It's not that people don't care, but rather they don't understand the situation well enough or are powerless to do anything about it. Wall Street really screwed Main Street over with the credit and derivatives bubble. This current crisis is unprecedented and could make the decade long Japanese stagnation look like a sneeze. Or one could assume the powers that be realize the world would get pulled down by an American collapse, and hope a disaster will be averted.
i highly doubt even 5% of the america public knows about the credit swap market and potential massive nuclear trainwreck there.
my boss is the top credit guy at my company, and he is a very smart guy who has been around hedge funds and just has a very good knowledge of a lot of markets and sectors including banks. i asked him how credit swaps work, he couldn't tell me, he was of course aware of them.
The fed will run out of money when -- lenders won't accept the money because of the high inflation. Basically Fed creates money by robbing the lenders. Corporations, as a whole, is net borrower. Since the U.S. economy as a whole is net borrowers too, that means other countries, namely China, will have to share some burden, until, they damp it. That's what happened to Latin America. Foreigners won't accept the local fiat money because of the hyper inflation, and all debt, including governments' have to be issued in then-strong dollar. And you have a bankrupt government.
The federal reserve and it's bubblicious policies since Reagan is where a huge chunk of the blame lays in my eyes. We've built a country out of debt and deficits and it's time to get our act together. Magical fed policies can't save us all the time.
I just don't understand how financial institutions that are so highly regulated in certain spheres are/have been allowed to gamble assets in this market which they don't really understand.
There was a very good article in the Bloomberg magazine this month. It pretty much laid everything out. They are just basically bets on the credit worthiness of a company. The only problem is it is completely unregulated and the market is somewhere between 35 and 65 trillion dollars and completely untested. If a major bankruptcy occurs and the seller of the contracts can't fulfill their obligation to pay up then you could have a major trainwreck. Oh yeah and JP Morgan is the biggest player in this unregulated market...
HAHA YES! The market's volatility makes me sick. I was being adventorous and bought 100 shares pre market (through etrade) of FRE for 4.34/share. I haven't made a fortune but it sure is interesting on how some people probably made tons or lost tons within 6 hours.
It's really not that complex, basically you have 2 sides that are betting on the credit rating of a particular asset. i.e. you pay x dollars to a counter party and receives y dollars when the assets drops below AA rating. The problems isn't really the complexity of the swaps, but rather the volume. They really are meant for insurance to the asset you own. But when people started to do pure synthetic deals, creating swaps for liquidity and profits. You get this insane dollar amount, essentially multi billion IOUs, and one link off the chain can set off a big disaster.
Boo-yaa, off to buy myself a HUMMER H3 with a diamond-encrusted gearshift, while I toss $20's in my wake, Pac-Man Jones style!
EDIT: well we're back down 160, make that a HUMMER w/Cubic Z encrusted gearshift, and me tossing $10's.
Nope, I am just setting up a stop order for $6 so I don't lose money on the trade unless of course it dips after hours. Other than that, Let's see if the $200 invested grows to anything. So much for a rally...
The entire financial system is based on our faith on our government. That is all that really backs up our money. Trillions of dollars have been cut from equities. That is probably more than actual losses incurred by this banks. And even these loses are paper loses. Next week the banks might report bad numbers but not as bad as expected and watch the market makers drive the price of financials up. I think it would be best if this country didn't understand the entire truth because this country is bankrupt.
Just wait till EVERYONE says stocks are a bad buy, Jim Cramers show gets cancelled, and CNBC goes off the air. Then it's time to buy stocks! Business Week published an article titled "The Death of Equities" in 1979. We then had about a 25 year bull run. It's time to watch out for those signs. Sadly, everyone is still talking about "the end of the commodities boom" even though it just freakin started.
You make a solid point. I was reading "Beating the Street" by Peter Lynch and he compiled some quotes back in the fall of 1990. "Layoffs this time hit professional ranks with unusual force," Wall Street Journal, October 4 "The Consumer has seen the future, and gotten depressed," Business Week, December 10 "A survival guide for the age of anxiety," Newsweek, December 31 "Can America still compete?," Time, October 29 This was followed by the Dow going up 25% in 1991. The titles to these articles look pretty similar to some we read about everyday today... "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." Warren Buffett
Yep, exactly. But it still seems to me that people are more afraid of buying commodities than equities. Most people only recommend 5-10% of your portfolio in commodities and more in stocks. But more and more managers are taking money out of stocks and just holding cash. And Fannie and Freddie just keep looking worse- it looks like the capital they will have to raise dwarfs their market capitalization. They are probably insolvent right now.
