Getting Big Government off our backs

[ursus arctos]

Getting Big Government off our backs

The institutions are very different in both function and size, but the underlying fear of the policy makers (that allowing them to fail would have massive negative repercussions for the rest of the economy) and at least some of the underlying reasons for them being where they were (over-expansion, an absence of sufficient reserves to weather a sharp downturn and an inability to raise new capital when push came to shove) are similar.

[caja-dglh]

Getting Big Government off our backs

Not really villain - there isn't any true equivalent in the UK. I will try and get some time to clarify, but it might be a bit confusing.

[Guest]

Getting Big Government off our backs

Cheers mate. Someone over on 40% linked to this article:

http://www.independent.co.uk/news/business/analysis-and-features/they-gave-ordinary-americans-a-home-and-then-the-roof-fell-in-872158.html

Which sums it up.

[Ginger Yellow]

Getting Big Government off our backs

Villain, basically what Fannie and Freddie do is set certain broad underwriting standards (credit score, LTV etc) and agree to buy loans that meet those criteria from banks. They finance them by issuing mortgage backed securities, which are guaranteed by Fannie and Freddie, and which have always been considered to have an implicit government guarantee, so they have very low funding costs. The idea is to more or less remove credit risk from investors' caluclations, making them a "simple" bet on prepayment risk, which is in turn a bet on interest rates. Central banks in particular buy these bonds in the trillions.

Like DGLH says, there is simply no equivalent in the UK. Banks traditionally funded their mortgages through deposits and unsecured wholesale funding. In more recent years they have used securitisation and covered bonds - both markets are now more or less closed, however - hence the lack of mortgage lending in the UK. Many other countries have an approach similar to the US, although typically the mortgage agency is owned or controlled by the government. Fannie and Freddie used to be until the 70s, when LBJ wanted to get its debt off the government's books.

[Guest]

Getting Big Government off our backs

Cheers GY.

I presume that if the Fed take these over, regulations will follow to stop this mess from occuring again?

[Incandenza]

Getting Big Government off our backs

A blog post from Krugman:

I wish people wouldn’t say that Fannie and Freddie have been “nationalized.” I mean, it’s basically accurate, but it conveys the wrong impression.

The fact is that Fannie Mae was originally a government agency; it was privatized in 1968, not for any good economic reason, but to move its debt off the federal balance sheet (and Freddie was created 2 years later as a competitor.) Private ownership of Fannie and Freddie never made any real sense, and was always a crisis waiting to happen.

So what we’re really seeing now is deprivatization. It’s not something like the UK government seizing the steel mills; it’s more like firing Blackwater and giving responsibility for diplomatic security back to the Marines.

[caja-dglh]

Getting Big Government off our backs

Conscience of a Liberal summarizes his clutching at straws though, doesn't it? We didn't make it go private for the right reason, so it isn't nationalization.

The cost is going to be the same whether it be re-nationalization, nationalization or communist style state-takeover. Splitting hairs of the highest apologist level.

[Ginger Yellow]

Getting Big Government off our backs

The thing is, it was never really privatised, in a risk sense (which is all that matters when the balance sheets are so large). It was the worst kind of form over substance accounting trickery.

[caja-dglh]

Getting Big Government off our backs

So here we have it. Here is where the serious stuff starts to happen. If there is no relative good news in the next two hours (and it seems unlikely), we are heading into unknown territory.

Watch out London - the FTSE is going to get hammered on Monday, and the S&P is going to go insane. Unless, of course, everyone can see something I can't right now.

[DCI Harry Batt]

Getting Big Government off our backs

Lehman Bros files for bankruptcy

Headline not completely supported by the story, which says:

The fourth-largest investment bank in the US, Lehman Brothers, says it will file for bankruptcy protection, amid a growing global financial crisis.

Lehman had incurred losses of billions of dollars in the US mortgage market.

The move threatens to deal a further blow to the global financial system, as banks unwind their deals with Lehman.

Merrill Lynch, also stung by the credit crunch, has agreed to be taken over by Bank of America in a dramatic weekend of events for Wall Street.

The chance that Lehman Brothers could collapse increased sharply after the strongest potential buyers pulled out at the weekend.

Greg Wood, the BBC's North America business correspondent, said that police had cordoned off the bank's headquarters in New York and staff were leaving with cardboard boxes as onlookers gathered to watch the bank's demise.

[ursus arctos]

Getting Big Government off our backs

It certainly has been an interesting weekend.

The extraordinary trading session in the derivatives market last night, to allow people to close Lehman-related positions assuming that they file, is to the best of my knowledge unprecedented.

