Bethesdamadman,

I'm not sure those who voted against yesterday's Bill care about what happens to the economy or home prices. July's S&P/Case-Shiller was released this morning. Home prices were tanking before yesterday. Wait until all of those Congress folks take a look at their home's value next month!

"Sept. 30 (Bloomberg) -- House prices in 20 U.S. cities declined in July at the fastest pace on record, signaling the worst housing recession in a generation had yet to trough even before this month's credit crisis.

The S&P/Case-Shiller home-price index dropped 16.3 percent from a year earlier, more than forecast, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

The housing slump is at the center of the meltdown in financial markets as declining demand pushes down property values and causes foreclosures to mount. Banks will probably stiffen lending rules even more in coming months to limit losses, indicating residential real estate will keep contracting and consumer spending will continue to falter."

"The fact that house prices quickened their slide before the worst point in credit markets hit this month does not bode well,'' said Derek Holt, an economist at Scotia Capital Inc. in Toronto."

Here's the complete article.

/tricia

Here is a link that might be useful: July S&P/Case-Siller

Do most ARMs have an annual cap? I have a 10 year ARM which is fixed until January 2016. It can't go up more than 2% a year and caps at 10-11% (can't remember right now). I am planning to refinance before that, of course.

I thank God I didn't listen to the bank/lender. They were pushing me to do a shorter ARM (at a lower rate) or a IO. They actually called me "foolish" for choosing the 5.375 10 year ARM (it's a jumbo, although now it wouldn't be since they adjusted the jumbo threshold). They said since I have so much equity we'd be able to refinance easily at any time. That's what a lot of people were told.

sue: "Do most ARMs have an annual cap? I have a 10 year ARM which is fixed until January 2016. It can't go up more than 2% a year and caps at 10-11% (can't remember right now)."

Some do, some don't. I have a 7/1 ARM whose initial rate was 4.25%. It has a 5% maximum cap on the loan so it can never go higher than 9.25. At the initial change date after seven years it can go up the full 5% if that is what the index is at that time. After the first reset, it can only go up or down a maximum of 2% each year. However, I plan to be out of my house before all this happens. (Although the way the housing market is these days, who knows?)

There was and still is zero guarantee that even if the bailout deal passed, that the LIBOR rate would not have jumped as high. It may have jumped even higher..or, maybe not. No one can say for sure, one way or the other...as this is an unprecedented situation.

The point is even the staunchest supporterÂs state that they are not even sure if the package would work....and even if it does help, that does not mean that everything will be magically fixed the moment a yes vote happens.

That said, one of the biggest problems that needs to be remedied is the vagueness of the package itself, it's lack of transparency and of language that would require Wall St. to pay back, it's lack of language that specifies severe penalties for those who violate the rules (As SEC oversight has been proven to be very lax with Bear Stearns, contributing to its demise)as well as some clear idea on exactly HOW it WILL benefit the public...other than doomsday warnings about credit being unobtainable, etc.

Also realize as little as a few weeks ago Bush and Paulson were telling everyone the economy is fundamentally sound...is there any wonder why folks are suspicious abut their doomsday warnings...especially given lack of credibility Dubya's track record in this respect?????

Payback's a B_ _ _ _.

This is just ONE of the problems with having a President that most no longer trust.

In addition, any package of such a magnitude is not something that ANYONE can responsibly vote upon with only a day or two to review.

Paulson had to know that this was a huge possibility...and most assuredly started formulating a plan months ago in case it would be needed. HoweverÂ...it was not revealed until the last minuteÂÂwith minimal info, along with a major doomsday guilt trip push to vote it through.

Anyone with a modicum of intelligence would and should be suspicious of being asked to immediately approve something that is lacking in specifics and before they have an opportunity to perform due diligence. Paulson & Dubya should also be required explain why they were asleep at the switchÂ.or, pretended to beÂ

This is exactly what many homeowners who are in default are being accused of doing...borrowing money that they could not afford to pay back because they did not attempt to understand the terms and they did not perform due diligenceÂÂÂ..and they are being lambasted for doing so.

However, that SAME irresponsible behavior is being asked of Congress.

The double standards in this whole debacle are legion.

I agree with Logic 100%. Sadly, I doubt Congress is looking at it that way though. It is my understanding that those whose seats are in jeopardy come November voted against the bill because their constituents wanted them to, and those who are safe come November voted in favor of the bill because of pressure to do so from party leaders.

