Market down 450+ pts

[BTB]

Re: Market down 450+ pts

I'm not sure a lack of credit would really be a bad thing. It did get us into this mess.

This is a catastrophic thing. Our economy runs on debt. No one in the US saves, unfortunately. Businesses need to have debt financing available, it's just a fact. If nothing is done, we are all screwed.

This whole wall street/mainstreet rhetoric is baloney. EVERYONE needs some kind of solution to pass.

[stewaat]

Re: Market down 450+ pts

I'm just going to continue to watch and hope. That's all I can really do!

[stewaat]

Re: Market down 450+ pts

This is a catastrophic thing. Our economy runs on debt. No one in the US saves, unfortunately. Businesses need to have debt financing available, it's just a fact. If nothing is done, we are all screwed.

This whole wall street/mainstreet rhetoric is baloney. EVERYONE needs some kind of solution to pass.

Exactly because if there's no credit then businesses can't start up or expand. Borrowing is the most important thing for businesses because having that start up capital come out of pocket is unheard of.

[BTB]

Re: Market down 450+ pts

Exactly because if there's no credit then businesses can't start up or expand. Borrowing is the most important thing for businesses because having that start up capital come out of pocket is unheard of.

It's not even start up companies; it's pretty much every company. There are very very few companies that don't rely on debt financing. Go to money.msn.com and use their stock screener and try putting in a filter for companies that have low debt/equity ratios. You wont find many; on the other hand if you do find anything attractive in that list it might be a good investment option at this point

[BTB]

Re: Market down 450+ pts

After hearing more about why the bill didn't pass (seems Paulson just wanted a blank check to buy whatever the hell he wanted, coulda been other types of debt, from foreign governments all kinds of wild ****) it's making more sense. But at the same time, I still want to see something done.

We need a bailout to keep liquidity in the market for the short term so that our country doesn't burn in front of our eyes in the coming weeks. At the same time, we need it to include regulation so that this doesn't happen again.

If it was up to me I'd pass SOMETHING quickly to encourage the markets, which might encourage private equity to help and also buyout some of these assets. Then once that happens, continue working to pass regulation bills. But we need something soon.

[SPTO]

Re: Market down 450+ pts

Cebby yes i'm informed and knew all that but I didn't know it was THAT ridiculously easy to get a house.

Plus cut me some slack some of the nuances do get by me. Not many granted, but still.

[Alliball]

Re: Market down 450+ pts

On news the bailout was voted down in the House. The next Depression is now the current one.

Overstate things much.

[Angel_Fan]

Re: Market down 450+ pts

The stock market lost more than a trillion dollars just today. Thats pretty bad, and it will get worse.

This isn't just a wall street thing, credit is a big issue. A deal needs to be done now.

[callmetaternuts]

Re: Market down 450+ pts

Here is the little article i wrote. I sent it out via email to some of my co-workers who like to over-state things. For the record, i work at a fairly prominent brokerage firm and PCA (in my email) refers to the name of a business unit here. This is a long read, but while its not inclusive of all the issues, think it covers alot.

