Facebook's IPO Debacle, Day 3: Un-Friended and Dis-Liked on Wall…
Former Olympic Rower Turned to Minimalism to Pay Down $82,000 in Debt
In the midst of what historians will likely view as the worst financial collapse in a century, it is hard to know what will happen next or what to do about it. This weekend Hank Paulson drew a line in the sand -- refusing to put the Treasury in the middle of the Lehman Brothers Holdings Inc. (NYSE: LEH) bailout which caused Bank of America (NYSE: BAC) and other bidders to pass -- and now Lehman and Merrill Lynch & Co., Inc. (NYSE: MER) are gone. (Although Bank of America's $50 billion Merrill buy could be a Pyhrric victory -- its stock is down 13% in pre-market). But now the Fed is, in effect, stepping over Paulson's line in the sand by accepting that same collection of junk that caused Lehman to fail as collateral from Wall Street in exchange for Fed money.
The Wall Street Journal reports that the Fed is expanding its lending facility for Wall Street banks. In addition to getting money from the Fed after posting collateral such as bonds, mortgage-backed securities (MBSs), collateralized debt obligations (CDSs) -- the banks can now get money for posting equities as collateral. To translate into English, after permitting two of Wall Street's biggest names to go under, the government is realizing that it may have made a mistake. It is now back in the business of bailing out Wall Street.
But this means that the Fed is becoming Wall Street's garbage collector. So when it takes MBSs, CDSs, and stocks as collateral, it is risking taxpayer money because in all likelihood, this collateral could be worth much less than its face value. But wait, there's more. The Fed is being joined by a $70 billion lending facility created by some banks to help bailout their brethren. And one analyst expects 110 banks (out of 8,400) to fail by July -- that would account for $850 billion in assets out of $13 trillion total.
After saying it would not get involved in any more bailouts, the government is back as bailer-out-of-last-resort. It is painfully obvious that the government has no idea what to do. Paulson's false bravado -- with his comments about bazookas in his pocket, subprime being contained, and this weekend's line in the sand -- is just so much wasted air.
And, regrettably the lessons of history are no match now for a deeply flawed global financial architecture. As I posted last night, there are three big flaws: trillions worth of complex securities that nobody wants to own, too little capital on the books of the financial firms that own the securities, and the tight global interconnections of those firms.
What to do? If you need your money in the next 10 years, take it out of everything else and deposit it in sub-$100,000 accounts with profitable banks.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
Goldman Earnings Sink After Buffett Dividend
Johnson & Johnson's Income Falls 23%
Burberry Shares Leap on Sales Update
Reader Comments (Page 2 of 2)
9-17-2008 @ 8:23PM
Cathy said...
And GW wanted to privatize Social Security and have us all invest it in the stock market. The little people said, what, are you kidding??? We won on that one. Of course, SS has been raided time and time again, but ... lesser of two evils ... maybe we'll come out with $2 in the end instead of none. Greed, to be sure, that's all this is about. GW, Chaney and the rest of gang are all about power and greed. They've made a killing on the oil alone. This gang of crooks is also not going to be held accountable. Once upon a time there was an American Revolution (taxation without representation being one of the issues). Once upon a time there was a French Revolution (too much disparity between rich and poor a big issue) and ditto for the Russian Revolution.
9-17-2008 @ 8:32PM
Babs said...
All- it has been every single one of our leaders in every level of government from the states up, who have failed to lead this country and who have contributed to this disaster among all the other crap that is going wrong. we have had no real leaders, no real representation, no real solutions just total and profound greed eating this country up from the inside out like a cancer. We need to stop fighting amongst ourselves and stop blaming republicans and democrats. Its time to stand together and take this country back and throw all the jerks out!!!!
9-17-2008 @ 5:18PM
Trude Blomsoy said...
While America is facing economic disaster,
those in power have learned their lesson
well from Prof. Carroll Quigley who wrote in his book "Tragedy and Hope" page
1247 :
"The argument that the two parties should represent opposed ideals and policies, one, perhaps of the Right and the other of the Left, is a foolish idea. Instead the two parties should be almost identical, so that the American people can
"throw the rascals out" at any election without it leading to any profound or extensive shift in policy...It should be able to replace it every four years if necessary, by the other party, which will
still pursue with new vigor, approximately
the same basic policies."
(The candidates and the media hated Ron
Paul who has warned us of this for 30
years. No one is as blind as those who
refuse to see.)
9-22-2008 @ 6:53PM
Jennifer said...
In this time of corporate greed, Why hasn't anyone asked about the TRILLIONS of dollars in Off Shore Accounts!
I believe the USA should INSIST on opening these accounts that are illegal and hiding TRILLIONS OF DOLLARS to evade US taxes.
We should be able to look at these accounts and seize that money to be able to put that money back into the US economy!
I bet there will be accounts from the highest US elected officials, judges, senate and congress and also most of these corporate SEO's that have Raped our US Finance system!
This would ease the burden on the middle class tax payers!
10-16-2008 @ 10:03PM
Nelson said...
I just finished reading an article by a top writer with The wall Street Journal. This writer explained that government investments in some financial institutions could "crimp" the ability of these institutions to find and keep top talent and performers. Well, they've not been 'crimped" for a long time..and look what happened. Maybe a little "crimping" would be good; and help to prevent the mess that's discussed previously.