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The Financial Crisis

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Today saw a lot of news about America's financial institutions. I will admit to not having a lot of expertise in this area, but I was interested in other people's reactions to this news. Do you think this is a big deal? Is it a strong forewarning of things to come, or is this just much ado about nothing?

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I think it's more than a "correction" at this point. What frightens me is that the fundamentals of our economy - particularly the availability of home-ownership - are beginning to erode.

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Looks to be more of a correction at this point. I think the decision by BoA to buy ML and to let Lehman go down were wise. The market is weeding out the now weaker banks with some closing down and others being snapped up by BoA, Barclays and others. I also found it a really smart move by the top 10 banks to create that 50 billion pool to help keep others afloat that are in danger of failing. I think if we were more along the lines of the great depression, you wouldn't see BoA and other buying up other banks, as they would be in too much of a hole themselves.

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I think we are just seeing the tip of the iceberg. America has been living on credit for way too long and its finally coming home to roost. The fundamentals are not there as we have shifted huge numbers of jobs overseas, the federal government has taken on unprecedented amounts of debt, and we continue to have trade imbalances that are eye watering. The reason we have not seen much from it is because there was a huge amount of wealth generated on just paper, based on the unsustainable rise in real estate prices, that has now collapsed.

BTW, 57% of taxes are going to war, items to make war, and items to prepare for war, and items to repair people and places destroyed by war. One wonders why this insanity continues. Meanwhile there has been no investment in public projects that would make the United States more competitive on the world stage.

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Looks to be more of a correction at this point. I think the decision by BoA to buy ML and to let Lehman go down were wise. The market is weeding out the now weaker banks with some closing down and others being snapped up by BoA, Barclays and others. I also found it a really smart move by the top 10 banks to create that 50 billion pool to help keep others afloat that are in danger of failing. I think if we were more along the lines of the great depression, you wouldn't see BoA and other buying up other banks, as they would be in too much of a hole themselves.

My question is - is that good or bad?

I myself have been through some major financial difficulty. It made me pay a lot more attention to my finances, and I realized just how much money I was loosing to things such as interest, fees, and process. I am a firm believe in that the larger your company, the more the bureaucracy eats up costs. The sheer volume of simply dealing with paperwork and trying to standardize ends up costing lost of money. It seems in teh banking industry much of the real money is tied up in the process, and not actively being put to work. Some people can make money off of this by doing that work, but ultimately it comes from somewhere, and that is most often the consumer.

I am beginning to think that the problem is our financial system has become too complex, and consumes too much effort and money that really needs to be used to keep the economy flowing.

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I don't think we're at the dawn of a new great depression, but I do think there's a level of seriousness in the structural and economic problems in the country that are being shied away from; I don't feel that I'm seeing much "big picture" analysis, or any kind of coherent deep analysis. And maybe just another correction, but there have been a lot of these rather euphemistically described corrections, as of late, and the general economic drift of the decade isn't exactly great either. I think isolated events or "corrections" (which are being explained away as specific events) are part of a larger reshuffling of the socio-economic deck, and it's a protracted, slow-motion event (unlike the onset of the great depression), and ultimately I think the personal effects will ultimately seriously impact a fair number of people who thought they were quite secure. And the euphemistic refusal to use blunt, real language in describing these events as they unfold is telling: I wonder if a lot of people who should know better are refusing to face some harsh reality.

In my admittedly uninformed opinion, I also think any expectation that this will all end swiftly and painlessly is very unrealistic, and the political messes that this will entail for both/every political party out there is something that is quite difficult to predict at this point. Of course, if "corrections" (at whatever scale we are actually dealing with) are an economic and social period of wiping-the-slate-clean, this particular series of interrelated "corrections" might turn out to be a serious, great equalizer of a magnitude not seen in at least a couple decades.

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My question is - is that good or bad?

