- This topic has 19 replies, 8 voices, and was last updated 17 years, 7 months ago by
.
- Posts
I see the US taxpayer is to bail out the banks over all of this bent debt they have been recycling through the money markets.
The bail out is reckoned to be in the order of $700Bn.
How are they ever going to pay this back?
It seems a bit strange to me that the Republicans are doing this, I mean they are the ones who are happy to see poor people with no medical insurance die in the street and when it comes to helping out banks they can basically have what they want.
I agree it’s harsh Dave but if you’re the Treasury leader what do you do ?
The reason for the bail-out is actually to help the small man and not the execs.
Yes, the taxpayer is effectively funding the bail out but while this will obviously hit them in the pocket the alternative is far worse.
If these companies go under then people’s pension funds, which will rely heavily on mortgage backed bonds, will be severely hit.
That’s not to mention the global effect it will have on markets world-wide.
At least Paulson seems to be standing up to the fat cats who have gone a large way to causing this problem. By putting restrictions on pay of CEOs of companies helped by the bail-out it will make the taxpayer feel that bit better.
The risk of course is the potential for companies to refuse bail-outs for that very reason and therefore putting their underlying mortgage backed assets at risk.
Who’d want to be head of treasury ???
Lee
So what are you saying is this.
The taxpayer should bail out corrupt companies and banks on the basis that at some point in the future they may or may not pay everyone’s pension. I take it you didn’t have an endowement mortgage?
No of course not but your average taxpayer will be just as bad, if not worse off if the companies weren’t bailed out – even if they’re fractionally funding it, especially those with endowment mortgages – although I’m not sure why you raised that question.
Imagine you have 5% of your endowment invested in a mortgage backed security where the issuer goes broke. Unless your fund manager has had the foresight to hedge your exposure with credit protection against the investment house your fund will take a hefty hit.
When you have triple A rated companies like Lehmans going under you’re affecting a large portion of the population – indirectly.
Lee
The endowment mortgage scenario is exactly what these financial companies will do in the future with everyone’s pension. I don’t think there will be a private pension or a pay out when the time comes in 20 or 30 years time. It’s the same now as it was then, the government stepping in with taxpayers money to bail out the financial markets.
The Northern Rock has been nationalised, the US governement is effectively doing the same thing in the states, only they aren’t calling it nationalisation. It’s a bail out, which I think means a gift.
There’s no evidence that this will actually work.
It would appear that capitalism doesn’t work?
But Dave it would appear that you’re confusing the financial institutions responsible for administering pensions and endowment policies with those who are to blame for the current climate.
A pensions administrator would not be allowed to naked short sell, it was only in the middle of 2007 that a fund could go short and that only applies to certain types – certainly not pension funds.
Therefore they will typically hold 3 basic types of investment;
1. Equities
2. Fixed Income, e.g. Bonds
3. Mutual funds (a combination of 1 and 2 with a greater spread to lessen risk).There’s nothing wrong with this approach and while some will make the odd bad decision, the fundamentals are fine and are governed by the FSA.
The problem has arisen because of Hedge funds who untill recently have had pretty much zero reporting requirements. These have been allowed to hold short positions.
What has been happening is your good old pension fund company has say for example invested in HBOS – nothing wrong with that, they were once a highly rated investment.
The hedge funds short sell the company though, creating market panic and a snowball effect – there’s also much talk of internet based rumours to force the price down.
This helps make the hedge fund money but screws the fund managers with long equity positions only.
Result – Equities = even higher vunerability.
This leaves fixed income…
But – the companies issuing bonds are losing money due to the reason above – amongst other things, so they carry a higher default risk and there bonds are no longer as safe an investment as they once were.
The lower credit rating will assist in forcing the price down and while this wil mean a higher yield it’s not good for the issuer.
Fortunately both the SEC in the states and the FSA over here have now stepped in to protect these companies – the FSA for instance prohibiting short selling on 34 financial institution stocks as the SEC have done but with slightly different rules.
This only happened last week and you could say after the horse had bolted.
Bailing out is not good for the tax payer I agree but it’s wrong to blame the companies looking after pensions et al.
The hedge funds are the reason the markets are shot – guys earning huge bonuses on short term results.
