Monthly Archives: April 2008

Credit Crisis 101

It is difficult to get a man to understand something when his salary depends upon his not understanding it.  – Upton Sinclair

The following link is worth the time if you want to know what’s going on financially in layman’s terms.

Terry Gross NPR interview with Michael Greenberger of the University of Maryland
http://www.npr.org/templates/story/story.php?storyId=89338743

Highlights

a. Prof. Greenberger compared the major issue right now to banks placing bets on a basketball game and then booking the winnings as assets, even though the game hadn’t even been played yet.

b. Credit Default Swaps are technically insurance but specifically misidentified as NOT insurance to avoid State regulations.  Now I understand why Paulson announced a “federalization” of insurance regulation as part of the “reform” to prevent this in the future.  Sounds like the same tactics as the EPA disallowing California’s regulation of pollution.

c. Problems just starting because the same problems found in sub-prime mortgages also infect credit cards and other debts. Current problem may be the “canary in the coal mine signally and greater problem”.

d. These bets, not only uncertain in their outcome, are not even known because the financial firms are way behind on paperwork. To paraphrase Professor Greenberger, it’s like a bookie taking hundreds of bets but not writing any of them down. Fun huh.

e.  Phil Gramm seems to be at the root of all legislative failures, basically removing regulations, in the late 1990’s that paved the way for these problems (now John McCain’s chief economic advisor’s)

Much much more of course, enjoy and be prepared.

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$28 Billion Dollars

Regardless of any other details, on March 16 the Federal Reserve gave $28 billion dollars to JP Morgan so they would “buy” Bears Stearns.

As the chart below illustrates, a non-recourse loan of $29 billion (the extra $1 billion JPMorgan may have to repay) was given to JP Morgan. To add insult JP Morgan still retains the right to any profits from the Bears Stearns collateral.

Oh…and on the jump from $2 to $10 a share for this bail-out; it reminds me of the scene from “Blazing Saddles” when the sheriff takes himself hostage.

Bear must have said “Give me more money or the Bear gets it

28 Billion

Quotes of the Day (or week if I’m feeling uninspired)

“In the beginning of a change, the patriot is a scarce man, and brave, and hated and scorned. When his cause succeeds, the timid join him, for then it costs nothing to be a patriot.”-  Mark Twain

 

 

“Those who stand for nothing fall for anything.” – Alexander Hamilton