I myself have been through some major financial difficulty. It made me pay a lot more attention to my finances, and I realized just how much money I was loosing to things such as interest, fees, and process. I am a firm believe in that the larger your company, the more the bureaucracy eats up costs. The sheer volume of simply dealing with paperwork and trying to standardize ends up costing lost of money. It seems in teh banking industry much of the real money is tied up in the process, and not actively being put to work. Some people can make money off of this by doing that work, but ultimately it comes from somewhere, and that is most often the consumer.

I am beginning to think that the problem is our financial system has become too complex, and consumes too much effort and money that really needs to be used to keep the economy flowing.

Consolidation can be both good and bad. Good in that, like in this situation, it can help prop up failing companies and minimize their economic damage and bad in that when they are bought out, mass layoffs take place. Personally, the mess on Wall Street hasn't affected me in the least, its just something I read about in the news and all my investments were shifted to treasury bonds at the first signs of trouble. Actually, one of the reasons for business combinations when there is mass economic turbulence is because they save money. Instead of two marketing departments, you now have one. Instead of two HRs, you now have one and so forth. This is why the airline industry, for instance, has been going through a flurry of mergers. Each of them cannot stand on their own, so they combine operations. The larger the company, the more buying power they generally have, like Wal-Mart for instance. They have the ability to keep their price low because they are so huge, they can easily push their weight around with manufacturers because they have the ability to by en masse. In the case of airlines, combining gives the new company a larger fleet, which in turn needs a large purchase of fuel, which in turn allows the airline to negotiate a better price because they are buying so much.

The largest expense of most industries is making sure they are compliant with government regulations. Everything else is based largely on how well managed the company is. The company I work for, for instance, is a large fortune 500 that is the largest in terms of sales in its industry. The profit margins are very slim, but yet, because the company is diligent spending and is always attacking bureaucracy whereever it pops up in the company. My company has weather the great depression and has not missed a sales target in 35 years.

The current financial crisis was caused by lack of regulation on the mortgage market. Banks have been loaning people cash with bad credit and no money down, which is one of the major reasons for the bank failures. In turn, these people default on their loans, creating bad debt that continues to pile up. This leads to foreclosed homes that sell for below market value, which in turn drags down the market value of the homes around it, which in turn causes financial problems for those people because they went and got home equity loans, among other things. This results in those people defaulting on their loans as a result and on and on.

Banks lending what they don't have and in turn selling them to Freddie and Fannie, who in turn package them up as an investment, which in turn winds up in the investment banks on Wall Street. The investment banks put too much into making profits off of these mortgage and everytime one defaults, they loose money. Because of the lack of loaning discipline at the bank level, it sparked a Tsuami of defaulted loans, which is what has been killing the investment banks. The large banks, such as BoA, that actually sell many of their loans down the line, remained in much better shape because they no longer own the liability. Consolidation with an investment bank will no doubt make them far more careful, as they now have a much wider range of exposure to such turbulence. The moral of the story is, we need much better mortgage regulations in place to prevent such undisciplined loaning. More consumer education would be helpful as well. I read of one state (I think MI) that wants to require first time buyers to go to credit counseling before they make the purchase so they are more aware of what it entails.

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Put me in the 'correction' crowd.

I'm glad to see that the failures are being allowed to fail. I also hope this scare will make people look at their own debts and make good decisions regarding buying on credit. I'm on an economy car board, and I was amazed by how many people were taking 72+ month loans and putting no money down on a car that generally goes for less than 15K.

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HP is announcing today they are laying off 25,000 people in the United States. In a good economy this would not be happening but here we are and 25,000 jobs held by educated people who did what they are supposed to be doing in society, are going up in smoke. Many of these jobs are going to go overseas. More importantly, HP used to be one of the engineering jewels in the USA. They are mostly now reduced down to doing services and selling stuff made in Asia. We are quickly losing our technical edge, if it isn't already lost, to these kinds of moves.

As corporation after corporation is allowed to do this we are going to see more meltdowns in the economy. As I said earlier, the fundamentals are no longer there.

