good commentary on bear stearns bailout

[rob_gould]

[quote author="barclaycon"]

So out of a country of 60.7 million, only taxpayers, all precious 2.8 million of them, have to pay 880 each for the bailout of 25 billion?

Hey Mike, I didn't calculate the figures. That is the most conservative estimate. One report is quoting £3500 per person:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/19/nrock119.xml

Whatever happens WE are left carrying the can.
The managing director of Northern Rock (who paid himself £1.3million a year) walked away with a bonus and still maintains that his business model was 'sound'. We haven't had a run on a bank like that for 150 years; and things are still looking shaky.
So I say again. When the dodgy dealing is pulling in the cash, it goes straight into their accounts. When it all goes tits up, we have to bail them out. It's not the politics of envy. It's blatent unfairness.[/quote]

My understanding of this was that actually, this kind of borrowing by banks from the national reserve of its country is common.

The difference in the case of Northern Rock is that shortly before the run on the bank happened, government passed a law making it necessary to declare publicly when a bank is borrowing money from the national reserve.

You can see where this is heading.

Northern Rock customers, whipped into a frenzy by idiotic and inaccurate media reports caused the biggest run on a UK bank in XX number of years, causing it to collapse.

The botom line is that all banks operate in this manner. The only difference with Northern Rock is that the information was made public and turned into a story by the British News, on the back of the sub prime crisis.

Did Northern Rock have interests in the sub prime market?

Did Northern Rock and will most other UK lenders be hit hard by sub prime?

The answer to both questions I'm quite certain is yes

BUT

IMO that's not what caused the collapse of Northern Rock. Want someone to blame - I'd start with the Daily Mail et al - the scaremongering British newspapers who trade more on sensational bullshit than real news, and follow that with the good old British public who don't realise half the time that they're their own worst enemy for believeing everything that they're told without reading between the lines.

 

[rob_gould]

Don't want to hijack this thread, but anyone who's shown an interest in this topic would do well to watch these.

http://www.youtube.com/watch?v=ThXpjmfyiMQ

http://www.youtube.com/watch?v=LgkYjFYr2QI&feature=PlayList&p=191FAEC042947F31&index=1

http://www.youtube.com/watch?v=qTu4kGkQOvE&feature=PlayList&p=191FAEC042947F31&index=2

http://www.youtube.com/watch?v=CPmZBfBx53Q&feature=PlayList&p=191FAEC042947F31&index=3

http://www.youtube.com/watch?v=-IdpkvLdKLQ&feature=PlayList&p=191FAEC042947F31&index=4

 

[barclaycon]

Rob.
You are SO uninformed.
Your assertion that the Northern Rock crisis was caused by the Daily Mail is unintentionally hysterical.
If you had your life savings tied up in a bank that was looking decidely dodgy, would you just leave it to chance?
John Moulton of Alchemy said the whole crisis could be summed up in one phrase: 'Bankers Greed and regulatory failure'.
You are suggesting it was some sort of local difficulty.
In finance there are standards - you spread the risk, don't over-extend yourself and allow for unforseen events (like taking out sufficient insurance). Northern Rock didn't do any of these things and THAT is why it failed.

 

[rob_gould]

[quote author="barclaycon"]
If you had your life savings tied up in a bank that was looking decidely dodgy, would you just leave it to chance?[/quote]

I don't want to offend or upset you Barclaycon. I like debate and banter, not full blown argument where people start to get angry.

If we're talking about me personally I certainly wouldn't be foolish enough (I don't think that's too strong a word) to invest my life savings with a bank.

Do you know about the Fractional Reserve System? Fiat Money?

This kind of occurence (I'm talking generally now rather than NR) risks becoming much more of a regular feature in our lives than banks / governments would like us to think. Perpetual growth is unsustainable and at some point, IMO, the world finance systems will collapse. The only real question is just how horrifically.

I accept that my assessment was oversimplified. However I do think it's naive not to accept that all banks ask for this kind of funding on a regular bassis. They're all at it.

please take the time to at least read the first few lines of this article.

http://www.iht.com/articles/ap/2007/08/31/business/EU-FIN-COM-Britain-Barclays.php

I appreciate that the NR fiasco was on a level more serious than that, but the point remains.

 

[Greg]

I am a big fan of diversifying when it comes to investing. As a direct result of this, I would NEVER... and I mean NEVER... tie up my own retirement money in a company I work for. In this case, you are relying on one single company to provide for you now and your future. Silly talking about all your eggs in one basket. Never let a company talk you into this... it is unwise. I think an IRA is the way to go. I'm in my 20s, so I'm invested in stocks... no bonds. Though a nice chunk of my IRA is in cash. Cash is king.

Regarding Bear Stearns, the stockholders are last in line and are going to lose, or have already lost, their asses... the lenders to Bear Stearns are first in line. But this is way is has always been. Based on the current information, those who have money invested with Bear Stearns (not stockholders) should be ok... i.e. their investment accounts are "safe."

I have not followed the Northern Rock situation closely... but in the US, I feel that the Federal Reserve (going back to Greenspan days) is partly to blame for this mess. Greenspan and Bernanke made some bad decisions along the way. Their actions need to be scrutinized as well.

 

[rob_gould]

I think that of late, investment in precious metal seems to be a good way to put some money aside.

Even though the price of gold has risen massively of late, despite a drop off in the last week or so I think that over the coming months the price of gold should go up and up again. Peak oil (whether you believe in it or not), the state of the US economy and weakness of the dollar ought to see to that.