With all of the headlines this week, you might have stopped and asked what’s really going on here? How did all of these companies get in such trouble? Let me see if I can paint you a picture. Let’s say that you decide to start a bank for your fellow PCA employees. We’ll call your bank, Bank PCA. Your fellow employees like the idea of your bank, so before you know it, you have $100 in deposits. You agree to pay each of your depositors 2% on their deposits. Next you have to lend out the $100 so your bank can make some money. Fortunately, 9 of your fellow employees want to buy a house. They each come to you to borrow $10 to buy the house (it’s a very, very small house). You charge 6% for the loans. Things are great. You are netting 4% or $0.40 per year on each loan. You only make 9 loans because bank regulations require you to keep a % of your total deposits as a reserve. In your case, you are required to keep $10 on hand to back up the $100 in deposit. So far so good. You’re making a total of $5.40 per year on your 9 loans, plus the interest you are earning on your $10 in reserves and all you have to do is pay $2 in interest to your depositors. Life is grand.
<O> </O>
But now you start to ask yourself how you can make more money. Fannie Mae (FNMA) comes to you and offers to buy your loans from you for $4. This is $1.40 less than you get from the loans each year, but now you have the $90 back that you lent out. You can now lend the $90 back out to 9 more PCA employees, each of which also want to borrow $10 to buy a house. So, now you are still getting the $5.40 per year that you were getting, but you are also receiving $4 from Fannie Mae. Once the 9 new loans are in place, you can sell those to Fannie Mae as well, thereby further increasing your fee income. Your depositors are oblivious to all of this. They just continue to leave their money on deposit with you in exchange for the 2% you pay them each year. As long as they are getting their interest and have access to their money when they need it, they are happy too.<O></O>
<O> </O>
Fannie Mae takes the mortgages that they buy from you along with the mortgages they buy from other banks and they package them together to make a security. They then sell these securities to investors that want to receive the income from the mortgages but don’t want to be tied to the risk of just one mortgage. Let’s say each of these securities has 100 of the $10 mortgages, for a total of $1,000. Let’s further assume an investor only has $10 to invest and therefore can’t buy the entire $1,000 security. No problem. Fannie Mae just divides the security into 100 pieces. Each piece would represent 1% of each of the 100 mortgages. This allows the investor to diversity their position by not relying on any one homeowner. As the homeowners pay their monthly mortgages, each investor would get 1% of each of the 100 monthly payments. <O></O>
<O> </O>
Still, so far so good. As an investor, you have no way of knowing anything about the quality of each mortgage. Despite this, you would like some way to be assured that the security is safe. In steps S&P and Moody’s. For a fee from Fannie Mae, they will rate the bonds based on quality. Fannie Mae is happy to pay this fee because the rating makes the security easer to sell. S&P and Moody’s basically assume that these are very safe. After all, the bank checked out each mortgagee before they lent the money and each security is made up of 100 mortgages. So even if a couple of homeowners have trouble paying, the total impact on the entire security is quite small.<O></O>
<O> </O>
So far, everyone is still happy. Now let’s go back to Bank PCA. As the owner of Bank PCA, you soon realize that the more mortgages you write, the more money you can make. You also realize that since you are selling the loans to Fannie Mae, you really don’t have to worry about the credit of the person borrowing the money. And of course everyone in PCA wants a new house – especially since the value of real estate keeps going up, up and up. So people are willing to borrow the money even if it costs a bit more. They might even be willing to be less than truthful about things like how much money they make. Plus, everyone wants to buy the most expensive and biggest house possible. After all, it feels good to live in a large house and you will make more money selling a $20 house than a $10 house. Bank PCA wants to help you buy the house, because that means more money for them. If the borrower can’t put much if anything down on the house, that’s OK because the price of the house will increase anyway. If the borrower can’t quite afford the monthly payment, that’s OK too. Bank PCA agrees to let you pay a reduced interest rate for a year, or pay just the interest on the loan. Both you and Bank PCA figure that once the price of your house increases, you can either sell the house and pay off the loan or take out a new loan under better terms based on the new higher price. Life continues to be wonderful.<O></O>
<O> </O>
Enter some very smart people from Broker/Dealer X. They realize that different investors have different needs. Not everyone wants current income. Others want to maximize their income. So these smart people decide to buy a bunch of the mortgage securities issued by Fannie Mae. They combine them together and then carve them into new pieces. One piece contains only the actual amount of interest on each mortgage. Another piece contains only the amount of principal on each mortgage. Since mortgage payments are mostly interest and very little principal when the loan first starts, the investors with the interest piece will get more cash flow than the ones with the principal piece. B/D X sells these new carved up mortgage securities to a whole new set of investors. This works so well, they begin to carve the securities up some more. They carve them up based on how old the mortgage is, whether or not they are adjustable rate loans, fixed rate loans, even where they are geographically. Each time they do this they make additional fees. Heck, it works so well, they buy the new carved up securities, combine them with other carved up securities and carve them up some more. Before long, investors are buying and selling different pieces of the same mortgage without even knowing it. Each mortgage is carved up into so many different pieces, nobody really knows what is in each one. But that’s OK, because the bank did the due diligence on the borrower originally and S&P and Moody’s continue to rate the securities highly. In addition, in order to manufacture these securities and to have some around to buy and sell, B/D X begins to buy them for its own account. <O></O>
<O> </O>
