Merrill bought, Lehman bankrupt

[The Stig]

So are the CEO's responsible for these poor financial decisions going to stay on top of their companies? I think part of this deal should be that those responsible for these overly risky decisions should be replaced. If the same people keep making the decisions, then the same decisions will be made, and we'll end up with the same results.

I'm more familiar with the airline industry, where executive continuity is a big problem. A management group drives an airline into bankruptcy, and when the airline emerges from that bankruptcy the same people are still in charge. Not surprisingly, the airline is no better run after the bankruptcy, so they end up back there before too long. That's one of the big reasons why the airline industry's motto is "O thank heaven for Chapter 11!" Good CEO's and management teams should be retained and rewarded, but those that drive their companies into bankruptcy shouldn't still be in charge when the company comes out the other side.

[SirSaxa]

Sept 23, 2008 22:52:50 GMT -5 The Stig said:

So are the CEO's responsible for these poor financial decisions going to stay on top of their companies? I think part of this deal should be that those responsible for these overly risky decisions should be replaced. If the same people keep making the decisions, then the same decisions will be made, and we'll end up with the same results.

I'm more familiar with the airline industry, where executive continuity is a big problem. A management group drives an airline into bankruptcy, and when the airline emerges from that bankruptcy the same people are still in charge. Not surprisingly, the airline is no better run after the bankruptcy, so they end up back there before too long. That's one of the big reasons why the airline industry's motto is "O thank heaven for Chapter 11!" Good CEO's and management teams should be retained and rewarded, but those that drive their companies into bankruptcy shouldn't still be in charge when the company comes out the other side.

Very reasonable comments on the CEOs.

And Pushy, if you think the bill is going to pass Congress without limits on CEO compensation ... well, perhaps you will be right. But I can't see any members of Congress from either party going home to their constituents proudly announcing they used tax payer dollars to bail out Wall St. so the Fat Cats can walk off with more millions.

As for the threatened brain drain, that is simply a Wall St inspired fiction.
What Company in corporate America is going to hire the CEO who not only drove his finanical institution to near bankruptcy (saved only by the biggest bail out in History), but instead of seeing it through and cleaning up his own mess, he jumped ship because he wasn't going to make more millions on the backs of taxpayers? Do you really think that is going to go over with his next Corporate board, Shareholders and the public?

As for the blame related to the specific mortgage crisis, there is plenty to go around. I was not going there. But if you DO wish to go there, one might observe that the two biggest financial meltdowns in the history of the country --the S&L debacle and the mortgage meltdown --both happened under long time Republican Administrations. Come to think of it, the Great Depression occurred on Republican Herbert Hoover's watch too.

As big a problem as the mortgage meltdown is, it was precipitated and exacerbated by the Fiscal irresponsibility of the Bush Administration. That is simply to point out a fact. Looking at facts objectively is not taking a partisan view.

Suggesting the Bush Admin is NOT to blame and standing by your party even as it abandons all of its own commitment to being the party of fiscally sound government, balanced budgets and conservative leadership? Now THAT is being partisan.

[SirSaxa]

Sept 23, 2008 21:32:34 GMT -5 TC said:

The thing that Editedes me off the most about all this is Buffett's involvement - he has railed for years about derivatives, and yet he's putting himself into Goldman Sachs, in what must have been a private deal with Paulson (former CEO of Goldman). He is gonna make Berkshire a mint off this I'm sure, but it's going to come at the expense of his reputation because it's going to cost taxpayers.

I understand your point TC, but I think there is a misunderstanding in your assumption. Goldman Sachs actually has a very sound balance sheet and virtually none of the "toxic mortgage backed paper" that has brought about the crisis. It is unlikely to be accessing much of the $700 billion from Treasury. Goldman, and Morgan Stanely too have been unfairly attacked even though both weathered the storm pretty well. Hence, Buffet stepping in now -- before the Fed Bail Out is approved - is a bold step that will re-assure the market. And, Buffett will very likely make a very handsome profit on it. I have no problem with that. He's doing it on his own without govt. assistance.

[SirSaxa]

Sept 23, 2008 18:41:26 GMT -5 EasyEd said:

.

As for placing the blame solely on Bush (with a little for Greenspan), you ignore the role Dodd and company played in helping detour new rules for Ginnie and Freddy, particularly when you consider that Dodd is the largest recipient of "donations" from the two, Obama being second. I'm not claiming Bush's policies were not major contributors but both parties pushed hard to make it easier for people to buy homes, whether they could afford the mortgage or not.

Ed... I wasn't really focused on placing blame for the mortgage crisis in those comments. Clearly there is a lot of blame to go around for that one. But once again you mention Chris Dodd, who has been the Chair of the Banking Committee for the last 20 months, when Richard Shelby was the Chair for years before that. And in 2005 or so, the Bush team came out in favor of No Down Payment Mortgages to extend home ownership in the country. That was unprecedented in American History -- because it is an entirely unsafe and unsound way to lend. No "skin in the game" for the homeowner? They don't care and can easily walk away if they can't afford it later. nothing -- no down payment -- to lose.