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Put me in the 'correction' crowd.

I'm glad to see that the failures are being allowed to fail. I also hope this scare will make people look at their own debts and make good decisions regarding buying on credit. I'm on an economy car board, and I was amazed by how many people were taking 72+ month loans and putting no money down on a car that generally goes for less than 15K.

But ultimately it's rarely a choice of spending the money or not spending the money at all. People need a car to function in this country. No car, unless you live in one of the few cities where they have extensive transportation, you can't find adequate work. And if it is that difficult for you to afford a car, it is going to be even more difficult to be able to afford to live in a city like that. Yes people get trapped in the credit trap. Having gone through that myself, once you are in you have no choice. So much of your money goes into the interest and fees that you have no choice but to finance. Telling people they shouldn't take out a loan isn't going to stop them from having to take one out because their rent is more expensive than their mortgage payment, they have to take the cheapest option to be able to survive day to day. They can't think long term.

So ultimately, just saying it is a bad thing is not enough, it doesn't fix the underlying problem. The overall problem is we have to streamline the business costs. Those large departments can theoretically save money on paper. But you forget all teh little extra costs add up just like the savings. Forcing everyone to have to follow the same procedure, and just plain costs in handling the extra paperwork, the communication of information back and forth between different offices in a different state, the added work that comes from having to compensate for the time it takes to go back and forth, that all adds up. They can no longer adjust to minor variations, and so always have to take a hit.

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Anecdotes about car loans seems like talking about a pop gun during a WWII battle.

I am not sure if people realize the significance what has happened over the last week but we have just had two of America's oldest financial institutions simply disappear. One is bankrupt, the other is being absorbed by troubled BofA and would have gone the same route. Others are sure to follow like AIG which will be a trillion dollar bankruptcy. The largest in history by far. All of this on the top of the federal bail out of Freddie Mac and Fannie Mae.

What this really means is that hundreds of billions if not trillions of dollars in wealth is disappearing from the American economy. It is creating a huge burden that has mostly so far ended up right in the American taxpayers pockets. My question is what are the American people going to do and say when the time comes to pay taxes to repay this debt, or at least the interest on it. The only real answer of course, and people especially politicans are in complete denial, is there are years of sacrifice coming up to cover all of it. How bad that is, is anyone's guess.

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And now AIG gets an 85B dollar bailout.

Where do we go from here? I can only assume Washington Mutual is next, or on the list of next.

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^More money being dumped on the taxpayers. To put just that number in perspective, this amount of money would build 113 brand new light rail systems. That would cover every large and medium sized city in the USA that wants to build a transit system with some left over. Or more relevant to this topic, would cover 5,470,000 people who might put a 72 month note down on a $15K car.

But it's not any of that, instead it's more corporate welfare going to the richest of Americans.

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Anecdotes about car loans seems like talking about a pop gun during a WWII battle.

I am not sure if people realize the significance what has happened over the last week but we have just had two of America's oldest financial institutions simply disappear. One is bankrupt, the other is being absorbed by troubled BofA and would have gone the same route. Others are sure to follow like AIG which will be a trillion dollar bankruptcy. The largest in history by far. All of this on the top of the federal bail out of Freddie Mac and Fannie Mae.

What this really means is that hundreds of billions if not trillions of dollars in wealth is disappearing from the American economy. It is creating a huge burden that has mostly so far ended up right in the American taxpayers pockets. My question is what are the American people going to do and say when the time comes to pay taxes to repay this debt, or at least the interest on it. The only real answer of course, and people especially politicans are in complete denial, is there are years of sacrifice coming up to cover all of it. How bad that is, is anyone's guess.

I think it could get very bad. The "time comes to pay taxes to repay this debt" will continue to be a political hot potato, until things get far more dire than they are now. Blame will get thrown around, the usual moralizing and political grandstanding, but I seriously wonder if there's any mass sense of urgency with any of this.

