Stocks and investing thread

[southsider2k5]

I think you guys have to seperate the executives who run the firms and the firms themselves as entities. The firms employ thousands not to mention provide liquidity and stability to the markets - they need to have a safety net. The executives who leapt off the buildings, on the other hand, need to be held accountable.

 

Bingo. You can't think of the macro and micro in the same frame of mind. In the micro sense, there are banks and companies that need to go under. In the macro sense you HAVE to protect the banking system. Look no further than the Great Depression to understand why. The banking sector dried up, and all loaning completely stopped. There was no liquidity in the system, and it literally took the government spending, not of the publics works projects, but of WWII to really get things going again.

[southsider2k5]

In your opinion, is more government regulation the way to go here?

 

Not more, smarter. Currently we have a governmental agency for pretty much each piece of the financial sector, and they do not work with each other at all. The reality of the 21st century is that pretty much all of these things are intermingaled. Instead of having regulating bodies for stocks, another for options, another for futures, another for banking, another for mortgages etc, there needs to be one central agency to oversee all of this, and be nimble enough to manage the whole system. In my opinion it is something that probably should be a tool of the Federal Reserve Bank, as they are pretty much the overseers of the economy now anyway.

[Balta1701]

I'll post this little bit from Rob (Citi) Reich.

Some of the dollars I'm sending to Washington are now being used to backstop Wall Street investment bankers, hedge fund and private equity managers, and anybody else associated with a borrower that's too big to fail.

 

The reason they're too big to fail is they've borrowed so much from me and from you - from our pension funds and money-market funds - that if they went bust, our savings would disappear. Even the danger of them going bust might make us so anxious we'd demand our money, which would close down the entire financial system.

 

The reason they've been able to borrow so much from us without putting up much of their own capital is they're unregulated, and don't have to put up their own money. Hank Paulson's new ideas won't change this one bit. He just rearranges the regulatory boxes.

 

The tax code also rewards them for borrowing rather than investing, by letting them deduct interest payments on the money they borrow. Wall Street is leveraged to the hilt in part because the Street has got a fat tax break for taking on debt.

 

The tax code also allows financial types to treat the earnings they get on the investments they make with the money you and I lend them as capital gains rather than ordinary income. So many of them are paying taxes this tax season at a 15 percent rate. That's a lower marginal tax rate than you and I and most of the middle class is now facing.

[southsider2k5]

<!--quoteo(post=1599641:date=Apr 2, 2008 -> 07:15 AM:name=NorthSideSox72)-->

<!--quotec-->I think you guys have to seperate the executives who run the firms and the firms themselves as entities. The firms employ thousands not to mention provide liquidity and stability to the markets - they need to have a safety net. The executives who leapt off the buildings, on the other hand, need to be held accountable.

Steven nails it. Your house is going in to foreclosure and the government won't bail you out? Go buy a house worth about $10 billion, so that if your house goes under, the fed will have to bail you out because its so big that it provides a major impact on the economy.

 

 

We are quoting comedians now for economic policy? I can't wait to throw in some George Carlin in the envoirnment thread!

 

Anyways, the even implication that some how the private person is out on their own when it comes to buying a house is freaking laughable. The government is involved in so many steps along the way to hold people's hand, it isn't even funny. Starting with the most obvious, HUD, who has programs for everything from being spoonfed the information in your mortgage, to grants for your first house, to getting a subisidized HUD house in your area, to how to sell your house. Then there is all of the government mandates closing steps, which turns closing on a house into a day long event with each page of paperwork explained to you ad nasuem, which still doesn't seem to help most people (wait my ADJUSTABLE rate mortgage can go up???). After that there are the tax deductions for your interest paid on your mortgage, and the property tax credit for your main residence. The sad thing is that I KNOW I am forgetting stuff here... But the main point is that there are TONS of safety nets that have existed for a long time here in the US. We hold people's hands along every step of the homeownership process, and still people don't get it. I don't know if we need to get a governmental agency in charge of smacking people's hands and yelling "no" like my mom used to when I tried grabbing stuff I didn't need in the store as a kid, but there is so much stuff out there now, I don't see the need for more. If you really want to stay out of trouble, you can do it, pretty much unless you are too lazy to seek out help.

