By now most Americans have heard about sub-prime mortgages and the havoc they’ve wreaked on financial firms and the economy.
But on Sunday, 60 Minutes had a great story on the next mortgages that will become everyday words to Americans. And they’re called “Alt-A” or “Option Arm” mortgages. Check out the video story after the fold and more. Read the rest of this entry »
Just before the previews started at a showing of Slumdog Millionaire on Saturday night, my ear caught the two 40-something guys behind my wife and I talking about Bernard Madoff’s giant Ponzi scheme.
“That makes like 10 people we know who were caught up in this,” said one of the guys.
As I pretended to listen to what my wife was saying I focused on their conversation – hoping to hear a name I might know.
The American auto industry is like a lame horse: The only way to fix it is to let it die.
GM announced on Friday that the company will close 20 of its North American plants and is considering filing for Chapter 11. Chrysler LLC is slated to close 29 plants and lay off 53,000 workers effective immediately. And, though Ford Motor Company CEO Allan Mullaly told a Congressional committee that his company does not face what he called “near-term liquidity issues” which have slammed GM and Chrysler, he still has his cap in hand for $9 billion of Treasury-sponsored credit, should the industry worsen.
Ponzi schemes and defrauded Manhattan hedge funds can be lots of fun, and are guaranteed to create ample water cooler chit chat for days. But to give the Bernie Madoff super-scandal a little bit of context – and help you really impress over cocktails during the holiday party season – here’s a handy-dandy chart I created that chronicles some of the more outrageous of single-handed Wall-Street money losers, stealers or swindlers over the past couple of decades. Let’s see how they stand up to Madoff:
Clearly, Wall Street ripoffs are only getting more outrageous, and Madoff’s crimes have had the farthest reach of all.
Billions Lost in Former Nasdaq Chairman's Pyramid Scheme
At the end of last week, former Nasdaq chairman and money manager Bernard L. Madoff was arrested for running a firm that lost billions of dollars through a pyramid scheme. Although such scandal is not new to Wall Street, Madoff might hold the dubious honor of committing the largest fraud in financial history. And the details are emerging rapidly this weekend.
Today I learned a new phrase: Moral Suasion.
From Investopedia:
A persuasion tactic used by an authority (i.e. Federal Reserve Board) to influence and pressure, but not force, banks into adhering to policy. Tactics used are closed-door meetings with bank directors, increased severity of inspections, appeals to community spirit, or vague threats.
It would be nice if it worked. Consider these three news events from the week:
In each case, the persuasion tactic didn’t matter because actors are unpredictable.
Sure, the The Dark Knight is a near definite Oscar winner. But it also may be a key to boosting Time Warner’s earnings and future stock performance.
Provided by ABC News
The next bubble: bonds. This week, investors parked their money in an investment with absolutely no return. They poured $30 billion into four week T-bills at zero percent. (At this rate, the government will have plenty of cheap cash to build all the bridges, roads, tunnels, highways and roads it wants—too bad fewer Americas will be able to afford cars to take advantage of all the new infrastructure). Now back to the original point: the demand for bonds has also ballooned in the secondary market, which has pushed yields down to 1929 lows.
What could Barack Obama’s plan to save or create 2.5 million jobs by investing in green buildings, schools, and transportation mean for Wall Street? Deals, deals, deals.
Check it:
Bailouts work when one or two otherwise viable companies need temporary assistance either to survive a short-term cash shortage or to effect an orderly wind-down. An example of a successful bailout occurred in 1998 when Wall Street and the Feds came together to prevent the immediate bankruptcy of Long Term Capital Management—in that case, Wall Street firms bore the brunt of the monetary pain. LTCM’s bailout, although government initiated, also posed a low risk of moral hazard because the plan was an industry-funded solution and was manageable because it only involved one firm.
The government rescue of an entire industry felled by greed and poor leadership, however, becomes an expensive quagmire, which is what TARP is proving to be.
After LTCM’s rescue, the Cleveland Fed reviewed the Federal Reserve’s action. The number one lesson learned: Context matters. Large losses at a financial firm do not by themselves create a need for Federal Reserve action; the losses must have a systemic component.
While one could argue that the failure of the big three would worsen the unemployment significantly and cause a spate of follow-on bankruptcies, the orderly unwinding of the auto manufacturers still does not pose the same kind of systemic risk that failure of the major U.S. commercial banks would have.
A bailout for the Big Three also would not force the kind of changes that domestic auto manufactures need but which a pre-packaged bankruptcy plan created outside a courtroom might. More importantly, it would prevent the obvious scenario a few months from now when the auto industry comes back for an even bigger handout.
The financial services bailout is exhorbitant, messy and rife with moral hazard. It was also necessary to avoid a meltdown of world financial markets. Unpalatable as a bailout for financial services is for the country, replicating it for the automakers makes no sense.
