The Great Recession - post mortem

[SportsDino]

I'm lurkin, drooling over the Maxim girls video and reading about football instead of watching it like I should be! (well MSU vs CMU kind of turned me off this season... was there in person, did not have the heart left in me to comment in the college football thread).

Boom time for me at the moment means I have even less time than ever to preach about the evils and wonders present in our so called capitalism!

[flere-imsaho]

Just read a fascinating excerpt from a book about the financial system meltdown called "Too Big to Fail".

Tim Geithner and Hank Paulson do not come off very well in this excerpt and the investment bankers, while looking better than the feds, seem to miss the irony about the market taking advantage of their situation when in fact their entire business model involves them taking advantage of others in the market.

Anyway, a pretty fascinating read. Will make you even more cynical.

[DaddyTorgo]

Originally Posted by flere-imsaho

Just read a fascinating excerpt from a book about the financial system meltdown called "Too Big to Fail".

Tim Geithner and Hank Paulson do not come off very well in this excerpt and the investment bankers, while looking better than the feds, seem to miss the irony about the market taking advantage of their situation when in fact their entire business model involves them taking advantage of others in the market.

Anyway, a pretty fascinating read. Will make you even more cynical.

yeah...was wondering how that book was...been wanting to pick it up. i wonder if the local library has it yet...

i read that same excerpt (or a similar one i suppose) and thought it was pretty good.

[flere-imsaho]

It's a very amusing read.

It's set just after Lehman fails and Morgan Stanley and Goldman Sachs are trying to find ways to avoid going bankrupt.

Tim Geithner comes across as an arrogant, self-absorbed ass. Not surprising.

Hank Paulson comes across as exhausted, out of ideas, and out of his depth.

Ben Bernanke comes across as out to lunch.

The only people who come out looking pretty good are JPM's Dimon and Citi's Pandit, both of whom spend the entire piece politely telling the government they're not going to be railroaded into buying more in-trouble companies (pity Ken Lewis of BofA couldn't have done the same, for his own sake).

[DaddyTorgo]

well i put a hold on it at the local library when the copy they ordered 3 months ago arrives

[SportsDino]

I'm tempted to buy it and give it a read. My BS detector is flaring up though... but as long as you don't believe it to be the gospel truth I'm sure there is plenty to learn in it.

[JPhillips]

The title says it all:

Greenspan Says U.S. Should Consider Breaking Up Large Banks

http://www.bloomberg.com/apps/news?p...d=aJ8HPmNUfchg

[SportsDino]

I agree. 'Too big too fail' is a systemic failure, and really a big key is this:

"Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations. That squeezes out competition and creates a danger to the financial system..."

This is my biggest concern with all big business protectionism. We don't need big businesses, we need BUSINESS, and often that is done best through several vigorously competitive/cooperative/engaged firms rather than one bloated/content/extracting firm. Growth (and its motivation, greed) is good, easy money for the established is bad.

Sadly, these banks are even bigger, more entrenched, and will eagerly stir up a new panic in order to maintain their fortified position. They will bank on the apathy and gullibility of the American public to successfully destroy the American economy in the end (and their own wealth).

[JonInMiddleGA]

Best I can figure the recession must be over, at least for people in advertising sales.

I recently bitched about the piss poor to non-existent "service" when trying to buy newspaper but I swear I think trying to buy online adv. is just about as bad. About 1/3rd of the people selling it are complete idiots & I know their product better than they do, about 1/3rd of them seem to be con artists who abhor honest answers more than anything else on earth, and the other 1/3rd are apparently making so much money they don't have anyone available to even take a call from a guy standing here with cash in hand looking to buy.

Yes ESPN.com I'm talking about you. And CBSSportsline.com.

And ESPN the cable network, and ESPN the Magazine (which we both know you can't hardly give away much less sell).

And NBC affiliates in over a half dozen markets than can't be bothered to return a f'n phone call in a month's time.

Swear to God, a lot of the problems are self-inflicted, up to & including businesses who continue to make advertising decisions based on who bought them lunch last or who they play golf with instead of any remotely fiscally sound rhyme or reason.

I've truly reached the point of hating what I do for a living because of the other people involved in doing it.

[SportsDino]

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Cash Cow - High-Frequency Trading
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Crisis

If anyone is interested in this topic still, this Daily Show sketch illustrates something that bothers me quite a bit (and I'm one of the heavy computer modeling monster people out there).

These auto-trading systems have a really ugly achilles heel, they rely on a 'status quo' of sorts so that the gaps that develop between two linked instruments (say oil company stock A, and oil future B) can be reasonably assumed to synch themselves over time. Because this synch reaction time is generally rather small these systems are built to run pretty much on automatic and zip as fast as possible through the trading process.

The problem is these auto-traders often do not account for a fundamental change in the objects being modeled, say a massive never before seen downturn. If the assumptions that cause synch to be restored are broken, these trades can go into the red. Historically this has already happened (I think in the 80's?). The assumption by the finance nerds is they simply need a smarter computer... the problem is they forget the science of how markets function and only consider the game that has developed around that function. If you get enough computers making enough flash decisions about overly flashy models that increasingly only reflect market momentum psychology and not fundamental economic principles, you can end up with devastating feedback loops where the 'first mover' may profit fine, but can wreak massive economic damage on the system on either subsequent movers, or if each manages to eek out a fractional profit, this ultimately ends up shifting down to the slow moving 'dead money' (i.e. your 401(k) or other brokerage funds that are investing on a time horizon not based on jumping on a dime).