Tricia I respect you very much so please do not take this the wrong way. You talked about the housing slump and the impression I was left with is that you think it will get worse if this bill is not passed. It is my (laymans) understanding that housing *must* correct back to reasonable prices based on income and rental prices, so even if the bill passes, we still need further correction in housing values. Do you not agree???

Yes, jeri, I do believe housing prices have to correct more before we're finished. But this is NOT the way to correct the market.

I just heard on CNBC that they've just done a survey of retailers doing more than $100M in annual sales. Now is the time of year retailers are beefing up inventories ahead of the holiday season. They are both having trouble getting credit and/or having their lines reduced. Of those surveyed, 36% said they are planning on closing stores & 24% said they were going to layoff significant numbers of employees. This will, of course, ricochet to the manufacturers especially the small to medium-sized companies creating further closures & layoffs.

We have two problems, jeri. One is the housing debacle. I believe most of us on this forum understand how we came to have that problem. The second problem is the credit crisis & it's clear, to me, from reading the forum recently that some do not understand this component.

With reference housing prices...ultimately, we have to return to affordability. That was going to be tough enough without this major recession that's now looming like an 800 lb. gorilla because of the credit crisis.

Small lending institutions across the country still have funds to lend but they are not large enough to fill the void being created by the tie-up in the larger institutions & captives. A single local or regional just does not have the capital to finance 30 car dealerships within their service area, for example, in dire need of floor plan financing. Captives are pulling back hard & there's nobody to pick up the slack. After yesterday's failed vote in the House, DH did not put the bank's excess capital out for loan last night nor will he going forward until there's resolution in the credit markets. Every night, excess capital goes to the Fed & is lent to other institutions overnight. Or, at least that how it's supposed to work. Now, the banks are not lending to each other. Banks daily capital requirements are normally met by these overnight lending practices. With no money available, institutions are hoarding cash resulting in that retailer I spoke of above being unable to finance his holiday inventories. Round and round we go. This is NOT the way to correct housing prices.

Because of the credit crisis...instead of a controlled slide down the hill housing is going to fall off a cliff. The sharp & sudden drop from already falling prices is going to force many who've been able, so far, to stay on top of their mortgage payments to falter via increasing unemployment.

Instead of my earlier predictions I now believe we're looking at a decade of rough sledding in this country. Yesterday's $1.3T market drop didn't help. Fall back positions of everyday Americans were hit hard. So, increased layoffs, rapidly declining house values, more difficult credit in select areas for individuals & larger problems for small businesses, plus depletion of savings via stock market losses is creating a Perfect Storm scenario.

We need federal intervention & we need it soon. Nobody's yelling "Wolf" in a crowded theater. The problem's real. Also, if it's not corrected soon even the smaller lenders that are healthy now won't stay that way long as their customers lose jobs & begin to default.

It's a confidence problem. Our financial system is based on trust. Without trust...just like any relationship...cracks open up that often prove impossible to fill. I'm worried.

And don't even get me started on the global implications of a breakdown in the American financial system.

Jeri, this has moved way outside the housing crisis & people need to remove the blinders that apparently are causing tunnel vision.

DH was on TV last night being asked how ordinary Americans can best protect their assets. They weren't asking him how to protect the value of their homes...people are worried about their life savings' disappearing. We have two separate problems.

/tricia

Received in an email from a friend who is an analyst..who, BTW, he is not in favor of the Paulson proposition. He thinks this one is not perfect of course, but far better than the dreck proposed by Paulson..and I agree..however, if they even tried to do this, he predicts a massive pushback as Wall St. will not like it...too drastic for the poor little darlings...

***********************************************************

September 22, 2008
An Open Letter to the U.S. Congress Regarding the Current Financial Crisis

John P. Hussman, Ph.D.

This article may be reprinted and distributed without further permission
Edited 9/26/08 to add Principles section and amend specifics of PAR obligations

Summary Of Principles

1) Public funds must function to increase the capital of distressed financial companies, not simply to take bad assets off of the balance sheet at market value (which may improve the "quality" of the balance sheet, but does nothing to improve the capital cushion and therefore little to avoid future runs on the institution).

