Fortune Passes Everywhere
Written on Thursday, September 25th, 2008 at 12:41 pm | by cocoyEven as Bush says the entire United States economy is in trouble, the world’s economy is sick and getting sicker and if America fails to act, such troubles will cascade across the planet. From Beijing to Hong Kong to Melbourne to London to New York, economies are in trouble, getting there or slowing down. In fact, Bloomberg reports that for the first time since the Asian financial crisis, Hong Kong is facing a bank run. And if the barometer of economic challenges is the Great Depression, the world has time to draw a line on the sand and act.
The bailout has been criticized as saving the already rich. The market’s exuberance they say is the root cause of all this and thus, allow these companies to fall. In fact, it is a failure of the Free Markets, the Marxists cry out.
Is the rich getting a get out of Dodge free card?
The FBI, according to the Times Online is already investigating Fannie Mae, and Lehman Brothers. Rightly so, if a crime has been committed, then these people must go to jail. And if laws are inadequate, new ones must be written. That this crisis can never happen again.
On the other hand, according to Bloomberg, the US Government’s “Bailout” isn’t charity at all (empahsis mine):
AIG will pay at least 8.5 percent annual interest on the entire Federal Reserve credit line and a $1.7 billion fee, no matter how much is drawn down, the insurer said in a statement late yesterday. The company fell $1.69 to $3.31 at 4:05 p.m. in New York Stock Exchange composite trading.
“AIG has such a burden to satisfy the government obligation, the U.S. is basically pushing the company to a liquidation of its businesses,” said Keith Wirtz, who helps manage $21 billion as chief investment officer of Fifth Third Asset Management in Cincinnati. Wirtz sold his AIG stake in July.
Was the root cause of this, the mismanagement of derivatives, akin voodoo manipulation of wealth?
The closest and simplest analogy of the subprime crisis is like one gigantic pyramid scheme. I borrow from Jester Insurance Group to buy a house. JIG gives out the mortgage without hardly asking me to back it up. JIG sells my mortgage to CVJGroup who in turn sells that to Dean and Ding who in turn sells that to the Jenbank and who does business with NickGroup. But then in a run of bad luck, my employer LaTtEX downsizes and includes me in the list of people fortunate enough to be updating resumes. Since I am unable to pay, JIG forecloses the property, which is now hardly worth anything at all. Now holding an asset that no one wants, they can’t pay CVJGroup and round and round it goes. Everyone is holding an empty bag. Multiply n-times and n-times more complex with combo of low interest rates and boom! a glass of cards collapses.
In the Philippines, an economy so tied closely to America, who relies on a global workforce that send American dollars home, what then?
Metrobank, the country’s largest reportedly has exposures to Lehman. PhilamLife— correct me if i am wrong has exposure to AIG. The global economy is so tied together that a failure in New York echoes like a tsunami across Tokyo, Hong Kong, London, Beijing and everywhere.
Now imagine a world where Tokyo and Hong Kong wake up to the imminent collapse of AIG. Unless you’ve been reading annual reports, you wouldn’t know which company is exposed. The fear of the market is that they’d pull out investments in stocks. Stocks is another way for companies to secure funds. The shock troubles everyone and they stop investing. I mean, who in their right mind would? People stop spending. Jobs are lost. Wages are put on hold. As everyone tightens their grip on money, in the end when trade slows down the lowest person gets hit. That poor janitor who hardly cares for anything beyond earning his daily wage will find his purchasing power so diminished that he would be worst off. For all the distaste people have with Wall Street and market exuberance, a catastrophic and more importantly, sudden financial failure directly affects not just emerging markets but even markets that hardly does business with the United States.
That’s the big picture.
Now do you see that it is fundamentally imperative that trade barriers be destroyed? That an invisible hand be allowed to do business? Because in the end— it is the poorest of the poor who is better off when trade continues and wealth is created. As for market exuberance, sick the markets may be now and some controls might have to be put in place to ensure that excessive greed and derivatives voodoo is kept in check. How deep would change how business is done for decades to come.
Even as markets slump, the astute win. That’s Darwinian and Free Market in action of course. Even the Fed is making money off “bailing out” financial institutions, the Buffett table made money the other day, with an equity stake on Goldman. There is still money to be made everywhere. Opportunities abound. Fortune passes everywhere.