A chain reaction where the computers all predict sell and a group of slower computers says buy, can lead to an overreaction in the market price and lots of transactions, and that pain eventually has to land somewhere. It is my theory that for the most part the firms are using their less connected clients as a buffer for when they jump the wrong way, so that their well connected clients can play the rapid timing games for huge gains.

I personally never let my computer place a transaction (well I do, but its a scheduled transaction I create manually), because I read my finance 101 and don't have the connections to play statistical arbitrage (and the theory is bogus based on inefficient markets, which they are, but have no fundamental value to the economy, just for extracting money out of the zero sum game that is the stock market).

Anyway, thought the Daily Show clip highlights something most people don't see the dangerous consequence of, these auto-traders sound like get rich schemes but they are a terrible thing for the economy.

[Galaxy]

Originally Posted by JPhillips

The title says it all:

Greenspan Says U.S. Should Consider Breaking Up Large Banks

http://www.bloomberg.com/apps/news?p...d=aJ8HPmNUfchg

I don't trust Greenspan much either. After all, I think he had a role in this mess.

With me, it's more regulations than "breaking up" big banks. Why not bring back the Gramm–Leach–Bliley Act? Require banks to hold a certain % of its deposits in reserves? Tighter lending requirements?

What is "too big to fail"?

[SportsDino]

"Too big too fail" apparently is when a bank is so massive and has made so many bad decisions, that not bailing them out would lead to catastrophic failure of the economy.

Since capitalist economies kind of assume that a single firm failing is a natural occurrence, this pretty much flies in the face of all financial common sense, but is enough of a scare tactic to start the mob rolling. The only economy where a firm is not supposed to fail is a planned economy... enforcing a constraint that firm X cannot be allowed to fail prevents the option of an alternative, better run firm, from taking its place.

I agree reserve requirements are an important start. I'd also severely up the transparency of the derivatives trade (its full of massive abuse in my opinion). Tighter lending requirements, as in actually assuming an income stream of payments, instead of planning for repossession and refinancing as a source of profit, is supposed to be banking 101, but easily forgotten by the morons running our government and economy.

[Flasch186]

I am so in the camp of the double dip that you all ought to know it is almost assuredly not going to happen.

[albionmoonlight]

Research Triangle Park in North Carolina is now seeing some pretty high profile job cuts with Sony Ericsson, Pfizer, and Kellogs all announcing layoffs. From what I could tell, RTP (and the Triangle generally) were dealing with the recession pretty well. But even we are, apparently, not immune to it.

And, based on those job cuts, I would say that we have not yet bottomed out on the job-loss front of this recession.

[SportsDino]

No we haven't, for shame, if anything the inflation I so fervently predicted is on the way before the job bounce. Bloody lying scum running the country and banks and businesses are doing their damn best to flatline the country.

Oh well, stocks are up, rejoice, for the most meaningless part of the economy with the most money stashed in it is generally considered to be better than the start of the year.... now thats progress you can shit on! I mean rely on!

I think the naughtiest stat that will come out in hindsight is the descrepancy between the public money bounce (money in giant endowments, mutual funds, etc) and the private money bounce related to stocks. They must really know how to pick winners! Gosh, they are practically bragging about frontrunning on the national news... so whatyagonnado?!

Time to shut up before I get all stressy again. Gamblers still makin out like bandits so I shouldn't whine too much.

[SteveMax58]

Yeah, the (biggest) problem I see is that we've not done anything (significant) to reduce what we spend recurring money on...like energy, resources, etc.

We're just trying to figure out ways to take money (i.e. tax) from some Americans so we can give it to other Americans (i.e. entitlement programs). Not to say we don't always (need to) re-evaluate this balance but this is a zero sum game in the nationalistic sense...and therefor not the highest priority IMHO.

[sterlingice]

Petition: U.S. Senator Bernie Sanders (Vermont)

This is one of my favorite little things out there, tho it has no chance of ever seeing the light of day.

As a friend of mine described it, Sanders basically said: "I have a two page bill. The first page says 'give me a list of institutions that are too big to fail'. Page two says 'break up all institutions on page one using Sherman anti-trust act"

SI

[DaddyTorgo]

love it

[sterlingice]

I'm a little crazier so I'd apply that across all industries. I'd love us to actually dust off the Sherman anti-trust act. But we're so gun shy because corporations have such better lawyers than the government and the whole mess with Microsoft in the 90s left egg on their face. Europe saw it through and got a bunch of cash and concessions there but the US folded their case.

SI

[SportsDino]

Sounds like a good start. There is a lot to be said for smaller, more service oriented banks that actually do their due diligence and are on the hook for the consequences, than the derivative assembly line we have today.

What gets me is what still exists out there, after all the panics we recently had. Same game is going on, and same result will occur, except now they have us taking even more of the fall for their bad bets.... so smart Bernanke, Paulson, Geitner, Bush, Obama, ... fucktards ...