Let’s cycle back to Bank PCA again. Remember that $10 you have to hold in reserve against your deposits? Well you decide you can make even more money by using this $10 to buy some of these mortgage securities. Their safe and they pay more interest than what the bank was buying before, so it’s just more income. <O></O>
<O> </O>
Now some buyers of these securities get a bit worried about the quality of what they own. After all, they now hold so much of it. What if something goes wrong? So, they go to a company called AIG and ask them to guarantee the mortgage securities. AIG has tons of money so they are happy to do this for a fee (an insurance premium really). After all, these are all really safe, so this is really just additional income to AIG. Before long, AIG and other companies like it are insuring billions and billions of securities like these.<O></O>
<O> </O>
Suddenly, an unthinkable thing happens. Home prices begin to fall. Homeowners that were stretching to meet their monthly payments, suddenly can’t. They get late on their payments. Some of them even stop paying. This means the amount of income generated on these mortgage securities begins to drop. People even begin to question whether or not some of the underlying mortgage payments will ever get made. As a result, the value of these securities begins to fall. Some homeowners even go into foreclosure. The value of the securities fall even further.<O></O>
<O> </O>
Banks and B/Ds that own these securities are required to reflect them on their balance sheet at their current value. So, let’s go back to B/D X. Originally they bought 1,000 of these securities at $10 each or a total cost of $10,000 to hold in inventory for future sales to investors. Now these securities are worth only $8 each. Under accounting rules, B/D X must adjust its balance sheet to reflect the $8 price. This causes B/D X to reflect a loss (take a write off) of $2,000. The news of the write off makes investors nervous, so they begin to sell the mortgage securities they own, thereby pushing down the price some more. This in turn causes B/D X to either sell the securities they own or reflect the new price on it’s balance sheet – thereby creating more losses. <O></O>
<O> </O>
But remember, Bank PCA owns $10 of these securities as well. Suddenly the price is now $5. Bank PCA is still required to put up $10 as reserves against it’s $100 in deposits. But now its reserves are worth only $5. So, Bank PCA must either shrink the size of the bank in half or go raise additional capital. Bank PCA doesn’t want to shrink, so it elects to raise additional capital. It can do this by a) selling more stock to the public, or b) selling a portion of the bank to another investor.<O></O>
<O> </O>
Back to B/D X. They too have to put up a certain % of capital against it’s assets. As B/D X takes more write offs, they too must raise more capital. Then they announce that not only were they holding some of these securities in inventory for future sales, but they had also decided to buy some of their own. Essentially, they borrowed a bunch of money at 3% and used the money to buy these securities paying them 6%. They were making 3% net on each security they bought, so they borrowed even more and bought even more securities. Of course these have to be marked down as well, creating even more losses. They begin to worry that the value of the assets will fall faster than they can raise capital, so they begin to sell them. Only now there are essentially no buyers. No one really knows what the securities are worth, so no one is willing to buy them. The firms that lent the money to B/D X so that it could buy these securities begin to worry that they won’t be paid back. They demand their money back. But this money is tied up in the securities that can’t be sold. Suddenly, B/D X has a liquidity crises on its hands. It needs money, but no one will provide it. A run on the bank (in this case a B/D) begins. The next thing you know the B/D is either a) bankrupt, b) owned by the Fed, or c) owned by another financial institution.<O></O>
<O> </O>
Of course, the problem that affects B/D X also continues to affect Bank PCA. They too can no longer find a buyer for their securities. They have raised capital once or twice, but now find that no one wants to buy their stock or lend them money. They too are facing bankruptcy. Since the Fed does not want these banks to go under, they agree to lend basically whatever money they need. The Fed agrees to take the securities that can’t be sold as collateral against these loans. If the loans don’t get paid, the Fed will now own those securities.<O></O>
<O> </O>
But let’s not forget about AIG. Remember all of those securities they insured? Well, it’s now apparent that they will have to pay off on the insurance they sold. In fact, they will have to pay these off at a much higher rate than expected. This causes AIG to take write offs to reflect their greater than expected liability (think of it as an insurance company that assumed they would pay off on 2 hurricanes and instead experienced 10). Oh, and it turns out that AIG owns a bunch of these securities too. Life B/D X, no one will give AIG capital or lend them money. In fact, it’s creditors are demanding repayment. They too have a liquidity crises. Their stock price begins to crater. Suddenly, AIG is owned by the Fed too.<O></O>
<O> </O>
Finally, there is one last piece to the puzzle. Since it becomes doubtful that AIG will be able to pay off on the bonds they insured, the holders of these bonds now have to write them down. They hadn’t previously done this because they assumed their losses would be covered by AIG. Now that this is in question, they are required to write the securities down. Fearing the size of the ultimate write down, they too try and sell the securities thereby pushing the price lower. Which of course makes everything cycle once more.<O></O>
<O> </O>
<O> </O>
<O> </O>
While this story above is pretty long, it is still an oversimplified view of what has happened. Still, it’s not that far off. Hopefully, this gives you some idea as to how related these issues are. It’s like a wild fire. The Feds keep digging a break to try and stop the fire only to see it hop the break and/or flare up someplace else. The Fed has been fighting the fire with money. It will continue to do this, but it’s now clear that other steps will be required. <O></O>
<O> </O>
The bottom line is that this country (the world, actually) is in the process of unwinding 25 years of debt creation. This will not be unwound over night. Things will continue to be messy for some time to come. The one good thing is that each day we are closer to the end. And when it does all finally unwind, we will all be much better off.

