Finreg and the markets.

[Pheidippides]

What I don't get is President Obama stated before signing this bill:



is why did we have taxpayer-funded bailouts in the first place? Why couldn't we let some companies fail like GM?

Also, this bill doesn't seem to do much for private sector jobs:



So we will follow up this bill with another stimulus to unemployment:

I actually quite like the bailouts from today's position (some of them I thought were absolutely necessary at the time in order to prevent us from living in caves again). We should be clear as to the form the bailout took - it was not free money with no strings attached. It was an investment (mostly in the form of preferred stock or similar, it appears) made by the government. These types of investments happen every day in the real world when companies are failing and need cash if the economics support the investment, and all of this without government intervention. The problem back in '08/'09 is that the financial markets that at least probably would have made those investments were not working because of the crash (I can't tell you how weird it got, when LIBOR was essentially broken). So the government did it instead. And now it looks like, as far as I can tell, the bailout investments are going to bring a net positive return to the government. I don't have the actual figures, of course, and am open to being proved wrong.

The problem with finreg (and what little I know about it) is that it goes about making sure we don't get into the same problem in a way that has other consequences. Look, derivatives are good and useful, even those nasty credit default swaps you've heard about. The derivatives are - in my view - simply a scapegoat for the real culprit here: investment bank compensation systems. Because most banks do bonuses, etc. on a short-term review system, everybody can see the crash coming but nobody has the guts to call it because they may lose their shirts for a bit (and hence their job) because timing the crashes is not easy. Couple that with ridiculous lending practices based on the belief that real estate (unlike tech stocks) would never go down simply because it never had, and you have a disaster.

Make no mistake - there are a lot of factors that contributed to this mess. I don't tend to throw around a lot of profanity, but clusterfuck is precisely the right word for what happened. The real tragedy, though, is that a lot of people saw it coming (if not the severity) but few people were willing to go against the flow. Hell, I saw this coming back in 2004/2005 (I have witnesses! In particular, my MIL thinks I am an oracle), and I'd be retired with millions if only I would have known what a credit default swap was and how to buy it back then.

[Uncle Ted]

I actually quite like the bailouts from today's position (some of them I thought were absolutely necessary at the time in order to prevent us from living in caves again). We should be clear as to the form the bailout took - it was not free money with no strings attached. It was an investment (mostly in the form of preferred stock or similar, it appears) made by the government. These types of investments happen every day in the real world when companies are failing and need cash if the economics support the investment, and all of this without government intervention. The problem back in '08/'09 is that the financial markets that at least probably would have made those investments were not working because of the crash (I can't tell you how weird it got, when LIBOR was essentially broken). So the government did it instead. And now it looks like, as far as I can tell, the bailout investments are going to bring a net positive return to the government. I don't have the actual figures, of course, and am open to being proved wrong.

For the big banks and maybe AIG it was most likely a good investment but GM? WTF? Unless GM can file bankruptcy so it can get relief from its union contracts and entitlement obligations it is screwed. Government investment has just delayed the inevitable. Why is the government investing the people's [future] money anyway? Let the people do it. Of course, the people are too afraid do it now because they don't know what the hell the government is going to do next. The current stagnant market indicates this.

BP looks like a good buy and could most likely use a bailout investment right now. Why doesn't the government invest in BP too? [Add your favorite company that is on the rocks that needs investment here.]

The problem with finreg (and what little I know about it) is that it goes about making sure we don't get into the same problem in a way that has other consequences. Look, derivatives are good and useful, even those nasty credit default swaps you've heard about. The derivatives are - in my view - simply a scapegoat for the real culprit here: investment bank compensation systems. Because most banks do bonuses, etc. on a short-term review system, everybody can see the crash coming but nobody has the guts to call it because they may lose their shirts for a bit (and hence their job) because timing the crashes is not easy. Couple that with ridiculous lending practices based on the belief that real estate (unlike tech stocks) would never go down simply because it never had, and you have a disaster.

Make no mistake - there are a lot of factors that contributed to this mess. I don't tend to throw around a lot of profanity, but clusterfuck is precisely the right word for what happened. The real tragedy, though, is that a lot of people saw it coming (if not the severity) but few people were willing to go against the flow. Hell, I saw this coming back in 2004/2005 (I have witnesses! In particular, my MIL thinks I am an oracle), and I'd be retired with millions if only I would have known what a credit default swap was and how to buy it back then.