[sterlingice]

Yeah- I can't believe how little action is happening. But I think it does speak to how complex of issues there are out there. Two years ago, how many of us could say we knew 1/10th of what we understand now because we've all had this crash course in the system?

That said, they aren't that complex. I'd like to think I have a pretty decent grasp on them and that's just casually looking them over the past year. I couldn't solve all of the problems, certainly, and I'm sure my solutions would have massive unintended consequences. However, we're just sitting on our hands and the only big solution I've seen is "give more oversight to various institutions". I don't want oversight. Oversight with very limited power is useless. These are people driven only by money so you need to threaten them with a loss of money and jail time. If you don't give them hard and fast rules- they can lawyer around squishy ones. I want cold, hard regulations that are set in stone and ironclad.

We're already back to re-bundling securities (thanks, Morgan Stanley!) and there are still credit default swaps out there worth more than 10x the value of all the money in the world. How does anyone not see this as a problem?!? Oh, and banks are still allowed to severely over-leverage. We're talking about dropping them from 30x to 15x. Really? That's your solution? So, for every $1B, you can only have $15B in phony money floating around as opposed to $30B? Yeah- that'll be a great cushion when the next crisis comes about. You'll only have 15 different guys asking for money when the economy goes south instead of 30.

Where's the repeal of major parts of the Gramm-Leach-Bliley Act and the systematic unwinding of "too big too fail" conglomerates whose very structure is rife with all sorts of conflicts of interest?

Where's the reinstatement of the uptick rule or, better yet, stock shorting rules like they have in Europe where you have to possess the stock to short it? Where are the investigations into the DTCC and who shorted Bear Stearns and Lehman Brothers as clearly whoever did it had insider information and might have even caused their downfalls.

Where's the complete rewrite of CFMA which is long overdue- I mean, really, how are credit default swaps and other exotic financial instruments even allowed to exist? These add no value to the economy but open it up to huge systemic panic-style risk. They exist only to bleed dry the long term investors by sucking out any sort of long term gains they might receive, which will eventually lead to massive inflation.

Where are the corrections to the bond rating system so junk doesn't continue to get AAA ratings? Unless these are changed, companies will keep bundling their crap with good stuff and no one will be able to tell the difference.

And where's my audit of where *my* damn taxpayer money went? I'm pretty sure, Hank, that a bunch of your buddies got it with no strings attached. I want to know how and why.

SI

[SportsDino]

Well, arguably we are paying these guys to have foresight, and either they don't or they are corrupt (I think some of both, but mostly the latter). Sure everyone is aware about various things now, but the fact that so many people had so much of their money in things that were exposed to factors they didn't even know about? That is dangerous. It is why I don't think we should be drug dealers pushing stock investing (or even mutual fund investing as I ranted about long long ago) on the masses.

It has been pushed so much because it creates a massive pool of dead money that can be finessed into a cushion for really large gambles by banks. This is if they don't outright use the foreknowledge of how that money operates to do some arbitrage like situations (for instance, knowing a fund needs to have a certain balance in its portfolio so timing buy/sell orders with a little information to turn around some pennies on 'sure money').

Like you say, oversight is useless, there does need to be criminal prosecution, even of the laws that already exist.

Mass leverage is a mess, as are the portfolio creation techniques that are en vogue today. They act like these are models created by quantum physicists and such (and brag about it), but really they have blinded themselves with their own math. Just because you made a several page equation that returns an incredible boundary case of awesome where the only way you lose money is if the market cuts in half next year.... often they don't even do the first step right... fill in the proper variables! They assume a default rate for a particular type of mortgage based on historical stats, often when those stats no longer correspond to the sample (for instance ARMs being given to an entirely differently class or mortgage consumer than they had ever been before, in far greater quantities, and in different sizes). Quickly, hiring that advanced mathematician to do all that work sort of fails because the assumption on what x and y are IS COMPLETELY WRONG! Instead of the economy dropping by half in order to destroy the portfolio, it soon becomes: 'Well if 10% of these mortgages to people who can't afford them fail, it will set off a chain effect and margin calls that trigger auto-sell orders and swap contracts which happen to change the value of other assets in our crazy portfolio.... whoops'.

We need more money invested in real economy, even if its slower growing, than imaginary games that rely on leverage and timing. If you ask me, we should get it such that most loans are through and held by banks small enough that they actually know the customers expected to keep them afloat. If that means 10 regional banks instead of the awesomeness of Citigroup mcNational Super Bank... or a 1,000 city-level banks, than so be it. Efficiencies of scale can be achieved in other ways, certainly better for the small consumer, and probably more risk-aware for the megabank. Instead we have the rubber stamping, mcMortgage, where plenty of people who could probably pay a mortgage will now get denied, and plenty of people who shouldn't somewhere else are probably still getting them.

But ya, need to focus:

- No bundling. That is what a portfolio is for fools! Quit tricking yourself into the idea that you are creating products like a factory... get back to making bets and admitting it... or actually searching out real investments and making them, and living with the risk and reward. Maybe we would actually see some of that capital start flowing into business creation instead of expanding pools of finance for finance...

