Posts Tagged ‘financial crisis’

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I came across two articles that were both enlightening, one of which was rather entertaining if you don’t mind a good dose of crude humor and sarcasm (I’ll let you determine which is the entertainingly sarcastic/crude piece based on the published magazine listed below). Both pieces are full blown articles that take some time to read but are well worth the investment. Here is a snippet from each to see if the writing style suits your fancy with a link to the full blown article:

The Quiet Coup - The Atlantic

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.
 

The Big Takeover - Rolling Stone

There are plenty of people who have noticed, in recent years, that when they lost their homes to foreclosure or were forced into bankruptcy because of crippling credit-card debt, no one in the government was there to rescue them. But when Goldman Sachs (a company whose average employee still made more than $350,000 last year, even in the midst of a depression) was suddenly faced with the possibility of losing money on the unregulated insurance deals it bought for its insane housing bets, the government was there in an instant to patch the hole. That’s the essence of the bailout: rich bankers bailing out rich bankers, using the taxpayers’ credit card.

Ciao,
Franco

Two politically oriented posts within a week…don’t look now but Franco is becoming a pundit.

Ciao,
Franco

As anyone who has been monitoring this blog will have noticed, my posting has dropped off a cliff lately. I’m on a bit of a hiatus for the next couple months as I ramp up for the CFA exam. I will try to make some occasional posts as I stumble across anything of interest.

Along those lines, check out Rick Santelli’s recent rant on the new “stimulus plan” to socialize mortgages. As a rule, I tend not to be very political as politics is 99% hot air and 1% follow through, but I would have to agree with Santelli’s beef on this one.

Ciao,
Franco

The final episode of this series opens in summer of 2006 at the peak of the US housing markets. Consumers have been leaning on their home equity to finance their spending and drive economic growth. In addition, the advent of the credit default swaps have made risk a transferable and tradeable product. The perception that risk can be stripped out of an investment vehicle and transferred to another counter party has driven credit spreads (the difference between the cost of risky, corporate debt and the risk free US government debt) to historically low levels. Tight credit spreads have made it very cheap to borrow money and create leverage to amplify returns. But all that is about to change as the era of easy money and excessive leverage comes to a screeching halt.

In the first two parts of this series, we covered the rise of securitized loans and birth of credit default swaps. We left off in the throngs of a raging bull market being driven by a new era of technology companies. With the exception of a few hiccups, Wall Street has perpetuated almost 20 years of wealth creating, bull market returns on the backs of financial leverage, innovation, and good ol’ fashion greed.

We last left off with a red hot financial market in the mid 1980’s being led by the fancy MBS (mortgage backed security) and CMO (collateralized mortgage obligation) securities running in tandem with a leveraged paradise known as the junk bond market. The easy money and lavish lifestyles of the 1980’s were not isolated to Wall Street. Savings and loan (S&L or “thrifts”) institutions across the nation were taking advantage of the newly implemented Tax Reform Act of 1986. The new act was passed to update “old banking standards” and allow thrifts to take on more risk in order to better compete in the “complex financial markets” of the 1980’s. Thrifts ran with their new found freedom and grew like wild fire. Some of the more aggressive ones were doubling in size every year with less than ethical lending practices. All this easy money was making thrift executives very rich and further compounded the greed running rampant through the markets of the 80’s.

Falling home values, growing unemployment, plunging stock prices; how did we get into this mess? Well, in order to fully understand our current economic funk, we need to go back and examine the roots of what has now been coined the credit crisis. So take a walk with me down memory lane while we explore the origins of securitized loans and unregulated swap contracts in a fascinating tail of innovation, riches, stupidity, and good ol’ fashion greed.