Did you make it all the way through? Like i said, it was a long read, but it gives you an idea that this isn't just about AIG or home loans, it's very complex and has been brooding for years.

[Cebby]

Re: Market down 450+ pts

And just like that, the Dow is up 250.

Then again, it was -565 about an hour before closing.

[SportsTop]

Re: Market down 450+ pts

Here is the little article i wrote. I sent it out via email to some of my co-workers who like to over-state things. For the record, i work at a fairly prominent brokerage firm and PCA (in my email) refers to the name of a business unit here. This is a long read, but while its not inclusive of all the issues, think it covers alot.



Did you make it all the way through? Like i said, it was a long read, but it gives you an idea that this isn't just about AIG or home loans, it's very complex and has been brooding for years.

Thanks for the write up.

It sounds to me like the one gigantic issue that needs to be addressed is CONFIDENCE. Not all the paper is bad, but people are going nuts thinking that they are going to lose everything if they don't get their investments back right now.

If confidence in the market was restored then that would go a long way in helping ease the crisis.

I suppose that's what the $700 billion is for, but there is the rub. What is the magic number that will ease fears and restore confidence?

[stewaat]

Re: Market down 450+ pts

Talk about greed and not looking at things from two angles. How can you not ask yourself the question of "What if the housing market stalls or declines?".

It's easy to say this now but still...you would think folks would look at everything, especially when they made things so complicated.

[SportsTop]

Re: Market down 450+ pts

Talk about greed and not looking at things from two angles.

Because it was a CASH COW for so long that everyone wanted in on it.

Who knows how many people's mutual funds and 401k's had investments rolled up in mortgage securities? Not many people were complaining when their portfolio's value was increasing beyond belief.

[fishepa]

Re: Market down 450+ pts

And just like that, the Dow is up 250.

Then again, it was -565 about an hour before closing.

Which goes back to my theory that if wall street really wants to make it go up they can if they want. They just get kicks out of watching everyone speculate and geting worried.

[stewaat]

Re: Market down 450+ pts

Which goes back to my theory that if wall street really wants to make it go up they can if they want. They just get kicks out of watching everyone speculate and geting worried.

It's more of a created panic or hype. Yesterday was obviously panic and if I had more free money in my account I would've bought all the financial stock I could've and then sold on the gap up this morning.

Panic = oversold
Hype = overbought

They'll correct themselves early the next day, usually.