Saturday, September 27, 2008

TIME to ACT! Contact your elected public servicemen and women.

To all that are concerned with the state of the economy and the imminent need for a bail out:
Please take the time to contact your representatives and make your opinion known so that they do not steer the country into an irreversible course that damages the incentive structure of the nation further in a unrepairable way. So there is an "American Dream" to speak of. Protest the current Treasury plan.

For San Franciscans, here are some links to district's most powerful representatives' contact forms:
- Nancy Pelosi, Congresswoman
- Barbara Boxer, Senator
- Diane Feinstein, Senator (As of this post the site seems down...)

Friday, September 26, 2008

BAIL OUT: The Public Deserves a Better Deal

Today's WSJ contains an opinion piece by John Paulson who happens to be #165 on the Forbes 400 wealthiest Americans list. Mr. Paulson is the foremost hedge fund manager that capitalized on the sub-prime market collapse by shorting the troubled stocks with near perfect timing so he knows a thing or two about the situation to say the least. His proposed solution to the imminent bail out situation to me is the best I have heard so far. In it, he proposes:
"There is a better alternative to stabilize the markets: Invest the $700 billion of taxpayer money in senior preferred stock of the troubled financial institutions that pose systemic risks. Let's call this the "Preferred plan." In fact, it is the Fannie Mae and Freddie Mac model -- which the Treasury Department has already endorsed and used in practice. It is also the approach Warren Buffett used for his investment in Goldman Sachs."

He then goes on to elaborate that the current rescue plan is nothing more than a WEALTH TRANSFER from taxpayers to "shareholders and executives of the very institutions that brought on the financial crisis".

I agree that instead of trusting the Treasury department assigning values to the toxic securities that nobody will probably ever buy, his solution effectively puts taxpayers AHEAD of all other shareholders and creditors where they really belong. It is great to see that there are still some cool heads out there rising above the deafening noise of bankers, lobbyists and compromised politicians and telling how it should be. And thanks to WSJ for providing space for such insightful denizens of the increasingly neurotic finance world.

Wednesday, September 24, 2008

2004 SEC Rule Change and The Wall St. Meltdown (Part II)

Continuing on the link trail for the SEC rule change I came across remarks referring to investment bank insider accounts attesting to leverage ratios of 1 o 45!!! Apparently it was customary during those heady times to lever back to the maximum allowed levels (a mere 1 to 30) during short regular reporting windows only.

What would you call this?
- Opportunism
- Greed
- Business Savvy
- All of the Above

Also reportedly, the SEC chairman active at the time had made a name as a "heavy-handed" regulator.

What would you call that?
- Plain Old Dumb
- Wishful Thinking
- The usual "This time its different" Laissez Faire Naevity
- All of the Above

No matter which way you slice and surely STINKS. Yes, in more than one way this is a systemic failure but let's not forget every social system is composed of organizations, which in turn are composed of living walking homo sapiens. Since when Merriam-Webster stopped printing the word "Accountability" in the dictionary? And by way of bailing out this, that and the other are we leaving the door ajar for more rescues and "get-out-of-jail free" cards down the road? Bail out or not, this time I really hope as the dust settles the landscape will be altered in a more stable way. If not, I guess the bright minds on Wall St. can always come up with an "off-balance sheet" country called United Structured Investment Vehicle of America and throw all the shoddy stuff over there conveniently claiming to have cleaned off their hands of all the dirt.

Saturday, September 20, 2008

2004 SEC Rule Change and The Wall St. Meltdown

It seems that a 2004 rule change authorized by SEC, (Securities and Exchange Commission) which is tasked to regulate U.S. financial markets may have provided the highly flammable fuel that eventually led to the massive fire at Wall St. brokerage headquarters. The rule change granted permission to Bear Sterns, Lehman, Merrill, Morgan Stanley and Goldman Sachs AND NONE OTHER to assume a new designation that would let them lever their portfolios by a ratio of up to 1 to THIRTY(30)!!

It effectively replaced the old rule put in place in 1970s limiting the same ratio to 1 to 12. Especially interesting quote in the press release is that of then SEC Commissioner Harvey Goldschmid who said, "If anything goes wrong, it's going to be an awfully big mess."

1- Why did the SEC feel the need to grant such a permission in 2004, a year that U.S. economy had already recovered from a mild recession?
2- Why did the rule change apply to 5 financial firms only?
3- How could the SEC justify letting go of the "leash" while without a well-defined mechanism to investigate and confirm that the portfolios of these institutions did actually conform to the new set of rules?

These are only some of many key questions that come to mind with no satisfying answers. One would find it hard to resist labeling this decision as the flapping of the wings of the butterfly that may have ultimately caused the current devastating hurricane hitting the shores of Manhattan.

The American public deserves a good look into the annals of this mystery.