[quote author="barclaycon"]Trouble is whenever there is a financial scandal on this scale, it's a case of 'Privatise the profits - Socialise the losses'.
In other words when creaming the profits off from a scam like Sub-Prime, the cash goes straight to the perpertrators. But when it all goes wrong the government, the stock market and the tax payer has to pick up the tab.
Here in England the government has just had to take over a bank called Northern Rock, otherwise there would have been massive instability on the markets. The problems were caused by greedy, incompetent managers who paid themselves millions of pounds a year, but didn't take out sufficient safeguards to cover their speculation.
They have walked away with bonuses, while we have to pick up the tab![/quote]
Northern Rock is is another example of this derivative credit bubble, popping. This is a global issue. While the basic function of derivative instruments to spread risk is useful in financial markets, it can lead to serious distortions if the downside risk from such instruments (not being worth par value) is not felt by the originators.
In the case of these packaged sub prime mortgages, several people in the chain of transactions got fat, selling mortgages to people for houses they couldn't afford, with interest rates they couldn't pay. After the paper got flipped a few times the only people left on the hook were the home buyers and the poor sucker at the end of pipeline holding the paper when the music stops and there are no chairs left. The home owner has the option of walking away but, the market finally wised up that this paper wasn't worth what people were trying to sell it for and stopped buying. Lots of big institutions got stuck with huge holes in their balance sheet and net worth.
This will not be over until all the false value is deflated from home prices and institutional balance sheets. While I am not a fan of more government, these derivatives are a little like printing money so need regulatory oversight.
I'm not familiar with the corporate structures in GB but assume it is similar to here. I believe Richard Branson was trying to buy Northern Rock, but may have run into government approval or just the worsening credit markets problems.
The Bear Sterns deal was not a bail out and actually a take under... The former owners lost most of their capital. For many of the 14k workers who owned 30% of Bear Sterns they lost their life savings. The government ended up guaranteeing the worth of the $2 bid, not the original company value.
The "privatize profits and socialize losses", is a clever turn of phrase but a mean spirited spin on this. That said there were abuses and way too much unearned income generated at every step of this derivative pipeline.
The issue now is how to manage the disconnect between all these incorrectly valued assets and reality. I am nervous that our central bank may be inflating the currency to bail out overextended home debt and institution holding this debt. This is in fact "socializing" the loss, and punishing all of us who didn't buy inappropriate houses, or deal in funny deriviatives.
An ugly situation all around with no easy answers. There is not a small cadre of sleazy business people with all this ill gotten gain sitting in a handful of numbered swiss bank accounts. The windfall has been mostly spent by many thousands of people, and trying to reconstruct who got what would be Herculean.
I don't like it but it is the nature of government assistance to socialize loses and this will be felt widely. Another downside is they will turn a sharp painful correction for the (not so) few, into a prolonged drag down for the rest of us.
JR
