Horrible News: Lehman Brothers Bankrupt and Merrill Lynch bought by BAC

[Banquo's Ghost]

Thats just populism.

A company can hire a monkey as CEO if it so desires. The responsibility to ensure that a business is managed correctly lies with the board and the investors, not the government.

Somewhere along the line, these golden parachutes had to be disclosed to, if not approved by, shareholders. They certainly weren't on the first page of the annual report, but the information was acessible. If a shareholder didn't believe in that sort of compensation, it was his responsibility to sell the stock or lobby to get it changed.

I remember an older gentleman who invested that I used to help after school for required service hours. He watched his stocks every day and took an active interest in the companies he "owned". He could recite business plans, past and present variables, and even bios on important people in management.

Nowadays, you're lucky to find someone who checks their investments more than quarterly - more often than not its annually. 401ks and the like have thrown a huge number of people in the market who don't really know how it works or even care as long as they make money; then when things go bad, they're all looking for someone to blame. In general, the market has become a far more impersonal atmosphere with more and more power put in the hands of brokers who more than likely all go to the same country club.

If people dont have the time to educate themselves on what they are buying into, maybe they should invest in something less risky. /endrant

You make excellent points, but only I fear, from a theoretical standpoint.

The vast majority of shareholders are in fact, institutions rather than the little old man you idealise. These institutions are run by people keen to perpetuate their own share options, golden parachutes and excessive salaries. Whilst the market does act on these interests, one can see rather too many instances of smaller investors being over-ruled at meetings on remuneration, and when companies go bust, the same fellows in charge end up in a cushy chairmanship next door.

The system works, but not when significant stresses are applied, and not through the actions or otherwise of small investors.

Well, rarely. Tuff, you asked in another thread how the US choice of leaders affected my life. Well, your lovely President Bush and his Treasury Secretary have just given me a goodly sum of your tax dollars, bless them. My financial manager bought up banking shares in the UK and Ireland because we both felt, as a long term investment, they were near bottom and could only recover in the next few years. As it happened, Secretary Paulson promising loads of tax dollars to buy up banker's toxic debt kicked them back into the stratosphere in one day, and we sold 'em all again for an average 70% return.

Hurrah for American Socialism!

[Husar]

Welcome to the USAR (Union of Soviet American Republics).

You mean the uhm... Historic Union of Soviet American Republics... yeah, sounds a lot better to me.

In related "news" I saw that some german bank dealing with tax money in some way sent 300 Million Euros to that Lehman bank on Monday, after the collapse of the bank was known since Saturday so they basically threw 300 million Euros taxpayer money out of the window(or so the news said anyway). Now they're looking for someone to blame of course but that could be hard, someone said such transactions have to be signed by several people.
My question is if the government helps the bank with what you call a bailout, wouldn't that mean that all those investments aren't lost after all, isn't that the whole point anyway?

[Xiahou]

The traditional public bulwark against such galloping greed is deligent government regulation, but the dozing watchdogs of Congress and the Bush administration weren't much interested in ensuring that investment banks offering mortgages had enough reserves to cover bad loans.

I'd argue that the best bullwark against "galloping greed" is the greed of others. Companies rarely become exploitative, because they'll lose customers to competitors who aren't. The trouble comes when you have the government wading in to "fix" things. Just as much as you can count on greed in the free market, you can count on corruption and incompetence when it comes to government.

Setting aside the inherently corrupt nature of government sponsored enterprises like Fannie and Freddie, let's skip to more recent history- when the Clinton administration came up with the “The National Homeownership Strategy: Partners in the American Dream” plan. Here's an article from back in February that lays some of the blame for the current mess there.

Plenty of other ideas in the plan did become reality, though. Knowing what we know now about the housing bust, the earnest language in the document seems faintly ridiculous. Here's an excerpt. Read it closely and you can see the seeds of disaster being planted:

For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership.

Note the praise for "creativity." That kind of creativity in stretching boundaries we could use less of. Mason puts it well: "It strikes me as reckless to promote home sales to individuals in such constrained financial predicaments."

Obviously, Bush continued on with similar policies- encouraging (forcing) businesses to make loans to people who were bad risks. The now obvious result of all of this is the mess we're in today.

