Financial History

[Engineer]

This guy is right on the money.....  Washington should burn.



I currently manage a medium sized hedge fund (long/short equity).

The current populist uproar is absolute insanity. I don't know how else to say it. You are never going to legislate away greed. Period. It is part of the human psyche. That's all there is to it. You can either fight it, or use it. Incentives work. This is why.

Let's step back a minute and think about why and how this happened:

1. Starting back in the 1970s Congress addressed discrimination in mortgage lending (which was really a serious problem) with the Home Mortgage Disclosure Act of 1975. This approach was to open lending statistics by requiring banks to disclose the details of their lending by geography and, eventually, demographics and income level. This was a stroke of genius. Large banks were shamed into good citizenship. The act did have the effect of elevating a number of "civil rights" personalities (Jesse Jackson, for instance) as they used shrewd public relations to expose some rather egregious practices by large banks when it came to mortgage lending. These same personalities, names you doubtless recognize, in some cases, adopted more aggressive tactics, some that borderline on blackmail and extortion today. I leave it to you to determine if this downside outweighs the upside of truth in lending practices. I, for one, think that forcing disclosure like this was enlightened. It was to be the last of its kind.

2. The Community Reinvestment Act really was a serious break with the legislative practice before the legislation. Suddenly, you have a small number of people determining where dollars will flow based on some political definition of who is worthy. The early definition could be right as rain in terms of who is deserving, needs a leg up, has been wronged, etc. etc. but once you go down this path, you are truly fxxked. Once you start dictating capital flows based on political worthiness (an entirely subjective and whimsical standard) you have opened the door to all kinds of mess. Play stupid games...

3. ...win stupid prizes. In the 1980s and 1990s Congress literally had a hornet's nest up its ass with mortgage regulation. Almost 400 bills in the 101st Congress contained the word "mortgage." This doesn't seem like a big deal until you realize that the housing ranged from 7-20+% of GDP in a quarter. Absorb that. Something like 1/5 of quarterly GDP. Now put in place mechanisms to literally pour trillions of dollars into the system to encourage "The Dream of American Home Ownership." Think of it. You have a small group of regulators/legislators (less than 100 people are making major decisions about how much Freddie or Fannie will lend, or what their capital ratios will be raised to, or what interest rates should be) controlling a massive portion of the economy. You suddenly have price fixing for a sizable fraction of the GDP. To compete with Fannie and Freddie, their subsidies, their tax breaks, their implied government backstop and their downward pressure on interest rates, you have to take on more risk for less money. Hello Countrywide. (Just a bit of history, Countrywide was explicitly founded to collateralize the only loans left to non-GSEs- those not already being siphoned by Freddie Mac and Fannie Mae). GSEs held 1/3 of all residential mortgages by 2001 or so. ONE THIRD. GSEs were run by political hacks, installed there as a reward for political services rendered. These are facts.

4. Banking and Insurance regulation is, and always has been, daft. The blind focus on capital ratios, reserve ratios and the like, and the pedantic concentration on definitions of risk that results in notional insured figures being counted in capital ratio calculations but credit default swaps not counted in this way was insanity. Of COURSE massive capital is going to flow into the exception you, regulator, have explicitly written into the regs. Now you are shocked and surprised that people wrote Credit Default Swaps like there was no tomorrow? Incentives matter. Period.

ETA: I am not stupid enough to ask you to explain to me why you cannot just let dying firms in dead industries FAIL? Watching an airline enter its THIRD bankruptcy, and proceed to wage a deleterious price war, only to suck down millions if not billions in federal aid may pull $50 off a ticket to Florida, but it also fxxks the entire industry. You've created the appearance of a right to cheap airfare, cheap gas, cheap insurance, and bailout if the McMansion you were stupid enough to built on a 20 year flood plain gets- quelle surprise- leveled by a storm. Of course you can't let anything fail. You've promised the world. You've been borrowing and delaying the inevitable to deliver it for decades.

5. The market for talent is global, and you can't legislate it away. Like it or not there is a metric ass-ton of money in finance. The power to create, move or allocate wealth is very valuable. It always will be. You aren't striking a blow for social justice by enacting the first salary caps in the modern history of the United States. You are guaranteeing that finance experts will flee. The hiring binge going on right now as the likes of UBS suck out talent is just amazing. UBS, with the support of the Swiss Government, is offering 10 year permits to execs and their families who relocate to Switzerland, not to mention the ability to negotiate your personal tax rate for the next 10 years up front in some Cantons. You can't determine what finance execs will be paid, folks. You can only determined WHERE they will be paid. Who exactly do you think is going to pull the United States out of this mess. Big Auto?

