Market crash: are we there yet ?

[PBzeer]

John Allison is chairman of North Carolina's BB&T, one of the biggest and most successful banks in the U.S. (though Tar Heel State rivals Bank of America and Wachovia are larger still). He is also a passionate believer in freedom (full disclosure: he's a donor to my think tank and his company is a sponsor of my radio program). He dislikes the Paulson Plan, and thinks better alternatives exist. Here's part of what he has to say in a new public letter on the subject:

BB&T is a $136 billion multi-state banking company. We have 1,500 branches throughout the mid-Atlantic and Southeastern states. While we have been impacted by the real estate markets, we continue to have healthy profitability and a strong capital position.
We think it is important for Congress to hear from the well-run financial institutions as most of the concerns have been focused on the problem companies. It is inappropriate that the debate is largely shaped by the financial institutions that made very poor decisions.


Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.


There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.
While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.



Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.
A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed “rescue” plan.

Taken from NRO

[sailhog]

I have a poll question: Has President Bush COMPLETELY checked out of his office? Has he COMPLETELY LOST INTEREST IN HIS JOB?

[PBzeer]

Hawg - what's he supposed to be doing? He has his "experts" working with Congress to pass the proposal he's submitted. He's giving a primetime speech on the situation tonight. What more should he be doing? What more CAN he do?

[PBzeer]

Come to think of it, since everyone says he's so stupid and clueless, WHY do you want him to do any more?

[sailhog]

Originally Posted by PBzeer

Hawg - what's he supposed to be doing? He has his "experts" working with Congress to pass the proposal he's submitted. He's giving a primetime speech on the situation tonight. What more should he be doing? What more CAN he do?

John,
He should be explaining a very complex situation to his fellow citizens. That's what I think he should be doing. I saw him come out a couple of days ago and butcher about every sentence that was printed on the piece of paper for him to read... but he didn't explain anything. That's what presidents do. They interpret things, they put it in everyday language and build consenses on important subjects.

You look at the guy and he's just... whipped. He's pooped. Makes me think the Brits have a better system. He's done. Get the next guy in.

[PBzeer]

He gave them 2 days to work on it, they are deadlocked, he's giving a speech tonight.

[craigtoo]

Shhhhh

THE PRESIDENT'S ON!

[Rickm505]

I heard the President say that they would buy the MBSs at a discount. Yesterday, Secretary Paulson said he wanted to pay the full 'mature value'.

Who's running the show? Has Chris Dodd said anything yet?

[chris_gee]

This analysis is basic but clear and easy to follow. A Brief Guide To Fixing Finance - Brookings Institution It includes as a factor the push to affordable housing. However this is far from being a primary cause.
I suggest that the real causes lie in excessive credit, artificially low interest rates partly caused by excessive growth in money supply in many countries, and kept low by Japan and Greenspan’s failure to do anything but keep the party going. Toss in arrogance, greed, and stupidity and a failure to regulate and problems were inevitable. This has come as a surprise to many who thought the good times would roll forever. However, it was not only foreseeable but foreseen as I have been reading many commentators over at least the last three years who foresaw it. Indeed the pattern was recognized far earlier than that.
Part of the problem was that the statistical models used to calculate risk were flawed and risk was underestimated. Indeed there was so much money chasing a return that there was very little risk premium.
Where a prudent banker would first ensure that his capital if loaned was not at risk, by bundling securities and selling them on this risk was passed to others. Supposedly spreading risk by CDOs and CDSs etc, mechanisms which grew hugely to 60 trillion and now exceed world GDP, was fatally flawed. Risk was underestimated by not allowing for a systemic fall, and the assumption made that the counterparties were good for their liabilities. The losses and liabilities attached to these derivatives in the cases of Lehman and AIG are as yet unknown, and in the latter case may make the buyout much more expensive than first evident.
The pressure to misprice risk was on the financial employees because premium less risk equals profit. A good and easy to follow explanation is at "AIG’s Dangerous Collapse" by Daniel R. Amerman, FSU Editorial 09/17/2008.
A marginal lowering of risk has a substantial effect on profit and therefore bonuses as well as ensuring a greater profit by gaining a greater market share by being competitive with pricing. So assume less risk, and the firm profits supposedly and you get a big bonus. When you are making huge profits on these trades huge bonuses are paid. I believe the average per employee of GS last year was around 660,000. The catch is not only is this a zero sum game but when the whole stack of cards collapses with 40 x leverage the losses are huge and the capital is wiped out. While GS supposedly has lost less the fact that Warren Buffet bought in at a calculated 20% annual return in interest plus warrants shows how serious the true picture is.
While the average person probably has little idea what is going on, the sense that he is the fall guy either in bail outs or in unemployment and recession or inflation should the financial system have major problems may understandably make him aggrieved.

[PBzeer]

well Hawg, was that what you wanted?