- Kill anything labeled 'too big to fail'

- Repeal legislation that lets companies pull shenanigans

- Reinstante legislation that prevented known shenanigans companies pulled in the past.

- You must require shorts to actually borrow the stock (which I always assumed I did, but only later on could I actually be close to sure whether a physical stock was tied to my work). There actually is quite a few things wrong with allowing imaginary selling (or imaginary buying) for that matter, some are even outright illegal... There are economic necessities for there to be only one physical stock involved in each transaction.

- To be fair, I shorted Bear Sterns, while I don't doubt there being insider information somewhere, if you knew what to look for you could spot a number of banks that were overstretched and due for a stock crash. And once the crap hit the fan, just about every bank it was a smart bet to short at one point (hence my profitable love affair with the SKF). The fact it was shorted potentially more shares than existed though.... that needs to be investigated since that can only happen with the help of regulatory agencies and big banks!

- Derivatives are like a bazooka in the hand of a three year old. Unless you are a soldier trying to take out a tank, don't use em. Like you said, they have no value add to the real economy... in the ideal world they provide risk management and transaction smoothing factors (sort of like how currency gets you away from a barter economy, a derivative like a future contract can get you away from temporal jitteriness)... but a lot of them are pure junk to obfuscate shenanigans. It is mostly an attempt to all gamble on a 'sure thing' and then leveraged out the eyeballs to turn the extremely small margin into something worth mentioning (because a bet on a sure thing should surely get small odds on your money of course). That we have many times the size of the real economy in messy bets is just plain shameful.

- I'm starting to get the impression they should just disband bond rating agencies! I'll be honest, i stopped using them a long time ago, any bond I go after gets the full treatment as if I was investing in the company like a stock (which in the case of say, oh numerous institutions, that is EXACTLY WHAT IT IS< MWAHAHAHAHAHAHHAHAHA!!! OH FUCK THE SADNESS.... )

- The taxpayer money went into a black hole. I think Paulson likes 'ass to ass'. (okay that is sick, but at least my bad joke didn't cost a trillion dollars)

[Arles]

We've been running a mythical economy for years - it's our new model. If we suddenly try and "correct it", we'll be in recession for years.

Without massive leveraging allowed to banks/lending institutions, Americans will be called out on their 25-50+K in unsecured debt. This will lead to a ton of bankruptcies which will injure the financial sector even more (maybe end up being $40B to $1B after the bankruptcies occur). Many people will have crappy credit and purchases will begin to seriously slow down.

Everyone loves to play the "let's just fix it and stick it to these lending giants", but the people who will pay for that are small business owners and over-leveraged middle class consumers.

[SportsDino]

I think we are already getting called out on our debt!

No, you don't flip a switch and have it fixed overnight. But you don't use that as an excuse to charge full steam ahead until the wheels come off the train and you spill nuclear waste all over disneyland.

You triage the machine, and hack it in the order that keeps the beast alive. That means letting the imaginary being that gone too far die its death... the money is a tool for making it easier to keep the machine that feeds, shelters, and entertains you alive. Right now we have politicians across the country making 'money' decisions that will result in incredible suffering for people either now or down the road (reduced aid to needy, reduced education, reduced crime budgets putting felons back on the streets to shoot you or cops, etc...). This is because the mythical budget is not balancing... and the numbers to just 'inflate it away' would screw just about anyone who saved money ever in their life, leading to another crisis and need for aid. Unless you want to live like North Korea!

This is why I say we target the ten biggest problems facing the U.S. and solve them, we need the mythical economy to start reflecting reality again, even if the process itself seems overly idealistic. Do we want a myth that encourages the rise of gambling addicts living the luxury elite lifestyle and bankrolling their bad debts at the expense of the middle class? Or do we want a myth where you can fish out of the rivers, not smell landfill while driving through the city on pothole filled roads, breathe the air, and not waste resources like they are going out of style?

Since the first gold coin was minted in ancient times it has, and always will be, WORTHLESS. A chunk of circular metal, no matter how pretty, will never feed, house, bathe, or save you. All it represents is some concept of luxury value, which eventually is parlayed into a system of imaginary value to lubricate transactions. In itself, quite worthwhile, it makes life easier because it is a simplifying abstraction... but when the abstraction does not make transactions easier, it has failed its purpose.

That is what we have now. Banks that are afraid to lend, not because there is no good reason to lend, but because they have gotten so silly and now have to 'balance the books' and 'avoid past mistakes', that they are engaging in transactions that make sense in a flawed game, but have no value to humanity. There is nothing wrong with starting to redirect all that wasted energy, the question is how, not whether we should.

You need to pay off your credit card, short and simple, resolving the abstract deferred obligation you made to get some pleasure in the past is a necessary component of how the economy fundamentally works. The idea you can get something for nothing is how the economy is fundamentally failing (at all levels).

[SportsDino]

As for the how, you turn off the giant pipe spewing sewage into the river. That means stopping the increase of new leverage by banks. Chop that fractional reserve to actually be in line with the default risk at the least (note this a core equation that must be balanced for the entire concept of fractional reserve to match its reason for existence!!!).