So, let me get this straight, Mr. or Ms. Congressional/Executive Scumbag....

You've spent the last two decades pumping trillions upon trillions of dollars into particular segments of the mortgage market, a major portion of the U.S. economy, dictating what risks were appropriate, how much would be paid for assuming those risks and generally underpricing risk in the entire system for years and years. You've been inflating a bubble and assuring that the inflation passed to the riskiest portions of the economy. You've been passing the buck for four decades. Every time the economy tries to correct itself, you stall, pump borrowed money into the system, and grow the disaster the country will eventually have to face. You buy votes year after year by delivering graft now, to be paid for later (after you've long left office). In effect, nearly one third of the American economy has been run by central planning for the last five years. During this inflation, you happily collected taxes on everyone, effectively collecting tax on borrowed money and inflated assets (none of which you propose to repay- what luck would I have asking for the real-estate taxes I have paid for years on appraisals that were pure illusion?) I didn't hear you complaining when you saw massive, record revenues to the Treasury thanks to the boom the finance community facilitated and delivered to you, year in and year out. I didn't see you pointing fingers when we dug in and pulled your ass out of two recessions. Finance is a massive portion of the economy because it creates wealth. Period. Your social programs, state and local, are massive bloated vote-buyers because of our hard work, sweat and craft. (New York State, I'm looking at you). We work until mid-May for you and your vote purchasing juggernaut. I accept that. I have for years. This is because what I make from June to December is more than enough to, not just enjoy the American Dream and the promises of success and wealth, but to take the capital I collect over the years and invest it, again and again back into American business, start-ups, and even your fxxked up GSE mortgage securities (which my taxes support). We carry the freight. 10% of us pay 70% of all income taxes. 50% of us pay 97% of all income taxes. We tolerate this because this is the promise of America. Work hard, pay taxes, and no one will second guess what you spend your money on in your personal time. No one will tell you how much is a "fair wage."

Now, now that you have run out of delaying tactics, you want to point the finger at... me?

I came to this country for a reason. I spent 9 years in U.S. universities, which I busted my ass to get into. I didn't borrow a dime to do it. I paid every cent myself. I've never so much as accepted a single unemployment check. I've never availed myself of any government largess that I wasn't forced to take. I have repeatedly declined to challenge some of your more deluded tax claims against my income in court, as was my right. Two of these I clearly could have won, though expensively. What's more, I consider myself a patriot. I consider it a great privilege to live in the United States and to be called one of her adopted children. I defend this country, and what used to be her ideals, to any European socialist moron who cares to engage me in conversation. I support the troops. Wherever they are. Unconditionally. I create jobs. Aside from two years where I broke even, I have made money for my clients and partners every year since I have been in professional life. This includes 2008 and 2009 YTD. You could house 50 families in reasonable comfort for 10 years on what I have paid in taxes since I've been here. Actually, now that I've actually done the calculation just now for this post, you are really pissing me off.

Now you want to call me greedy? Are you fxxking kidding me? After you fxxked this place up? You want to tell me that capitalism failed? What capitalism? You've socialized/centralized almost half of the GDP. Now, you want to use me and the paycheck I've earned year after year to deflect attention from the basic fact that you have been shoving debt on people who couldn't hope to find within themselves the character to take responsibility for repaying it? They get a pass and I get... what... a sharp stick in the eye?

And, you want to tell me that $250,000 is "enough?"

I will tell you what is "enough." Me paying for your power grab for the last decade now. That's quite enough.

Let me just tell you, Congressional/Executive Branch Scumbag, Esq., if you do this... if you take this turn... I won't even think twice. I will move my firm to Switzerland, or to London before the year is out. Those employees who do not follow me, I will have to fire. The corporate taxes I pay will no longer be yours. Instead, they will go to something useful, like a nice tunnel through a mountain for high speed trains that actually work. Further, I will dedicate a substantial portion of my personal time, effort and capital to frustrating your every attempt to collect personal taxes on me thereafter- given your draconian anti-expatriation laws. But that's not all. My job is to make money for my clients, in whatever way I can. I will short your flagging financial firms mercilessly and remorselessly. I will buy QGRI puts to bet against any firm that took bailout money. I will buy credit default swaps on every firm you put your greasy paws on, because I know your fingerprints are laced with poison. For every boneheaded centralist move you make, I will be there, profiting from your lunacy. I will never again take a client who pays taxes in the United States. I will not permit any capital or profit to be diverted to any such. I will do this because in the same way you believe it your divine right to punish "greed," I consider it my duty to punish the stupidity and arrogance that is central planning, and because I believe in economic freedom. I will divert as many of your resources to my new home and its relative economic freedoms as I can. I will promote free markets in this way, and I will never look back. You will have made it clear that you are my enemy, and I do not forget such declarations.

