A Rasmussen poll 2 days ago showed that only 7% of people, regardless of political affiliation, supported a government bailout of financial institutions. I think support is so low because the term 'bailout' is so vague and people may not understand the consequences of doing nothing.
These government actions are not gifts to stockholders. The stockholders of Fanny Mae & Freddy Mac were wiped out. Take the most recent case of AIG. This is a solvent company with a temporary cash flow problem, mostly caused by greedy short-sellers. But stockholders were forced to give up 79.9% of the equity. There is a good chance that the taxpayers will end up making money on the deal.
As for the plan now being worked out for the government to buy shaky debt from financial institutions, these assets will be purchased by the government entity at large discounts, as little as 30 cents on the dollar. Not all of these loans will go bad. And they are all backed by houses, which are worth something. Again, the taxpayers could make money on the deal.
Clearly the debt crisis was on the verge of becoming a full-scale panic. If the government had not stepped in, this likely would have spread to the overall economy and very possibly resulted in a worldwide depression.
So how did we get here? I don't have all the answers, but there is plenty of blame to go around.The Greenspan Fed keeping rates too low (1%) for too long: Congress' cozy relationship with and lax oversight of Fanny & Freddy: greedy lenders and stupid homebuyers: securitization of loans, in which the banks/brokers making the loans made their money up front and then sold them, mostly to Fanny/Freddie, which sliced them up & sold them in packages to yield-hungry investors: the SEC's permitting naked short-selling of stocks.
The important thing is that we can be thankful this weekend that we have probably narrowly missed a disaster.
1 comment:
I think it's great! I wish someone would pay off my bad debts and let me gamble.
What happened to most of these companies, but especially ML was it was harder to make money because people could trade stocks on line. So they got into the lucrative home mortgage biz. They started leveraging themselves so that they could invest more and make more. Then competition increased and many people had already re-financed. They had to find more people to sell mortgages to, so they eliminated income checks and credit checks. By this point they were leveraged approx 35 to 1 ($35 dollars of debt for every dollar in assets), which would have been no problem if the housing market would have kept climbing, but the first down-tick brought down the whole house of cards.
So greed and the cash machine. People putting themselves first to the exclusion to the reality of the downside.
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