Updated:
You might want to read this piece from Will Hutton: “I’ve watched the economy for 30 years. Now I’m truly scared”
snippet:
Tags: business, financial crises, sub prime crisis“If more people understood what has happened in the British and American banking system, the financial crisis would only be containable by the immediate partial nationalisation of every bank in Britain and America. There was not a run on the banks by depositors queuing in the streets to withdraw their savings. Rather, it was an escalating and terrifying run on the banks in effect by themselves, which, if it spread to millions of small savers, would reproduce the events of 1929.”
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18 Responses to “Fortune Passes Everywhere”
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Cocoy, i like your analogy. However, the two concluding paragraphs after your sentence…
…looks disconnected from the preceding paragraphs. Not that i’m against breaking down trade barriers per se, but the connection between financial speculation and the need to remove trade barriers has not been established in your post.
Even in the long glacial history of evolution, there are punctuated events and even, Mass Extinctions. Someone screwed the Pooch on this one.
Cocoy, AIG is Philam’s parent company.
In a collapse of any sort — whether it is environmental or financial — there is a more fundamental question to ask.
Which society will you be willing to bet on to pull itself together and rebuild?
Case in point: The Philippines in both good times and bad remained a Third World country.
In contrast:
- Germany and Japan suffered a devastating defeat in war, the latter got nuked twice, and the former relied on food supply airlifts for months.
- The U.S. suffered the mother of all depressions in the early half of last century, had to switch over to a war economy a couple of decades later, then back to a peacetime economy, then oversaw a rapid ascent to world domination within decades after the war.
- Singapore was kicked out of the Malay Federation, had to rely on its evictor for much of its water supply for decades, was abandoned militarily by its former colonial master, and had to rely on Israel to train its infant army while Indonesia breathed down its neck.
etcetera, etcetera.
Today we see Vietnam, stunted by decades of repressive communist rule now making a play for the Philippines’ traditional share in global trade. There are many others that were way behind that WILL eventually catch up and OVERTAKE the Philippines.
Collapses are as inevitable as taxes. They are inescapable parts of both economic and environmental cycles. What matters is how well people and societies ride the crests and troughs and how they rebuild when they succumb.
It’s hard to bet on a society that fails to build even in good times.
You haven’t heard the chismax that GSIS may have funds sunk in Wall Street, the main reason why GMA met with Paulson and Bernanke?
http://www.businessmirror.com.ph/09252008/headlines01.html
More than the $1B that Winston Garcia has to account for, there are questions now percolating in the coffee shops: the government’s $36-B in foreign reserves.
“Even the Fed is making money off “bailing out” financial institutions”
How can they when it will be tax payers who will be shouldering the $ 1 trillion budget deficit and the accumulated debt of $11.3 trillion????
Let us wait for the debates on how the next US president will address the issue.
for sure the republicans will change their tradition of tax breaks to big corporations, and other tax policies.
As for the democrats they have always been for taxes and regulation .
Ding,
please expound on the questions about our $ 36 billion reserves.
what are the coffee shop rumors?
Things are turning surreal, I mean, cats sleeping with dogs, like that. After all, Bush and Company may accomplish in a few weeks what they’ve been accusing the Dems of trying to accomplish for decades: Socialism. Like a GOP stalwart said of the bailout plan, “It’s financial socialism, it’s un-American!”
I’m against the $85,000,000,000.00 bailout of AIG. Instead, I’m in
favor of giving $85,000,000,000 to America in a “We Deserve It
Dividend”.
To make the math simple, let’s assume there are 200 million bonafide
U.S. Citizens 18+. Our population is about 301,000,000 +/- counting every
man, woman and child. So 200,000,000 might be a fair stab at adults 18
and up..
So divide 200 million adults 18+ into $85 billion that equals
$425,000.00.
My plan is to give $425,000 to every person 18+ as a “We Deserve It
Dividend”. Of course, it would NOT be tax free. So let’s assume a tax
rate of 30%. Every individual 18+ has to pay $127,500.00 in taxes.
That sends $25,500,000,000 right back to Uncle Sam.
But it means that every adult 18+ has $297,500.00 in their pocket. A
husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
* Pay off your mortgage - housing crisis solved.
* Repay college loans - what a great boost to new grads
* Put away money for college - it’ll be there
* Save in a bank - create money to loan to entrepreneurs.