I take no pleasure in this fight. I did not ask for it. I only asked for liberty, and the pursuit of happiness. Deny me these at your peril. In the end, I can only hope I'm not alone.

[fabr]

I agree but who is the author?

[Pacman]

Well that doesn't sound like hope and change!
You greedy bastards!   

[Engineer]

I agree but who is the author?

I could tell you, but then I would have to..... Oh nevermind.


http://www.ar15.com/forums/topic.html?b=1&f=5&t=848445

It gets particularily interesting when he answers the question "So how do you get that job"

[trojan]

Next we'll hear from a pedophile about how "children like it, and it's good for them".

The global mortgage markets which have propper regulation aren't collapsing, sure they're taking a hit. Only markets (mortgage or otherwise) exposed to the US debacle are suffering, in proportion to their exposure.

While were counting, given the execs know the "real direction" of the company as much as 5 years ahead, how much was paid as "bonuses" and "above market salaries" in that period?

Go get your job in Switzerland, they have heavy regulation, taxes and high fuel prices - look out, the Boogey man will get you!

[Engineer]

You just don't get it Trojan!  When you loan money to people that can't pay it back you will get burned eventually.

Just like Deficit spending will eventually destroy the: Company, Country, Household.  It is all the same. 

Gee I wonder why the US mortgage markets are suffering?  Maybe because of the "common sense" regulations mandating 50% Sub-prime mortgages.

So lets change the subject to bonuses.  How long will it be before the 90% tax on bonuses will be a 90% tax on everyone making over a certain amount?

You must have a mental block on history lessons. 

[trojan]

OK I'll put it another way, "I understand everything you are saying and I agree with some of it BUT you don't seem to (or even try to) understand half what I'm saying".

Hedge funds are set up "To Circumvent Regulation in order to Create Wealth". "Create" is distinctly different to "attain".

What's next "Wal-Mart, The Great American Hero"? or how about setting up "The New Reformed Enron Church" with the Good Reverend Gordon Gecko?

[Boostinjdm]

OK I'll put it another way, "I understand everything you are saying and I agree with some of it BUT you don't seem to (or even try to) understand half what I'm saying".

Welcome to the wonderful world of debating non buggy topics with Engineer.

When you get on one of these topics with Engineer you just have to imagine that we are all truckers talking on cbs and the button on Engineer's mic is stuck so he can't hear what anyone else is saying.

[trojan]

[fabr]

QUote engineer,  "So lets change the subject to bonuses.  How long will it be before the 90% tax on bonuses will be a 90% tax on everyone making over a certain amount?"

  Why is it acceptable for congress to screw up royally,absolutely fail to do their job, prove their incompetance by throwing money at an unknown and not understood problem and THEN decide to RETROACTIVELY fix their fxxk up by tacking on a RETROACTIVE 90ish % tax? This is totally unacceptable.It WILL trickle down to the rest of us "rich " bastards within a few years. Of course this is "change we CAN believe in " you know.
Marxism,fascism,communism,socialism, BIG BROTHER LIBERALISM,whatever you want to call it is WRONG in this country or any other "free" country. Each and every one of our stupid ass incompetent  legislators need kicked out on their collective asses and if they keep it up it will happen. If this economy is noy humming along nicely by the next election that may just happen.

[trojan]

Marxism,fascism,communism,socialism, BIG BROTHER LIBERALISM,whatever you want to call it

There we go again, demonising that which we don't understand.... it's derived from ideal capitalism and generally called Crony Capitalism.

[fabr]

I don't care what you call it.  You know what I mean.

[Engineer]

OK I'll put it another way, "I understand everything you are saying and I agree with some of it BUT you don't seem to (or even try to) understand half what I'm saying".

I understand exactly what you are saying, I just don't think your looking at the whole picture.  I will gladly admit that you educated me on naked short selling.  I can see how it could devastate a company, or many companies.

However, I don't see you giving any weight to government intervention causing some of the problem we are in.  Everything you put out indicates that if the government had more control we would not be in the problems we are in. 

I agree that some market practices including naked shorting can be harmful to an economy.  Do you really believe that that is the entire cause of our current problems?  This is where you lose me, because I see many more things that have been harmful to the economy, including government mandates.  Which you seem to totally discount.

