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One potential explanation for 'TARP On Ice' is during the latter half of the derivatives madness; there weren't many real toxic assets as part of the tranches being sold by the 'investment banks'. Anotherwards they new the sub prime was going to default and just made up the sub prime part of the derivative without any actual mortgage being held. So Paulson knows, since he was there at the time, the government buying the 'toxic assets'; would be exposing the banks and brokers to the fraud they had perpetrated, through their derivative sales.

Michael Lewis, the author of Liar's Poker, has an interesting article about how short sellers couldnt understand why the investment banks were offering them to short their derivative sales until the short sellers realized the banks needed short sales in order to perpetrate the fraudulent long transactions they were selling. Link is:

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boo m#page1

by An American in London on Tue Nov 18th, 2008 at 09:03:04 AM EST
most likely reason that the whole scheme blew up - too many people became aware of the gigantic short sale going on. Two effects: 1) bidding up the price of a CDS and 2) some gamblers started to sweat and fidget (not a good sign for gamblers).

I'll throw in one other off-the-wall suggestion on the holdback of further bail-outs at present: they can't sell enough bonds. The Chinese, Saudis, etc. may have told them that they're not in the market. The Chinese, for one, have decided to use what's left of the US$ credibility to finance their huge infrastructure, public-works projects.

paul spencer

by paul spencer (paulgspencer@gmail.com) on Tue Nov 18th, 2008 at 11:07:32 AM EST
[ Parent ]
"they can't sell enough bonds"
That's what a lot of us have been waiting for- or fearing-- the ultimate day of reconing.  You could be right.

"--use what's left of the US$ credibility to finance their huge infrastructure, public-works projects."

Paul, to fail to prop up the bond zombie will immediately trash that cred.
The time frame would seem to favor converting cash held into commodities, real estate--real-world assets- while keeping the corpse moving enough to sustain the illusion. But that's an awful lot of real assets. Who could miss a movement that size? How could it be hidden? Look there, I think.


Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Nov 19th, 2008 at 10:44:38 AM EST
[ Parent ]
What an amazing article.  I recall several instances in the spring where Steve Eisman's pronouncements were shown  wry appreciation by Alan Abelson, my favorite columnist in Barron's.  Financial services company CEOs regarded him as the Devil incarnate.  The truly amazing thing about him, Meredith Whitney and the others mentioned in the article is that the only defense Wall Street had for their devastating insights into the fraudulent nature of the entire "securiturization" business was that it hadn't yet collapsed.

Sinclair Lewis reportedly noted that "it is very hard for a man to understand something if his livelihood depends on him not understanding it."  I guess that the essence of the bull mentality is: "Don't look a gift horse in the mouth."  It seems that the vast majority of the players are simply incapable of attempting such a feat.

I recall my mortgage broker in Los Angeles indicating that some of the real estate appraisers in the local market could generally be relied on to meet or exceed the proposed sale price with their estimate of value.  If you did not do so, the sale might fail and repeat business would dry up.  The nature of the compensation system guaranteed that Gresham's law would come to prevail regarding the intrinsic worth of the estimates.

I suspect that one has to have been knocked around a bit in order to be able to see such things.  Else it is too easy to go along in order to get along.

The bit about short sales enabling the continuation of the market illustrates the importance of personal interest and profit to understanding a transaction.  To the short seller, he wants to sell short because he thinks it is going to tank.  To his counter-party, his short sale is the equivalent of printing another security certificate with a slightly reduced face value.  He assumes it won't tank.  The dependence of the market on conflicting assumptions is probably why it is so tricky to understand.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 19th, 2008 at 01:38:56 AM EST
[ Parent ]
I assume you are referring to this one:

I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they'd be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn't expect was that any future reader would look on my experience and say, "How quaint."

I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, "I hope that college students trying to figure out what to do with their lives will read it and decide that it's silly to phony it up and abandon their passions to become financiers." I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.

Somehow that message failed to come across. Six months after Liar's Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They'd read my book as a how-to manual.

Great. Chilling.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Nov 19th, 2008 at 11:00:05 AM EST
[ Parent ]
Yeah. Great article.  I sat out the entire bull market of the '80s because I couldn't see how it could not blow up.   Had my 401K in CDs, which at least were paying 6-7%.  Most of my colleagues were in Magellan and did much better.  I finally went into mutual funds in the 90s and  did well until 2000. Did ok again from about 2002 to November 2006, when I pulled out of funds and went all cash.  I thought it certain that the market would drop after the election.  So I missed 2000 points on the Dow.  Still beats riding it down to 8,000 or below.  The very best thing I did was selling my house in LA in the fall of 2005.  Wasn't ready to retire, but saw the real estate collapse coming and didn't want to be on the wrong side of it. Dumb luck beats no luck at all.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 19th, 2008 at 11:45:07 AM EST
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