 on commodities markets.

Investors may be worried about higher inflation resulting from the expensive government aid to the financial sector, which also includes $200 billion to bail out failed mortgage companies Fannie Mae and Freddie Mac.

100 Year Crash: McCain advisor spurred $62 trillion derivatives market that will swamp global

100 Year Crash: McCain advisor spurred $62 trillion derivatives market that will swamp global markets
Peter Cohan
Sep 15, 2008

http://www.bloggingstocks.com/2008/09/15/
100-year-crash-mccain-advisor-spurred-62-trillion-derivatives/

Lurking in the background of this weekend's collapse of two of Wall Street's biggest names, is a $62 trillion segment of the $450 trillion market for derivatives that grew huge thanks to John McCain's chief economic advisor, Phil "Americans are Whiners" Gramm. That's because in December 2000, Gramm, while a U.S. Senator, snuck in a 262-page amendment to a government re-authorization bill that created what is now the $62 trillion market for credit default swaps (CDSs).

Gramm's 262-page amendment, dubbed "The Commodity Futures Modernization Act," according to Texas Observer, freed financial institutions from oversight of their CDS transactions. "Prior to its passage, they say, banks underwrote mortgages and were responsible for the risks involved. Now, through the use of [CDSs]-which in theory insure the banks against bad debts-those risks are passed along to insurance companies and other investors," wrote Texas Observer.

How does this relate to Lehman's bankruptcy? "[CDSs] were a key factor in encouraging lenders to feel they could make loans without knowing the risks or whether the loan would be paid back. The Commodity Futures Modernization Act freed them of federal oversight," according to Texas Monthly. And it was due to these CDSs that Wall Street held an emergency session yesterday to try to minimize the damage of Lehman's CDSs and other derivatives. Unfortunately, this session did not produce much thanks to the built-in lack of knowledge of the risks in these transactions that Gramm's legislation ensured.

Last Gasp of a Doomed Currency

Last Gasp of a Doomed Currency
Euro Pacific Capital
Sep 12, 2008

http://www.europac.net/externalframeset.asp?from=home&id=13975

By transforming $5.5 trillion of suspect mortgage-backed securities into seemingly bullet-proof Treasury bonds, the move has sparked a relief rally in the dollar as foreign investors no longer have to worry about defaults or markdowns. In fact, to holders of Fannie and Freddie debt, it no longer matters what happens to the housing market. Home prices can drop another 50%, every single homeowner can default on their mortgage, and bond holders will not lose one dime. This has emboldened foreign investors, and temporarily increased demand for both dollars and Freddie and Fannie debt.

Had the government done the right thing and not guaranteed Freddie and Fannie debt, I believe we would now be experiencing an outright financial crisis. The dollar would be falling sharply along with real estate prices, gold would be soaring and the recession would be deepening. However, by nationalizing Freddie and Fannie, the government has merely delayed the crisis. The borrowed time will cost us dearly, as the day of reckoning will now likely involve much steeper losses for our currency.

Greenspan: Tough decisions await in Lehman case

Greenspan: Tough decisions await in Lehman case
Associated Press
Sep 14, 2008

http://news.yahoo.com/s/ap/20080914/ap_on_bi_ge/greenspan

WASHINGTON - Without offering a recommendation, former Federal Reserve Chairman Alan Greenspan said Sunday the government faces tough choices as it tries to help arrange a rescue of Lehman Brothers without using public money.

He cautioned that more major U.S. financial institutions may fail in the future, but the government should not protect them all.

The weight of the housing and credit crises, he added, "is in the process of outstripping anything I've seen" and has yet to run its course. "It will continue to be a corrosive force until the price of homes in the United States stabilizes," perhaps next year, he said.

The Power of No

The Power of No
Alex Jones
Sep 11, 2008

http://www.huffingtonpost.com/alex-jones/the-power-of-no_b_125782.html

With the nation in economic meltdown and multi-front wars, Halperin summoned the Power of No. He declined to engage what he considered a stupid and distracting "issue" in the final weeks of one of the most important presidential campaigns in our nation's history.

But with Halperin, something seemed to snap. He was disgusted even to be asked about something that was, to his mind, a clear campaign maneuver and manipulation in which the so-called serious press was the shill.

And he had had enough.

Would that the rest of the news media had that gag reflex and collectively decided, "Enough!"

Though Halperin did not say so, there is something sinister about the press's complicity in allowing campaign coverage to feed hungrily on meaningless charges and counter-charges. It is not unlike the McCarthy period in which Senator Joseph McCarthy's allegations about communists in the State Department were considered legitimate news simply because he said it.

The truth or legitimacy of what he said was not seriously questioned. Today, in the echo chamber of the fast-moving web and cable news environment, the truth of something is almost immaterial as long as the charge can be repeated and repeated and repeated again.

The news media's passive willingness to be used by campaigns is bad enough. But add to that the effort to stifle serious questioning of such things as Sarah Palin's political history -- a journalistic inquiry that is central to the role of a responsible press. The public's broad contempt for press coverage of the stupid stuff creates fertile ground for silencing legitimate, tough reporting.

It is time for news organizations to stop being shills and for serious political reporters to stop being hacks. Mark Halperin and Campbell Brown have showed the way. Don't play the campaign game. Don't scramble after the next shiny object the campaigns throw your way. Take yourself and your work seriously. If the subject is stupid, say so. And say no.