2) In return for these funds, the government should NOT take equity (which is a subordinate claim and also creates potential conflicts of interest), but instead should take a SENIOR claim that precedes not only the stockholders but also the senior bondholders in the event the company defaults anyway. Congress may need to make some modification to existing bankruptcy law or provide for expedited bondholder approval to do this, but essentially, the government's claim should be subordinate only to customers in the event of default, and senior to both stockholders and bondholders. However, it should also be countable as capital for the purposes of satisfying bank capital requirements.

3) Ideally, the rate of interest on such funds should be relatively high (which will encourage these firms to substitute private financing as soon as possible), but actual payment should be made once the firms are again profitable so that the payment burden does not weaken them during the present recession.

4) The bill should allow for expedited bankruptcy resolution for these institutions, so that in the event of failure, the "good" bank (all assets and customer liabilities, but excluding debt to bondholders) can be cut away and liquidated to an acquirer as a "whole bank" sale. For nearly all of these institutions, the debt to bondholders is far more than sufficient to absorb any losses even in the event of bankruptcy. The current difficulty is that the bankruptcy process itself draws out the process of taking receivership, cutting away the good bank so that it can be sold to an acquirer, and delivering the proceeds as a residual to bondholders. Streamlining that process is one of the best ways to ensure that the failure of one institution does not have "systemic" effects.

5) To assist homeowners, the bill should allow for a reduction of mortgage principal during foreclosure, but the mortgage lender should also receive a Property Appreciation Right (PAR) that gives the original lender a claim on future property appreciation up to that original mortgage amount. In other words, the homeowner receives a substantially lower mortgage balance and payment burden now, but the lender stands to be made whole over time through property appreciation rather than immediate burdens on the homeowner to make payments.
To the Congress of the United States

In 2006, the president of the Federal Reserve Bank of St. Louis noted "Everyone knows that a policy of bailouts will increase their number." This week, Congress is being asked to hastily consider a monstrous bailout plan on a scale nearly equivalent to the existing balance sheet of the Federal Reserve.

As an economist and investment manager, I am concerned that the plan advocated by Treasury is essentially a plan to bail out the bondholders of financial institutions that made bad lending decisions, with little help to homeowners that are actually in financial distress. It is difficult to believe that the U.S. government is contemplating taking on the bad assets of these institutions at probable taxpayer loss and effectively immunizing the bondholders (and shareholders) of these companies.

While it is certainly in the public interest to avoid the dislocations that would result from a disorderly failure of highly interconnected financial institutions, there are better ways for public funds to accomplish this, other than by protecting corporate bondholders while homeowners remain in distress.

Consider a simplified balance sheet of a typical investment bank:

Good assets: $95

Assets gone bad: $5

TOTAL ASSETS: $100

Liabilities to customers/counterparties: $80

Debt to bondholders of company: $17

Shareholder equity: $3

TOTAL LIABILITIES AND EQUITY: $100

Now, as these bad assets get written off, shareholder equity is also reduced. What has happened in recent months is that this equity has become insufficient, so that the company technically becomes insolvent provided that the bondholders have to be paid off:
Good assets: $95

Assets gone bad (written off): $0

TOTAL ASSETS: $95

Liabilities to customers/counterparties: $80

Debt to bondholders of company: $17

Shareholder equity: (-$2)

TOTAL LIABILITIES AND EQUITY: $95

These institutions are not failing because 95% of the assets have gone bad. They are failing because 5% of the assets have gone bad and they over-stretched their capital. At the heart of the problem is "gross leverage" the ratio of total assets taken on by the company to its shareholder equity. The sequence of failures we've observed in recent months, starting with Bear Stearns, has followed almost exactly in order of their gross leverage multiples. After Bear Stearns, Fannie Mae, and Freddie Mac went into crisis, Lehman and Merrill Lynch followed. Morgan Stanley, and Hank Paulson's former employer, Goldman Sachs, remain the most leveraged companies on Wall Street, with gross leverage multiples above 20.

Look at the insolvent balance sheet again. The appropriate solution is not for the government to purchase bad assets with public money. The only way such a transaction would add to the institution's capital would be for the government to overpay for those assets. Rather, the government should either a) provide new capital, taking a claim in front of the company's bondholders and stockholders, or b) execute a receivership of the failed institution and immediately conduct a "whole bank" sale selling the bank's assets and liabilities as a package, but ex the debt to bondholders, which preserves the ongoing business without loss to customers and counterparties, wipes out shareholder equity, and gives bondholders partial (perhaps even nearly complete) recovery with the proceeds.