The leverage itself is triggering off the chain effect margin calls. Hell, even relatively healthy banks were sweating bullets as they realized that credit default swaps don't balance out if a party catastrophically fails! I can't stress enough that our pleasant consumer culture, dumb as it is, even if it works, it is in extreme danger if we don't cut off the excesses at the top of the pyramid.

We are already seeing this happen, normal people are seeing their credit card rates jump into the teens if not the twenties on that debt you mention. I'm sure any small business looking for a loan could report horror stories. And once another wave of inflation hits and the jobs don't come with it... it'll start to burn pretty dang badly. Ignoring this is not going to make it go away.

[sterlingice]

Originally Posted by Arles

We've been running a mythical economy for years - it's our new model. If we suddenly try and "correct it", we'll be in recession for years.

Without massive leveraging allowed to banks/lending institutions, Americans will be called out on their 25-50+K in unsecured debt. This will lead to a ton of bankruptcies which will injure the financial sector even more (maybe end up being $40B to $1B after the bankruptcies occur). Many people will have crappy credit and purchases will begin to seriously slow down.

Everyone loves to play the "let's just fix it and stick it to these lending giants", but the people who will pay for that are small business owners and over-leveraged middle class consumers.

The problem is that this is about to happen anyways if we don't do anything to arrest it. That 20~50K in debt won't seem like a lot when the dollar is worth 10c and in the next 5 years. We're due for horrible inflation when this recession unwinds.

Too bad all of our wages will also adjust accordingly to that horrible inflation and our standard of living is going to fall through the floor. But maybe that's what is meant to happen. No one economy is meant to be heads and shoulders above all others with free trade floating around. Face it, we were lucky- our success was primarily based on being the only civilized infrastructure intact and primed following World War II and then extended with massive borrowing from the early 80s on through today.

SI

[JPhillips]

Inflation fears are way overblown. A little bit of inflation right now would be a good thing.

As for meaningful reforms, no chance. Once they got the money with no strings attached it was over.

[Warhammer]

I'm afraid that we're going to have a double dip, at least in the construction sector.

[Edward64]

Originally Posted by Warhammer

I'm afraid that we're going to have a double dip, at least in the construction sector.

Are you referring to the looming defaults in the commercial real estate space that I've been reading about?

[SportsDino]

Ha, a little bit of inflation when everyone is being laid off, is already out of work, or has flat wages because companies are passing on the pain to their workers (and firing them if they bitch)...

Ya, lets see the wage/inflation gap increase yet further. Based on how you measure it, we've already had inflation out pacing wage growth for most of this decade. And that is based on things like CPI that are completely bogus by now anyway (its nice to report 0.5% inflation each and every year, never mind the equation for it CHANGING every few years... with various important variables excluded for 'variance' though they are always POSITIVE growth, gotta love statistical liars).

We don't need a little bit of inflation to help hide some billion dollar blunders by some big banks. That little bit of inflation is basically a tax on every poor person who is not seeing their primary income source (wages) grow with the rate of inflation. In fact, I've ranted a long time ago about the necessity of having a job recovery before the inflation bill comes due for the very reason that a combo of inflation and massive competition for employment makes it hard for wages to correct to price inflation, and you end up overall with less wealth in the non-investor class (who have massive assets in forms like stocks which due rise with inflation pretty rapidly).

And since I run pretty much a zero debt philosophy myself, I'm also screwed as an investor with any of my money in 'safer' investments that does not automatically adjust with inflation. I'm basically losing real value on my low risk investments to help pay for the risk taking behavior of super wealthy people that are stupider than me.

We can't stop the coming wave of inflation, but pretending it is a good thing is bullshit. Name me one positive effect on the economy it is going to have, preferably one that doesn't lead to massive destruction of standard of living or wealth for the larger number of Americans. And don't give me the trickle down line of thought where 'healthier banks = more jobs for Ameruka'.

[sterlingice]

I can only think of one possible benefit (far outweighed by the consequences): the national debt isn't nearly the concern when it's only half as much in real dollars. It's also why I'm not nearly as scared about deficit spending because it's going to actually get a better return on investment.

SI

[DaddyTorgo]

Interesting report I came across through work the other day - McKinsey's Global Capital Markets report from 9/30/09.

I had to zip it up as it's a 3.77mb PDF, but it gives a nice look at where things are and what has happened.

[sterlingice]

Time for a good old fashioned bump to this thread. I am shocked (sic) to see John Thain landing on his feet as the incestuous executive wheel continues to turn. He goes from one failed company (Merrill) to another (CIT).

John Thain Taking Reins at CIT - NYTimes.com

Originally Posted by NYTimes

After Turmoil at Merrill, Thain Will Lead the Lender CIT
By MICHAEL J. de la MERCED

Over his 30-year career, John A. Thain has risen to top executive positions at Goldman Sachs, the New York Stock Exchange and Merrill Lynch.

On Monday, he will start over at a humbler institution: the CIT Group, the lender to small and midsize businesses that emerged two months ago from a swift bankruptcy.

In doing so, Mr. Thain, 54, is seeking to leave behind the controversies that haunted his final days at Merrill after it was acquired by Bank of America, a deal he helped engineer to save the brokerage during the height of the financial crisis.