Here is a simple explanation on what happened and how the government (mainly Barney and Friends) screwed up:

[YOUTUBE]_SdtoKeFTi0[/YOUTUBE]

[Pheidippides]

For the big banks and maybe AIG it was most likely a good investment but GM? WTF? Unless GM can file bankruptcy so it can get relief from its union contracts and entitlement obligations it is screwed. Government investment has just delayed the inevitable. Why is the government investing the people's [future] money anyway? Let the people do it. Of course, the people are too afraid do it now because they don't know what the hell the government is going to do next. The current stagnant market indicates this.

BP looks like a good buy and could most likely use a bailout investment right now. Why doesn't the government invest in BP too? [Add your favorite company that is on the rocks that needs investment here.]

GM looks like it's a decent investment as well, now (Chrysler should have been let fail, IMO). At the time I was opposed to it, but my opinion has been tempered. I do very strongly think that our government should NOT be in the business of providing funds to struggling companies EXCEPT in times when the financial markets are not functioning properly in an extraordinary way. The slippery slope scares me. The markets are tight right now, but not entirely dysfunctional, so I'd be opposed to further bail-out style investments.

Even if we assume that the markets are in turmoil (I don't believe this) and that BP is a great buy (I do believe this, or at least I will in three months), BP is not an American company. Let Britain worry about them. Also, there are plenty of other companies in the oil and gas space that will take over BP's operations if BP goes under. I can name a dozen. Not so with GM/Ford/Chrysler. That's pretty much all we have in the automotive sector. But as I said, I think the markets have to be extraordinarly screwed up (LIBOR not working is pretty strong evidence - let me know if that happens again) for the gov't to get involved. I worry about the situation 5 years down the road, where Proctor & Gamble, say, is struggling and people start arguing in congress to bail them out based on the auto and bank bailouts.

[Moliere]

For the big banks and maybe AIG it was most likely a good investment but GM? WTF? Unless GM can file bankruptcy so it can get relief from its union contracts and entitlement obligations it is screwed. Government investment has just delayed the inevitable. Why is the government investing the people's [future] money anyway? Let the people do it. Of course, the people are too afraid do it now because they don't know what the hell the government is going to do next. The current stagnant market indicates this.

While I don't like the investment in GM from a government intervention standpoint, there is something to say about making sure that certain industries remain active and vibrant in a country. Obviously we have a vested interest in keeping steel and manufacturing industries going and those are tough things to do without government intervention when you are competing against the Chinese and other countries with low pay rates. The last thing I want to have happen is to outsource all manufacturing jobs to China and then they nationalize all the plants and start a war and we are left with two decade old plants to try to manufacture military vehicles and weapons. I realize that we have exported a lot of our manufacturing, but we have a vested interest in keeping some of it here.

Of course, maybe you just dislike the GM bailout because your GM cars sucks so bad . I will admit that I love my GM car.

[Moliere]

I do very strongly think that our government should NOT be in the business of providing funds to struggling companies EXCEPT in times when the financial markets are not functioning properly in an extraordinary way.

I agree. The government should only invest in something if the markets are not functioning correctly and not because it is a "great buy". If it is such a great buy, then individual people and private institutions should be pouring money into it.

[Uncle Ted]

Of course, maybe you just dislike the GM bailout because your GM cars sucks so bad . I will admit that I love my GM car.

I am admit that I am very biased against GM given my POS Yukon is still in the shop.

I am not a Mitt Romney fan but he called this one right considering GM now has lots of thoughts of bankruptcy even after the bailout funds.

I just hoping that GM will fix our Yukon before they close our local dealership.

[cowboy]

I believed then, and I believe now, that TARP was absolutely necessary to keep us from plunging into a depression. My problem with it is that politicians have expanded its scope to inclued any pet project they want instead of returning unused and repaid funds to the Treasury. $700 billion would have gone a long way toward deficit reduction and restored confidence in our country's financial position.

