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Dear Main Street: A Letter of Explanation From Wall Street

 
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jebba
PostPosted: Sat Sep 20, 2008 10:13 pm    Post subject: Dear Main Street: A Letter of Explanation From Wall Street Reply with quote

http://blogs.wsj.com/deals/2008/09/17/dear-main-street-a-letter-of-explanation-from-wall-street/?mod=googlenews_wsj

Wall Street Journal wrote:
Dear Main Street,

Are you trying to make sense of what’s happening here on Wall Street?

Don’t worry–you aren’t alone. A lot of people even here are trying to figure that out. It isn’t that complicated, but Wall Street is so full of mumbo jumbo that it’s easy to get confused–or bored.

Say “collateralized mortgage obligation” a dozen times and see if you can stay awake.

Stick with me, though, Main Street and I’ll explain what’s going on here in New York.

Believe it or not, you’ve seen this movie before. And I don’t mean, “It’s A Wonderful Life,” though that movie isn’t far from the mark.

What’s going on is a classic industry shakeout–not all that different from the shake-out of the American steel or auto industries over the past half century. Just in a much shorter time frame.

In just nine months, we have gone from five big, independent Wall Street brokers to only two–Morgan Stanley and Goldman Sachs.

The government took over Fannie Mae and Freddie Mac, the country’s largest mortgage companies, a bit more than a week ago.

And just Tuesday, we nationalized AIG, the world’s largest insurer.

Of course, consolidation inevitably produces winners and losers. Lehman Brothers, the fourth largest US broker, is a loser. It went bankrupt two days ago.

Bank of America is a winner. It bought brokerage Merrill Lynch three days ago and is now our nation’s largest financial institution.

That’s a lot of change in a not a lot of time.

And when there’s change, there’s uncertainty. Today, for example, we still don’t know whether Washington Mutual, the largest U.S. savings & loan, will stay independent.

Uncertainty isn’t good for any business, as it destroys confidence. It is especially bad for our financial system, because the system runs entirely on confidence. I lend you money confident that you will pay me back. If I don’t have confidence in you, I won’t lend.

Which is just like Wall Street today. Our nation’s financial institutions don’t really trust each other. And for good reason.

In all, about $2 trillion dollars of lower quality mortgages are spread about our financial system. Many of these are now in default which threatens the banks that hold them.

And of course the lack of trust spirals. Less lending by banks to each other, less lending to Main Street’s companies and less lending to you. In the end, the money’s not there for you to get a mortgage or auto loan.

And you account for 70% of the economy. So when the money isn’t there, that’s bad for everybody. Without credit, you get a crisis–a credit crisis.

Of course, we deserve heaps and heaps of blame. Wall Street took the mortgages, sliced and diced them a hundred ways, sold and traded them. We took a nice cut along the way, blissfully oblivious to the risks.

We do have a remarkable talent for cooking up crazy get-rich schemes. Remember the Internet bubble? That was less than a decade ago.

But Main Street, you’re also to blame.

Recall the hundreds of billions in bad mortgages that are now killing Wall Street? That was money lent to you, Main Street, for homes and condos many of you could not afford.

And ironically, it is now your money that will be used to repay those dud mortgages because we on Wall Street are running out of money.

The government takeovers of AIG and Fannie and Freddie? That’s your money. J.P. Morgan’s buyout of broker Bear Stearns last March was also your money,

You might not like it. We on Wall Street may not like it. And even the politicians in Washington may not like it.

But nobody has a choice — unless you happen to have an odd yearning to live in a barter economy.

So Main Street, our crisis is unfortunately your crisis. We made the mess together and now we pay for it together.

The mergers, government takeovers and bankruptcies that will continue to sweep our financial system are a good sign. It means that we are fixing ourselves. Albeit at gunpoint.

Isn’t it strange the way our free market works? The government saves Wall Street — and you Main Street foot the bill.

My advice? Save this letter and show it next time we all embark on another stupid misadventure.

Sincerely,

Wall Street


I'll take that barter economy.

john maclean
PostPosted: Sun Sep 21, 2008 9:51 pm    Post subject: Reply with quote

When I graduated from my first degree I couldn't understand how I got junk mail from umpteen credit card companies almost the day that I finished my exams. Jim from the BLAG meets was explaining to me what he thought was the underlying problem of this mess....

"a bank has one pound and borrows another pound from another bank. It then goes into business of lending money. It lends ten pounds to its customers - where did that other eight pounds come from?"

It must be a great game to be in. Just wrap everything up in mumbo-jumbo and people get scared, bored or just assume that you know what you are talking about. When the profits come in we all say..

"... well, he's the one that took the risks and besides, have you ever hear him talk about what he does? [insert mumbo jumbo fiscal-interdependency-correlated-jargon here]..."