As CIT’s new chairman and chief executive, he will try to rebuild a company whose bet on increasingly risky businesses led it to the brink of dissolution, only to be saved at the last minute by its creditors.

CIT also bears the ignominy of being the first company in which the government realized a loss under its $700 billion federal bailout program. Taxpayers’ $2.3 billion investment was wiped out by the Chapter 11 reorganization. When it ran into trouble last summer, CIT failed to persuade its regulators to give it another bailout and was forced to rely on its large investors for help.

Now CIT is positioning itself as a crucial player in the administration’s effort to preserve and create jobs; it is one of the main providers of capital to businesses like small merchandisers and Dunkin’ Donuts.

“What attracted me here is that CIT is a company that’s very important to small- and medium-size businesses,” Mr. Thain said in an interview on Sunday. “If we’re going to see the U.S. economy continue to grow and see new jobs, we have to provide financing to those companies.”

Mr. Thain was forced out of Bank of America in 2009 amid controversy over billions of dollars in losses at Merrill, lavish spending on renovations to his office and several huge bonus payouts to Merrill employees. Since then, he has kept a low profile, considering job opportunities in areas like private equity. But he was approached by an executive search firm hired by CIT about two months ago.

“We saw tremendous upside to John,” John Ryan, CIT’s lead director, said in an interview on Sunday. “We think of him as an Olympic-class athlete with a lot of potential going forward. He’s the best person to position us to become profitable again.”

Jeffrey H. Aronson, a co-founder and managing principal of Centerbridge, a large CIT shareholder, said the firm supported the move. “Following its successful restructuring, CIT is well-positioned to continue its role as a leading lender to small businesses and the middle market,” he said. “John Thain is a skilled and proven business builder.”

Mr. Thain’s hiring was cleared by CIT’s regulators, including the Federal Reserve, the Federal Deposit Insurance Corporation and the Treasury Department, which still has a say over the company’s executive compensation despite the loss of the bailout investment.

Mr. Thain’s pay at CIT will be lower than he has made in years, according to people briefed on the matter. He will receive a $500,000 base salary, along with $5.5 million worth of restricted stock, much of which must be held for one to three years. He will also receive an additional discretionary payment of $1.5 million in restricted shares, which will vest over two years.

He pointed to his tenure at the New York Stock Exchange as a precedent, where he helped it rethink its business model. He took the exchange public, doing away with its long-held tradition of membership seats, and helped give it an international presence.

Mr. Thain must find a way to curtail CIT’s dependence on short-term debt markets for financing, a source of capital that dried up after the financial crisis.

CIT has pledged to move more of its operations into a bank subsidiary based in Utah and focus on the same kind of staid lending to small and midsize businesses that was its mainstay for decades. Mr. Thain must also hire a new senior management team, one that may include Nelson Chai, his former deputy at the N.Y.S.E. and Merrill Lynch.

“I’m optimistic, but these things are not easy,” Mr. Thain said.

For those who forgot who he was, here's a clip that might have the greatest line I can recall about the recession: "Is there no greater metaphor for the dysfunction of our economy than a thirty-five thousand dollar toilet you cannot take a sh*t in?"

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Stim City
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Crisis

SI

[SportsDino]

Interior decorating aside, Thain is another in a long line of incompetent board room scum (buddy network over brains). His actions in Merill at the end of 2007/early 2008 were shameful, this is before the $35,000 toilet hit the news.... Essentially he's on my list of CEO's who will gladly extract money from shareholders and support his own fiefdom of cronies (and he himself is little more than a crony).

Didn't surprise me who would be the subject of an epic fail news story later on. Another bum who takes credit for things that arguably have nothing to do with him (although you could give him credit for polishing the Merill turd to sell at a high price, you have to look at the incompetent scum performing the due diligence and realizing its an idiot fleecing idiots).

Anyhoo, CIT isn't even on my radar, it self destructed pretty much on schedule, not to mention was one of the TARP losers that seem to get buried in the public media among the stories of the US being 'paid back'. Essentially paying out a couple billion dollars to... see the company head into bankruptcy, yay! I wonder how many 'jobs' they saved with that smooth move. Fuck ups all of em.

[albionmoonlight]

I don't know if this is a leading indicator, a lagging indicator, or just a personal thing that has nothing to do with the broader economy, but based on the last couple weeks of mail, Mrs. A and my unsolicited offers for credit cards, car loans, etc. are back to pre-recession levels.

After the crisis hit, those "you are pre-approved" offers slowed to a trickle. Now, they seem to be back, like nothing ever happened.

Again, it may mean nothing. But it is one sign of "back to normal," I guess.

[Ksyrup]

Yeah, I've seen the same thing over the past month or so, come to think of it.

[sterlingice]

Dang, you're right. Me, too

SI

[Edward64]

Don't know about you guys, but I've started moving from cash back into mutual funds, specifically Fairholme and Matthews China. I'll have to watch Matthews China carefully due to the "bubble" talk and will pull out quickly. Looking to buy GM when they IPO. All in all, feeling optimistic ... but what do I know.

[JPhillips]

Can we please start locking up some of these motherfuckers? From Felix Salmon.

http://blogs.reuters.com/felix-salmo...-bond-scandal/

You thought the foreclosure mess was bad? You’re right about that. But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred.