The key is to recognize that for nearly all of the institutions currently at risk of failure, there exists a cushion of bondholder capital sufficient to absorb all probable losses, without any need for the public to bear the cost.

For example, consider Morgan Stanley's balance sheet as of 8/31/08. Total assets were $988.8 billion, with shareholder equity (including junior subordinated debt) of $42.1 billion, for a gross leverage ratio of 23.5. However, the company also has approximately $200 billion in long-term debt to its bondholders, primarily consisting of senior debt with an average maturity of about 6 years. Why on earth would Congress put the U.S. public behind these bondholders?

The stockholders and bondholders of the company itself should be the first to bear losses, not the public. That is the essence of what a free and fair market, and a responsible government would enforce. The investors in the companies that produced the losses should be accountable for them, and the customers and counterparties should be protected.

The case of Fannie Mae and Freddie Mac was special in that government had already provided an implicit guarantee to their bondholders, so that bailout couldn't have been done otherwise without harming the good faith and credit of the government, but it's absurd to tell Wall Street "send us your poor and your tired assets, and we will tend to them." The gains in financial stocks we have observed in recent days reflects money that those firms expect to be taken out of the public pocket.

A further difficulty with the Treasury plan is that it does little to actually reliquify banks that are at risk. To the contrary, the process of reverse-auctioning bad mortgage debt will provide for "price discovery" about what these assets are actually worth, most likely forcing other institutions to write down assets that are still held on the books at unrealistically high values. As a result, we may observe an increase, rather than a decrease, in the number of financial institutions having insufficient capital.

Replacing the bad assets on the balance sheet with cash, at the market value of those bad assets, may improve the quality of the balance sheet, but does nothing to increase the capital on that balance sheet or the ability of financial institutions to lend. If the objective is to prevent these institutions from bankruptcy or liquidation, or to increase their ongoing lending capacity, then the government requires a method to provide more capital. It is essential that in return for providing more capital, the government should receive a special, possibly novel, security interest that places the government in front of even senior bondholders in the event that the institution fails anyway.

Rather than making small changes around the edges of Treasury's vague and costly proposal, Congress should focus its attention on approaches that will provide capital to viable institutions and expedite the assumption and "whole bank" sale of failing ones.

On the regulatory front, Congress should restrict the speculative use of credit default swap (CDS) transactions. These swaps are essentially insurance policies that pay the holder in the event that an institution's bonds fail. Both credit default swaps and short sales should be allowed for bona-fide hedging purposes when an investor has a related asset that is at risk. However, it is appropriate for regulators to curtail the speculative use of credit default swaps and short sales relating to financial institutions.

With regard to assisting homeowners, purchasing the bad mortgage securities from financial institutions will do nothing to help those homeowners because it does nothing to alter the cash flows expected of them. Congress will be a far better steward of public funds by offering distressed homeowners what amounts to a refinancing, coupled with a partial surrender of future appreciation.

In practice, when a homeowner defaults on an existing mortgage, the bankruptcy court would be allowed to "push down" the principal value. Alternatively, government could purchase the foreclosed property at an amount near existing foreclosure recovery rates (presently about 50% of mortgage face value), and the government would then sell that home back to the owner with a zero-equity mortgage, allowing individuals to keep their homes. In either case, there would be an additional obligation placed on the property owner in the form of what might be called a "Property Appreciation Right" (PAR), which would be provided to the original mortgage lender. Though it would accrue no interest, it would provide a claim to the original lender on any appreciation in the value of the original home (or other property subsequently purchased by the homeowner) up to the difference between the foreclosure proceeds and the original mortgage amount. Note that the PAR would only become relevant at the point that the government was fully repaid.

For example, consider a homeowner with a $300,000 mortgage balance on a home now worth less than the mortgage balance itself. The government would buy the foreclosed property at say, $200,000 and mortgage it to the existing homeowner. The original lender would receive $200,000, plus a Property Appreciation Right (PAR), giving it a claim on $100,000 of any future appreciation of property. If the homeowner was to sell the property later for, say, $250,000, the owner of the PAR would receive $50,000, and there would be a remaining lien on future appreciation of property purchased by the homeowner. At any point the recovery from price appreciation satisfied the $100,000 claim, the PAR would be fully repaid.