[southsider2k5]

The laws should be changed. Here is an example - if you so thoroughly screw up your company, as a C-level executive, that the government has to step in and spend money, then guess what? All compensation you receive after that point is subject to seizure by the government to cover the costs of your mistakes. You also would be subject to lawsuits by employees and shareholders effected by your decisions (which is already partially true). Any stocks, options or phantom shares you hold are subject to same.

 

Now, that doesn't cover everything, but its a start.

 

You could also lace this in with bankruptcies. Backruptcy law should put executive compensation beyond existing pure-salary levels at the very bottom of the pay-of pile if a company enters bankruptcy.

 

Two things.

 

I would like to see that law done to cover strictly illegal acts. If mistakes are made in good faith, I have a hard time taking away compensation.

 

Second, if you remove compensation for companies in bankruptcy, they will never come out. Ask Kap how hard it is to entice execs to work at a company in bankruptcy, he knows. You have to pay A LOT more because of the condition of the company. Its kinda like trying to attract a free agent to play for a bad baseball team. You have to overpay. You would be sealing companies to a fate of liquidation with that law.

[bmags]

the lede in this article gave me a chuckle (from front page of wsj):

 

http://online.wsj.com/article/SB1207183159...=hpp_us_pageone

 

[NorthSideSox72]

Two things.

 

I would like to see that law done to cover strictly illegal acts. If mistakes are made in good faith, I have a hard time taking away compensation.

 

Second, if you remove compensation for companies in bankruptcy, they will never come out. Ask Kap how hard it is to entice execs to work at a company in bankruptcy, he knows. You have to pay A LOT more because of the condition of the company. Its kinda like trying to attract a free agent to play for a bad baseball team. You have to overpay. You would be sealing companies to a fate of liquidation with that law.

I see what you are saying about mistakes versus illegal acts. And certainly, illegal acts should cause that. But gross incompetance should, at the least, allow for them to be sued by their employees. That may actually be true already, I am unclear on that.

 

As for companies IN bankruptcy, I agree. Its the companies that are afloat and solid, then driven to either bankruptcy or bailout, that concern me. And I am not at all saying they shouldn't be well compensated. I am saying the max should be their existing salary, which would be quite good anyway, and that any other monies they get go to the bottom of the bankruptcy priority pile, AFTER things like employee health care and severance, pensions, etc. And again, for companies going into their bankruptcy plan - not already in their exit plan.

 

[Disco72]

One solution discussed by us eggheads (academics) is moving towards more of a stakeholder perspective for compensation rather than just a stockholder perspective. Not sure that it would work in this particular case (and I'm not an expert on this part of corporate governance theory). However, a stakeholder perspective takes into account the others (from employees to the environment) that are affected by the decisions of organizations. Lots of issues to be worked out, but I think it is an interesting idea.

[kapkomet]

One solution discussed by us eggheads (academics) is moving towards more of a stakeholder perspective for compensation rather than just a stockholder perspective. Not sure that it would work in this particular case (and I'm not an expert on this part of corporate governance theory). However, a stakeholder perspective takes into account the others (from employees to the environment) that are affected by the decisions of organizations. Lots of issues to be worked out, but I think it is an interesting idea.

That's something that wouldn't work. You think there's fraud now? I hear what you're saying (this is more of a utopian perspective on business) but I think that opens pandora's box on what's "right" to be focused on. What stakeholder's interests are louder? It's the effect we see in the political arena every day and is subject to much more grey area in terms of measurement.