* Buy a new car - create jobs
* Invest in the market - capital drives growth
* Pay for your parent’s medical insurance - health care improves
* Enable Deadbeat Dads to come clean - or else
Remember this is for every adult U S Citizen 18+ including the folks
who lost their jobs at Lehman Brothers and every other company that is
cutting back. And of course, for those serving in our Armed Forces.
If we’re going to re-distribute wealth let’s really do it…instead of
trickling out a puny $1000.00 ( “vote buy” ) economic incentive that
is being proposed by one of our candidates for President.
If we’re going to do an $85 billion bailout, let’s bail out every
adult U S Citizen 18+!
As for AIG -
* liquidate it.
* Sell off its parts.
* Let American General go back to being American General.
* Sell off the real estate.
* Let the private sector bargain hunters cut it up and clean it up.
Here’s my rationale. We deserve it and AIG doesn’t.
Sure it’s a crazy idea that can “never work.”
But can you imagine the Coast-To-Coast Block Party?
How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the
$85 billion We deserve the “We Deserve It Dividend” more than the
geniuses at AIG or in Washington DC.
A sudden collapse by AIG would impact markets around the world. the panic alone would do 90% of the damage.
part of the deal with AIG is to liquidate their assets. it is chapter 11 in all but name. what this “bailout” really is doing is to “soften” the impact of a liquidation of AIG and similar institutions. stem panic. The deal with AIG is several % above libor— profit that goes to the US Government.
So, it really can’t be characterized as selling out the principles of free enterprise. perhaps there should be a better term other than “bailout”. it isn’t charity at all.
Benign0,
You are measuring progress based on Western Standards. That is a mistake. If we measure progress as a state of emotional well being, a happiness index if you will, the Philippines as a people will be way on top of everyone.
Money isn’t everything dude.
this out of topic… but this thread caught my attention shel israel tweeted: “If we Americans kick in an extra few hundred billion to acquire Canada, will you vote for Obama? Let’s talk deal.”
The analogy is not correct.
The fly-by-night mortgage lenders which mushroomed during this time (in Florida alone, 4,000 mortgage
loan brokers were found to have been convicted felons) approved loans (sub-prime) in favor of people who do not even have the financial capacity to pay the monthly amortization for houses which are overpriced (thanks to the realtor). Homeowners did not realize that they were paying predatory interest rate packaged at low variable rate during closing of sale and increased on the third year. So even if these people were not downsized, they will not able to afford to pay the amortization.
Nortgage lenders do not own the money that they use for the loans. The mortgaged backed loans which cannot be sold to Fannie Mae and other prime holders are sold to financing institutions which shoulder the credit risk. The financing institutions bundled them into mutual funds and sold them to investors.
But who are these financing institutions? They are subsidiaries of the big homeloan lenders, insurance and banking instutions.
When the housing bubble burst, the overpriced real estate crumbled in value so is the value of the mortgaged back securities. With the decline in the assets of the corporation, financing institions’ profitability, liquidity and stability suffer which they can no longer cover up with fancy accounting system like what Fannie Mae ex-CEO attempted to do before he was forcibly retired because SEC became strict when it comes to financial position disclosure of public corporations after ENRON.
AIG did not hemmorrhage in its insurance business.
It is its financing companies which suffered the most among its subsidiaries.
Not to mention the Friends of Angelo Progran which granted “friendly home lending rates” to favored politicians, former CEO of Fannie Mae included.
Bottom line–it is greed and conspiracy which caused the meltdown of the economy.
The Ca t, my analogy admittedly is purposely and overtly simplistic. but everyone agrees it was market exuberance which is greed that drove all this. one can argue that “easy” money started the greed trend.
it also should be pointed out that these executives also need to be investigated and brought to justice if there were laws that were violated. Which to my understanding is being done by the FBI.
Fixing it is another matter entire. how do you help millions of people who lost homes? how do you rebuild an economy? how many millions of people (who are ordinary) will suffer direct and indirectly by the catastrophic and sudden failure of these institutions?
UPDATE:
You can find a DRAFT of the BAILOUT BILL HERE.
You can find Buffett being quoted by CNN as saying, “Billionaire Warren Buffett told congressional negotiators that if they can’t agree on a proposed financial bailout, the nation will face “its biggest financial meltdown in American history,” two sources familiar with the talks said.”
Sure. I’m happy for you that you believe all that.
UPDATE 2:
Belgium, The Netherlands and Luxembourg have “bailed out” ailing Fortis.