 

[JohnRoberts]

I tried to stay away...but.

I think the run on Northern Rock may have been helped by a difference in deposit insurance rules between here and there... Ours is 100% up to limit, while in UK, it's only 100% up to a modest amount, then 90% up to the higher limit. I understand the economic theory for having the insured share in the loss so they will be a more involved shopper when it comes to choosing a bank to make deposits in, but the prospect of losing even 10% of a large account is enough for most to pull their funds out at the first hint of trouble. I blame how the insurance is structured more than press coverage (while I hold the press in pretty low regard otherwise).

Economic theory and understanding of global credit market and currency interaction is a work in process. We have all benefited from the faster economic growth facilitated by a soft currency and much study has gone into setting the optimal rate of money supply growth, to keep inflation in check while not hindering GDP growth.

In my opinion, the derivative bundling of sub prime mortgages for resale completely distorted the true value of those instruments and therefore stimulated too much lending activity in that sector. The net effect of too much credit was not unlike too much money supply and the result was inflated home prices, with risky (uneconomic) purchases based on these unsustainable price trends continuing, resulting in a bubble that we must now deal with.

There will always be simple answers offered, and just like in most things, more often wrong than right. This too will pass, and we will have another chapter of understanding in our economics text regarding these instruments, but there will be more blood on the ground from the existing unresolved imbalances between now and then.

Gold would have been a smart investment a few years ago, but for any one keeping track it has only recently touched former peak levels from the last time there was a gold price bubble, so buy with caution. If and when order returns to markets gold should return to more typical levels. There are a few general trends supporting the price of gold, like more wealth in heavy gold buying nations (like India), but most of the price move IMO is due to current (low) valuation of the US dollar and fear. If you wish to bet on the dollar continuing to drop forever go for. I'm not that brave.

I don't like to give investment advice, but you want to buy when everybody else is selling and vice versa.. based on that, now is probably a good time to "sell" gold while people are paying a premium. (I bought some home builders, because everybody hates them). Unlike oil, which looks like it will continue to enjoy huge demand growth with increasingly difficult supply expansion, gold has mainly ornamental utility, or as hedge against inflation.

I wish everybody could be more informed about everything (I don't claim expertise). Economics is just one of many disciplines we ignore at our own risk. If something looks too good to be true (like a no money down mortgage on a house we can't afford), run don't walk away.

JR

PS: I have openly posited that the inflating the currency is one way to bail out troubled homeowners. In that case gold would rise further. It is directly opposed to the mandate of the FED to control inflation, so we'll see. I can't predict the future

 

[rob_gould]

[quote author="JohnRoberts"]I wish everybody could be more informed about everything (I don't claim expertise). Economics is just one of many disciplines we ignore at our own risk. If something looks too good to be true (like a no money down mortgage on a house we can't afford), run don't walk away.
[/quote]

Amen to that.

Your sum ups are always articulate and well informed whether I agree with them or not John.

 

[barclaycon]

Just about every bank has been hit by the Sub-Prime debacle.
Most have been able to stay upright because they had diverse investment strategies and sufficient capital to cover unforseen circumstances.
Northern Rock had neither.
It went from being a small building society in the North East, to the 5th. largest mortgage lender in the country within a decade. As soon as its line of credit dried up it had to go cap in hand to the Bank of England because it only had a weeks worth of money to cover its liabilities.
The FSA (Financial Standards Authority) has had to admit that it failed in its job to act before things got out of hand. It should have known that the Northern Rock business model was flawed and acted when it showed signs of being over-stretched.
There are quite a lot of highly paid executives at the FSA who have been carpeted because of their inability to do their job. (The chairman for example will be spending more time with his family).
The idea that most people in the country have a 'portfolio' of investments with long term financial strategies is far fetched. Perhaps you have?
Most people have their pension or they have their savings and they put it somewhere where they think it will be safe.
Northern Rock looked very shaky, the government failed to immediately guarantee customer's savings hence massive queues of people round the block to get the money out.
If any of my money had been in there I would have done the same.
Now. Back to audio!

 

[bcarso]

I've followed Alan Greenspan for many years, dating back to his writings when a member of Ayn Rand's inner circle, long before his role as presidential economic adviser and then Fed chief. I haven't read the recent book as yet.

He wrote famously back circa 1962, IIRC, under the auspices of the Nathaniel Branden Institute, that the creation of a central bank in 1913 directly led to the crash of 1929. Although there had been panics and recessions before, as a result of individual bankers' misjudgments, they were limited in duration and scope. He described the creation of the Federal Reserve and its policies as "putting pennies in the fuse box" and allowing banking excesses to be virtually unlimited.

As we feel the pinch of tax time we should remember that the amounts we relinquish are but a fraction of what's really being stolen via the creation of more and more fiat money. Hence the attraction of gold, which is not easy to print.

 

[JohnRoberts]

You are free to own gold. At least since 1971.

Opinions vary, especially among economists. I think there's an old joke "if you want three opinions on a subject ask two economists". Greenspan may even disagree with himself.

Many hold Greenspan complicit in the stock market (dot com) bubble of early '90s and he left Bernake with less than a rock solid currency. Greenspan seems much more talkative now that he's pimping his book, than when he was in office and being asked tough questions. While Bernake may not possess all the answers either, at least he answers questions when asked and tries to explain rather than conceal what he's thinking. Greenspan was a master of obfuscation.

One of the attractions of electronics is you don't have the variable of human behavior to deal with, at least regards circuit behavior. Once marketing gets involved in the design brief, you do get a little human weirdness.

JR