The government caused the problem, so pardon me for remaining skeptical when people say the government will do it right next time, with more regulation and favoritism. The nationalization of companies and obscenely expensive bailouts is disgusting, but we have little alternative given the mess we're now in. The question will be what do we do when we're finally out of the woods?

[Husar]

when we're finally out of the woods?

You really think you'll ever get there?

[KukriKhan]

You mean the uhm... Historic Union of Soviet American Republics... yeah, sounds a lot better to me.

I bow to superior acronymity.

Are you still sure you want to come live here? At least over there, as far as I can tell, you guys pretty much abide by your constitution. Over here, we seem to have moved from ignoring ours, to dousing it with gasoline, setting it on fire, and stomping it to smithereens. Then charging the citizenry for the paper, gasoline, and cleanup costs.

[Oleander Ardens]

What a terrible day for stocks. If they go up like that markets will go down low in the long term. Well anyhow, thanks to the American taxpayer for lifting my few remaining stocks

[CountArach]

The Financial Bailout Bill was released today and, surprise, surprise there is a power grab in it:

I would guess that this has to be one of the biggest peacetime transfers of power from Congress to the Administration in history. (Anyone know?). Certainly one of the most concise.

The Treasury Secretary can buy broadly defined assets, on any terms he wants, he can hire anyone he wants to do it and can appoint private sector companies as financial deputies of the US government. And he can write whatever regulation he thinks are needed.

I understand that they wanted freedom to respond and an ability to move quickly, but to designate the Treasury Secretary full power to oversee the, uh, Treasury Secretary's decisions seems unusual. Especially given that Congress only gets a report twice a year:

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

This graph really stands out:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Whoa.

So, for the next three months, and then an additional six months after that, the Treasury Secretary can do anything he deems appropriate without anybody anywhere looking it over.

[KukriKhan]

The Financial Bailout Bill was released today and, surprise, surprise there is a power grab in it:

The transition to the Imperial Presidency is almost complete. Just throw the Dept of Transportation and the FCC under Homeland Security, and give the Post Office the power to charge their own rates anytime they want, and charge mail recipients 10 cents per piece for the privilege of picking up their mail at a secure, semi-disclosed location...

and we're there. All Hail King George!

No wonder those guys fight tooth-and-nail for the job. Won't they be disappointed when, by Executive Order, for the good of the country, as a "temporary" measure, martial law is declared, elections are postponed indefinitely, Congress and haebeus corpus are suspended, and for added security, soldiers are stationed in private homes. But hey! the trains will run on time.

1776.

Dust off yer muskets, lads.

[CountArach]

I think Senator Bernie Sanders has a good plan that will punish the people who actually caused this mess rather than the regular tax payer.

Specifically, to pay for the bailout, which is estimated to cost up to $1 trillion, the government should:

a) Impose a five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers. That would raise more than $300 billion in revenue;
b) Ensure that assets purchased from banks are realistically discounted so companies are not rewarded for their risky behavior and taxpayers can recover the amount they paid for them; and
c) Require that taxpayers receive equity stakes in the bailed-out companies so that the assumption of risk is rewarded when companies’ stock goes up.

(2) There must be a major economic recovery package which puts Americans to work at decent wages. Among many other areas, we can create millions of jobs rebuilding our crumbling infrastructure and moving our country from fossil fuels to energy efficiency and sustainable energy. Further, we must protect working families from the difficult times they are experiencing. We must ensure that every child has health insurance and that every American has access to quality health and dental care, that families can send their children to college, that seniors are not allowed to go without heat in the winter, and that no American goes to bed hungry.

(3) Legislation must be passed which undoes the damage caused by excessive de-regulation. That means reinstalling the regulatory firewalls that were ripped down in 1999. That means re-regulating the energy markets so that we never again see the rampant speculation in oil that helped drive up prices. That means regulating or abolishing various financial instruments that have created the enormous shadow banking system that is at the heart of the collapse of AIG and the financial services meltdown.

(4) We must end the danger posed by companies that are “too big too fail,” that is, companies whose failure would cause systemic harm to the U.S. economy. If a company is too big to fail, it is too big to exist. We need to determine which companies fall in this category and then break them up. Right now, for example, the Bank of America, the nation’s largest depository institution, has absorbed Countrywide, the nation’s largest mortgage lender, and Merrill Lynch, the nation’s largest brokerage house. We should not be trying to solve the current financial crisis by creating even larger, more powerful institutions. Their failure could cause even more harm to the entire economy.