 

[Disco72]

That's something that wouldn't work. You think there's fraud now? I hear what you're saying (this is more of a utopian perspective on business) but I think that opens pandora's box on what's "right" to be focused on. What stakeholder's interests are louder? It's the effect we see in the political arena every day and is subject to much more grey area in terms of measurement.

 

I competely agree - what to measure? how to measure it? Who determines what is important? Special interests will quickly come to dominate the process, and the intended behavior will be skewed in unintended directions. From a theoretical perspective, it is interesting to move agency theory towards trying to align managerial interests with a broader set of stakeholders than just stockholders. Early research shows that firms that consider a broader group of stakeholders perform better, but clearly we can't determine causality. There are a number of spurious influences that can affect these results. For now, it is cleary an academic question because I don't see how it can be implemented.

 

EDIT: I'm not sure why I used "clearly" 8,000 times in that post.

Edited April 3, 2008 by Disco72

[NorthSideSox72]

Well, ATA just went under. Back into bankruptcy, and full halt to all services. They lost their military contract, and their passenger business was dying off anyway.

 

Probably best for the industry, but, sucks for the people who work there.

 

[StrangeSox]

And anyone who had a flight with them.

[southsider2k5]

http://www.realclearpolitics.com/articles/...he_economy.html

 

Undue Haste on the Economy

By Steve Chapman

 

Democracy does not cultivate a taste for deferred gratification: Politicians eyeing the next election want to give people what they want sooner rather than later. And in a time of economic turmoil, the impulse to do something immediately is even stronger. But the haste is misplaced. In the current climate of panic, policymakers need to learn patience, and they need to learn it right now.

 

A couple of alleged crises are getting all the attention at the moment. The first is the risk of a recession. The second, not unrelated, is the mortgage meltdown and the credit crunch it has helped to bring about. Just about everyone in Washington agrees that swift action is needed on both.

 

The scenario brings to mind what the late Ohio State football coach Woody Hayes said about throwing the football: Three things can happen, and two of them are bad. Efforts to micromanage the macroeconomy may be useless, or they may be destructive. In either case, they can impede a painful process that is needed to correct mistakes like the housing bubble.

 

For all the alarms about a repeat of the Great Depression, it's not a sure thing we'll even have a recession, much less a serious one. A recession is technically defined as two consecutive quarters of negative economic growth -- meaning total output actually declines. A recent Wall Street Journal survey of 51 economists, however, found that, on average, they expect not shrinkage but very slow growth in the first and second quarters.

 

One economist interviewed by the Journal suggested that "there might not be even one negative quarter in this recession" -- which is the equivalent of a damp drought. Herbert Hoover should have had such problems.

 

But let's suppose we face a real downturn. If the federal government can do anything to goose growth, it's already doing it. The Federal Reserve has slashed interest rates since last summer, and the Treasury is about to start sending tax rebates to 130 million families, who are supposed to rush out and spend it in a flurry of economic stimulus.

 

It may not work, but we may never know -- since even if it doesn't, the economy will do what it normally does in a recession, which is to ultimately right itself. But the economic stimulus is no longer such an appealing option for Congress and the president, because it has already been done and therefore can't be done now, which is when they want to be doing something.

 

Fortunately, the mortgage mess is an excuse for additional intervention, which they can justify in the name of helping homeowners as well as the economy. As it happens, though, an effort to rescue people who can't pay their mortgages will probably make a bad thing worse.

 

In the first place, it will slow down what has to happen to bring back the housing sector -- which is for prices to drop to a level that will clear out the existing oversupply. In the second, it will shift the burden of bad lending and borrowing decisions from the people who benefited from them to the people who didn't.

 

Rep. Barney Frank, D-Mass., is pushing a bill to let the Federal Housing Administration guarantee "at risk" mortgages if lenders agree to reduce the total debt. It might be callous of me to say this approach amounts to rescuing "people who were imprudent and bought more house than they should have." But I didn't say it. Barney Frank did.