Some provision would have to be made for the appreciation of an unsold home, but that detail could be accomplished through some form of equity extraction refinancing. To account for time value, the claim on future appreciation could be increased at a small rate of interest. Though the credit impact of a mortgage default would likely be sufficient to dissuade solvent homeowners from making inappropriate use of the program, the government could impose additional costs or eligibility requirements to avoid such risks.

In summary, the Treasury proposal to address current financial difficulties places corporate bondholders ahead of the public, rewards irresponsible risk-taking, and sets a precedent for future bailouts. Moreover, we know from a long history of economic experience across countries that a major expansion of government liabilities is invariably followed by multi-year periods of extremely high inflation, particularly when it is not matched by a similar expansion of economic production. Such inflation would initially be modest because of the current weakness in the economy, but could pose unusual challenges to the United States in the coming years.

Congress can benefit the American public by maintaining a focus on responsibly assisting homeowners in distress rather than defending the stockholders and bondholders of overleveraged financial companies. It is essential to recognize that the failure of these companies need not result in "financial meltdown" provided that the "good bank" representing the vast majority of assets and liabilities is cut away, protecting customers and counterparties, so that the losses are properly borne out of the capital base of the companies that incurred them.

Again, everyone knows that a policy of bailouts will increase their number. By choosing who bears the losses for irresponsible decisions at these companies, Congress will also choose the scope of the bailouts that follow.

Sincerely,

John P. Hussman, Ph.D.
President, Hussman Investment Trust

Alabama's largest county is facing bankruptcy as they are unable to refinance sewer construction costs. More signs of economic problems due to the credit crisis...

/t

After yesterday's failed vote in the House, DH did not put the bank's excess capital out for loan last night nor will he going forward until there's resolution in the credit markets.

Why? Is he worried the money will go to a bank that will fail?

Triciae Thanks for trying to explain. Im trying *hard* to understand as much as possible. Are you and Logic on separate sides of this issue???

Yes, jeri, he said, "I don't want some Tuesday night's routine excess capital to disappear into a black hole".

I'm not on any "side".

I don't believe we have six months to debate, as a country, the minutiae. There's a tipping point somewhere that once crossed we can't lessen the consequences of a credit freeze at our country's largest financial institutions. Exactly where that point is & what day it will happen...I don't know. This morning's LIBOR should have been enough to get Congress' attention.

Now, I hear Cox is fiddling around with the "mark to market" accounting. That's a day late & a dollar short, IMO. Gosh, we all know there's toxic waste in the building...what difference does it make if they hide it in a closed door closet?

It will help to raise the FDIC insurance limits especially for small business. During September, there's been significant withdrawals helping to sink both WaMu & Wachovia. Right now, we need to stabilize the financial system. There's time later to rehash who did what to whom.

Remember when we used to discuss such mundane things as whether the wallpaper should be removed in the hallway & if the extra room should be staged as bedroom or home office? Where are all of those people? Have all the home sellers given up?

/tricia

no-they are trying to figure out what to do with the cat.

LoL! :-)

"We have two problems, jeri. One is the housing debacle. I believe most of us on this forum understand how we came to have that problem. The second problem is the credit crisis & it's clear, to me, from reading the forum recently that some do not understand this component."

I disagree - the fundamental problem is that the middle and lower class have been losing wages and health benefits for some time. That is what brought us to this debacle - people could no long afford a house though they bought anyway. The credit crises - lending to people who no longer had the wages to back up the loan risk. The lending part is not the important part - its the wages part that is the important part!

None of that has changed or is going to change soon.
Until someone talks about the FUNDAMENTAL problem I'm not on board (as if it matters)

The problem has been and is - JOBS, not some meaningless one note sound bite number that leads this administration to say everything is fine - but all the numbers behind that number. "I lost my job and the only job I could find paid half of what I was earning before" "My employer cut health benefits" kind of numbers. The effects of that didn't show up right away as people took other action to try to make up the slack. Seems like a lot of people who lost their jobs went into construction :( But the effect hit eventually and this is the result. Why no one is talking about it I don't understand.

"Instead of my earlier predictions I now believe we're looking at a decade of rough sledding in this country. "

I figured that was the minimum of what was coming a year ago. Hell, summer of 2004 I smelled it coming.