[Banquo's Ghost]

The tax rise in a) is just theft for no good reason and will change nothing.

However, the following points have some merit, most especially 4). The increasing danger is that consolidation will result in a set of global institutions that are back-stopped by national taxpayers, but free from national policy. No organisation that benefits from market freedoms can be "too big to fail". Nor should they receive the advantages of incorporation.

[CountArach]

The tax rise in a) is just theft for no good reason and will change nothing.

I believe that 1a was more a way to raise the money to help pay off the debt and for the rest of the costs associated with paying for the assets. The money has to come from somewhere.

[Banquo's Ghost]

I believe that 1a was more a way to raise the money to help pay off the debt and for the rest of the costs associated with paying for the assets. The money has to come from somewhere.

Maybe a more focussed approach to these fellows.

[CountArach]

Maybe a more focussed approach to these fellows.

I wouldn't disagree with you there...

[Hosakawa Tito]

Maybe a more focussed approach to these fellows.

That is exactly the reason I protest these bailouts with no strings attached or punishment for the perpetrators involved, and this same sort of thing happens time & time again. They have no right to mismanage, monkey CEO's included, and expect to profit or be rewarded from it at taxpayer expense.

Unfettered, unregulated free markets ensures that every dirty financial trick will be used by some to manipulate and exploit for fun & profit. Controlling galloping greed by the greed of others, on this scale, is one can o' worms we don't want to open.

Senator Sanders' plan is a good start, let's hope it isn't too watered down.

[Mangudai]

http://www.icahnreport.com/report/20...ate-democ.html

It is the board’s responsibility to hold a CEO accountable, and remove the CEO if he or she is not producing results. But exacting such a measure requires effort and strategic consideration, and boards are often too lazy and/or passive to rock the boat, especially since the company will continue to pay and pamper and even indemnify them under almost any circumstances. Board members receive expensive tickets to important sporting events, the theatre, and are also treated to use of the company’s fleet. Worst of all, the board itself is not made accountable because corporate board elections are generally a joke.

Board meetings are often a complete travesty. I know because I have sat and do sit on a number of boards where I am in the minority. Because of this, today our economy is in a major crisis. Many of our companies are incapable of competing. Additionally our banking system has issued mortgages that cannot and will not be paid back. We are in this situation because there is no leadership in the executive suite. Why did we get here? Because in corporate America there are no true elections. It is tyranny parading as democracy. It’s a poison running through the blood of corporate America. Perhaps, with enough public support, the lawmakers and regulators will take note.

When you rid a company of a fruitless board, the rewards are often enormous because the underlying company and its employees can be excellent. It is the top level management that hangs like an albatross around the company’s neck. Years from now historians will marvel why we the shareholders – the legitimate owners of companies – did not do something effective about removing terrible managements. We can do something about the current situation. I will discuss in future entries how simple it can be and what has constrained us from taking action.

This country's corporate democracy – the primary mechanism of which is the election of a company's board of directors – is ineffectual. Every year, a company will circulate a proxy statement to its shareholders for their vote on a slate of board nominees, but those nominees are nominated by the board, and they nominate themselves or others that they deem to be "qualified."

It is possible for a shareholder to nominate directors, but the company does not have to include these nominees in the company's proxy statement. In an attempt to elect nominees to the board in a proxy fight a shareholder is forced to comply with arcane rules for prior notification and to prepare and circulate his or her own proxy statement at great expense. A proxy fight can cost millions of dollars out of the shareholders pocket.

Faced with a contested election for the board, management will spend the company's money (the assets of the shareholders) fighting to reelect themselves and their handed picked nominees. To add insult to injury, it's likely that the company has a staggered board In this case, even if the shareholder wins seats, the representation will not be the majority required to enforce action thus necessitating another proxy fight the following year. Occasionally newly elected directors, even if a minority of the board, are able to sway the incumbents. However, this is often very difficult to achieve – trust me, I've been there.

[Ronin]

Sinfest hits it (once again) right on the head.

[yesdachi]

If we have to bail out someone, would we be better off bailing out the people who foolishly over borrowed or the banks that let them.