 

If the FHA guarantees all these mortgages -- up to $300 billion worth, if Frank has his way -- it will be putting its trust in people who have already shown themselves to be a bad bet. So taxpayers could end up eating a lot of delinquent loans.

 

The mortgage problem has had the useful effect of forcing financial institutions to exercise greater care in scrutinizing their customers. A lot of the credit crunch is not a bad thing but a good thing, reflecting a tightening of standards that got way too loose. A bailout, by contrast, can only weaken the lesson we should all learn from this episode.

 

Acting in a hurry without considering the long-term consequences, you may recall, is how we got into this predicament. Fixing major mistakes is not an overnight task. But in time, foreclosures will subside, the housing sector will return to normal and the economy will regain its usual vigor. Here's what Washington should do to help: Let them.

[email protected]

[bmags]

does anyone have an account with the wall street journal? I only ask because my professor Steve Weinberg I guess had a great review for his new book on Ida Tarbell and John D. Rockefeller by the former editor of the wall street journal. thought this would be a good place to look.

[Balta1701]

If the FHA guarantees all these mortgages -- up to $300 billion worth, if Frank has his way -- it will be putting its trust in people who have already shown themselves to be a bad bet. So taxpayers could end up eating a lot of delinquent loans.

Oh, but it's ok for the Federal Reserve to step in and tell all of those banks that made hundreds of billions of dollars worth of bad loans and purchases that they don't have to worry because the Federal Reserve will bail them out? Isn't that EXACTLY the same thing, and can't the exact argument be made about that? If bailing out people who took out bad loans is bad policy because it's putting trust in people who have already engaged in risky behavior, why should we put so much faith in bankers?

[StrangeSox]

Oh, but it's ok for the Federal Reserve to step in and tell all of those banks that made hundreds of billions of dollars worth of bad loans and purchases that they don't have to worry because the Federal Reserve will bail them out? Isn't that EXACTLY the same thing, and can't the exact argument be made about that? If bailing out people who took out bad loans is bad policy because it's putting trust in people who have already engaged in risky behavior, why should we put so much faith in bankers?

 

If the entire banking system collapses, we can all lose our homes.

[Balta1701]

If the entire banking system collapses, we can all lose our homes.

So why are entities like banks allowed to make decisions on their own that can lead to the total collapse of the American economy if the taxpayer doesn't bail them out?

[southsider2k5]

Oh, but it's ok for the Federal Reserve to step in and tell all of those banks that made hundreds of billions of dollars worth of bad loans and purchases that they don't have to worry because the Federal Reserve will bail them out? Isn't that EXACTLY the same thing, and can't the exact argument be made about that? If bailing out people who took out bad loans is bad policy because it's putting trust in people who have already engaged in risky behavior, why should we put so much faith in bankers?

 

Because we didn't have a choice. If you don't believe me, try some really important people's opinions on for size, including a nice liberal just for you. This is the head of a fed bank, the President of the fed bank, and the head of the senate banking committee. This wasn't anything close to the exact samething.

 

http://money.cnn.com/news/newsfeeds/articl...37_FORTUNE5.htm

 

"Are there risks here? Yes, but the risks are modest in comparison to the substantial damage to the economy and economic well-being that potentially would have accompanied Bear's insolvency," said New York Federal Reserve President Timothy Geithner, who played a central role in the 96-hour rush to rescue Bear Stearns last month.

 

"It became clear that Bear's involvement in the complex and intricate web of relationships that characterize our financial system, at the point in time when markets were especially vulnerable, was such that a sudden failure would lead to a chaotic unwinding of positions in already damaged markets," Geithner commented.

 

Sen. Chris Dodd, the chairman of the Senate Banking Committee, said he would not try to "second guess" the Fed and Treasury. Dodd is chairing the hearing of the events surrounding the Bear Stearns bailout.

 

"I think they made the right decision," Dodd said in an interview on Bloomberg TV.