, I don't really have understanding of all this, but I'm not sure anyone does.
I'm not sure anyone or anything can fix this. Since I'm not an expert I do believe that at a minimum I'm not missing the forest for trees which I think some experts are prone to.
And I figure if I'm going to be screwed then Wall Street and hopefully Congress and the Bush's and Cheney's should be right there with me.
I don't trust this administration. They have used panic to goad action and sprung initiatives based on information twisted to suit their agenda several times in the past.

Lots of houses for sale here. And some buying going on too.

marys1000 -- I agree with you about the loss of *real* jobs; the number of people working two or three part-time, low-paying jobs; the decline in real dollar income for the middle class. The government's numbers on creation of new jobs has fallen lower and lower. I don't even know what KIND of jobs they count, and who can trust numbers that get adjusted a few days after the good news was announced?

We may have been talking here more about one end of the stick while ignoring unemployment and underemployment -- the stuff that conjures Depression nightmares for Main Street.

You're right about the jobs, Mary. But, you're wrong about not supporting this Bill.

I don't understand a group of people who choose to stand around in the street watching in glee as flames consume a house because they don't like the owners. While they're slapping each other on the back laughing & cheering the flames jump to the neighbor's house. An hour later, the entire street has been consumed by a fire storm. Oh well, I guess the other lost homes are just 'collateral damage' from sticking it to the fat-cats, huh?

A part of Monday's $1.3T stock market loss belonged to me. We've worked long & hard for retirement always playing by the rules. Now, our savings are threatened thru no fault of our own. I choose to pick up a fire bucket, fight the flames, & an axe to make a firewall rather than join those standing around bemoaning the unfairness of the world.

We were in for a recession before this credit crisis. With no intervention we could be in for a decade long depression. Oh well, 'collateral damage' of no importance, right? We'll just all stand together holding hands & singing 'Kumbaya' because those fat-cats got their cumuppance.

We do need new leadership...desperately. It can't come soon enough, IMO. We'll all have our say in that come November.

Right now though...last week mortgage applications tanked -down 23% & refinances were down 34.7% from the prior week. More 'collateral damage'...not important, right? It's more important that we punish those fat-cats!

This Bill is not a cure all & won't prevent recession. It will lessen the damage for all of us. Even if it eventually passes it will take months before we really start to see any progress...not like it passes on Friday & Monday everything's normal although the markets will stabilize (at least temporarily).

Well, we can thank the Europeans for the last hour's rally on Wall Street. We were down 200+ & now trading is about flat. The reason is because Ireland & France are acting to free up their financial systems.

It's amusing to me that the phone calls to Congress are now coming in more for the Bill than against. Maybe, seeing the hit to their savings has something to do with that??? Like they say, "There are no athesists in a foxhole!"

/tricia

PS Hope nobody here is relying on dividends to support income because they're falling prey to 'collateral damage' also. 'Course, those fat-cats are getting their cumuppance so everything's okay.

A hasitly composed bill that puts the U.S. in even more debt trouble is no solution.

Perhaps we all need to experience some of the aches and pains of our false economic booms.

It is like Americans can't tolerate a single moment of discomfort anymore... so we go deeper into debt to the tune of 700billion or more just to delude ourselves.

It seems no different than buying myself a BMW to make myself feel rich even though I actually can't afford it.

Let the various markets shake themselves out, let some folks take on roommates to pay rent, let home prices get back to honest prices (and I bought MY home at the peak of the housing fever), and most of all... let's take our time on ANY solution that costs the US more money!!!

Must we always have a rip roaring economy?

I don't think anyone disagrees that something should be done. No one is saying "let's take six months to figure this out." That's a straw man. It took them, what? a week? to monkey this thing up. Surely in that amount of time they could have developed something better, especially if they had not tried to turn Paulson's sow's ear into a silk purse.

This MUST be revisited after the new government is sworn in.

What are CNBC's worriers now?

The 700 billion will be hoarded by the banks and no 'quality' loans can be made so the consumer can't keep on keeping on. Sure liar loans can be made. They can keep on with the derivative crap shoots.

But when it comes to quality investments...well it is painfully clear that AAA ratings are not the same as there were back in granddads day. Back then they had a modicum of ethics and honor. Accountants actually meant what they said.

But whenever honor is brought up we must remember ...'Honor dies where interest lies.'