Lee
A tax payer is a privileged member of a society where the welfare of one is the concern of all
" My best friend, my doctor, won’t even tell me what I’ve got"
Wilson, it takes a great leap of imagination to pretend that there are no parallels between the endowment mortage debacle and the current one. It’s a bit like saying everyone who works for the NHS doesn’t work for the Government.
Let’s look at what happened in both cases ..
Financial Institutions agree to help people in society at some time in the future.
They don’t and end up losing the money they promised to pay out.
The tax payer (we) stump up the cash.
No-one is responsible and no-one goes to prison and all the crooks get to keep millions.All that about selling short and all that is a smoke screen .. they could put Al Capones accountant to shame.
An interesting letter in today’s Daily Telegraph re. the sub-prime crisis. I haven’t heard this argument before; don’t know how correct it is. What do forumites think?
,The sub-prime crisis in America, from which our own disasters spring, would never have occurred had it not been for political correctness.
“Minorities” in the United States were not as successful as whites in being granted mortgages, and this was considered by the liberal-Left as an indication of racial discrimination.
Actually, research published in the US Department of Housing paper Mortgage Discrimination and FHA Loan Performance (1996) showed there was no such discrimination.
But starting in 1992 the Democrat-dominated Congress instructed Fannie Mae and Freddie Mac to increase their purchases of mortgages for low- and medium-income borrowers. The Clinton administration threatened banks with prosecution under such laws as the Equal Credit Opportunity Act, which outlaw discriminatory lending by reason of race, marital status, religion and so on.
Fannie Mae was investigated for racial discrimination, and the Federal Reserve required banks to treat such sources of income as welfare payments and unemployment benefits as of similar merit to such criteria as income from employment, a good credit history or the ability to make a down payment.
These affirmative-action lending policies, lauded at the time, are the direct cause of the present crisis.
Dave,
I have never said that I agree with companies being bailed out after their investments go wrong.
My argument for the defense is;
1. They were not taking an high risk strategy as such, rather it’s been a case of other investment houses without the same compliance rules having basically shafted them.
2. What alternative do you suggest as opposed to the government bailing them out ? – If they hadn’t a lot of people would be screwed.
Insomniac – I have no doubt that the sub-prime issue is what has caused the current situation. Whether that’s down to political correctness or not I’m not sure but by lending to people who basically can’t afford to pay you are asking to write-down huge amounts of debt.
Lee
Insomniac, any loan that is made that can’t be paid back is not the whole problem.
Take student loans that the government are getting the banks to lend out here for example. Say everyone doing a non-degree like art, tourism, heraldry, etc. decide that it would make sense to make themselves bankrupt and not pay back their £24k. They can’t get any more debt for about 3 years but as they will be only earning about £9/hr in Tescos, it’s not a bad deal.
But how the banks deal will this debt is where the problem comes in. The banks then take this bundle of debt and sell it to another bank as an asset which is worth (the value of the original debt + annual projected interest) nothing in reality. This is the bad debt in the system.
The way I see it the governments have caused this, not building houses, encouraging unrealistic amounts of debt, student loans, 125% mortgages, amongst people who can’t afford to pay it back.
Why anyone would think that a mortgage of more than 100% of the value of their property was a good deal, is beyond me – they’d be better off going to Ocean Finance for the non-mortgage part.
And any Bank lending more than 100% of the value of a property is just taking the piss, and really deserves what it gets when people start defaulting in their thousands.
Take student loans that the government are getting the banks to lend out here for example. Say everyone doing a non-degree like art, tourism, heraldry, etc. decide that it would make sense to make themselves bankrupt and not pay back their £24k. They can’t get any more debt for about 3 years but as they will be only earning about £9/hr in Tescos, it’s not a bad deal.
This is factually incorrect. Since 2004 student loans are not wiped away after after becoming bankrupt.
With reference to the US bail-out, i don’t see that there is any choice. The working tax payer of the future has to face the consequences rather than loosing his car, job, house, kids college fund (etc) today.
IRoland, it is uncollectable debt that the Government has forced the bank into taking, which ever way you look at it.
The American taxpayers can count themselves lucky.
At £2,750 per head of mortgage debt they’re only burdened with half of what we’ll have following the announced bail out of B&B.
Or maybe the Spanish will save us
Lee
- You must be logged in to reply to this topic.