This whole mess started because people miscalculated and underestimated risk. That's it. Products and positions became so complicated that small errors in risk calculation were leveraged and magnified to enormous proportions. I'm not sure that new regulations are going to prevent that. Further, it drives me batcrap crazy that the companies who paid the money back are getting punished, while the institutions that we lost our butts on (Fannie and Freddie) are skating away with roses in their hands and smiles on their faces.

[landpoke]

I believed then, and I believe now, that TARP was absolutely necessary to keep us from plunging into a depression. My problem with it is that politicians have expanded its scope to inclued any pet project they want instead of returning unused and repaid funds to the Treasury. $700 billion would have gone a long way toward deficit reduction and restored confidence in our country's financial position.

This whole mess started because people miscalculated and underestimated risk. That's it. Products and positions became so complicated that small errors in risk calculation were leveraged and magnified to enormous proportions. I'm not sure that new regulations are going to prevent that. Further, it drives me batcrap crazy that the companies who paid the money back are getting punished, while the institutions that we lost our butts on (Fannie and Freddie) are skating away with roses in their hands and smiles on their faces.

You ought to start a blog about this stuff. A REGULARLY UPDATED blog with this sort of "Common Sense Perspective" would garner a huge audience I bet.

[Uncle Ted]

Even if we assume that the markets are in turmoil (I don't believe this) and that BP is a great buy (I do believe this, or at least I will in three months), BP is not an American company. Let Britain worry about them. Also, there are plenty of other companies in the oil and gas space that will take over BP's operations if BP goes under. I can name a dozen. Not so with GM/Ford/Chrysler. That's pretty much all we have in the automotive sector. But as I said, I think the markets have to be extraordinarly screwed up (LIBOR not working is pretty strong evidence - let me know if that happens again) for the gov't to get involved. I worry about the situation 5 years down the road, where Proctor & Gamble, say, is struggling and people start arguing in congress to bail them out based on the auto and bank bailouts.

BP is more American that one might think:

...39 percent of the company is owned by American shareholders and six Americans – half the total – sit on its board of directors.

There is a reason it is no longer called "British Petroleum”.

[Uncle Ted]

I agree. The government should only invest in something if the markets are not functioning correctly and not because it is a "great buy". If it is such a great buy, then individual people and private institutions should be pouring money into it.

Because investors are scared to hell what the government might do. BP could be a good buy if the government doesn't mandate more stuff.

[cowboy]

You ought to start a blog about this stuff. A REGULARLY UPDATED blog with this sort of "Common Sense Perspective" would garner a huge audience I bet.

That's a great idea. I need something else to feel guilty about procrastinating. I'd guess that for something like that to be successful, I'd need reader participation to help supply regular column ideas.

[Moliere]

Because investors are scared to hell what the government might do. BP could be a good buy if the government doesn't mandate more stuff.

I'm not talking about one company, I'm talking about the market. Back in 2008 the entire credit market dried up. No one want to lend. I think Niku already made the point that if BP goes under, there are many O&G companies waiting in the wings to take their place. I understand many O&G companies have taken a hit on the deep-water drilling ban, but this is not a case where the government needs to intervene and inject capital.

I guess the government could always buy a bunch of BP stock and then let them off scot-free and then sell the stock for 2 or 3 times what they paid for it, but I'm guessing that would not be looked on favorably by anyone.....well I'm sure Nanci and Barney could spin it one way or the other but everyone else would be peeved.

[Moliere]

BP is more American that one might think:



There is a reason it is no longer called "British Petroleum”.

This is why buying a Tundra is just as American as buying a Suburban.

[byu71]

What ticks me off is that the money paid back with profits to the government from TARP are now being used to fund other projects. Why didn't that money have to come back and go into the treasury to reduce the debt or increase the feds reserves or whereever it came from.

What is maddening is they can appropriate money and if they don't use it they spend it where they want without asking for it for that particular thing.

[Uncle Ted]

This is why buying a Tundra is just as American as buying a Suburban.

Except the Tundra will still running great after ten+ years and the three year old Suburban/Yukon will be in the shop every other month. At least that is my experience.

Edit: Actually the Tundra is more american than the Yukon. The Tundra is 75% american while the Yukon is 70%.