 

On March 14, the Fed stepped in and effectively put a force field around Bear's assets, preventing a fire sale. The following weekend, the Treasury and Fed engineered the sale of Bear Stearns (BSC) to J.P. Morgan Chase & Co. (JPM).

 

"You could have had not only a national but a global meltdown" if Bear Stearns had been allowed to declare bankruptcy, Dodd said.

 

http://ap.google.com/article/ALeqM5hUAnlkw...rgp_pQD8VQE8FG2

 

 

We did what we did because we felt it was necessary to preserve the integrity and viability of the American financial system, which in turn is critical for the health of the economy," Bernanke said.

[Balta1701]

I'll outsource my response to Dean Baker, from the Center for Economic and Policy Research. Showing me that BearStearns needed to be bailed out is not the point I'm making. The point I'm trying to make is that this is a landmine in the economy that will detonate bigger than Bear in the future if not fixed.

It reports that the Fed wanted to keep the purchase price down as a way of preventing a problem of moral hazard, in which the Fed would be rewarding the company's stockholders and managers for taking big risks and losing.

 

The Fed was only partially successful in this effort, since Bear Stearns managed to push up the original price by a factor of five. This money was paid to Bear stockholders in exchange for a $30 billion guarantee from the Fed, not for the value of Bear's assets.

 

But the direct payment is actually the less important aspect of moral hazard in this story. The far more important aspect, which was totally missing from the WSJ article, is the guarantee to Bear Stearn's customers. The Fed assured all of Bear Stearn's creditors that it would insure Bear's obligations, even though Bear lacked the capital to meet its commitments. It also explicitly made the same guarantee to the customers of the other major investment banks.

 

This commitment creates an enormous moral hazard problem. Ordinarily, creditors would be very cautious dealing with investment banks of questionable solvency. However, if the loans come backed up by a Fed guarantee, then there is no reason to be concerned about the solvency of the bank.

 

In such circumstances, investment banks have an incentive to take large risks. Effectively, the Fed has created a "heads I win, tails you lose" situation for the banks and their customers. If they take a big risk and win, they gain make large gains. If they lose, then the Fed covers the losses for the customers, although not for the bank. Nonetheless the opportunity for the creditors to make large one-sided bets is very valuable, so creditors will be willing to share part of this windfall with the banks in the form of large fees.

 

(If this sounds far-fetched, it shouldn't. It happens all the time. A big bank goes to a state or local government or pension fund or anyone else with a pool of money and promises them a better return with their new swap/derivative whatever. They then tell them their investment is guaranteed by big bank. While a guarantee from Bears Stearn in February should have been seen as completely worthless, when Ben Bernanke stands behind it, such a guarantee is gold.)

 

This is the situation that led to the huge losses for Savings and Loan institutions in the 80s. If the Fed cannot find a way to impose much more stringent oversight of the investment banks than had been in place, the moral hazard problem it has created virtually guarantees large losses for taxpayers in the future.

The issue to me is not whether or not Bear should have been bailed out, nor is it whether or not bailing out Bear saved the banking system. The issue is whether or not the taxpayer bailout of a company is setting us up for worse in the future, which I would say is the obvious end result. If you've got a 5% chance of making a big profit, but a 50% chance of taking a big loss, normally that's nto a good bet, but if Ben Bernake sits behind you and says he'll pick up the tab if you lose, suddenly that 5% chance of the big profit looks a lot better because you can't lose!

 

So, therefore, if a homeowner makes a bad bet on a house, he or she is SOL, because we can't get rid of the penalties for making bad bets. But if a banker makes a bad set of bets, we have to bail them out because it kills the economy. So what's to stop the banker from making bad bets in the future, just like they KEEP DOING!

[NorthSideSox72]

If the entire banking system collapses, we can all lose our homes.