But that’s not even the biggest potential problem facing the investment banks who put these deals together. It also turns out that there’s a pretty strong case that they lied to the investors in many if not most of these deals.

I mentioned this back in September, and I’ve been doing a bit more digging since then. And I’m increasingly convinced that the risk to investment banks isn’t only one of dodgy paperwork; there’s also a serious risk of massive lawsuits from the SEC or other prosecutors, as well as suits from individual mortgage investors.

The key firm here is Clayton Holdings, a company which was hired by various investment banks — Goldman Sachs, Bear Stearns, Citigroup, Merrill Lynch, Lehman Brothers, Morgan Stanley, Deutsche Bank, everyone — to taste-test the mortgage pools they were buying from originators.

Here’s how it would work:

First, the bank would put in a winning bid for the pool of mortgages, with the intention of slicing it up into mortgage bonds and selling those bonds off to investors at a profit.

After submitting the winning bid, the bank would commission Clayton to take a closer look at a representative sample of loans in the pool. Clayton controlled as much as 70% of the market for this service, which is known as third-party due diligence. But Clayton’s not at fault here, and the problem is likely to apply no matter who performed this service.

The size of the representative sample would vary according to the size of the loan pool; it could be anywhere between 5% and 35% of the loans in the pool. Essentially, Clayton would go back to the loans, one by one, and re-underwrite them after the fact, checking that the originator’s underwriting standards were in fact being upheld.

Clayton would either accept or reject the loans it was looking at, according to whether or not they met underwriting standards. Here’s the results of what it found for one bank, Citigroup; the chart comes from this document filed with the Financial Crisis Inquiry Commission. I’m just using Citi as an example, here; all banks behaved in basically exactly the same way.

citi.tiff

Look at the first line. Clayton reviewed 1,280 loans on behalf of Citigroup in the first quarter of 2006. Of those, it accepted 554 outright: they lived up to the originator’s underwriting standards. It also waived another 144, on the grounds that there were mitigating factors (a large downpayment, say). And it rejected 582 for a rejection rate of 45%.

This kind of information was valuable to Citigroup: it showed them that the quality of the loan pool was much lower than you’d think just by looking at the ostensible underwriting standards.

Armed with this information, Citigroup would do two things. First of all, it would take those 582 rejects and put most of them back to the underwriter. Essentially, they said, the loans weren’t as advertised, and they didn’t want them. But Citi would still keep some of them in the pool.

But remember that Clayton had tested only a small portion of the loans in the pool. So Citi knew that if there were a bunch of bad loans among the loans that Clayton tested, there were bound to be even more bad loans among the loans that Clayton had not tested. And those loans it couldn’t put back to the originator, because Citi didn’t know exactly which loans they were.

If there had been any common sense in the investment banks, that would have been the end of the deal. But there wasn’t. Rather than simply telling the originator that its loan pool wasn’t good enough, the investment banks would instead renegotiate the amount of money they were paying for the pool.

This is where things get positively evil. The investment banks didn’t mind buying up loans they knew were bad, because they considered themselves to be in the moving business rather than the storage business. They weren’t going to hold on to the loans: they were just going to package them up and sell them on to some buy-side sucker.

In fact, the banks had an incentive to buy loans they knew were bad. Because when the loans proved to be bad, the banks could go back to the originator and get a discount on the amount of money they were paying for the pool. And the less money they paid for the pool, the more profit they could make when they turned it into mortgage bonds and sold it off to investors.

Now here’s the scandal: the investors were never informed of the results of Clayton’s test. The investment banks were perfectly happy to ask for a discount on the loans when they found out how badly-underwritten the loan pool was. But they didn’t pass that discount on to investors, who were kept in the dark about that fact.

I talked to one underwriting bank — not Citi — which claimed that investors were told that the due diligence had been done: on page 48 of the prospectus, there’s language about how the underwriter had done an “underwriting guideline review”, although there’s nothing specifically about hiring a company to re-underwrite a large chunk of the loans in the pool, and report back on whether they met the originator’s standards.

In any case, it’s clear that the banks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool. That’s a lie of omission, and if I was one of the investors in one of these pools, I’d be inclined to sue for my money back. Prosecutors, too, are reportedly looking at these deals, and I can’t imagine they’ll like what they find.

The bank I talked to didn’t even attempt to excuse its behavior. It just said that Clayton’s taste-testing was being done by the bank — the buyer of the loan portfolio — rather than being done on behalf of bond investors. Well, yes. That’s the whole problem. The bank was essentially trading on inside information about the loan pool: buying it low (negotiating for a discount from the originator) and then selling it high to people who didn’t have that crucial information.

This whole scandal has nothing to do with the foreclosure mess, but it certainly complicates matters. It’s going to be a very long time, I think, before the banking system is going to be free and clear of the nightmare it created during the boom.

Update: KidDynamite asks a good question in the comments: were the bond investors able to do their own due diligence on the loan pool? The answer is no, they weren’t — the prospectus did not include the kind of loan-level information which would enable them to do that.

