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Financial Turmoil and Bailout

Financial Turmoil and Bailout. Poverty Law Ezra Rosser. Possible things you read about in New York Times on Sept. 24, 2008. Option A: Cute story about monkeys being rescued. Option B: The rest of the newspaper. Full Page Ad in New York Times 9/23/08. New York Times, 09/20/08.

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Financial Turmoil and Bailout

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  1. Financial Turmoil and Bailout Poverty Law Ezra Rosser

  2. Possible things you read about in New York Times on Sept. 24, 2008 Option A: Cute story about monkeys being rescued Option B: The rest of the newspaper

  3. Full Page Ad in New York Times 9/23/08

  4. New York Times, 09/20/08

  5. Housing Bubble: the bubble in home prices, fueled by the ready availability of credit, resulted in an underestimate of the risks of residential real estate; • Delinquencies: the peaking of residential home prices in 2006, combined with lax lending standards were followed by a very high rate of delinquencies on subprime mortgages in 2007 and a rising rate of delinquencies on prime mortgages; • Collateralized Debt Losses: losses thereafter on the complex “Collateralized Debt Obligations” (CDOs) that were backed by these mortgages; • Losses for those Insuring Mortgage Securities: increased liabilities by the many financial institutions (banks, investment banks, insurance companies, and hedge funds) that issued “credit default swaps” contracts (CDS) that insured the CDOs; • Banks/Investors Feel Losses: losses suffered by financial institutions that held CDOs and/or that issued CDS’s; • Credit Crunch: cutbacks in credit extended by highly leveraged lenders that suffered these losses. Simplified Version of What Went Wrong Based on a Brookings Institute Report: http://www.brookings.edu/papers/2008/0922_fixing_finance_baily_litan.aspx Another version, pretty similar: Paul Krugman, “Thinking the Bailout through,” New York Times, Sept. 21, 2008, http://krugman.blogs.nytimes.com/2008/09/21/thinking-the-bailout-through/ or “Cash for Trash,” http://www.nytimes.com/2008/09/22/opinion/22krugman.html

  6. 1. Housing Bubble Sources: S&P/Case-Shiller Home Price Indices, http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/2,3,4,0,0,0,0,0,0,1,6,0,0,0,0,0.html and New York Fed, http://www.newyorkfed.org/regional/Synopses.pdf

  7. Housing as an Investment http://www2.standardandpoors.com/spf/pdf/index/SP_CS_Home_Price_Indices_Factsheet.pdf

  8. 2. Delinquencies Source: New York Federal Reserve, http://www.newyorkfed.org/mortgagemaps/ 6 month change in foreclosures to Aug. 2008 Red means more foreclosures

  9. New York Times, “The Debt Trap Series”: http://www.nytimes.com/interactive/2008/07/20/business/20debt-trap.html

  10. New York Times, 08/04/08

  11. 3. Collateralized Debt Losses I have no idea what a good graphic or comic of this would look like so we will move on . . . Maybe?: http://www.youtube.com/watch?v=PJu57ZbIFKA(Bush Rough Patch/Fundamentals Strong, Kansas City Speech)

  12. 5. Banks/Investors Feel Losses Multimedia New York Times 09/15/2008 Graphic: “A Year of heavy Losses” http://www.nytimes.com/interactive/2008/09/15/business/20080916-treemap-graphic.html

  13. Fed attempts to inject liquidity into the market 6. Credit Crunch Source: New York Fed, http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

  14. Characterizing the bailout A necessity or a bad break from market fundamentals? Leaning against the market? Socializing risk and not reward? Intergenerational inequality (greed)? Correcting/Reversing de-regulation?

  15. Perspectives on the Economy Phil Gramm (Mccain Advisor) “Nation of Whiners”: http://www.youtube.com/watch?v=2NVjq2py7BA

  16. Leaning against the market?

  17. Preventing short selling

  18. Further explanation of our sinking ship Source: The Big Picture Blog, http://bigpicture.typepad.com/comments/2008/08/debt-forgivenes.html

  19. Socializing Risk and not Reward

  20. Intergenerational (In)equity

  21. Corporate wrongdoing connected with lax oversight Correcting/Reversing De-regulation Source: AIG/Lehman Tipline, http://oversight.house.gov/contact/tiplines/financial.asp

  22. Alan Schwartz, Bear Stearns:  "Capital ... remains strong."     26% • Martin Sullivan, AIG:  Chance of a loss? "Zero."                       22% • Ken Lewis,Bank America:  There's "value in Countrywide."    12% • Ken Thompson, Wachovia: We're in "a great market."              11% • Dick Fuld, Lehman Bros: "The worst is behind us."                   8% • John Thain, Merrill Lynch: "We have tackled the problem."      8% • VikramPandit, CitiGroup: We are "well-capitalized."                7% • Kerry Killinger, Washington Mutual: "Profitability" in 2008.        4% • John Mack, Morgan Stanley: "Comfortable" with the risks.         3% Misleading Investors Results of a survey of readers of “Portfolio” asking them who is the least trustworthy CEO. Source: The Big Picture Blog, http://bigpicture.typepad.com/comments/2008/08/index.html