[Lemur]

Read someone who rather summed up my feelings this morning:

After nearly eight years, the phrase "trust us" no longer works. Now we're presented with a historically unprecedented bailout proposal for the nation's financial institutions. I have a jumble of differing reactions to this. First, for years the Republicans have sold us a deregulation mantra and suggested that any form of regulation is "socialism." But anyone who's actually read Adam Smith knows that he and other philosophers of free markets made plain from the outset that the state needs to guard the integrity of the marketplace. Smith says that there is a dark side to the entrepreneurial spirit that the state must guard against. This is not a rejection of market economics--it's a protection of the market place against those who abuse the freedoms it offers.

Second, we are as usual placed in a position in which great pressure is brought to bear to quickly accept a deal which will reverberate for decades without close inspection.

We are again told that things are vastly complicated and we should trust Treasury and the Fed to do the right thing. My trust reservoir is exhausted. I actually respect Paulson, but I also believe he is "playing the hand he's been dealt," as he said. This is not the way decisions should be taken that have long-term consequences for the nation's future. If in fact all of this bubbled to the surface quickly, without being anticipated, then the folks at Treasury are incompetent. However, I don't believe that for a second--I am convinced that in this case, again, the Bush Administration knew what was up and calculated that it could just muddle through until after the elections. We should all be apprehensive about what is coming after election day.

Third, the administration's proposals continue a process of socializing loss and preserving profits and distributions, many of which were made with full knowledge of the pending losses. When management distributes illusory profits to insiders in full knowledge of a massive loss, this is called a fraudulent conveyance, and in equity proceedings such distributions are routinely recovered for the creditor mass. There should therefore be a careful scrutiny of distributions of profits and bonuses by failed firms. The bailout we now see may mean effectively that taxpayer money is subsidizing the purchase of macmansions and Bentleys by investment managers who behaved irresponsibly. How can that happen? Only in the age of Bush.

Fourth, I really started steaming this morning reading the NYT article about the participation of foreign banks in the bailout. Granted that the US has an interest in protecting financial markets, but why should the US be bailing out German and UK firms? At least this should be a burden shared with their own governments. This really needs to be subject to some probing questions. What's going on here?

[TevashSzat]

Apparently, the Senate is not going to let this bailout pass too easily.

Basically, the Democrats won't let it happen unless there are strict regulations regarding qualification for the bailout and its terms and the Republicans won't let it because it is a bailout

[PanzerJaeger]

Read someone who rather summed up my feelings this morning:

Blaming Bush and the Republicans for everything is quite laughable, but definitely reflective of your worldview.

[drone]

Where have we heard this before?
http://www.washingtonpost.com/wp-dyn...l?hpid=topnews

In his statement this morning, Bush urged Congress not complicate the administration's proposal, saying the plan needs to be passed quickly and relatively intact to stem damage to global financial markets.

Weekend negotiations "made good headway" in crafting a bill to bolster a system weighed down by problem home mortgages, Bush said. But with proposals circulating to include provisions for homeowners in the bill or to use it to limit executive compensation, Bush cautioned that too many added provisions could impede approval of critically needed legislation.

"Obviously, there will be differences over some details, and we will have to work through them," Bush said, but "the whole world is watching to see if we can act quickly to shore up our markets and prevent damage to our capital markets, businesses, our housing sector, and retirement accounts.

"Failure to act would have broad consequences far beyond Wall Street. It would threaten small business owners and homeowners on Main Street."

Quick, pass the bill without reading it, and hand over the power of the purse to the executive branch! I wasn't sure what my feelings on the bailout bill were before, but these words scream "DANGER! DANGER!". Typical Bush administration crisis handling: let the situation get really, really bad, then demand extraordinary powers to "fix" it. The rape of the Treasury is almost complete.

Congress needs to really look at this bill before passing it. Let the markets flail for a bit, short term stability is not worth the price of poor legislation in this situation.


In other news, we have no more investment banks! Goldman Sachs and Morgan Stanley took on regulators and became normal bank holding companies. Not sure how well they will fare in this role, since they are leveraged to the hilt compared to other banks.

[CountArach]

Quick, pass the bill without reading it, and hand over the power of the purse to the executive branch!

I worked with FISA

[Strike For The South]

Well at least we gave it the good college try. Goodbye republic! Hello Caesar :rome:

[Crazed Rabbit]

Read someone who rather summed up my feelings this morning:

I'm no fan of the bail outs, but the blame is not really on the GOP for the cause of this mess. I posted this in the Fannie and Freddie topic:
http://www.bloomberg.com/apps/news?p...d=aSKSoiNbnQY0

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations.