As for who got the most $$ from Fannie and Freddie?

Seems McCain's Campaign Manager Rick Davis got the most of anyone -- $180,000/year, fot the last three years -- for doing nothing but being involved with McCain.

WASHINGTON POST STORY EXCERPTS

The lobbying firm founded and co-owned by Rick Davis, the campaign manager for Sen. John McCain's White House bid, received payments from Freddie Mac in recent months, despite assertions by Davis earlier this week that the firm's work for the mortgage giant had ended three years ago.

Washington Post on McCain Campaign Manager

And another story on the same subject
McCain Aide’s Firm Was Paid by Freddie Mac, NY TIMES


And yet another story. This one covers the previous 5 years, from 2000-2005. It says Rick Davis received close to $2 million during that time from Fannie and Freddie

Senator John McCain’s campaign manager was paid more than $30,000 a month for five years as president of an advocacy group set up by the mortgage giants Fannie Mae and Freddie Mac to defend them against stricter regulations, current and former officials say.

“The value that he brought to the relationship was the closeness to Senator McCain and the possibility that Senator McCain was going to run for president again,” said Robert McCarson, a former spokesman for Fannie Mae, who said that while he worked there from 2000 to 2002, Fannie Mae and Freddie Mac together paid Mr. Davis’s firm $35,000 a month. Mr. Davis “didn’t really do anything,” Mr. McCarson, a Democrat, said.

More on McCain Aide Davis

[theexorcist]

The greatest sign that the bailout is a great idea is that Jimym Carter hates it - www.usatoday.com/money/economy/2008-09-24-jimmycarter-bailout_N.htm

You know what gets me? Everybody KNEW this was coming. Four years ago, everybody was talking at parties about housing prices and how they were so high and people were talking about everything hitting the fan. This wasn't a secret, and both Republicans and Democrats didn't do anything about it. And no one really complained, because everyone's house was going up in value.

[TC]

Sept 24, 2008 0:14:31 GMT -5 SirSaxa said:

I understand your point TC, but I think there is a misunderstanding in your assumption. Goldman Sachs actually has a very sound balance sheet and virtually none of the "toxic mortgage backed paper" that has brought about the crisis.

"Goldman Sachs Group Inc. and Morgan Stanley may be among the biggest beneficiaries of the $700 billion U.S. plan to buy assets from financial companies while many banks see limited aid, according to Bank of America Corp."

www.bloomberg.com/apps/news?pid=20601087&sid=aUj_9.k13q7s&refer=home

Have you all lost your minds? "I'm for it because Jimmy Carter is against it?" Are we really that partisan and idiotic? This whole plan is to buy the distressed paper at higher-than-market prices - Paulson even admits it. There's no regulation involved, there was no regulation proposed, and it was a naked disgusting power grab. This whole plan should have been thrown out based on the lack of checks and balances - Congress should not be trying to compromise with it.

I saw an analyst last night saying that this bailout was not going to be $700B, or $1.8T, but $5T.

We will still crash, but the crash will be different. I've said it three times in this thread - increasing the national debt by these amounts ensures that we devalue the dollar, forces prices of everything up while not doing anything to wages, and will ensure that we have massive amounts of mortgage defaults. It compounds the problem.

[theexorcist]

The "Jimmy Carter is against it" line was a joke.

[EasyEd]

Part of McCain campaign's response to report Rick Davis is still involved with Freddie Mac:

"In fact, the allegation is demonstrably false. As has been previously reported, Mr. Davis separated from his consulting firm, Davis Manafort, in 2006. As has been previously reported, Mr. Davis has seen no income from Davis Manafort since 2006. Zero. Mr. Davis has received no salary or compensation since 2006. Mr. Davis has received no profit or partner distributions from that firm on any basis — weekly, bi-weekly, monthly, bi-monthly, quarterly, semi-annual or annual — since 2006. Again, zero. Neither has Mr. Davis received any equity in the firm based on profits derived since his financial separation from Davis Manafort in 2006.

Further, and missing from the Times' reporting, Mr. Davis has never — never — been a lobbyist for either Fannie Mae or Freddie Mac. Mr. Davis has not served as a registered lobbyist since 2005."

The firm, apparently, still receives payments but not Mr. Davis.

[TC]

Saxa --- Here's Cramer crying that Goldman would have gone out of business without Buffett...

www.thestreet.com/video/10439090/index.html?puc=_htmlbooyah&s=1#10439090

[Boz]

An interesting political development just announced:

online.wsj.com/article/SB122228304121472135.html?mod=googlenews_wsj

Leadership? Gamesmanship? All/None of the above?
You be the judge.