You also mentioned "but here we are and 25,000 jobs held by educated people who did what they are supposed to be doing in society, are going up in smoke" - I am not an engineer (I majored in something interesting in college - silly, silly me!), but I did have a spell in corporate America, and it was just to last a few years (before the last recession hit), and I was dumb enough to think that I had it made; in this day and age, unless you are stone-cold certain of your status, it's best to not make too many assumptions. The slide that hit me after that all went up and away was absolutely devastating - one of the worst experiences of my life, and not something that was quick and easy to climb out of, and in my circle of acquaintances I knew people who went through worse: resumes, interviews, moving, nothing. And that last recession was nothing like what we may be looking at now.

The ONLY silver lining in any of it was that I didn't run up a lot of debt I had no way of dealing with, and instead I systematically downsized and minimalized my life. This was usually very unpleasant, but also educational. And I am getting the sense now that large numbers of people who "did what they are supposed to .. do" are about to have to do the same thing, and this is pretty alarming, because it will be hell, they didn't ask for this, and it could have been prevented.

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But it's not any of that, instead it's more corporate welfare going to the richest of Americans.

Would you rather have the company go under and everyone lose their job? If I'm not mistaken, this money will have to be paid back, so I wouldn't really call it corporate welfare. I see this as more of a stop-gap measure in hopes the company will survive. Whether this is a good decision is debatable.

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Would you rather have the company go under and everyone lose their job? If I'm not mistaken, this money will have to be paid back, so I wouldn't really call it corporate welfare. I see this as more of a stop-gap measure in hopes the company will survive. Whether this is a good decision is debatable.

If AIG was not given this loan it would have been forced to sell its many pieces and be left with a much smaller holding company when it was over. The companies that were more conservative would have added mass, and everyone would have been fine for the most part. not now the taxpayer has had to cary part of the burden. sure we now have an equity stake in AIG that may count for something some day, but all of these bailouts, not this specific one are just bad news. these companies created this problem in conjunction with the ignorance and GREED of individuals buying more than they could afford. People trying to live above their means are the problem.

My wife and I work. work hard. have perfect credit, no kids yet. No credit card debt, and we own our cars outright(they are not likely as nice as most peoples cars). But we have to bail out the people who were reckless. Our next mortgage will be harder to get because of all of these people. our 401Ks are tanking, and our tax bill is rising. Instead of our conservative condo, and our used cars should we have bought the 500k-750k house our peers would have? should we be driving cars owned by banks?

It is just horrible that we have become a culture of consumption rather than one of production. My grandfather has been saying it over and over. "next time its gonna be worse than the last time(the great depression)". I know that his concerns are not really valid as I work in Investments and am acutely aware of the controlls put in place to avoid just such as catastrophe.

At this point I would rather see a full blown depression to teach people some humility.

/rant

and now for the real big news of the day that no one likely noticed.

The Libor doubled today

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The largest part of the problem thats been created here is the banks and others just giving out loans like money grows on trees. For that matter, they were giving loans to people with NO JOB, NO INCOME and BAD CREDIT!! Its the most absurd thing I've ever hear in my life. I'm not one that generally favors a lot of government regulation, but this is one situation where its time for the government to crack down, and crack down hard. I would love to see a minimum percentage down for large purchases to actually make people SAVE for once like they do in most other civilized countries. The art of saving was lost with the era of credit and its time for that to change. They also need more consumer education and it would be about time they start teaching the basics (balanancing a budget, checkbook, etc.) of financial planning in school. We obviously can't depend on many of the parents to teach their kids this, as they apparently don't know how to do it themselves and in today's world, this IS an essential life skill, right up there with science and math IMO.

The bailouts are about enough to make me puke. The thing that really gets me going is these executives getting millions in bonuses while the company goes down. As a condition of these loans (and they better be just that and every penny better be paid back), these executives should loose their bonuses. There is no reason they should see a penny of them. Also, any of them found to have been having the companies buy or make such loans should be prosecuted, spend a long time in jail and have to pay back ALL bonuses they got over the duration they were at the company. Its sick that we have cities like my own that have been struggling to come up with the cash for much needed mass transit and we have these clowns on the Wall Street goofing off.