And the idea that Merrill will be owned by what I still think of as a North Carolina-based regional retail bank (which is what the current version of BofA was 15 years ago) is staggering.

AIG looks like it may well be next, btw.

[Evariste Euler Gauss]

Getting Big Government off our backs

I'm thinking of encouraging as many US citizens as I can contact to write impassioned letters to the White House and the US Treasury, urging them not to allow the public funds contributed by ordinary hard-working Americans to be used to shore up an institution which is paying vast sums of money out to support a British soccer club, competing in Asian markets with similar US sporting franchises.

[ursus arctos]

Getting Big Government off our backs

I don't think that Hank Paulson is going to need much convincing on that score.

Let's see: Northern Rock, XL, AIG . . .

Who's next?

[Hofzinser]

Getting Big Government off our backs

Can anyone in the know tell me (a complete ignoramus in these matters) how all this stuff is likely to affect the value of the dollar against the pound?

It's just that I have a substantial (for me) amount of money which is currently in dollar form and I'd quite like to convert it back to pounds, or even Euros, if the dollar is likely to plummet any time soon.

[ursus arctos]

Getting Big Government off our backs

The dollar's fallen a bit already this morning, and will probably lose some more value in the very short term.

The longer term trend is harder to predict, especially given the UK's stand on interest rates (which we recently discussed on another thread that focused on sterling/euro rates).

[Hofzinser]

Getting Big Government off our backs

Ah ok, thanks. I'll probably just leave it for now then, assuming the dollar's not going to plummet dramtically against the pound over the long term or anything (it's my online poker bankroll I'm concerned about).

[ursus arctos]

Getting Big Government off our backs

Do they provide a Swiss Franc option?

Is your bankroll in USD because you play on a US-targetted site, or is that standard in the industry (I have no clue how any of that stuff works).

[Hofzinser]

Getting Big Government off our backs

The dollar is very much the industry standard currency, even on sites that have a predominantly European customer base - although as it happens I do play mainly on Pokerstars, which is one of the main sites for US players.

I could transfer the funds to a site that deals in Euros (not that I know off the top of my head which sites do this but I'm pretty sure they exist) but I'd rather not do so unless completely necessary.

I know of no site that has a Swiss Franc option, unfortunately.

[Ginger Yellow]

Getting Big Government off our backs

I hadn't even thought of that. The dollar fall has probably wiped out all my Poker Room winnings (about $150).

Depending on how large your bankroll is relative to your wealth, Hof, and how the withdrawal arrangements work, you're probably best off just using it when you travel to the US. That's what I'm doing with my US$ savings for the next five years or so.

[ursus arctos]

Getting Big Government off our backs

That's interesting to me.

I wonder if a (more prolonged) decline in the relative value of the dollar would lead to more sites allowing a Euro option.

[Ginger Yellow]

Getting Big Government off our backs

You'd think they would anyway, given that they'd be earning more interest on euro deposits than dollar ones.

[ursus arctos]

Getting Big Government off our backs

Perhaps they've decided that it isn't worth having to manage the currency risk at this point. They may also think that it is important to have a core of dollar-denominated players (though I would guess that was likely more true before poker took off in the Eurozone).

[Ginger Yellow]

Getting Big Government off our backs

But they're not managing the currency risk, are they, unless they allow conversions. If euro depositors can only withdraw in euros, and dollar depositors can only withdraw in dollars, then the punters take the bulk of the currency risk. There's a bit of risk in that they'll have revenue streams in two currencies, but given that the euro one will be much higher (as a percentage of deposits), and it would open up their "service" to new customers, it seems like a risk worth taking.

Edit: there's also the issue that online poker is illegal in the US, as is facilitating online poker related payments to US residents, so it makes sense to target Eurozone customers.

[ursus arctos]

Getting Big Government off our backs

I was assuming some conversion, and wonder if splitting the potential pot in that way would harm their business model (which I assume is based on having as many regular players as possible). I could also see potential time zone issues.

[ursus arctos]

Getting Big Government off our backs

Some institutions just never learn, do they?

Even as the turmoil on Wall Street is reminding many in Japan of the bad, old post-bubble days, some of Japan’s banks are finding themselves back in a financial nightmare.

Japan’s Financial Services Agency on Monday ordered Lehman Brothers’ Japanese subsidiary to retain assets in the country as it emerged that Japanese banks were the US group’s top unsecured lenders. Lehman’s Chapter 11 filing for bankruptcy protection reveals that Japan’s Aozora Bank - controlled by US private equity group Cerberus - is owed $463m in unsecured bank loans, more so than any other bank, while Mizuho is in second place with $289m owed, reports the FT.