(Fox is reporting that the Obama campaign said this was their idea first, apparently.)

EDIT: Oops, nevermind. I guess the joint statement idea was what the Obama campaign proposed, not suspending the campaigns and postponing the debate.

[Jack]

Sept 24, 2008 14:25:55 GMT -5 Boz said:

An interesting political development just announced:

online.wsj.com/article/SB122228304121472135.html?mod=googlenews_wsj

Leadership? Gamesmanship? All/None of the above?
You be the judge.

(Fox is reporting that the Obama campaign said this was their idea first, apparently.)

EDIT: Oops, nevermind. I guess the joint statement idea was what the Obama campaign proposed, not suspending the campaigns and postponing the debate.

Smells a lot like gamesmanship to me. And silly, too. Why would we be unable to have a debate while discussions about the bailout are ongoing. Would the participants in the bailout planning be unable to tear themselves away from the compelling political theater? Would the missing economic wisdom of McCain and Obama, heretofore shielded from us all by platitudes and vagary, be fatal to the bailout strategies success? Is it an inappropriate time for Americans to be thinking about the future of their country and engaging in a serious discussion about it?

I say we also postpone the World Series. And the election. And possibly, possibly Christmas.

[Bando]

Sept 24, 2008 14:25:55 GMT -5 Boz said:

An interesting political development just announced:

online.wsj.com/article/SB122228304121472135.html?mod=googlenews_wsj

Leadership? Gamesmanship? All/None of the above?
You be the judge.

(Fox is reporting that the Obama campaign said this was their idea first, apparently.)

EDIT: Oops, nevermind. I guess the joint statement idea was what the Obama campaign proposed, not suspending the campaigns and postponing the debate.

I was going to post this as a new thread, whaddya think, Boz?

[EasyEd]

Sept 24, 2008 15:16:02 GMT -5 williambraskyiii said:

Agree with Jack. This reeks of political brinksmanship (wanted my own "'manship")...Obama contacted McCain about a joint statement, so McCain wants to one-up him and solicits staff for ideas...how about we postpone the debates? Brilliant!

We are now less than 7 weeks away from Election Day. We have 3 debates scheduled (the minimum) and the American public needs time to analyze and digest each performance. Let's get on with it...3 hours on a Friday night will not prevent the timely passing of a bailout plan

If these debates are so important, why did Obama not agree to town hall type debates?

Also, I wish I had the insight to read McCain's mind on why he's doing it like many of you seem to be doing.

[TC]

Sept 24, 2008 15:45:31 GMT -5 EasyEd said:

If these debates are so important, why did Obama not agree to town hall type debates?

I don't know, maybe because those are dog-and-pony shows and not real debates like the big boys have always done?

[SirSaxa]

Sept 24, 2008 13:19:22 GMT -5 TC said:

Saxa --- Here's Cramer crying that Goldman would have gone out of business without Buffett...

www.thestreet.com/video/10439090/index.html?puc=_htmlbooyah&s=1#10439090

Thanks TC.
Without any additional research, here is what I would guess is going on.

Goldman's stock was trading in the range of $250.
It's been declining in recent months/weeks then dropped off a cliff down to $85 (or so) last Thursday when the crisis was at a maximum.

I've been told that Goldman did write down the limited amount of toxic mortgage paper it had. They were not in a solvency crisis until the overall crisis started more or less a run on the banks. The investment banks, much smaller than the huge deposit driven commercial banks like BofA, were at much greater risk. Clearly, GS needed some additional capital. Getting it from the most trusted name in America when it comes to investing, was a HUGE vote of confidence. Now they are seeking an additional $5b from two sources, a Japanese investment company and a new stock offering.

As a result of:
1. The Paulson/Bernake intervention plan
2. Buffet's $5b
3. The plan for an additional $5b
4. Possibly, the halt on short selling

GS stock went from the $85 to it's close today of $133.

Were they in trouble? Yes.... that was clear. The entire financial industry is in crisis which is why the $700b "bailout" is being discussed.

BofA, in the link you cited, is suggesting GS will benefit among the most, or enormously, from the $700b plan. It will certainly benefit -- as other financial institutions will -- from the restored confidence in the US financial market. But will they benefit by making a killing on selling this "toxic mortgage paper" to the Treasury? As I understand it, they don't have a lot as a percentage of their total assets. And what price will it be sold at? That is a question that has yet to be answered. Merrill sold their's at $.22 on the Dollar. They took a HUGE write down, but remained solvent long enough to sell themselves to BofA for $50b. That is $50b more for their shareholders than Lehman got for theirs when they went under.

Bernanke so far, has said the paper will purchase below its original price, but above fire sale prices. There's a lot of room in there... that is essentially not an answer. If the price is high enough, perhaps the banks can sell it above the prices to which it has been written down. That would amount to a paper profit for them. But it will be a profit that will offset the bigger loss they took when writing it down in the first place.

The market has given us a couple of benchmarks for pricing.
1. The $.22 that Merrill sold at
2. The $5b Buffett investment. That one is essentially a 10% loan (via the purchase of perpertually preferred stock) with warrants to buy a percentage of the company at any point in the future. Buffett is taking a big risk there, betting that the Congress will approve some kind of buy out agreement.

If the Treasury approaches these buy outs as a business, they do have the potential to make $$. They can run an auction to buy at the lowest prices (Though some say that won't give the banks the capital they need), and let the banks make their own judgements about the price that makes it viable to them. I am sure there are many other ways to play it.

But however it gets done, the banks will be selling well below origination price and -- as far as we can see -- the risk of foreclosures (barring the collapse of the US/Global economies) is much less than the current pricing on this paper. If the Treasury holds this for a while -- a period of years, then starts to sell it off piece by piece... there is a potential to make money.

Someone posted earlier that the people at Treasury are govt. bureaucrats who are unprepared to handle such a sophisticated financial program over the long term. But, the ideas floated by Treasury and the Fed have included bringing in WS firms to handle these transactions.

All of the current inside discussions in NYC and Washington, DC are highly sophisticated and there are not many people in the country who can truly comprehend the depth of the issues. I don't claim to be an expert on this, TC, but I do believe Buffett is making a significant statement on the US economy and GS, and putting his $$ at risk on this. If it works - and we all have to pray that it does -- he will be rewarded. I don't see anything wrong with that.

[Filo]

Here is a transcript of a Buffett interview with CNBC. He has some interesting things to say about the necessity of the bailout and the prices that the govt. should pay.

[SirSaxa]

Sept 24, 2008 20:41:28 GMT -5 Filo said:

Here is a transcript of a Buffett interview with CNBC. He has some interesting things to say about the necessity of the bailout and the prices that the govt. should pay.

Thank you Filo.

A few quotes:

If I didn't think the government was going to act, I would not be doing anything this week... I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly....

it was absolutely, and is absolutely necessary, in my view, to really avoid going over the precipice.And I might add, if they do it right, and I think they will do it reasonably right, they won't do it perfectly right, I think they'll make a lot of money. Because if they don't -- they shouldn't buy these debt instruments at what the institutions paid. They shouldn't buy them at what they're carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.
...

I would think they might insist on the directors of the institutions that participate in this program waiving all director's fees for a couple of years. They should, maybe, eliminate bonues. They may wish to do some of those things. I don't think you should try to write it into the instrument, though. I think that gets so damn complicated and ties people's hands. But if I were administering the program, I think I'd be fairly tough about some of those things, and I'd make sure that the advisers earned me a return that was well above my cost of borrowing before they got paid a dime.
...

But I'll tell you, with Hank Paulson on top of it, you couldn't have any better guy to do that. The important thing is that if this program extends into the next administration is to have somebody in the next administration that has similar market savvy.

[SirSaxa]

After the president spoke this evening, Barney Frank was interviewed in response. He said he feels they are already close to a deal and it includes the following key points, details to be worked out:
• Bi-partisan Oversight
• A cap on CEO, CFO and a few others' Compensation
• An opportunity to negotiate Warrants for the US Govt. for saving these companies bacon
• Some program/opportunities for home owners to help avoid foreclosures
• Pricing of Buy Backs -- still TBD, but it should be a market based mechanism


Personally, I like all those points.
And using "Market" models for pricing and acquiring warrants would be applying free market principles to this Govt. "Buy Back"/"Bailout"/"Investment". If the Taxpayers are taking the risk, providing the money, paying the interest and saving these companies, they deserve to be compensated. If this works, maybe in 10 years we can look back and say it made the country some money.

[SFHoya99]

I'd prefer...

1. Non-partisan oversight. Let's get someone who isn't a politician.

2. I get why -- I don't think this is the how.

3. Don't know enough to figure out the implications here

4. Absolutely. Even in a pure profit scenario, with values where they are, X% of a mortgage payment is often better than selling the property at auction. Plus the government can afford to wait.

However, some mortgages are just completely untenable and there may be no point in waiting.

5. Absolutely Key.

[GIGAFAN99]

Sept 24, 2008 22:25:54 GMT -5 SFHoya99 said:

I'd prefer...


4. Absolutely. Even in a pure profit scenario, with values where they are, X% of a mortgage payment is often better than selling the property at auction. Plus the government can afford to wait.

However, some mortgages are just completely untenable and there may be no point in waiting.

This is my issue with this. I get it if they were buying loans. I get it even bailing out AIG.

But the third-level tranche of some CMO? Sounds like that value is approaching zero to me. How much of this bad paper is that bad? We'll see but I bet a lot more than any S and L bailout.