Then there is the current government actions.  How does ramping up spending help get us out of the mess?  I don't care what type government it is, Capitalist, Socialist, Communist, None of them can spend like this and not destroy the currency eventually.

So I see current government actions as part of the problem not the solution.  I also see past government actions causing many of the problems.

So here are my questions:

1. What caused the Housing Bubble

2. How do you see current government spending creating a solution.

I like the debate, but your really not adding much helpful information here.  Talking about pedophiles, demonizing hedge funds, Wal-mart, but nothing about the causes of the problems or the solutions.

And Boostin.....  You had what information to add?

[Boostinjdm]

Not trying to pick a fight Engineer,  you are just very firm on the way you see things and it makes your non-buggy posts seem  like more of a rant than a discussion or debate.

I feel that the root cause of the whole housing bubble and current credit crisis is Joe sixpack    thinking he deserves a 250k house and a brand new beamer eventhough he only makes 28k a year.  Second on the list is the banker that filed the paperwork knowing Joe couldn't ever pay for it.  After that I don't care.  I don't feel sorry for those in general that are being booted out due to forecloser.  Sure there are a few that got a raw deal, but you are supposed to plan for that shit in advance.  Like buying a small house for starters and gradually working your way up to a mansion, not buying one right off the bat. 
I also feel that credit should go back to the way it started.  With an account at the mom and pop store down the street where if you didn't pay it off at the end of the week or month, then you couldn't charge any more.  Also, if you had to borrow money to buy a house, your mortgage stayed with the bank that you bank at.  Banks couldn't loan more money than they had, and people couldn't borrow more than they could pay back.

I am pretty young, but so far feel that I am doing things the way they should be done.  For the most part I don't spend what I don't have, but if I do, I make damn sure I can pay it back in the near future.  I am also willing to accept the consequences of any decision I make.  Even if it means moving back in with mom and dad, living in the back of my truck, or going to jail.

[artie on edge]

So here are my questions:

1. What caused the Housing Bubble

Ill have a go at this one if you dont mind, as I have quite a bit of inf about it rattling around.

You will need to go back a bit into recent history to fully explain this, so please bear with me its a little lengthy.

Back in the olden days the US gove mandated that banks would not use discretionary powers to discriminate against people who COULD pay back a mortgage but had little in reserves afterwards. These are the sub prime borrowers and they should have the chance at the home ownership dream.

Way back in 94 the Barrings Bank collapsed (had we forgotten that it isnt a new phenomenon?) immediately after this the US economy went into overdrive.

In 96 the MSCI World Market Capital passes through th e$10 Trillion mark, every body is making money.

97 was a little shakey as the Asian currency crisis hit but that was shortlived and back into overdrive again

98 saw the Russion debt crisis destrpy the USSR causes a dip and the US Gov relaxes monetary policy (key point).

Mid 99 saw the Euro launched and a confident investing market looked for places to throw money abd tech stockes were that place... what are tech stocks/ and why did they burst so dramatically?

A simple example. I rent a small office, buy 3 desks and 2 large servers, organise a heap of phone access capabilities and start selling access to teh internet, soon the money is rolling in. I decide to float the company and sell of teh shares at a ridiculous price based on turnover. All is well for a coupel of years until it turns out I couldnt manage a flee market let alone a multi billion dollar comp and it all falls over. When th eauditors comein the yfind no money in the accounts (liek im gonna leave that there) and no assetts to sell, remember 3 desks and 2 now, second hand servers. Suddenly my hugely expensive high divident shares are worth crap. A classic tech stock crash.

By Feb 2000 the crash is in full swing and the gov is lowerin ginterest rates to help reduce the landing.

Suddenly Enron collapses in mid 2001.

Sept 11 2001, need to go there.

The Gov panicks and reduces interest rates to ridiculous levels, 0.96 in mid 2003.

Suddenly people who couldnt afford a home loan in normal times can do so and teh banks cant say no (remember the gov mandate of years ago?). Also they pay their sales staff on a commission basis so they go hell for leather making huge personal incomes (part of the problem).

By mid 2005 people are starting to get into trouble by mid 2007 int rates hit 5.28% and the sub prime crisis is in full swing.

Now int rates are down to 0.02% and people still arent borrowing, seem ssome lesson were learnt.. but how many and for how long?

The sub prime issue on its own didnt cause all this and on its own you guys could have dealt with it. What did your gov do wrong? What didnt thay do wrong, could they have avoided it? Prolly not. IMO..