You have this backwards. As 98% of people have equity in their homes, and owe less than its value, even if the bank holding the loan were to "collapse", the owners would still be in the black. Even if some company swoops in and buys the debt, they won't want to call that debt, because that would be idiotic - they'd lose a ton of money. So in reality, your A>B is backwards. Its B>A. If suddenly people stop being able to pay their mortgages, then banks start to collapse or get in trouble.

 

[StrangeSox]

You have this backwards. As 98% of people have equity in their homes, and owe less than its value, even if the bank holding the loan were to "collapse", the owners would still be in the black. Even if some company swoops in and buys the debt, they won't want to call that debt, because that would be idiotic - they'd lose a ton of money. So in reality, your A>B is backwards. Its B>A. If suddenly people stop being able to pay their mortgages, then banks start to collapse or get in trouble.

 

I didn't necessarily mean it that way. If a large chunk of our banking system went under, our economy in general would be in for a world of hurt. Just about everyone loses in that situation.

[NorthSideSox72]

I didn't necessarily mean it that way. If a large chunk of our banking system went under, our economy in general would be in for a world of hurt. Just about everyone loses in that situation.

Of course. But one thing that nearly everyone would still have is their home.

 

[NorthSideSox72]

And anyone who had a flight with them.

As a follow up, Skybus also went under this week, to make it 3 airlines that stopped operating this week (ATA and Aloha are the others).

 

[southsider2k5]

I'll outsource my response to Dean Baker, from the Center for Economic and Policy Research. Showing me that BearStearns needed to be bailed out is not the point I'm making. The point I'm trying to make is that this is a landmine in the economy that will detonate bigger than Bear in the future if not fixed.

The issue to me is not whether or not Bear should have been bailed out, nor is it whether or not bailing out Bear saved the banking system. The issue is whether or not the taxpayer bailout of a company is setting us up for worse in the future, which I would say is the obvious end result. If you've got a 5% chance of making a big profit, but a 50% chance of taking a big loss, normally that's nto a good bet, but if Ben Bernake sits behind you and says he'll pick up the tab if you lose, suddenly that 5% chance of the big profit looks a lot better because you can't lose!

 

So, therefore, if a homeowner makes a bad bet on a house, he or she is SOL, because we can't get rid of the penalties for making bad bets. But if a banker makes a bad set of bets, we have to bail them out because it kills the economy. So what's to stop the banker from making bad bets in the future, just like they KEEP DOING!

 

How many times in American history has this exactly happened? From your HUGE leaps you are making it sound like every single bank in the US is decapitalized and about to under. Its not at all like that. This isn't about a 50% chance of taking a big loss, I haven't seen any quantitative analysis yet (its way too early) but I'd bet this is more like a 5 standard deviation chance of taking a big loss.

 

I don't know if you realized this or not, but a part of this is that Bear Stearns doesn't exist anymore. The Fed took the extraordinary step of asking JP Morgan to come in and take over BSK. This means that it is no longer Bear that is standing behind these loans, but JPM. In other words, the system worked exactly how it should, and the bad company is out of business, taken over by the one that make smart business decesions. In other words, they won't be making bad picks again. They are erased from existance as a punishment. The same as Enron is no longer around. Its hard to make mistakes when you don't exist.

 

Finally you can sleep at night by knowing Congress is already well on the road to over-reaction to this situtation by reading the laws they are wanting to pass. Nevermind they already screwed up everything after the Accounting Crisis's of the early 2000's with Sarbines Oxley. All of those things that were supposed to be fixed, such as "skyrocketing" CEO compensation have gotten way worse, while the cost of compliance has gone up astronomically. Its to the point where companies are fleeing the US, and not offering IPOs here, because the cost of business is way cheaper in traditionally more expensive and higher regulative places such as London. Why isn't anyone applying the same standards about Congress making mistakes in the past, and not allowing them to screw up things they know nothing about in the future? I'd be willing to bet that they have a greater chance of making things worse in the long run with new laws, than the banking sector taking care of itself in the future.

[kapkomet]

The government always does it better. Always.