  23. Limiting/Altering the $700 Billion Bailout • Increase the bailout: • Include homeowner protection as part of the bailout • Tag on social programs to the bailout • Condition the bailout: • Require firms accepting money to agree to greater regulation • Ensure up-side gains go to the government/taxpayers • Nationalize failed institutions (?!?) • Refuse to include foreign debtors in the class rescued • Place limits on CEO compensation • Add regulation (leverage limits, open balance sheets, limits on der)

  24. Lehman Brothers Chairman and CEO Richard Fuld Jr. made $34 million in 2007. Lehman (OTC:LEHMQ) filed for Chapter 11 Bankruptcy protection earlier this month. Fuld also sold nearly a half-billion –$490 million – from selling LEH stock; • Goldman Sachs (NYSE:GS)paid its Chairman and CEO Lloyd Blankfein $70 million last year. Co-Chief Operating Officers Gary Cohn and Jon Winkereid were paid $72.5 million and $71 million, respectively. • Bears Sterns (BSC JPM)former chairman Jimmy Cayne, rescued by a $29 billion Fed shotgun wedding to JPM, received $60 million when he was replaced; • American International Group (AIG) chief executive Martin Sullivan got a $14 million compensation package in 2007. He was ousted in June. The insurance giant (NYSE:AIG) is on the receiving end of an $85 billion federal bailout. Robert Willumstad was handed $7 million for his three months at the helm. (Edward Liddy took over as AIG’s chief executive earlier this month). • Morgan Stanley (MS) Chairman John Mack earned $1.6 million + stock. Chief Financial Officer Colin Kelleher got a $21 million paycheck in 2007. Morgan Stanley also received an expedited approval to become a banking holding company in 48 hours -- that's record time. • Countrywide Financial's (CWF BAC) founder & CEO Angelo Mozilo,  which has been at the forefront of the subprime fiasco, cashed in $122 million in stock options in 2007; His total take is estimated at over $400 million dollars; • Stanley Neal, who steered Merrill Lynch (NYSE:MER) into financial collapse before being taken over by Bank of America, was given a package of $160 million when he left his post last year; That package makes current CEO John Thain was paid $17 million in salary, bonuses and stock options in 2007 look like a bargain. • JP Morgan Chase & Co. (JPM) Chairman and CEO James Dimon earned $28 million in 2007. Chase  acquired troubled investment house Bear Stearns earlier this year with the federal reserve backstopping $29 billion in Bear assets to help get the deal done. • Fannie Mae (FNM) CEO Daniel Mudd received $11.6 million in 2007. His counterpart at Freddie Mac (FRE) Richard Syron, brought in $18 million. Federal government is taking over the mortgage backers with Herbert Allison to serve as Fannie CEO and David Moffett the new CEO at Freddie. • Wachovia Corp. (WB) Chairman and CEO G. Kennedy Thompson received $21 million in 2007. He was succeeded by Robert Steel as CEO in July. Steel is slated to get a $1 million salary with an opportunity for a $12 million bonus, according to CEO Watch. Wachovia (NYSE:WB) is one of the banks that could be sold in the midst of the financial crisis. • Seattle-based Washington Mutual (WM) will pay its new CEO Alan Fishman a salary and incentive package worth more than $20 million through 2009 for taking the helm of the battered bank, according to the Puget Sound Business Journal. CEO Compensation Source: The Big Picture Blog, http://bigpicture.typepad.com/comments/2008/09/index.html

  25. What could we do with $700 billion: $700,000,000,000.00 Nothing (After All: it is not our money to spend) Dramatically Reduce Poverty how much?, for more see Colbert, “The Word: OhMYGODSOCIETYISCOLLAPSING”: http://www.colbertnation.com/the-colbert-report-videos/185613/september-23-2008/the-word---ohmygodsocietyiscollapsing--- Eat a Lot of Pie: Jon Stewart Interview of Bill Clinton, 9/23/08 http://www.thedailyshow.com/video/index.jhtml?videoId=185197&title=Bill-Clinton-Pt.-1 NY Times provides adequate justification for choice of sources

  26. Multimedia Krugman: http://www.bloomberg.com/avp/avp.htm?N=av&T=Krugman%20Sees%20%60Socialization'%20of%20U.S.%20Financial%20System&clipSRC=mms://media2.bloomberg.com/cache/vZIB4UO6h.yo.asf Jon Stewart: http://www.thedailyshow.com/video/index.jhtml?videoId=185175&title=The-Economy-&-You---Wall-Street-Collapse 9/17/08 Joseph Stiglitz: http://www.bigthink.com/business-economics/12714/embedded Karl Denninger: http://www.youtube.com/user/kdenninger

  27. Thanks Much of the content of this presentation comes from The Big Picture Blog, http://bigpicture.typepad.com/ -Ezra Rosser (if you have content suggestions you can email erosser@wcl.american.edu)

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