Then legislative momentum emerged for an attempt to create a ``world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.
...
What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

Different World

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: ``It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

Fannie and Freddie were created by the government, and given special benefits because of that. Without those, I don't think we'd be near the mess we have today.

That means re-regulating the energy markets so that we never again see the rampant speculation in oil that helped drive up prices.

What an insane moron. That didn't work last time, did it?

We don't need knee-jerk leftist cries for regulation. We need to enforce accountability, which more burdensome regulation won't achieve. We need to take away governmental favoritism so that poorly managed companies cannot become as large as Fannie and Freddie did, and throw CEOs and boardmembers of companies that require public money rescues into jail and seize their assets.

CR

[Xiahou]

Fannie and Freddie were created by the government, and given special benefits because of that. Without those, I don't think we'd be near the mess we have today.

Creating Fannie and Freddie in the first place was bad enough, but then the government -starting under Clinton, and continuing under Bush, encouraged them to underwrite mortgages to bad credit risks under the guise of increasing home ownership. When housing prices were undergoing a meteoric rise, they got away with it, but when prices leveled out and began to slump, the whole house of cards came crashing down. Don't blame Wall Street- they did what the federal government wanted them to.

[drone]

I had a really evil thought creep into my head this morning, but since I'm no financier/accountant I'm not sure if I'm on the right track. I haven't heard any mention of this in the news, I think most people are just thinking short term at the moment, but here goes:

2008 - 1945 = 63. How much retirement planning and how many nest eggs for Baby Boomers are in jeopardy here? Theoretically, money should be moved to safer investments as the retirement age approaches, what is the risk to bond markets and other low-yield investments at the moment? Money market funds got insured, they should be covered for now. Even if these are all safe, in a couple of years large sums will be removed from these investments to pay for old people living (driving down markets as assets get converted to cash) as well as increased Social Security payments from the already-strapped Federal coffers. The looming SS debacle is upon us, we've known about it, we've pushed it off to future generations, but we can no longer ignore it and may not have the means when it comes about.

Am I off base?

[Crazed Rabbit]

An important note for the socialists here:
http://online.wsj.com/article/SB122186507676758669.html

Taking Revenge on the Rich
Will Not Bring Recovery
By AMITY SHLAES

Police short sales and block them, says Securities and Exchange Commission Chairman Christopher Cox. Fire the SEC chairman, says John McCain. Investigate those short sellers, say state attorneys general. Hold hearings to grill Wall Streeters says Nancy Pelosi. "Fire the whole Trickle-Down, On-Your-Own, Look-the-Other-Way crowd" says Barack Obama, and "get rid of this whole do-nothing approach to our economic problems." The Democratic presidential candidate wants public affirmation of his argument that the whole free-market philosophy of economics has been wrong.

Some of this talk carries an implicit suggestion: Do what I say or we will have another Great Depression. And no wonder: This September feels a lot like autumn 1929.

But there's an important fallacy here. The stock market crash of October 1929 and the Great Depression were not the same thing. What made the depression great was not magnitude but duration -- the fact that unemployment was still 20% 10 years later. In the 1930s, policies like the ones described above did not speed recovery; they impeded it.

CR

[Lemur]

An important note for the socialists here:

Hey CR? If the bailout goes through, and we effectively nationalize our financial sector? We're all socialists then, baby. Here, read this one, it will really get you blood boiling: How We Became the United States of France.

-edit-

This brightened my day somewhat:

Your Urgent Help Needed

Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transaction is 100% safe.

This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to
wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.

Yours Faithfully Minister of Treasury Paulson

[Crazed Rabbit]

Hey CR? If the bailout goes through, and we effectively nationalize our financial sector? We're all socialists then, baby. Here, read this one, it will really get you blood boiling: How We Became the United States of France.

No, no. Despite all this, we're not socialists. Not yet.

Socialists only nationalize successful companies.

CR

[yesdachi]

No, no. Despite all this, we're not socialists. Not yet.

Socialists only nationalize successful companies.

CR

What do you call someone that nationalizes unsuccessful companies?

Spoiler Alert, click show to read: