It is an intrinsically worthless piece of painted canvas which now goes from one wall to another. If next year it sells for $3 million the loser will be some one who had too much money in the first place.
I'm sure there are some retirement accounts that directly or indirectly invested in risky financial instruments, but (hopefully) this is a small part of their portfolio. So the impact on the average person should be slight. What we are seeing is that a bunch of wealthy people are seeing their speculations become losses. That this class includes media moguls and their lackeys means that it gets worried about more than it should.
Perhaps the average investor may see a decline in the value of some of the stocks as the panic spreads, but if they are in for the long haul then they should just sit tight and ride it out. I'm guessing that one or two prominent financial firms will have to restructure or be taken over. They will be the sacrificial lambs that everyone can point to as the "bad apples" so that actual reform of the financial community can be prevented. Notice that the reforms after the collapse of Enron and its contemporaries did nothing to prevent further bubbles. The widely hated Sarbanes-Oxley only generates paper work not changes in behavior.
Those individuals who have overextended their credit are going to take a hit, but this would have happened in any case. You can't payback $100 per month if your income is $90. The only reforms that may come out of this are slightly stronger notification rules for borrowers, but you can't stop people from making fools of themselves when they are motivated by acquisitiveness.
I'll repeat what I said the other day on another of Jerome's diaries: Don't Panic.
Just a technical criticism of the chart. The pricing of these instruments is not a sign of their declining value, but of the false risk evaluations they were given in the first place. They are now being priced by the market instead of a handful of ratings agencies which have a conflict of interest.
Anyone who buys any mortgage-backed securities has to be aware that these are always high risk, even the simple ones sold by Fannie Mae and Freddie Mac. At a minimum they have the risk of early repayment as well as default. That's why they had higher yields then corporate or government bonds.
When we look back five years from now we will see that the claims of super high returns were impossible, although there probably were some winners who got in and out at the right time. Ponzi schemes never lose their appeal. Policies not Politics ---- Daily Landscape
This is not about painting changing walls. and this is not about some banks being taken over - we're talking about them being wiped out altogether. In the long run, we're all dead. John Maynard Keynes
The problem is when there is risk that banking groups with substantial retail operations like Citi or Barclays will find themselves belly-up. We have met the enemy, and he is us — Pogo
Empathy for Jerome, man, this can't be good for ambiance where he works...
BTW, if you're still to see the LibDems today, could you ask their views on the Growth and Stability Pact and regional investment? Oh and, how'd you like Strasbourg? (I have a very good line on a job there, and am wondering what it's like...) Fai de bèn a Bertrand, te lou rendra en cagant
The problem is when there is risk that banking groups with substantial retail operations like Citi or Barclays will find themselves belly-up.
Isn't that most of them?
NR may have had the most aggressive (read - 'totally freaking insane') business model in the UK high street, but don't all of the banks and building societies do at least some of their business in the same way?
I'm finding it hard to imagine how finance will work if the main investment banks are replaced with big smoking craters.
In fact the NR Foundation has quite an interesting position in any solution, because although they "only" got 5% of the profits, they are entitled upon a takeover to 15% of the votes (I think that's how it works).
Uncanny echoes here of the Barings fiasco and the resulting demise of much of the Baring Foundation's "wealth". "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Banks, except investment banks, should have pretty much zero exposure to all this subprime crap.
Still, the bank stock just keep falling. Trading at p/e around 8-9 last time I checked.
This would all have been academic to me if I hadn't inherited a small amount of SE-bank shares, bought by my grandmother somewhere back in the mists of time.
Selling is out of the question due to the accumulated capital gains tax and the bureacracy of selling shares bought before 1990, so I shouldn't really care about the stock losing about 30 % of its value since the peak. It can never be more than a little dividend printing press.
Still, it's a bit irritating. Peak oil is not an energy crisis. It is a liquid fuel crisis.
A good thing for us up here is that that transformation hasn't really happened in Scandinavia. Banks, except investment banks, should have pretty much zero exposure to all this subprime crap. Still, the bank stock just keep falling. Trading at p/e around 8-9 last time I checked.
LY:In retrospect it was a mistake to let Citibank and Goldman Sachs define what a good market or a good regulation might be. Well - who'd have thought, etc? If you hand the hen house over to the foxes, it's not as if they're golng to eat everything and leave a bloody mess.
In retrospect it was a mistake to let Citibank and Goldman Sachs define what a good market or a good regulation might be.
Well - who'd have thought, etc? If you hand the hen house over to the foxes, it's not as if they're golng to eat everything and leave a bloody mess.
Fears rise of `earnings recession' Wall Street analysts are rapidly losing faith in US companies' ability to rekindle profit growth before the end of the year, raising the prospect of the first "earnings recession" - two consecutive quarters of falling profits - in more than five years. Mounting troubles in the financial sector have led analysts to reduce sharply their forecasts for earnings growth in the final quarter of the year. (...) The deterioration in the profit outlook is mainly due to the bigger-than-expected write-downs by large financial groups such as Citigroup and Merrill Lynch as a result of the turmoil in the credit markets. The energy and consumer discretionary sectors have also experienced a sharp decline in third-quarter earnings. Analysts, however, still expect a rebound in the fourth quarter. In contrast, the financial sector, which comprises 20 per cent of the S&P 500, saw a decline of 16 per cent in year-on-year profits during the third quarter, and now faces a slide of 9 per cent for the last three months of the year.
Wall Street analysts are rapidly losing faith in US companies' ability to rekindle profit growth before the end of the year, raising the prospect of the first "earnings recession" - two consecutive quarters of falling profits - in more than five years.
Mounting troubles in the financial sector have led analysts to reduce sharply their forecasts for earnings growth in the final quarter of the year.
(...)
The deterioration in the profit outlook is mainly due to the bigger-than-expected write-downs by large financial groups such as Citigroup and Merrill Lynch as a result of the turmoil in the credit markets.
The energy and consumer discretionary sectors have also experienced a sharp decline in third-quarter earnings. Analysts, however, still expect a rebound in the fourth quarter.
In contrast, the financial sector, which comprises 20 per cent of the S&P 500, saw a decline of 16 per cent in year-on-year profits during the third quarter, and now faces a slide of 9 per cent for the last three months of the year.
Other numbers suggest that finance and housing provided 40-50% of total growth in the US and the UK in recent years. These sectors just slowing down is enough to throw the economy overall into a nasty spin. In the long run, we're all dead. John Maynard Keynes
Having said that, in your other comments you and rdf have me back on the fence wondering if things won't turn out as catastrophically as they seemed at first.
Still, two things worry me: how much of the damage is unkown and hiddeen and the lack of separation between investment and retail/commercial banks. Truth unfolds in time through a communal process.
The global economy was flooded with liquidity, but that's not an excuse for these large investment houses handing out mortgages to people wanting to buy million-dollar condos in Malibu on middle-class salaries.
And, really, why should we slash rates to get more money into the hands of Morgan Stanley? Welfare is apparently Satanic in America, unless it comes in the form of rate cuts to the stock dealers or agricultural subsidies to the flyover states. (Somehow those two groups still find the balls to blame welfare on inner-city blacks.)
This latest rate cut was Ben Bernanke being bullied out of his lunch money. The economy grew at 4% last quarter. Well above trend growth. Unemployment is at 4.7%. Even if the former is revised down, and even if we suffer a recession, this is hardly an issue of the sky falling, and it does not warrant nearly a full percentage point in cuts over a period of a month and a half. A lot of investment houses are going to lose their asses. Well, I'm sorry, but that's capitalism. It ain't always pretty.
It's not going to be a catastrophe. It's going to be a nasty decline in house prices, involving a lot of foreclosures and bankruptcies. But it's also going to be a period in which the dollar falls and the world economy rebalances quite a bit.
Look, quite a few of the suits on Wall Street are going to lose it all. What does that mean? It means quite a few of the suits on Wall Street are going to lose it all. It doesn't mean production everywhere else immediately shuts down. It doesn't mean we're all out of work. At worst, it will mean a pretty rough recession, but even this seems unlikely to me. Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
I figure they have another name for moral hazard when it applies to the wealthy, to investment bankers and their money. It's called "good for the economy..." Fai de bèn a Bertrand, te lou rendra en cagant
The fallacy is that the "market" is not a person. It is an ever changing collection of people. Those who learn the lesson will not be those making the same mistakes in the future.
The way to prevent excess in the future is to incorporate the lessons learned into new regulation. That this effective can be seen in that the latest financial problems only occurred after the previous regulations were gutted by a succession of business-friendly administrations. The two biggest changes were the abandonment of anti-trust enforcement and the repeal of the Glass-Steagall act (which prohibited banks from owning investment services).
Once the restrictions were lifted, history repeated itself. Will "punishing" those responsible prevent future folly. No, but restoring regulation will. Policies not Politics ---- Daily Landscape
Those who learn the lesson will not be those making the same mistakes in the future.
Citigroup: $134.8 billion in 'level 3' assets From MarketWatch: Citigroup reports $134.8 billion in 'level 3' assets Citigroup Inc. ... said its so-called level 3 assets as of Sept. 30 were $134.84 billion. Level 3 assets are holdings that are so illiquid, or trade so infrequently, that they have no reliable price, so their valuations are based on management's best guess.
From MarketWatch: Citigroup reports $134.8 billion in 'level 3' assets
Citigroup Inc. ... said its so-called level 3 assets as of Sept. 30 were $134.84 billion. Level 3 assets are holdings that are so illiquid, or trade so infrequently, that they have no reliable price, so their valuations are based on management's best guess.
Citi net equityis $128bn...
Market Cap (intraday): 165.65B Enterprise Value (8-Nov-07): 80.18B
Goldman Sachs has disclosed its Level 3 assets, two quarters before it would be compelled to do so in the period ending February 29, 2008. Their total was $72 billion, which at first sight looks reasonable because it is only 8% of total assets. However the problem becomes more serious when you realize that $72 billion is twice Goldman's capital of $36 billion. In an extreme situation therefore, Goldman's entire existence rests on the value of its Level 3 assets.
Market Cap (intraday): 84.29B Enterprise Value (8-Nov-07): -366.85B
Enterprise value (EV), Total enterprise value (TEV), or Firm value (FV) is a market value measure of a company from the point of view of the aggregate of all the financing sources; debtholders, preferred shareholders, minority shareholders and common equity holders. Because EV is a capital structure-neutral metric, it is useful when comparing companies with diverse capital structures.
I certainly don't see a collapse in the banking system resulting from this. Many firms are going to go under. Many already have. (I know the hedge funds are shutting their doors all over town here.) When stupid firms make stupid decisions, they're supposed to go under. We have the FDIC to protect depositors, although I'll be God-damned if I'll trust my savings to the federal government.
My sense is that Robert's painting analogy is not way out in left field. Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
Or as this Asia Times article concludes, hold on and sit tight, because
Given the size of the overall figures involved and the excessive earnings that Wall Street's participants have enjoyed over the last decade, a taxpayer-funded bailout of Wall Street's titans would seem politically impossible, however loud the lobbyists scream for it. In the long run, that is probably a blessing for the US and world economies. Level 3 storm about to hit Wall Street
In the long run, that is probably a blessing for the US and world economies.
Level 3 storm about to hit Wall Street