http://biz.yahoo.com/ap/080713/mortgage_giants_crisis.html AP US spells out Fannie-Freddie backstop plan Sunday July 13, 8:14 pm ET By Jeannine Aversa, AP Economics Writer Fed offers to lend to mortgage companies, Treasury plans possible equity investment WASHINGTON (AP) -- The Federal Reserve and the Treasury announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival. The steps are also intended to send a signal to nervous investors worldwide that the government is prepared to take all necessary steps to prevent the credit market troubles that started last year with losses from subprime mortgages from engulfing financial markets and further weakening the economy and housing markets. The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies "should such lending prove necessary." They would pay 2.25 percent for any borrowed funds -- the same rate given to commercial banks and Big Wall Street firms. The Fed said this should help the companies' ability to "promote the availability of home mortgage credit during a period of stress in financial markets." Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current line of credit to the two companies should they need to tap it and to make an equity investment in the companies -- if needed. "Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owner companies," Paulson said Sunday. "Their support for the housing market is particularly important as we work through the current housing correction." The Treasury's plan also seeks a "consultative role" for the Fed in any new regulatory framework eventually decided by Congress for Fannie and Freddie. The Fed's role would be to weigh in on setting capital requirements for the companies. The White House, in a statement, said President Bush directed Paulson to "immediately work with Congress" to get the plan enacted. It also said it believed the plan outlined by Paulson "will help add stability during this period." Investors may not be as sanguine, however, according to Chris Johnson, an investment manager and president of Johnson Research Group in Cleveland. Stocks of financial institutions "are going to get clobbered," he predicted. "It is a situation where regulators and the government are trying to play catch up, and that means everything is not discounted in the stock prices yet." The Dow Jones industrials on Friday briefly fell below 11,000 for the first time in two years and Johnson expects shares of investment banks and regional banks could notch even lower as investors react to this weekend's developments. Fannie Mae and Freddie Mac either hold or back $5.3 trillion of mortgage debt. That's about half the outstanding mortgages in the United States. Fannie was created by the government in 1938 to provide more Americans the chance to own a home by giving financial institutions an outlet to sell mortgage loans they originated, freeing more cash to make more home loans. It moved from government to public ownership in 1968 and Freddie was started two years later. Sunday's announcements are likely to raise anew criticism that the government should have moved sooner to rein in the two companies, especially since investors widely assumed they would be bailed out if they got into trouble. The government denied it, but what was seen by investors as an implicit guarantee of support allowed Fannie and Freddie to borrow at rates only slightly higher than the Treasury -- and lower than what their banking competitors had to pay. "This really blows away the notion of an implicit guarantee," independent banking consultant Bert Ely said of the Treasury's plan to ask Congress to allow it to make equity investments in Fannie Mae and Freddie Mac. "It suggests a greater concern about how these companies are doing. It says the problems are deeper. It gets to the solvency of the companies, not just the liquidity." The announcement marked the latest move by the government to bolster confidence in the mortgage companies. A critical test of confidence will come Monday morning, when Freddie Mac is slated to auction a combined $3 billion in three- and six-month securities. Paulson's goal is to get his plan attached to a sweeping housing-rescue package. The Senate and House have each passed bills and a final package has to be hammered out. The centerpiece of the legislation is to help strapped homeowners avoid foreclosure legislation but it also contains provisions to revamp oversight of Fannie Mae and Freddie Mac. "Treasury's plan is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to U.S. taxpayers," said Sen. Charles Schumer, D-N.Y. House GOP leader John Boehner, R-Ohio, and Republican Whip Roy Blunt, R-Mo., said they "stand ready to work with Secretary Paulson and congressional Democrats to take appropriate steps to ensure the soundness of our mortgage markets." Officials from Treasury, the Fed and other regulators worked in close consultation throughout the weekend after growing investor fears about the companies' finances sent their shares and the overall market plummeting last week. Shares of Fannie Mae plunged 45 percent last week and are down 74 percent since the beginning of the year. Freddie Mac shares fell 47 percent last week, and have fallen 77 percent so far this year. Freddie Mac Chairman Richard Syron said Sunday that preliminary second-quarter results show that his company had "a substantial capital cushion" above the 20 percent minimum surplus it is required to maintain. Fannie Mae President and CEO Daniel Mudd said he believes the steps could send a calming message. "Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market. We will continue to do our part to provide liquidity, stability and affordability to the housing market now and in the future." A senior Treasury official said any increase in the line of credit -- now at $2.25 billion for each company-- would be at the Treasury secretary's discretion. The same would apply to any equity investment made by the government. The official, who spoke on condition of anonymity, also sought to send a calming message about Fannie's and Freddie's financial shape, saying: "There's been no deterioration of the situation since Friday." The Fed's offer of funds is viewed as a temporary backstop until Treasury can get its plan in place. The collateral they would have to pledge -- Treasury securities and federal agency securities -- is more narrow than the collateral commercial banks and Wall Street firms must pledge for emergency lending privileges. If one or both of the companies were to fail, it would wreak havoc on the already fragile financial system and the crippled housing market. The problems would spill over in the national economy, too. Paulson on Friday said the government's focus was to support the pair "in their current form" without a takeover. Hoping to bolster confidence, Senate Banking Committee Chairman Chris Dodd, D-Conn., told CNN on Sunday that Fannie and Freddie are financially sound. "What's important here are facts," Dodd said. "And the facts are that Fannie and Freddie are in sound situation. They have more than adequate capital -- in fact, more than the law requires. They have access to capital markets. They're in good shape. The chairman of the Federal Reserve has said as much. The secretary of the Treasury has said as much." Last week Fed Chairman Ben Bernanke and Paulson, appearing before the House Financial Services Committee, made a point of saying that the regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, has found both companies adequately capitalized. AP Business Writers Stephen Bernard and Joe Bel Bruno in New York contributed to this report.
