prudentinvestor

Wall Street Breakfast: Must-Know News

".....the research suggests the Fed should use unconventional policies to create the equivalent of a minus 5 percent interest rate."

I thought they already did.

Now Playing: Zombie Condos in Manhattan

I would not be surprised if NYC property takes a very long time to recover to its bubble-era stratospheric values, perhaps longer than it makes sense for a middle-aged (or older) investor to buy into it today.

Here is an interesting prognostication from Martin Hutchinson, who has been right for a long time in predicting the recent events:

www.prudentbear.com/in...



On Apr 17 02:46 PM WAKEUP wrote:

> Another urban legend in the making. New York City is the home of
> The White Elephant. Go ahead, try the above mentioned trick of swooping
> in on these White Elephants, and I'll see you in Central Park, feeding
> the pigeons, while you try to figure out what happened to your money.
> HINT: Look for your money in Paris, France, and in Geneva, Switzerland,
> and in, yes, that's right, Dallas, Texas, USA. Watch out, that pigeon
> is circling over your head.

Why It's Better to Bail Out Borrowers than Banks

mathgeek,

I am not sure what makes you think the world would have ended if other mismanaged banks had failed and been taken over by the government, just like the successful resolution of failed banks in the 1980's. It would have ended up costing the public treasury less than the cost of all the tortured programs now underway, and would have kept the system fundamentally fair and transparent.

WaMu and Wachovia went under, their investors lost out (myself included). Yet the world did not end, and would not have ended had Citi, or others, also gone under. I made a bad choice when I bought WB stock and WaMu bonds, and took my losses as the natural consequence of making poor investment decisions. I blame no one but myself, and will be more judicious about speculative investments in mismanaged, over-leveraged banks that engage in irresponsible lending within a clearly unsustainable bubble.

This is how capitalism and free markets foster the wise allocation of capital: You make a good decision, you win, you make a bad one, you lose. Unfortunately, when government distorts the free market in non-transparent and unpredictable ways, the problem of capital misallocation grows, instead of diminishing.



On Apr 11 04:57 PM mathgeek wrote:

> Felix, while I prefer to keep the details private, I was living fairly
> close to the fire in this chain of events... and it was all about
> psychology. Everyone, from market participants to the media was playing
> the game of "whose next?"
>
> While Leman was alive, the focus was there. The moment Leman fell,
> the focus shifted to WaMu and Wachovia... and please remember...
> WaMu was wiped out in less than two weeks not by losses... but by
> panic deposit withdrawls. As soon as WaMu went under, the pressure
> shifted almost instantly to Wachovia and Morgan Stanley.
>
> What the regulators realized they needed to do was to draw a line
> underneath the financial system and say, this far, and no further.
> That is why TARP funds were crammed down all of the largest banks...
> the government needed to make it clear that the government would
> not allow either speculative attacks nor a deposit runs to close
> any more major institutions.... Period.
>
> And, for better or worse, it worked. Almost overnight, speculation
> about who would be the next to go ended and that phase of the crisis
> ended. Now, its not at all clear that WaMu or Lehman share or bondholders
> were treated fairly... why let them hang while protecting Citigroup,
> for example? But the decisions were not made on principle, they were
> made in response to a chain of events, and by the time WaMu and Wachovia
> were gone, the Fed realized that they had to stop what had basically
> become a rolling bank run, and consistancy of policy was far less
> important than changing the psychology... and at the point, the train
> had already left the station on bailing out borrowers. The Fed needed
> to credibly back the remaining financial institutions, and they did.
>
>
>
>
>

Preview from Europe: All Fools' Day

As usual a great, succinct and witty summary. You state that suspending mark-to-market would allow bankers to "...... run their firms with little or no capital and leverage them to the hilt creating the biggest credit bubble the world has ever known ....".

I was under the impression that this has already come to pass.

Preview from Europe: Market Back on the Defensive

Regarding AIG's use as a router of taxpayers' money to the banks, you state: "..... however these profits were: one-time in nature ....".

I'd suggest that this sort of operation will continue on a massive scale in various ways, some transparent and others concealed.

Another AIG Scandal?

The economy will continue to "recover" as the banks will continue to state more "profits" emanating from more taxpayer-funded subsidies, obvious and hidden.

Who's Gaining from the AIG Unwinds?

Sounds like the AIG bonuses were to retain guys who can funnel taxpayers' money through the AIG conduit in various directions and in subtle ways. I suspect they will get highly rewarding "jobs" at the banks now receiving their largesse.

Exclusive: Big Banks' Recent Profitability Due to AIG Scam?

The government had to make a choice: (a) nationalise the large banks and reboot, or (b) prop them up and save their powerful managers.