Let the rich pay for their mess

Loan Wall Street the money, but do not give them money. Charge them interest and take back hi grade collateral.

Don't put in on the backs of the working class.

When we were in the darkest hours of the bailout meltdown, a commentator on CNBC complained how the 'poor taxpayer' will be stuck with all these bailouts. Then they backed off of their pity switching some of the blame to the taxpayer, for living beyond their means and consuming too much as a cause for Americas financial problems.

We complain when the consumer stops spending, so the stock market doesn't tank.

Then we blame the consumer for doing what we push them to do with ultra low interest rates, 24 hour advertising and loans that require no proof of ability that the loans can even be paid back aka "Liar Loans."

http://www.investopedia.com/terms/l/liar_loan.asp

America has been built on debt and spending. 70% of our 'economic heath,' better termed as 'economic sickness' is based on consumer spending. When the consumer can't compulsively spend any longer our economy collapses...we are not a healthy country. Without compulsive spending and conspicuous consumption we would fail as a country.

In a TV commercial, Discover card was promoting endless consumption 'as a good thing' and they wished to do us a favor by helping us spend money better as we create more debt that we can't afford to pay.
Do you see the insanity of all this?
Add the rapidly approaching depletion of all fossil fuels and global warming to this pro consumption picture and we can see we have created a time bomb. Our whole system is based on an unsustainable model that will eventually collapse no matter how much money that is printed up by the fed.
Well, the fed can do what it likes. After all, it creates money out of thin air. Used to be the fed at least printed money. Now all that needs to be done to create billions is to magnetize a silicon chip. This is what fuels the hard commodity people that want something tangible for real wealth.
Wall street has degenerated into a greed fueled, legalized 24 hour crap shoot with the blessing and full faith and credit on the US of A behind it. It is like an alcoholic that has inherited a whiskey factory. More of their drug wont fix them - it only increases the sickness. Same with greed. Greed is never satisfied by attainment - it is only satisfied by contentment.

In simpler times, we had stock and bonds to invest in. Most accountants did their jobs and earning did not have to be restated year after year and earnings were real. EBITDA had not been invented and our US dollar was backed by gold and later by silver.

In 1973 stock options were added to the mix. Then the late 90's brought us internet day trading as a new way for the masses to gamble in the privacy of our own homes.
Fast forward to 2008 and things have become much more complex when it comes to financial gambling. We've got interest rate swaps, total return swaps, equity swaps, forex swaps, currency swaps, constant maturity swaps, basis swaps, volatility swaps, credit default swaps, variance swaps and many more 'derivatives' to place our bets on.

We talk of living in a sustainable world, yet our actions betray our true feelings. All we have to do is to look at the stock market to see what happens when growth declines even a little.

Even if a company yields stable earning, but does not grow its earnings it is looked down upon. Stability and balance is part of a sustainable footprint, yet we shun such balance.
With one breath we talk about cutting global warming and how we have to cut our dependence of fossil fuel.

Then with the next breath we demand no cut backs in our standard of living, we must spend and consume above all else...build more, build faster, build bigger.

The GDP must only go up, up and away...all the while this consumption just increases global warming and keeps depleting the fossil fuels faster and faster.
Sick...sick..sick mentality, buy more cars, build more houses and monstrosities of architecture, spend more but 'cut back' to save our dear fossil fuels. For all practical purpose we will be out of crude oil in 2 or 3 decades and possibly much sooner.
Consumption is ingrained in us and we know no other way. And even if we wished to amend our ways, how could all our retirement funds take the hit?
Our world population has grown to levels where it has passed the point of no return for supporting a sustainable human population as we know it today when it comes to their energy demands.

And what does all that consumerism lead to?
It leads to the mess we are in now and the bigger mess the world will be in once India and China pick up momentum to copycat the envious lifestyle that they have held in high esteem as the 'American Dream'

Fueling the problem of consumption is the games the Federal and World banks play with interest rates. They manage the economies in ways to fuel consumption and mask the real trend.
Witness the recent cries for Federal bankers to lower interest rates...so the stock market can go up...fueled by spending of the consumer.
It is drug habit that Greenspan got us hooked on and we just can't get away from.
Our economy is not based on sustainable health - it is based low interest credit to encourage compulsive spending, debt and living a life of constant consumption with a 'disposable mentality' when it comes to durable goods.
All this consumption to artificially fuel our economy to make our retirement funds only go up contributes to more and more global warming and the depletion of our natural resources.
Then the governments juggle the numbers to make the inflation figures seem artificially low, so everyone's retirement portfolio will make them happy so they will continue to buy and consume more...and on it goes....IT IS ALL WE KNOW and the bill is coming due soon!