/end rant

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Just out of curiosity, what kind of shape is BoA in? I didn't think they were doing well and then they bought up Merrill Lynch. Reminded me a little of the Stdebaker-Packard merger that was characterized as 'two druks trying to prop each other up.'

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Just out of curiosity, what kind of shape is BoA in? I didn't think they were doing well and then they bought up Merrill Lynch. Reminded me a little of the Stdebaker-Packard merger that was characterized as 'two druks trying to prop each other up.'

Lets see. Their stock has dropped 50% this year, they are now being sued by at least a dozen state and local governments due to the actions of their subsidiary Countrywide, they have already announced 10,000 layoffs this year, and now with Merrill Lynch they are faced with absorbing another 60,000 employees that are most likely going to see fairly steep cuts. And now there are lawsuits being filed in NY State to stop the merger with ML.

So in my book I would say things are not going that well there.

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Would you rather have the company go under and everyone lose their job? If I'm not mistaken, this money will have to be paid back, so I wouldn't really call it corporate welfare. I see this as more of a stop-gap measure in hopes the company will survive. Whether this is a good decision is debatable.

So you are for the European style of government management of business? In the case of AIG, they actually nationalized it. It isn't a simple matter of just giving them a loan. I am fascinated by this idea of privatizing profits but when things go bad then lets socialize losses. Can Ford, GM, Chrysler and all the major airlines come up to the federal government and do the same thing? Can I get a government backed guarantee that if I start a business an fail, the government will come in and cover my losses?

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Lets see. Their stock has dropped 50% this year, they are now being sued by at least a dozen state and local governments due to the actions of their subsidiary Countrywide, they have already announced 10,000 layoffs this year, and now with Merrill Lynch they are faced with absorbing another 60,000 employees that are most likely going to see fairly steep cuts. And now there are lawsuits being filed in NY State to stop the merger with ML.

So in my book I would say things are not going that well there.

all those things being what they are, this meger was not all that bad.

ML sold well before they were in the kind of trouble LEH was in. it was not an 11th our deal, it was a 9th hour deal. ML has some killer assets, that BOA is surely thrilled to now possess. BOA also has a massive deposit base. the large deposit base keeps a bank going where an investment house/insurance company fails.

Also BOA is so in bed with the fed, we will be bailing them out if it gets that bad.

BOA should survive, and come out pretty well off, but many jobs will be cut. most of them at countrywide and ML. they were looking for $7B of anual synergies once this is all done.

Let us not forget that ML owns a 20% stake in Bloomberg, and a 49% stake in Blackrock.

so, now BOA will own those assets.

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Lets see. Their stock has dropped 50% this year, they are now being sued by at least a dozen state and local governments due to the actions of their subsidiary Countrywide, they have already announced 10,000 layoffs this year, and now with Merrill Lynch they are faced with absorbing another 60,000 employees that are most likely going to see fairly steep cuts. And now there are lawsuits being filed in NY State to stop the merger with ML.

So in my book I would say things are not going that well there.

Thanks, that's kinda what I was expecting to hear. I hate BoA. Used to do business with them, but their customer service was non-existant. Couldn't happen to a nicer bunch.

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^ I hated them too, but technically that means I hated the former BoA, not Nations or NCNB, when did you bank with them? I vowed back then that if I would ever have the means I would do what I could to bring them down, but of course that was a different company... which unfortunately kept the name of the one it purchased.

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The discussion of BofA's customer service is off-topic. There are two topics in the Charlotte forum if you wish to discuss that.

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Imagine if Bush's plans to privatized social security had gone through. People would have been forced to invest part of their paycheck in these firms that are going bankrupt and disappearing. It would have been a disaster especially to the people who depend in part or in full on this money.

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