They chose (b), which requires shovelling hundreds of billions, if not trillions, into private for-profit companies, at the expense of taxpayers. Since the required amounts are much larger than can be announced in a transparent way without excessive public opprobrium, it follows that hidden or disguised bailouts on a massive scale have to be implemented, so this "news" is no surprise, and likely just the tip of the iceberg.

As to your statement "...... If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day ......."; I personally doubt that the general public will have any interest in the arcane details of what is going on, and the potential fallout will be limited to academic discussions on sites such as this.

Not the Tax Clawback I Had in Mind

Everything you suggest seems reasonable, with little chance of adoption by congress.

The clowning to pacify the public, without any clawback from the real malefactors and beneficiaries of the current disaster, simply diverted attention from those who profited billions as they generated this crisis.

Will the Fed Finally Embrace Quantitative Easing Tonight?

Maybe I am naive, but it seems to me that what the fed just did today amounts to giving every working person in the US a 7% pay cut.

GDP is about $14 trn. When the fed creates by the stroke of a pen, an amount of $1 trn, it creates about 7% of GDP out of thin air, without anyone producing anything. This means that those who do produce something have just lost 7% of the value of their output for the year due to inflation, current or future.

This sounds simplistic, and I suspect many will take issue with it, but sometimes simple ways of looking at complicated matters bring out the truth.

Getting a Tax Clawback Right

Thank you for your clarification. I was under the impression, perhaps incorrect, that the windfall profits tax was an income tax surcharge on oil companies. I was also under the impression that there was an even earlier precedent, of a windfall profits tax in the form of a surcharge imposed on explosives manufacturers, almost specifically on DuPont, for profiting egregiously from the sale of explosives during WW1.

You are right that targeted, punitive taxes are a dangerous and slippery slope. However, we are facing a highly unusual situation in which the general public, especially its more successful members, are being made to pay more taxes for many years to come, in order to subsidize millionaires (or even billionaires) who have lost on their reckless risks. In this special and unusual circumstance, I would suggest that the millionaires/billionaires who made poor business decisions should cover as much as possible of the losses that they created before the general public is forced to cover the rest.

On Mar 18 11:46 AM donzelion wrote:

> Prudentinvestor - a "windfall profits tax" is still a variation on
> an income tax, and in the oil/gas sector, you'd impose it by simply
> disallowing certain deductions that would otherwise be available
> for large corporations (in oil and gas, the 'negative taxes' that
> the companies paid in subsequent decades pretty much made them whole).
>
>
> A tax clawback like the proposal, is a punitive tax imposed for purposes
> of correcting an abuse. When it comes to dishing out punishment,
> do you prefer to have the IRS select the guilty from the innocent,
> or a judge, before whom you can at least defend yourself?
>
> Now, a tax plan that applies a modest surcharge for certain types
> of "income" (e.g., "income" based on selling instruments which could
> be future liabilities) makes sense. But punitive clawbacks are a
> risky path.

Getting a Tax Clawback Right

Back in the late 70's or early 80's congress passed a "windfall profits tax" on oil companies, that was a sort of clawback on corporate profits, and is a precedent. The rationale was that egregious profits were obtained to the detriment of the public.

One can argue that there is a difference between corporations and individuals, but a counter argument is the recent development by which individuals at the tope echelons of Wall Street have been "earning" more than many mid-size (and some full-size) corporations. It has now become clear that this development was much to the detriment of the public and the productive sectors of the Main Street economy.

Will the Fed Finally Embrace Quantitative Easing Tonight?

"But pay them in stock, and allocate shares on the basis of the average AIG share price in 2008"......What a creative approach !

I was amused by Geithner's proposal that AIG pay back the bonus amounts to the treasury, from the 30 bn the treasury just gave them. Somewhat similar to his statement a few days ago, to the effect that there are private investors who would purchase toxic assets, but are unable to get credit (to buy bad credit!). I would imagine that he is young enough to have used Excel and therefore to have encountered the notion of a circular reference.

How to Not Pay the AIG Bonuses

I am suggesting that a court may reasonably find it unconscionable that bonuses are being paid from taxpayers' funds that have been expended to prop up a failed company, and being paid to the traders who precipitated said company's failure. So, even if the contract were established in good faith, its execution under the circumstances may be deemed unconscionable.

As I mentioned in my post, I have no legal education, but have discovered over the years that the law does indeed tend to be quite logical.

On Mar 16 08:45 PM john1940 wrote:

> Prudentinvestor:
> Probably not, but I've never seen an unconscionable contract particularly
> in a corporate environment covering employment and compensation.
> Worse yet, I don't even know what unconscionable features could be
> negotiated and accepted between employer and employee these days.
> Educate me on what that means in a circumstance that actually happened.

How to Not Pay the AIG Bonuses

I am not the lawyer, but am under the impression that an "unconscionable contract" is not enforceable.