When things get bad, (and we all pay for the bail-outs with our taxes), we say that the govt knows what it's doing.

If most of the financial instruments were invented in Africa the world would probably laugh and scratch its head, trying to understand the over complicated packages and markets, where money comes from nothing and trillions are traded on nothing solid.

Most of the products on sale should never be allowed. If you cannot explain a financial product to your kids then it does not make sense. How can one sell stock that one does not own? How do directors and senior partners get rewards of x1000 whilst the firm is going under? How do you justify bonuses and salaries of hundreds of millions of pounds? How the heck do some of the hedge fund managers get away with paying such little taxes?

This is real, but not real money. Where did the US govt get trillions of dollars to pay out for anything when it's over 18 trill in debt?


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hansencomputers
PostPosted: Mon Sep 22, 2008 11:32 am    Post subject: Reply with quote

Quote:
This is real, but not real money. Where did the US govt get trillions of dollars to pay out for anything when it's over 18 trill in debt?


We borrow it, or we print more money, or we increase taxes.

We might even start another war, just to distract the public. We then can blame our problems on our enemies.

jebba
PostPosted: Mon Sep 22, 2008 11:44 pm    Post subject: Reply with quote

hansencomputers wrote:
Quote:
This is real, but not real money. Where did the US govt get trillions of dollars to pay out for anything when it's over 18 trill in debt?


We borrow it, or we print more money, or we increase taxes.


and as far as I understand it, each dollar printed becomes *debt* the US taxpayer has to pay back, so they get hit twice.

The trillion dollar bailout they are proposing is mind blowing. Bush & Co. seem to be looting as much as they can as they go out the door. There were only two Investment banks left at the end of last week--the US Secretary of Treasury was CEO of one of them--Goldman Sachs--before becoming Treasurer (the Secretary of Treasury under Clinton was also former Goldman Sachs CEO). The other investment bank was JP Morgan--who himself was responsible for setting up the Federal Reserve ~100 years ago.

Anyway, so the secretary is making sure his firm doesn't go down. They also propose he gets complete discretion with *explicitly zero oversight* on how he gets to spend the trillion! Unreal.

Sums it up: "privatized profits, socialized loss"

Junichirô
PostPosted: Mon Sep 22, 2008 11:55 pm    Post subject: Reply with quote

jebba wrote:
[The other investment bank was JP Morgan--who himself was responsible for setting up the Federal Reserve ~100 years ago.

I think you speak about Morgan Stanley? And I read on BBC News "Morgan Stanley shares surged after Japanese banking giant Mitsubishi UFJ Financial Group said it would buy a stake in the bruised Wall Street bank.

The Japanese group said the stake will account for 10% to 20% of Morgan Stanley's common shares."

Junichirô
PostPosted: Wed Oct 08, 2008 10:49 am    Post subject: Reply with quote

And now?
john maclean
PostPosted: Wed Oct 08, 2008 4:48 pm    Post subject: Reply with quote

... business as usual? Once the top boys get the $100BN/ $700BN that they ask for it will be champagne and canapes on yachts from our bonuses, eh
;-)

... PS Dear GWB,

Thanks for getting that extra money the other day. I really liked the way you made a convincing argument for "crisis, yada, yada".

- jjm

Really Big House
Dough Street
My own Private Island


_________________
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jebba
PostPosted: Tue Oct 14, 2008 8:45 pm    Post subject: Reply with quote

john maclean wrote:
... business as usual? Once the top boys get the $100BN/ $700BN that they ask for it will be champagne and canapes on yachts from our bonuses, eh
;-)

... PS Dear GWB,

Thanks for getting that extra money the other day. I really liked the way you made a convincing argument for "crisis, yada, yada".

- jjm

Really Big House
Dough Street
My own Private Island


Morgan Stanley (left) and Citigroup (right) CEOs walk out of the Treasury Building today. <--- looks like they're happy with their looting

http://graphics8.nytimes.com/images/2008/10/13/business/14bailout2_337.jpg

john maclean
PostPosted: Wed Oct 15, 2008 10:38 am    Post subject: Reply with quote

guy on left: "hey, that was good, huh?"
guy on right: "yah. i wonder if we coud tap Nigeria for some money"
guy on left: "w00t!
guy on right: thinks....


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Junichirô
PostPosted: Sun Nov 02, 2008 8:03 pm    Post subject: Reply with quote

No more danger! We have Nicolas Sarkozy, our president or little clown who saved France, Europe and the all planet from the crisis. Hum... Well, he said that.
blendar
PostPosted: Mon May 16, 2011 9:29 pm    Post subject: I just cannot beleive it has gotten this bad! Reply with quote

What about our children and our grandchildren? The Post Office is going to run out of money next year and two years before I will be able to draw retirement from social security that I paid in to it IT will be broke! WTH?
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