We must accept we have built a defective model for long term population support. We can only keep on keeping on as long as the crude is free flowing and affordable by the masses. Once we officially come clean with peak oil and accept responsibility as a country, we can at least be at a semblance peace with the outcome of our actions and recover a modicum of honor in the process as we restructure our country for a post carbon world.

Until that time, we are living in a dream world that is rapidly becoming a nightmare. We have the tiger by the tail and cannot let go...but our grip is getting tired and all hell is going to break loose soon.

Thoreau didn't think much of those that lived beyond their means and he said so in Walden.

"Some of you, we all know, are poor, find it hard to live, are - sometimes, as it were, gasping for breath. I have no doubt that some of you who read this book are unable to pay for all the dinners which you have actually eaten, or for the coats and shoes which are fast wearing or are already worn out, and have come to this page to spend borrowed or stolen time, robbing your creditors of an hour. It is very evident what mean and sneaking lives many of you live, for my sight has been whetted by the experience of others; always living on the limits, trying to get into business and trying to get out of debt, a very ancient slough, called by the Latin - 'Res Alienum' or 'another's brass' for some of their coins were made of brass. Living, seeking to curry favors, lying, dying, and buried by 'other's brass'; always promising to pay, promising to pay, tomorrow, and dying today insolvent." (Quote shortened)

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Allenwrench...doyou want the job of next Treasury Secy...or head of the Fed? If so, you have my support. :-)

I'm not sure why people think the Paulson plan was hastily made up. The Treasury and Fed staff have been working on various scenarios for months. The plan Paulson proposed was his least-favorite - remember he is a free-market capitalist and solidly Republican - as it was the "never mind the house, the whole neighborhood is going down in flames", to use Tricia's excellent analogy. It was the one he hoped he would NEVER have to bring to the table, because only the most dire emergency would require such massive measures.

The LIBOR problem is serious. It is a direct indication that not just individuals are nervous, but professionals are as well. If the free market will not accept a floor price for those 5% (or whatever the percentage is) of distressed securities, then it is to everyone's advantage to have the government step in and do so. I agree with Tricia again, it will not prevent a recession, but it will make it end much sooner.

It is short-sighted to think a government bond insurance agency would take care of this problem. You would be leaving the taxpayers with risk but no ability to participate in the upside, unlike the Paulson plan. Almost everyone agrees that it would be surprising if even 10% of the overall CDOs/CLOs will actually go into default. Trying to set super-stringent entry requirements (such as the ridiculous limits on executive pay) would work against the application process, leaving the taxpayers with only the very worst and riskiest subprimes, because banks would be reluctant to participate unless they absolutely, positively had to. You don't want that - you want a good portion of those complex derivatives BECAUSE the majority of them are in fact, paying on time and viable.

Despite the inflationary concerns of the Fed's easy money and the bailout proposal, the Euro has sunk against the dollar because not only is it clear that Europe is just beginning to start their hard times, but their banks are in even more trouble than ours, because European banks are allowed to be more highly leveraged than we allow our commercial banks to be.

A couple of references to the international market recently mentioned on CNBC seems to have escaped most people's notice, BTW. Russia will be attending the next OPEC mtg as a guest of Venezuela with the stated mandate of discussing how to bring crude oil prices back up to $140/barrel.

Libor was 2.6 or 2.7. If it went up to 6 7/8 isn't the increase more like 270%? Think about it.

It's true that this plan has been in the works for months -- while Bush and Paulson publicly repeated that the economy was strong and resilient. Then, the plan was sprung on Congress with the message that if they didn't pass it now, the consequences would be disastrous. Similar to "we don't want the smoking gun to be a mushroom cloud." This is so reminiscent of previous instances where this administration has forced something down our throats in an emergency situation. Is it any wonder that there is skepticism that this is Bush's last chance to raid the Treasury for the benefit of the wealthy? I'm not saying that the bailout shouldn't pass, but public confidence is as essential to a functioning government as it is to a healthy economy.