[JonInMiddleGA]

re:

Update: KidDynamite asks a good question in the comments: were the bond investors able to do their own due diligence on the loan pool? The answer is no, they weren’t — the prospectus did not include the kind of loan-level information which would enable them to do that.

But wouldn't the failure of the bond investors to either perform due diligence or be smart enough to walk away from the investment opportunity in the absence of such put a good bit of the burden back on them? I mean, if you're willing to buy a pig in a poke then shouldn't you be pissed at yourself if it turns out to be a dead pig?

[SportsDino]

Don't worry, there is always some sucker pool of money out there to buy up the bad sides of all these deals... oh wait, we bankrupted a lot of that money recently... I wonder how many more times this trick will work before all the money is in the swindlers' hands.

[SportsDino]

Originally Posted by JonInMiddleGA

re:

But wouldn't the failure of the bond investors to either perform due diligence or be smart enough to walk away from the investment opportunity in the absence of such put a good bit of the burden back on them? I mean, if you're willing to buy a pig in a poke then shouldn't you be pissed at yourself if it turns out to be a dead pig?

Agreed, ultimately it falls upon the buyer to beware, unless they specifically make an inquiry to the seller and the seller puts in writing a lie it should know to be false, you might be able to make grounds on fraud there. That rarely happened, most buyers were simply being dumb.

My problem is when the dumb buyers happen to be representing 401k funds with seemingly harmless names like QuadroSlick Real Estate Advantage High Growth II (made up name so as to not offend the real culprits)... or worst, HyperSmooth Low Risk Finance III which markets itself as buying up AAA securities. More and more the dumb buyers are turning out to people like the average bum disconnected through their money through the magic of massive mutual funds.

Or those companies are doing the buying much more often, trying to get rich quick, and then their stock is being fed to the 401k's, which is even more disconnected and nearly impossible to track (without deeply researching the prospectus of the fund then doing detailed research on each company within it, often themselves opaque to the point you can't figure out what their holdings are based in).

There is no free lunch out there, you give your money to an 'expert' you are as dumb as that expert, or often that expert's sucker. Get someone you trust with your life, and then review the hell out of what they are doing with your moeny is all I can say (or take the time and have the luck to do it yourself).

[JPhillips]

I read this morning that nearly twelve percent of mortgages are currently in default.

This ain't over.

[stevew]

Heh. I noticed today in one of my textbooks that home ownership was up 10-15% over previous norms during the Bush era.

[SportsDino]

Those default statistics are also measured AFTER a number of foreclosures have already gone down the process, so the number is pretty scary.

Home ownership is a good goal I'd suggest for any family, but the problem is people using it as a get rich quick scheme, or depending on the bubble to flip a house... along with a number of people simply buying when they haven't put in the hard work yet to afford it.

Don't be a shifty banker's victim, having your equity wiped out to finance their margin.. use some common sense and look hard at the terms of the papers you are signing. This should be beat over the head of every high schooler and college student before they leave school.

[molson]

Originally Posted by SportsDino

Home ownership is a good goal I'd suggest for any family, but the problem is people using it as a get rich quick scheme, or depending on the bubble to flip a house... along with a number of people simply buying when they haven't put in the hard work yet to afford it.

Don't be a shifty banker's victim, having your equity wiped out to finance their margin.. use some common sense and look hard at the terms of the papers you are signing. This should be beat over the head of every high schooler and college student before they leave school.

Our government (both parties) has always been obsessed with increasing the number of homeowners in this country. Isn't it time to rethink that? It's definitely tough to look for a job when you're stuck to a house in a particular town (especially an underwater mortgage).

But it almost seems like a downward spiral, because the collapse of home values just creates more buying opportunities. Certainly, the only reason I own a house now is because of lower prices and the ridiculous homebuyer's credit. So the government has successfully tempted me into locking myself into this house and this town - but I'm not sure why it was so damn important for them to do so, and what the real benefit is.

[JPhillips]

Let's also not forget that a lot of people have lost their job and simply can't make payments, even if they had handled everything responsibly in the past.

[JonInMiddleGA]

Originally Posted by JPhillips

Let's also not forget that a lot of people have lost their job and simply can't make payments, even if they had handled everything responsibly in the past.

A number that is interestingly similar to the unemployment rate. Obviously I realize that the relationship is greatly coincidental, since everyone out of work didn't have a mortgage, I just thought it was randomly interesting.

[molson]

Originally Posted by JPhillips

Let's also not forget that a lot of people have lost their job and simply can't make payments, even if they had handled everything responsibly in the past.

Sure, and things would be a lot easier for those people, and they'd have a lot more options, if they were renters and not owners.

So I'm not sure why our government has always been obsessed with promoting home ownership. The personal financial level at which people feel entitled to own a house here is just too damn low.

[JonInMiddleGA]

Originally Posted by molson

The personal financial level at which people feel entitled to own a house here is just too damn low.

Or is it?

We're kind of in the middle among industrialized nations (as of 2002)
List of countries by home ownership rate - Wikipedia, the free encyclopedia

But in the top 5-6 on the basis of GDP Purchasing Power Parity
List of countries by GDP (PPP) per capita - Wikipedia, the free encyclopedia

edit to add: I looked this up because my gut reaction was to generally agree with your statement, but now I'm not as sure of that.